Islamic Banking in Somalia; Challenges and Opportunities

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1. Journal of Islamic Banking and Finance April – June 2019 93 Islamic Banking in Somalia; Challenges and Opportunities By Daud Dahir Hassan Abstract Nowadays, we hear about the emerging of Islamic banking in Somalia. The most important purpose of this study was to gain the challenges and opportunity that are facing Islamic banking in Somalia. The methods and procedures used in gathering data was primary and secondary data. Document review questions and personal interviews were used to gather data for the study. Research papers on Islamic banking, textbooks, magazines, and websites were used to analyze information for the purpose. To be specific, research finding shows that The absence of Sharia advisory board in the country, lack of active central Bank and Lack of Financial institution, Lack of awareness and proper understanding is one of the challenges that facing Islamic Banking in Somalia. On the other hand, the research findings show that there are greater opportunities in the Somalia for Islamic banks because the social acceptance for Islamic banking and finance in the country is higher compared to conventional banks, and the existing of some informal practice of Islamic banking products facilitates to have a formal Islamic banking system. Key Terms: Sukuk, Islamic Banking, Central Bank of Somalia 1.0 Introduction Islamic Banking refers to a system through which finance is provided in the form of money in return for either equity or rights to share in future business profits, or in the form of goods and services delivered in return for a commitment to repay their value at a future date1. The Islamic finance industry has expanded rapidly over the past decade,  1 Author: Daud Dahir Hassan, a researcher and Islamic financial expert, MBA in Islamic Bank, Garoe, Pl, Somalia. E-mail: dauddhassan4@gmail.com This definition is derived from the keynote address delivered by Dr. Mabid Ali Al-Jarhi, the then Director of the Islamic Research and Training Institute, at the Conference on Islamic banking and finance held at Brunei, Darussalam, Brunei and jointly organized by IRTI and the University of Brunei during 5-7 January 2004.
2. Journal of Islamic Banking and Finance April – June 2019 94 growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non- bank financial institutions, capital markets, money markets and insurance(“Takaful”). After the collapse the Somalia Economy was deeply depending on Money Transfer Companies (Hawala System) which have arisen with the hope to fulfil this gap and deliver some of basic banking services. As a result, Hawala System becomes the major financial institutions in the country due to their faster and cheap service charges, growing public trust and the reliability on its service and due to having agencies across the world, which are handling up to $1.6 billion in remittance annually to the home land (CIA world fact-book statistics, 2012). The role of the Hawala system is not ended with transferring money from overseas to back home, but it plays important role in trade and local investment financing since there is no investment and commercial banks in Somalia. Moreover, the Hawala system acts as a saving bank by accepting the public deposits in its current and saving accounts. Somalia has developed Financial Institution Law No. 130/2012, which provides the general guidelines of financial institutions operations, both Islamic and conventional. This situation leaves the financial industry to accommodate and to be open for conventional financial institutions. 1.1 Statement of problem and research Objectives The problem to be addressed in this paper is to will examine the major challenges experienced by Islamic financial institutions in Somalia, more specifically the following challenges; The effect of the absence of effective and comprehensive Financial regulation that controls the operations of Islamic Banks in Somalia. Lack of customer awareness and limited diversified products offered by Islamic banks inSomalia. The specific objectives of this study is: 1, To establish the effect of Customer perception on Islamic Banks in Somalia. 