Professional Documents
Culture Documents
MOGADISHU - SOMALIA
BY
OF UNIVERSITY
OF SOMALIA
(UNISO)
May
2018
I
STUDENT DECLARATION
I declare that this senior project entitled by The Role Of Central Banking In commercial
banks In Mogadishu – Somalia. is the result of my own research except as cited in the
references. The senior project has not been accepted for any degree and is not concurrently
submitted in candidature of any other degree.
Signature: ………………………….
Date: …………………….....
II
SUPERVISOR APPROVAL
I hereby declare that I have read this senior project and in my opinion, this senior project
Is sufficient in terms of scope and quality for the award of Bachelor Degree of Banking and
Finance and I accepted for the submission to the
Signature:____________________________________
Date: ____/_______/______
III
EXAMINING PANEL APPROVAL
This senior project entitled (The Role Of Central Banking In commercial banks In Mogadishu
- Somalia) prepared and submitted by: (SHUKRI YUSUF ADAN ) in partial fulfillment of
the requirement for the award of Bachelor degree of (Banking and Finance) has been
examined and accepted by examining panel.
_____________________________________________________________
_____________________________________________________________
Date: __________/_________/________________
IV
ACKNOWLEDGMENT
First of all, I would like to say praise is due to Allah that enabled me to complete my thesis and
indeed, throughout my life: I can do everything through him who gives me strength,.
Secondly, I would like to thank my dear Supervisor ABDINASIR AHMED ALI for his
professional guidance, follow up and great support, useful comments, remarks and engagement
through the learning process of this thesis, and also thanks to the Dean of business administration
in University of Somalia (UNISO) Mr. Said Abdi Mohamud my appreciation goes to all my
competent lecturers who taught me one time or the other.
Furthermore, I would like to thank the All participants in my research, who have willingly
shared their precious time during the process of answering the questionnaire.
I would like to thank my loved friends, who have supported me throughout entire process,
both by keeping me harmonious and helping me putting pieces together.
I will be grateful forever for your love. Of course, this thesis would not have been possible
without the participation of the subjects.
Last but not least, I would like to thank my parents for their unconditional support, both
financially and emotionally throughout my degree. In particular, the patience and
understanding shown by my mother, Father, sisters and brothers during the time of this
course, is greatly appreciated. I know, at times, my temper is particularly trying.
Finally, I am grateful to all who had either directly or indirectly been very supportive and helpful in
making this research in success.
V
TABLE OF CONTENTES
STUDENT DECLARATION......................................................................................................................II
SUPERVISOR APPROVAL......................................................................................................................III
ACKNOWLEDGMENT.............................................................................................................................V
TABLE OF CONTENTES.........................................................................................................................VI
ABSTRACT...............................................................................................................................................IX
CHAPTER ONE.........................................................................................................................................11
INTRODUCTION......................................................................................................................................11
1.0 INTRODUCTION............................................................................................................................11
Figure 1.9.1.............................................................................................................................................18
CHAPTER TWO........................................................................................................................................19
LITERATURE REVIEW...........................................................................................................................19
2.0 Introduction......................................................................................................................................19
2.4 BANKINGSUPERVISION..............................................................................................................48
2.5 Conclusions..........................................................................................................................................52
CHAPTER THREE....................................................................................................................................53
RESEARCH METHODOLOGY................................................................................................................53
3.0 INTRODUCTION............................................................................................................................53
3.6.2 reliability....................................................................................................................................55
3.6.1 validity.......................................................................................................................................56
CHAPTER FOUR......................................................................................................................................58
4.0 Introduction..........................................................................................................................................58
VII
4.1.2 Table Age of the respondents.........................................................................................................59
CHAPTER FIVE........................................................................................................................................64
5.0 Introduction..........................................................................................................................................64
5.2 Conclusions..........................................................................................................................................65
5.3 Recommendation..................................................................................................................................66
APPENDIX (A)..........................................................................................................................................67
REFERENCES...........................................................................................................................................67
APPENDIX (B)..........................................................................................................................................72
QUESTIONNAIRE....................................................................................................................................72
VIII
ABSTRACT
IX
CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
The first Chapter of the study focus on the following section: Background of the study,
Problem of the study, puropse of the study, specific object of the studyresearch
questions/hypothesis, Scope of the study, Significance of the study, operational definition
and conceptual framework.
