Impact Of Financial Institutions On Economic Growth In Somalia

Transcription

1. Impact of Financial Institutions on Economic Growth in Somalia ABSTRACT The purpose of this paper is to investigate the role of Financial on Economic Growth in Somalia , usually financial institutions play a vital role for economic growth, so it is one of most priorities. After the collapse of central government in 1991 the overall economic of the country was declined although financial institutions especially the remittances “Hawala Institution” take part in economic growth of the country. Remittances from the Somali Diaspora in abroad are primarily intended for supporting the needs of the households in Somalia and those families and relatives who are still in refugee camps in Africa and in other parts of the world. A survey conducted by UNDP estimates that more than 25-32% of families in Somalia receive Remittances from abroad (UNDP, 2015). The problem to be directed in this paper is around poor of financial institutions and in some instances improper financial service offered by poor financial institutions in Somalia. The methods and procedures used in gathering data was primary and secondary data. Documents review questions and personal interviews were used to gather data for the study. To be specific, research finding shows that there is no financial rule and regulation governing financial transactions, although, for the last three-decade remittance companies played an important role for the economic growth sending the money from abroad to families and business entities furthermore remittances help households to get money from their relatives in abroad to cover daily life business firms send, receive and collect money using though the remittances.
2. IMPACT OF FINANCIAL INSTITUTIONS ON ECONOMIC GROWTH IN SOMALIA 1 .0 Introduction Generally financial institutions play a vital role for economic growth, so it is one of most priorities. financial institution is a term refers for the combination of banks, remittances “Hawala” and microfinance institutions each of them plays an important position for the process of economic growth. In the last two decades the link between financial institution (FI) and Economic growth has generated a great deal of interest among academics, policy makers and economists around the world. Financial institutions become much more effectives and plays vital character for economic growth. In black continent Africa it’s same as the other parts of the world even if it’s less developed and there is a lack of valuable financial institution which plays important part for the economic growth but in Somalia since the central government was collapsed in 1991 the overall economic of the country was declined although financial institutions especially the remittances “Hawala” take part in the economic growth in punt-land and in Somalia generally. This study of financial institutions and its impact of economic growth in Somalia have been used to the following variables to analyze how financial institutions and economic growth are related to each other. Bank, remittance “Hawala” and microfinance institutions, Gross domestic production, employment rate and national income are independent and dependent variables respectively that we have analyzed. 1.1 1.1 Problem of the study and Research Objectives The problem to be directed is around the poor financial institutions and in some instances improper financial service offered by poor financial institutions in Somalia, this normally results to failure of economic growth. Deficiencies in the financial institutions are the major cause of poor economic growth Ellison and Orozco (2007). Are the Financial institutions in a position to influence the economic growth of the state? Lack of existence of important part of financial institutions including; credit union, insurance companies, mutual fund, pension fund and many others in a building up market can lead the economy to decline. This paper will analyze how effective and successful financial institution will bring economic growth in punt-land and how it will contribute the improvement of the economic in the state. One 1
3. of the most critical obstacles to financial institutions is informality . The poor often live and work in the informal sector, lacking legal ownership of land, homes and business. Half of Somalia people live in informal settlement in urban area alone, meaning that they cannot use their land as collateral on a loan; often they lack address they could associate with a bank account or credit application. Entrepreneurs can face high fees, inefficient and sometimes corrupt procedures, and burdensome regulation that essentially make it too costly to incorporate legally the result are enforce contract or declare bankruptcy. The main research objectives of this study is to assess the impact of Financial institutions on economic growth in Somalia Hence, the specific research objectives of this paper are:  To examine the relationship between banks and economic growth in Somalia.  To establish the effect of remittances “Hawala” on economic growth in Somalia.  To examine the relationship between the microfinance institutions and economic growth in Somalia. 2.0 Literature review Speciously, Somalia’s banking and financial system has been heavily impacted by the political confusion that has engulfed the country’s recent history. Consequently, there are no proper functioning banks in Somalia, although certain money remittance companies claim to be banks and provide some basic financial services. Historically in recent years the number of commercial banks in Somalia was massively increasing, this encourages the habit of saving and investing and it increases the liquidation and mobilization of resources in the market (Poutziouris, 2013) Since the collapse of the Somali state and economy in the 1990s, Somalia has become even more dependent on remittances from family members working abroad. Today, remittances are by far the largest solitary source of hard currency entering the country, and are vital to the country’s limited ability to feed and sustain itself. One study estimates that remittances to Somaliland alone (which is home to about 1/6 of the total population in Somalia, which is estimated at about fifteen million people) reach as much as US $500 million per year – two times the value of livestock exports in a normal year (Ahmed, 2000). Another study calculates that remittances constitute 2