2. To figure out the regulatory situation of Islamic financial institutions in Somalia. 3. To investigate the product of Islamic Financial institutions in Somalia. This study was conducted to investigate the challenges and opportunities of Islamic Banks in Somalia consists all its territory, mainly eight major cities which are Mogadishu, Hargaisa, Bosaso, Kismayo, Galkaio, Baidoa, Baletwaine and Garoe. 2.0 Literature review Somalia’s financial system has been decimated by two decades of conflict. In January 1991, all state institutions that provided services and regulated the economy collapsed, including the Central Bank of Somalia and the entire banking system. The commercial bank liabilities that had survived the 1989 bankruptcy of the only commercial bank in the
3. Islamic in Somalia ; Challenges Opportunities JournalBanking of Islamic Banking and Financeand April – June 2019 95 country disappeared. The country has also been suspended from accessing global financial markets, a situation that compromises the leverage of the Transition Federal Government (TFG) in domestic as well as international financial markets2. The situation in Somaliland provides a more detailed view of the incipient nature of financial services in Somalia. The Bank of Somaliland, which was in its inception a regional arm of the Central Bank of Somalia, currently operates itself under a Somaliland 1994 “Constitutive Law”. So far, the Bank of Somaliland is not in a position to perform key central bank functions, as it has not developed the typical in addition, past circulation of counterfeit currency (by individuals) has led to inflation and hyperinflation and an increasingly dollarized system within the Somali economy. In December 2006, the Central Bank of Somalia reopened its offices in Mogadishu and Baidoa, but it continues to have limited functionality. It is operating under Decree Law No 6 of 18 October 1968 (although a draft Central Bank Bill and Banking Bill have been developed). 2.1 Opportunities of Islamic Banking in Somalia Most of the universities in Somalia now offer courses in conventional banking and finance and yet there are no conventional commercial banks in Somalia. The graduates of these programs would have difficulty during the employment process. However, Islamic finance can take advantage to boost this emerging industry. The Somali people, due to their faith, favor ethical based financing and transactions. In addition to this, about 100% of Somalians are Muslims, which serves a basic platform for Islamic Finance to grow. Since there is sanity coming up in the polity now, this will be an added benefit for IFB industry to establish their operations in the country. To conclude, this review will support the objective of making Somalia becomes a financial hub in East Africa. There is a vital demand for academic and practical training in this developing sector. However, lack of harmonization of curriculum and regulations between the universities remains a challenging issue. This may create obstacles to the development of Sharia compliant banking system (Jama, 2018). 2.2 Products of Islamic Banks in Somalia Islamic Banks in Somalia offer an Islamic savings and current accounts. The savings accounts offer profit sharing and can be specialized in specific sectors of the economy, upon the client wish, while current account is for everyday money usage. FSB Islamic loan products are geared towards larger projects, like building and renovation financings. Trade Financings are also available to facilitate importing goods to the Somali market. 2  The bank can finance new real estate (property development) by Istina,  Financing of old real estate is set up through Diminishing Musharakah,  agriculture production is financed by Salam contracts,  Equipment are financed through Murabaha Purchase Order financing, Somalia relations with international creditors were frozen in late 1980s. As of 2007, Somalia’s national debt stood at US$ 3.3 billion (of which 81% is arrears), comprising 40% owed to multilaterals, 46% owed to Paris Club creditors and 14% owed to non-Paris Club creditors.