Central banks play a crucial role in ensuring economic and financial stability. They conduct
Prudential regulation, supervition and monetary policy to achieve low and stable inflation. In
the wake of the global financial crisis, central banks have expanded their toolkits to deal with
risks to financial stability and to manage volatile exchange rates. Central banks need clear
policy frameworks to achieve their objectives.(Goodhart,2000).Operational processes
tailored to each country’s circumstances enhance the effectiveness of the central banks’
policies.
Prudential regulation is an important part of the key activities of any economy involving the
supervision of financial institutions. They are important players in the financial markets and
should have their activities under surveillance to ensure that there is stability in the financial
system and deposits taken from the public are safe and secure.
Central banks perform two main functions namely macroeconomic and microeconomic
regulation. These activities are very closely inter-related because the achievement of
monetary and price stability rests on maintaining micro-level financial stability in the
payments and banking system (Goodhart, 2000)1. However in the last decade there has been
more and more separation of these two functions by policy makers. Examples where this has
occurred include the United Kingdom where the Financial Services Authority (FSA) was
10
established in June 1998 to supervise Financial Institutions.Following this move by the
United Kingdom, we had more and more European countries follow the same trend
(Masciandaro, Quintyn, 2009).
Between the years 1998-2008, many countries also made changes to their supervisory
structure (Masciandaro, Quintyn, 2009). It is noteworthy that in studies conducted countries
with a developed financial system did not have central bank exclusivity over banking
supervision but rather this was the case in less developed countries with little or no
international bank presence (Blei, 2001). The reason for these changes are the more complex
nature of financial markets and the seeming blur between the various kind of financial
institutions operating in the markets however in light of the rude awakening in 2007-2008
with the global crisis, there are attempts worldwide by policy makers to revisit their
regulatory structure.
In every region there is a lot of rhetoric on the structure of Central Banking and where
prudential regulation should be placed in that structure. This study highlights the fact that
there is no model that fits all situations. There are pros and cons to whichever method is
adopted by regulatory authorities and it is also dependent on other factors such as the level
of development and sophistication in the economy being considered.
The main focus will be on the prudential regulation activities of the Central Bank of Somalia
and will attempt a review of the effectiveness of the adopted structure. As with many
structural policies that emanate from developed countries, it has been widely acknowledged
that these policies require adaption to work in developing countries(Masciandaro, Quintyn,
2009).
Commercial bank A bank dealing with the general public, accepting deposits from and
making loans to large numbers of households and small firms. Such banks are known in the
UK as retail or ‘high street’ banks. They also provide various services for depositors,
including provision of cash and credit cards, storage facilities for valuables and documents,
foreignexchange,stockbroking,mortgagefinance,andexecutorservicesbanks that offers a broad
range of deposit accounts, includingchecking savings and timedeposits and extends loans to i
ndividuals and business.Commercil banks can becontrasted with investmentbanking firms, su
ch as brokerage firms, which generally areinvolved in arranging for the sale of corporate or
11
municipal securities,(Campbell R. Harvey 2012).So, Commercial bank is a intermediate
institution between the brower and lender.
In africa central bank play the development of comercial bank in many african countries
Like their counterparts around the world, African central banks are also starting to ask how
the financial and price stability mandates could best be coordinated. There were several
approaches to this issue. Some central banks had established an internal macroprudential
framework and drafted legislation restricting the scope of universal banking. All saw that
central banks faced a major challenge in fulfilling multiple mandates. Some thought it
moreimportant to strengthen domestic banking systems than to draft new governance
arrangements for financial stability.
One Governor noted that any potential conflicts between mandates disappeared when an
appropriate time horizon was applied. Several central banks also noted a need for better
cooperation with foreign banking regulators, either in neighbouring countries or in the home
countries of foreign-owned banks operating in their jurisdictions. All in all, much remains to
be done in this area. The good news is that central banks in Africa recognise the importance
of solid financial stability arrangements and are well aware of ongoing policy debates on this
issue worldwide.
