Somali Finance

Somali finance operates in a complex landscape shaped by decades of conflict, a largely informal economy, and the influence of Islamic finance principles. Understanding it requires considering both the challenges and the innovative solutions Somalis have developed. One of the most distinctive features is the prevalence of *hawala*, a traditional, trust-based money transfer system. In the absence of a robust formal banking sector for many years, hawala became the primary means for remittances, which constitute a substantial portion of Somalia's GDP. Somalis living abroad rely on hawala to send money to family members, supporting livelihoods and driving economic activity. While vital, the informality of hawala poses challenges for regulation and can be vulnerable to misuse. Efforts are underway to integrate hawala operators into the formal financial system to improve transparency and compliance. The formal banking sector is gradually developing. Commercial banks, primarily based in Mogadishu and major cities, offer services like current accounts, savings accounts, and loans. However, access to these services remains limited, particularly in rural areas. The growth of the formal sector is hampered by factors such as political instability, security concerns, a lack of financial literacy, and stringent regulatory requirements. Islamic finance principles play a significant role. Many Somalis prefer financial products that comply with Sharia law, which prohibits interest (riba). This has led to the emergence of Islamic banks and financial institutions offering products like *murabaha* (cost-plus financing) and *mudarabah* (profit-sharing). The demand for Sharia-compliant finance is driving innovation and shaping the development of the financial sector. Microfinance institutions (MFIs) are also playing an important role in providing access to finance for small businesses and entrepreneurs, particularly women. MFIs offer small loans and other financial services to those excluded from the formal banking sector, helping them to start or expand their businesses and improve their livelihoods. Despite these positive developments, Somali finance faces significant challenges. The lack of a fully functional national payment system hinders financial transactions and economic activity. Weak regulatory oversight and a lack of institutional capacity contribute to financial instability and vulnerability to illicit financial flows. Corruption remains a persistent problem, undermining trust and hindering economic development. The Somali government, with support from international partners, is working to address these challenges by strengthening financial regulations, promoting financial inclusion, and combating corruption. Efforts are underway to modernize the payment system, improve financial literacy, and enhance regulatory oversight. However, progress is slow and requires sustained commitment and international support. Looking ahead, the future of Somali finance hinges on several factors. These include continued political stability, improved security, the development of a robust regulatory framework, and increased investment in financial infrastructure. Embracing technology and promoting financial innovation will also be crucial to expanding access to finance and fostering sustainable economic growth. Bridging the gap between the informal and formal sectors, particularly regarding hawala, will be key to unlocking the full potential of the Somali financial system.