4. nearly 30 % of the income of urban households in the northern towns of Hargeisa, Burao, and Bosasso. Remittances to southern Somalia are less well-documented. Mogadishu is unquestionably the largest recipient of remittances; it probably accrues a similar level of remittances as does Somaliland. In the town of BeledWeyn, with a population of about 50,000, an estimated US $200,000 per month is received in remittances, for a monthly average of US $4 per town dweller. Our best estimates are that remittances nationally probably total somewhere between One billion to 1.3 billion US dollars per year (Toure, 2016) Microfinance institutions in Somalia Despite the many benefits, microfinance institutions face a range of challenges that limit their reach, especially in predominantly Muslim countries. One challenge is providing microfinance services under sharia, or Islamic law, which restricts the charging of interest for loans. Certain banks and microfinance institutions started to provide microfinance service for poor people including Somali Development and Reconstruction Bank and many others but the main challenge they face was absence of proper functioning financial legal framework and lack of trust among the beneficiaries. Microfinance is already enabling some of the poorest Somalis to plan for the future and to be more resilient to the shocks of conflict and famine. The expertise of companies like Dahabshiil and their experience of working in such regions will be essential if these innovations are to live up to their early promise (CEO D. D., 2012) 2.1 Role Banks can play Economic growth Banks are financial intermediaries that accept deposits and make loans. Banks offer several advantages in connecting borrows and lenders. By pooling the funds of thousands of different depositors they are able to make large loans beyond the means of any individual investor. In addition, because they deal in such a large volume of loans, their costs to making a loan are smaller than for a single investor. Banks make a variety of different kinds of loans. They lend money to businesses for capital improvement projects, called commercial and industrial loans. They lend money to consumers for projects such as auto and college loans, called consumer loans, and also to purchase a house, called a real estate loan, or a mortgage. Banks make profits by the spread between the interest rate on the loan that they make and on the deposits that they take (thiel, 2001). 3
5. 2 .2 Role of Remittance of Economic growth The alternative remittance system or Hawala operates outside of, or parallel to conventional banking or financial institutions. It was developed in India, before the introduction of Western banking practices, and is now a major remittance system used around the world (Sandhu, 2001). This system of remittance is no longer referred to as an "underground banking", as it is now operating with full legitimacy and it is openly advertised in a variety of media, such as ethnic newspapers and Internet websites. The major distinctive feature of this informal banking system that differentiates it from other forms of remittance systems is trust and the extensive use of connections such as family or clan relationships in the processes of money transactions. Trust is therefore a very important component in Hawala banking system. It is now well established that Hawala firms are honest and trustworthy in their dealings with their customers. Breaches of trust are extremely uncommon and rare. Hawala are informal money transfer companies that Transfer funds both domestically and internationally. 2.3 Role of Microfinance on Economic Growth Lesser-developed economies do not have access to financial technologies because perspective borrowers lack collateral; institutions do not want to pay high monitoring, screening, and enforcement costs; and because risks are very high in populations that suffer from severe illness, malnutrition, and low levels of education. Microfinance is a wide variety of economic interventions that aim to improve poor people’s access to financial technologies. The model of the Grameen (Village) Bank of Bangladesh is the most well-known and discussed model in the literature. Muhammad Yunus, a Bangladeshi economist who founded the Grameen Bank in 1976, won the 2006 Nobel Peace Prize. As of 2007, the bank has 7.3 million members in over 74,000 villages. Total assets are nearing $1 billion, the recovery rate is 98.4%, and profits are at $20 million. The distinguishing features of the Grameen model are joint liability, forced savings, and ‘non-financial products’ that aim to change the social and economic infrastructure of Bangladesh and other poor countries (Levine, 2012). Achieving balanced and inclusive economic growth is a key challenge faced by policymakers in countries around the world. 4