Commercial banking started in Nigeria in 1872 with the establishment of the African
Banking Corporation. It distributed the Bank of England notes for the British Treasury. The
First Bank of Nigeria, then the Bank of British West Africa, was set up in 1894 followed by
the Barclays Bank, DCO in 1917 (now known as Union Bank of Nigeria). At that stage of
Nigeria's development, these Banks were set up to provide banking services for the Colonial
Administration and British Commercial Interests.(Alashi, S. O. (1993).
They both enjoyed a virtual monopoly in the industry until National Bank of Nigeria came
into existence in 1933 athe first indigenous bank which managed to Survive since two other
indigenous banksIndustriai and Commercial Bank and the Nigerian Merchantile Bank
established prior to that time had collapsed. Between May 1945 and the present time,
indigenous banking development went through a period of turbulence particularly in the last
50*s and early 60*s with many of them going exit of business, either for lack of sufficient
12
capital, lack of patronage or bad management, e.g. Nigerian Farmers and Commercial Bank,
Merchant Bank Limited, etc.
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 country
disappeared. The country has also been suspended from accessing global financial markets, a
situation that compromises the leverage of the Somali Federal Government (TFG) in
domestic as well as international financial markets.1In addition, past circulation of
counterfeit currency (by individuals) has led to inflation and hyperinflation and an
increasingly dollarized system within the Somali economy.
With the passing of the Financial Institutions Law of 2012, the CBS is responsible officially
for the licensing and supervision of Banks and Non Banks Financial Institusions. The CBS
has made steady progress in developing regulations to support the law, with assistance from
the International Financial Institutions (IFIs) Regulations passed by the CBS and approved
by the CBS Board of Directors .
commercial bank A bank that provides a wide range of financial services, both to the general
public and to firms. The principal activities are operating current accounts, receiving
deposits, taking in and paying out notes and coin, and making loans. Additional services
include trustee and executor facilities, the supply of foreign currency, the purchase and sale
of securities, insurance, a credit-card system, and personal pensions.
Central banks perform two main functions namely macroeconomic and microeconomic
Regulation. These activities are very closely inter-related because the achievement of
effective regulations, supervision s and monetary and price stability rests on maintaining
micro-level financial stability in the payments and banking system (Goodhart, 2012) Central
banks around the world play important role of regulating, supervision and controlling the
functions of commercial banks in order to develop the whole economy of the country.
13
Somali is emerging from more then two decades of civil war conflict the destroyed its
financial system and is today making significant progress towards consolidating peace,
entrenching state-building and driving economic recovery.
The central bank acts as a regulator as well as as s supervisor for the financial system in
Somalia it appears that CBS is moving towards the right direction, still there is no effective
regulations and supervistion role of central bank towards the commercial bank.
However,this study will therefore,wiil seek to examine or investigate the role of monetery
policy,banking regulations and banking supervision in the commercial banks in somalia.
The purpose of this study is to examine the role of central banking in commercial bank.
1.6.1 Content scope This study will focus on the role of central banking on
commercial banks.
1.6.2 Geographical scope This study is carry out in Mogadishu Somalia
1.6.3 Time scopeThis study will cover a period of months started march 2018 upto july 2018.
14
1.7 Significance of the study
This study shall be of great relevance to the commercial banks under study aswell as other
financial institutions. the non-financial busines firms,whether security agencies or
regualatory agencies shall also benefit from the research findings.
This is because the result of the study shall enable the users especially commercial banks to
appraise its performance and to review its operations critically formore result oriented
approach in the dealing with its regulation facilities.
Monetary policy According to the (Koshy Mathai 2009).monetary policy has lived under
many guises. But however it may appear, it generally boils down to adjusting the supply of
money in the economy to achieve some combination of inflation and output stabilization.
Most economists would agree that in the long run output is fixed, so any changes in the
money supply only cause prices to change. But in the short run, because prices and wages
usually do not adjust immediately, changes in the money supply can affect the actual
production of goods and services. This is why monetary policy—generally conducted by
central banks such as the U.S. Federal Reserve (Fed) or the European Central Bank (EBB)—
is a meaningful policy tool for achieving both inflation and growth objectives.