4. Journal of Islamic Banking and Finance April – June 2019 96  Business Expertise like running a restaurant is financed by Mudarabah financing. Clients can also invest in safe fixed return products like Treasury Murabaha deposits accounts or by investing together with the bank in some of its associated business (Musharakah) like Islamic finance operator (Takaful), which are riskier but carry more profit rates if it is successful. The bank’s aim is to move Somalia towards modern and more secure cashless society together with the mobile phone and internet-based banking facilities (FSB, 2012). 2.3 Growth of Islamic Finance in Somalia In 1970s was the time that Islamic banking system emerged in Somalia. Islamic Banking is interest free banking governed by the principles of Islamic Sharia (LAYLA ABDULLAHI, MOHAMED HASSAN, AMIN HASSAN, 2016) .In the modern era Islamic banking is growing very fast due to its optimistic impact on every individual, industry and the economy as a whole. As Islamic banking is not only covering the credit worthiness and the ability to pay the loans and the profits as and when it is due, it also increases the worth of the project which is directly proportionate to the profit of the project. Ultimately, projects grow at a rapid speed and business are getting bigger and bigger (Shahzad, 2012). 2.4 Challenges Facing Islamic Banking Services Lack of Awareness and understanding: Despite the growth of Islamic banking over the last 30 years, one of the main challenges facing Islamic banking is the poor understanding about its operations.  Regulatory Challenges: The relationship between Islamic banks and monetary authorities is a delicate one. Whatever the goals and functions are, Islamic banks came into existence in an environment where the laws, institutions training and attitude are set to serve an economy based on the principles of interest.  Lack of Supportive Institutional and Market links: Islamic banking is at an early stage of learning and experience, lacking the flexibility to choose arrangements which best suits their need in reacting to structural shifts in the economic setting as well as changes in consumer preferences.  Need for Professional Bankers: There is a need to institute professionalism in banking practice to enhance management capacity by competent bankers committed to their profession. Because, the professionals working in Islamic banking system have to face bigger challenge, they must have a better understanding of industry, technology and the management of the business venture. They also have to understand the moral and religious implications of their investments with the business ventures. There is also a need for banking professionals to be properly trained in Islamic banking and finance. Most banks‟ professionals have been trained in conventional economics. They lack the requisite vision and conviction about the efficiency of the Islamic banking (Olad, 2012).
5. Journal of Islamic BankingChallenges and Finance – June 2019 Islamic Banking in Somalia; andApril Opportunities 3.0 97 Research Methodology A descriptive research design was used to get a deeper information and high analytical approach and a purposive sampling was conducted on Somalis who met the research selection criterion such as financially literacy. The researcher used both interview and questionnaire research instruments which are structured set of questions designed to generate the information required for specific purpose. The researcher demonstrated analytical discussion of research findings based on evidence compiled with logical and analytical arguments. Data was analyzed both quantitatively and qualitatively. Descriptive methods were employed and data presented in the form of frequent distribution tables, graphs and charts that facilitated description and explanation of the study findings. 3.1 Data analysis and discussion 3.2 Demographic Profile of the Respondent The table below shows the demographic profile of the respondents. Regarding the gender of the respondents, 64% of respondent ware male while the rest which is 36% was a female. Concerning the age of respondents, 65.3% of respondent ware between the age of 20 and 30 years, 17.4% of respondent ware between the age of 31 and 40, 10.6% ware between the age of 41 and 50, while the rest 6.7% ware above the age of 50. On marital status of respondent, 48% of respondent are signal, 44% of them are married while the rest 8% are divorced. Finally, respondents ware also questioned about their educational level, 2.6% of them have a diploma, 44% of them have a University degree likewise 44% of them have a master degree, 5.4% of respondent have a PhD while the remaining 4% have other including military or religious knowledge. Table 1. Profile of the respondents Variable Frequency Percentage Male 48 64% Female 27 36% Total 75 100% 20 – 30 49 65.3% 31 – 40 13 17.4% 41 – 50 8 10.6% Above 50 5 6.7% Total 75 100% Single 36 48% Married 33 44% Gender Age Marital Status