6. 3 .0 Research Methodology A descriptive research design ware used to get a deeper information and high analytical approach to develop solutions, purposive and simple random selection was conducted on Somalis who met the research selection criterion such as financially literacy, current political awareness, business connection, strong Somali roots and were resident in Somalia. The sample size for the study was (N= 25) In total we had 17 questions in our study. The researcher used interview and questionnaire research instruments which are structured set of questions designed to generate the information required for specific purpose which is suitable in large population with short time 3.1 Population and Sampling of the study The target population for this study is totaled to sixty individuals with different qualifications from different institutions. While the sample size will be 25 individuals coming from different sections of the selected study population. Table1: Population and Sampling of the Study Study population Target Population Stakeholders Male Female Male Female Government sectors 8 4 3 2 Financial institutions 12 6 2 3 Business sectors and households 6 9 3 4 Education and research centers 7 8 5 3 Sub Total 33 27 13 12 Total 60 4.0 Result and Findings 4.1 Profile of Respondents 5 25
7. This section gives the characteristics of the respondents in cross tabulations and graphs in relation to job title , highest level of education, gender and age of the respondents. Profile of Respondents Frequency Percentage Male 13 52% Female 12 48% 26 - 35 10 40% 36 - 45 10 40% 45- 55 3 12% Above 55 2 8% Single 10 40% Married 12 48% Divorce 2 8% Widowed 1 4% Certificate 2 8% Diploma 4 16% Bachelor Level 10 40% Master Level 9 36% Gender Age Marital Status Educational Level 6
8. Table2 : It is observed that the 52% of the respondents were males since there was 48% female of the respondent. While number of male respondents were 13 out of 25 participants as well as female respondent number was 12. Regarding to the age of respondents is it showed that 40% of the population ware between 26 to 35 and 36 to 45 where 12% ware between 45 to 55 and the remaining 8% was above 55 which means only two participants ware above that age. Concerning the marital status shows that the 40% of the respondent were single which means 10 of total respondents, where 48% of the respondents were married which means 12 of total respondent and where 8% of the respondent were Divorced which means 2 and other remaining participants were 4% was widowed which means 1 persons of the respondents. This table also indicates that the majority of the respondents are Bachelor level, 40% of the participants were Bachelor degree level. While 36% of them were master level, and the 16% of were diploma and remaining 8% were secondary level students. 4.2 Research findings The first objective of this study was to examine the relationship between banks and economic growth in Somalia. All the relevant variables were tested as mentioned earlier and the results revealed that banks play significant role in economic growth and majority of respondents strongly agreed that since the central government collapsed the state doesn’t have legally and properly working central banking so the economic situation and supply of money in the market was not noble as well as the state doesn’t have internationally recognized bank therefore it resulted for economic decline however absence of development it plays an effective role for economic reject. The second objective of the study was to establish the effect of remittances “Hawala” on economic growth in Somalia. The result indicates that the majority of participants strongly agreed that there is a strong relationship between remittances and economic growth knowing that for the last three decade remittances was play an important role for economic growth via sending the money from abroad to families and business entities furthermore remittances help households to get money from their relatives in abroad to cover daily life business firms send, receive and collect money using though the remittances. The third objective of this study was to examine the relationship between the microfinance institutions and economic growth in Somalia. All the relevant variables were tested to achieve this 7
9. objective . Consequently, the results of the study reveal that microfinance institutions can be the most appropriate method by which poverty can be eliminated, create jobs and opportunities although they are considered a new phenomenon in Somalia. 5.0 Conclusion and Recommendations In this paper, the researcher has explained the impact of financial institutions on economic growth in Somalia, Financial institutions perform an important role in the development process, particularly through their role in allocating resources to their most productive uses. It is recommended to develop and implement legal financial framework and strategies to International financial institutions and foreign investors. The state has to collaborate financial institutions to motivate and mobilize society to build and increase the habit of society in banking and financial institutions. Somali remittances in most countries do not have license to operate and send money but they have an account from other banks to send money in Somalia so that the study will recommend them to take license in order to transfer money in a legal way. The study will recommend International Financial organization and other related bodies to help the state in order to improve the quality of existing microfinance institutions and craft new ones. 6.0 References Bank, W. (2015, March 31). Financial Sector "Islamic Finance". Retrieved from Work Bank: http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance CEO, D. D. (2012, January 20). PRNewswire. Retrieved from http://www.prnewswire.co.uk/newsreleases/dahabshiil-ceo-gives-lse-lecture-on-value-of-remittances-144567005.html Toure, A. (2016). World Bank Makes Progress to Support Remittance Flows to Somalia. Washington: The World Bank . Ahmed, I. (2000). Remittences and their impact in Somaliland. Hargaisa: hargaisa pringting press. Levine. (2012). microfinance in africa: way for economic development. Akra: akra African printer. sandhu, k. l. (2001). remittances and illegal migrant in USA. Virginia: south Virginia print centre. thiel, k. (2001). Banks and nonbank financial institutions. paris: APR Publication Centre. Poutziouris, P. C. (2005). Finance and Growth: Theory and Evidence. Oslo: NBER Working Paper. 8