(Banking Regulation Act 1949),Government and RBI’s Powers Opening of New Banks and
Branch Licensing Constitution of Board of Directors and their Rights Banks Share Holders
and their Rights Concepts Cash-Currency Management Winding up - Amalgamation and
Mergers Powers to Control Advances – Selective Credit Control – Monetary and Credit
Policy Audit and Inspection Supervision and Control - Board for Financial Supervision – its
Scope and Role Disclosure of Accounts and Balance Sheets Sub mission of Returns to RBI,
Corporate Governance.
15
Banking supervision is the process of monitoring banks to ensure that they are carrying out
their activities in accordance with laws, rules and regulations, and in a safe and sound
manner.
Banking supervision the supervision of financial institutions and other credit institutions with
the exception of insurance undertakings.19 in euro area Europe, therefore, prudential
supervision remains a matter of national responsibility.
However, no longer conducts monetary policy. Even in situations in which a central bank is
not the prudential supervisor, (e.g., the ECB), a central bank cannot remain divorced entirely
from the supervisory process, particularly during a financial crisis. Moreover, even when
central banks are not the primary supervisor, central banks' supervisory role may vary to a
large degree. For example, the central bank may retain the power to conduct back-up
examinations2' or it may not. Moreover, the central bank's role (when it is not the primary
supervisor) is likely to be strongly influenced by the general reputation and stature of the
central bank and its governors, as much as by its positive legal authority As Carmine (Di
Noia and Giorgio Di Giorgio).
Commercial banks accept various types of deposits from public especially from its clients,
including saving account deposits, recurring account deposits, and fixed deposits.
Commercial banks provide loans and advances of various forms, including
an overdraft facility, cash credit, bill discounting, money at call etc.
Commercial banks introduce different investment programs for all income level people
Accepting money on various types of Deposit accounts lending money in the form of Cash:
by overdraft, installment loan etc. Lending money in Documentary form Letters of
16
credit, Guarantees, Performance bonds, securities, underwriting commitments, issuing Bank
drafts and Bank cheque, and other forms of off-balance sheet exposure.
A commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes business, personal and mortgage loans, and offers basic financial
products like certificates of deposit (CDs) and savings accounts to individuals and small
businesses. A commercial bank is where most people do their banking, as opposed to
an investmentbank.
Figure 1.9.1
17
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter summarizes the information from the available literature regading theories of
The role of the central bank. This chapter seeks to present in depth details from related
literatures, books, academic journals, and articles relating to the supervisory role of the of
central bank on the commercial banks.
In every countary, there is one bank which acts as the leader of the money market-
supervising ,controlling and regulating the activities of commercial banks and other financial
institutions. It acts as a banker of issue and is in close touch with the government, as a
banker, agent and advisor to the letter. Such a bank is known as the central bank of the
countary.
Monetary policy has lived under many guises. But however it may appear, it generally boils
down to adjusting the supply of money in the economy to achieve some combination of
inflation and output stabilization. Most economists would agree that in the long run output is
fixed, so any changes in the money supply only cause prices to change. But in the short run,
because prices and wages usually do not adjust immediately, changes in the money supply
can affect the actual production of goods and services.
This is why monetary policy generally conducted by central banks such as the U.S. Federal
Reserve (Fed) or the European Central Bank (ECB)—is a meaningful policy tool for
achieving both inflation and growth objectives. In a recession, for example, consumers stop
spending as much as they used to; business production declines, leading firms to lay off
18
workers and stop investing in new capacity; and foreign appetite for the country’s exports
may also fall. In short, there is a decline in aggregate demand to which government can
respond with a policy that leans against the direction in which the economy is headed.
Monetary policy is often that countercyclical tool of choice. Such a countercyclical policy
would lead to the desired expansion of output (and employment). But, because it entails an
increase in the money supply, it would also result in an increase in prices.
As an economy gets closer to producing at full capacity, increasing demand will put pressure
on input costs, including wages. Workers then use their increased income to buy more goods
and services, further bidding up prices and wages and pushing generalized inflation upward
— an outcome policymakers usually want to avoid.