6. Journal of Islamic Banking and Finance April – June 2019 98 Divorce 6 8% Total 75 100% Diploma 2 2.6% University Degree 33 44% Master Degree 33 44% PhD 4 5.4% Others 3 4% Total 75 100% Educational Level Source: Primary data. 3.3 Discussion of the results The first objective of this study was to establish the effect of Customer perception on Islamic Banks in Somalia. All relevant variables were tested as mentioned earlier and the results revealed that establishing Islamic banks in Somalia is the existence of low level of awareness about the operations of Islamic Banking in Somalia. However, the overall low awareness score may be attributed to lack of understanding and awareness about its nature and operations or may be due the fact that most of the respondents are familiar with the prohibition of Riba. Moreover, many respondents do not understand that Islamic banking is useful and beneficial to the growth and development of the local economy and is an indication of how wrong people think about the importance of Islamic banking in the Somali economy and half of them do not have a bank accounts in local Islamic banks. The second objective of this research was to figure out the regulatory situation of Islamic financial institutions in Somalia. All the relevant variables were tested to achieve this objective. Consequently, the results of the study reveal that Regulatory challenges are among the main challenges facing Islamic banking in Somalia. Therefore, for further understanding of the regulatory challenges facing Islamic banks in Somalia, specific items have been directed to reveal respondents' assessment of the current banking system. 39% of respondents agreed that absence of well-functioning central bank have a negative impact on Islamic banks in Somalia. Meanwhile, according to finding of the study most of respondent belief that lack of Islamic financial regulation is the main challenge that face Islamic banks in Somalia. Nevertheless, that majority of respondent agreed that nonexistence of sharia advisory board in the country have weakened the performance of Islamic banks in Somalia. Finally, the third objective of this study was investigate the product of Islamic Financial institutions in Somalia. Similarly, all relevant variables were tested and the results revealed that products of local Islamic banks are less practiced compared to Islamic banks in middle east. The other view that examined the product challenge in Islamic banking in Somalia is that majority of respondent confidence that the product and service of Islamic banks are not efficient and time effective
7. Islamic Banking in Somalia ; Challenges and Opportunities Journal of Islamic Banking and Finance April – June 2019 4.0 99 Conclusion This study had three research objectives and all of them were achieved by testing their respective relevant variables as previously discussed. Covariance based structural equation modelling using SPSS was performed on the data. Results revealed that there is a high demand for the revival of the country’s banking system and the provision of banking services consistent with the belief of the local population who are 100% Muslims has a high chance of success which means that Islamic have opportunity in Somalia If the supremacy of the law can be guaranteed. This suggests that the success on the revival of the banking sector in Somalia will greatly depend on the level of customer awareness to adopt Islamic banking. Also, the results revealed that a proper financial regulation and sharia advisory board Islamic banks are highly needed. Finally, the research found that Islamic banks have to adopt the global market of Islamic finance and offer a wide variety of product. References: Alawode, A. A. (2015, March 31). World Bank. Retrieved from World Bank: http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance CBS. (2018, Mar 06). Central Bank of Somalia. Retrieved from http://www. somalbanca.org /financial_institutions/brief_history_of_the_somali_ financial_ institutions.html Dictionary, F. F. (2018, Febuary 19). Farlex FinancialDictionary. Retrieved https://financial-dictionary.thefreedictionary.com/Islamic+Banking FoA. from (2018, Mar 06). Fortune of Africa. Retrieved from http://fortuneofafrica. com/somalia/financial-sector-profile-of-somalia/ ISDB. (2002, Jan 23). Islamic Development Bank. Retrieved from http://www.iefpedia. com/english/wp-content/uploads/2009/11/ISTISNAA-MODE-OF- FINANCING.pdf Jama, A. (2018, Feb 10). Islamic Finance Education Country Report. ISLAMIC finance education in somalia: opportunities and challenges, pp. 49-54 Layla abdullahi, mohamed hassan, amin hassan. (2016). The Contribution of Islamic Banks to Economic Development of Somalia. SIMAD's Somali Business Review, 17-21. Olad, M. (2012). Islamic Banking: prospectives, challenges and opportunites in Ethiopia. Addis Ababa: Addis Ababa University. Warsame, M. (2016). Can Islamic Banks Flourish in Somalia after 25 Years of the Collapse of the Country’s Entire Financial System? . Sharjah: iiste. Yussuf, O. (2014). Islamic banking in Somalia; challenges and opportunities. Mogadishu. Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk . (2015). IMF working Papaer, an overview of Islamic Finance. Washington: IMF. ICS. (2010). Banking, remittances, and the role of the central bank in promoting financial and private sector development in Somalia. Istanbul: Istanbul Press.