Twin objectives
The monetary policymaker, then, must balance price and output objectives. Indeed, even
central banks, like the ECB, that only target inflation would generally admit that they also
pay attention to stabilizing output and keeping the economy near full employment. And at the
Fed, which has an explicit dual mandate from the U.S. Congress, the employment goal is
formally recognized and placed on an equal footing with the inflation goal.
Monetary policy is not the only tool for managing aggregate demand for goods and services.
Fiscal policy—taxing and spending—is another, and governments have used it extensively
during the current crisis. However, it typically takes time to legislate tax and spending
changes, and once such changes have become law, they are politically difficult to reverse.
Add to that concerns that consumers may not respond in the intended way to fiscal stimulus
(for example, they may save rather than spend a tax cut), and it is easy to understand why
monetary policy is generally viewed as the first line of defense in stabilizing the economy
during a downturn. (The exception is in countries with a fixed exchange rate, where
monetary policy is completely tied to the exchange rate objective.)
19
Independent policy
Although it is one of the government’s most important economic tools, most economists
think monetary policy is best conducted by a central bank (or some similar agency) that is
independent of the elected government.( Steven N. Durlauf Ireland, Peter N., 2009.
This belief stems from academic research, some 30 years ago, that emphasized the problem
of time inconsistency. Monetary policymakers who were less independent of the government
would find it in their interest to promise low inflation to keep down inflation expectations
among consumers and businesses. But later, in response to subsequent developments, they
might find it hard to resist expanding the money supply, delivering an inflation surprise. That
surprise would at first boost output, by making labor relatively cheap (wages change slowly),
and would also reduce the real, or inflation-adjusted, value of government debt. But people
would soon recognize this inflation bias and ratchet up their expectations of price increases,
making it difficult for policymakers ever to achieve low inflation.
How does a central bank go about changing monetary policy? The basic approach is simply
to change the size of the money supply. This is usually done through open market operations,
in which short-term government debt is exchanged with the private sector. If the Fed, for
example, buys or borrows treasury bills from commercial banks, the central bank will add
cash to the accounts, called reserves, that banks are required keep with it. That expands the
money supply. By contrast, if the Fed sells or lends treasury securities to banks, the payment
it receives in exchange will reduce the money supply. While many central banks have
experimented over the years with explicit targets for money growth, such targets have
20
become much less common, because the correlation between money and prices is harder to
gauge than it once was.
Many central banks have switched to inflation as their target—either alone or with a possibly
implicit goal for growth and/or employment. When a central bank speaks publicly about
monetary policy, it usually focuses on the interest rates it would like to see, rather than on
any specific amount of money (although the desired interest rates may need to be achieved
through changes in the money supply). Central banks tend to focus on one policy rate—
generally a short term, often overnight, rate that banks charge one another to borrow funds.
When the central bank puts money into the system by buying or borrowing securities,
colloquially called loosening policy, the rate declines. It usually rises when the central bank
tightens by soaking up reserves. The central bank expects that changes in the policy rate will
feed through to all the other interest rates that are relevant in the economy.
Transmission mechanisms
Changing monetary policy has important effects on aggregate demand, and thus on both
output and prices. There are a number of ways in which policy actions get transmitted to the
real economy. The one people traditionally focus on is the interest rate channel. If the central
bank tightens, for example, borrowing costs rise, consumers are less likely to buy things they
would normally finance—such as houses or cars—and businesses are less likely to invest in
new equipment, software, or buildings. This reduced level of economic activity would be
consistent with lower inflation because lower demand usually means lower prices. But this is
not the end of the story. A rise in interest rates also tends to reduce the net worth of
businesses and individuals—the so-called balance sheet channel— making it tougher for
them to qualify for loans at any interest rate, thus reducing spending and price pressures.
( Lawrence E. Blume,2008)
A rate hike also makes banks less profitable in general and thus less willing to lend—the
bank Lending channel. High rates normally lead to an appreciation of the currency, as foreign
investors seek higher returns and increase their demand for the currency. Through the
exchange rate channel, exports are reduced as they become more expensive, and imports rise
as they become cheaper. In turn, GDP shrinks.
21
Monetary policy has an important additional effect on inflation through expectations—the
self-fulfilling component of inflation. Many wage and price contracts are agreed to in
advance, based on projections of inflation. If policymakers hike interest rates and
communicate that further hikes are coming, this may convince the public that policymakers
are serious about keeping inflation under control. Long-term contracts will then build in more
modest wage and price increases over time, which in turn will keep actual inflation low.
During the past two years, central banks worldwide have cut policy rates sharply—in some
cases to zero—exhausting the potential for cuts. Nonetheless, they have found
unconventional ways to continue easing policy.
One approach has been to purchase large quantities of financial instruments from the market.
This so-called quantitative easing increases the size of the central bank’s balance sheet and
injects new cash into the economy. Banks get additional reserves (the deposits they maintain
at the central bank) and the money supply grows.
A closely related option, credit easing, may also expand the size of the central bank’s balance
sheet, but the focus is more on the composition of that balance sheet—that is, the types of
assets acquired. In the current crisis, many specific credit markets became blocked, and the
result was that the interest rate channel did not work.
A key role of central banks is to conduct monetary policy to achieve price stability (low and
stable inflation) and to help manage economic fluctuations. The policy frameworks within
which central banks operate have been subject to major changes over recent decades.
Since the late 1980s, inflation targeting has emerged as the leading framework for monetary
policy. Central banks in Canada, the euro area, the United Kingdom, New Zealand, and
elsewhere have introduced an explicit inflation target. Many low-income countries are also
making a transition from targeting a monetary aggregate (a measure of the volume of money
in circulation) to an inflation targeting framework.
Central banks conduct monetary policy by adjusting the supply of money, generally through
open market operations. For instance, a central bank may purchase government debt from
commercial banks and thereby increase the money supply (a technique called “monetary
22
easing”). The purpose of open market operations is to steer short-term interest rates, which in
turn influence longer term rates and overall economic activity. In many countries, especially
low-income countries, the monetary transmission mechanism is not as effective as it is in
advanced economies.
Before moving from monetary to inflation targeting, countries should develop a framework
to enable the central bank to target short-term interest rates.
Following the global financial crisis, central banks in advanced economies eased monetary
policy by reducing interest rates until short-term rates came close to zero, which limited the
option to cut policy rates further (i.e., conventional monetary options). With the danger of
deflation rising, central banks undertook unconventional monetary policies, including buying
bonds (especially in the United States, the United Kingdom, the euro area, and Japan) with
the aim of further lowering long term rates and loosening monetary conditions. Some central
banks even took short-term rates below zero.
Bank regulation: a body of specific rules or agreed behavior either imposed by some
government or other external agency, or self-imposed by explicit or implicit agreement
within the industry that limits the activities and business operations of financial institutions.
Regulation of banks has been defined by Llewellyn (1986) as a body of specific rules or
agreed behavior either imposed by government or other external, agency or self-imposed by
explicit or implicit agreement within the industry that limits the activities and business
operations of banks. In a nutshell, it is the codification of public policy towards banks to
achieve a defined objective and/or act prudently. Banking regulation has two major
components:
(ii) The monitoring and scrutiny to determine safety and soundness and ensure
compliance.
The prime reasoning behind the need for bank regulation usually stems from market failures
more often due to externalities, market power, or asymmetry of information between the
buyers and sellers. In the case of banks, the need for regulation is necessitated due to
23
potential systemic crisis and the inability of depositors to monitor the banks3 Allen and
Carletti (2010),.
One of the obviously of repeated fundamental question is “Why are banks so risky”? It is
indeed hard to imagine another sector of the economy where as many risks are managed as in
banking.
Banking is one of the most heavily regulated businesses since it is a highly leveraged (high
debt-equity ratio or low capital-assets ratio) industry. In fact, it is satirical that banks, which
invariably appraise their borrowers based on debt-equity ratio, themselves have a debt-equity
ratio far too contrary to that of their borrowers! In simple terms, banks earn by undertaking
risk on their creditors' money rather than on that of their shareholders'. Their appetite for risk
needs to be con- trolled, as the money involved is not that of their share- holders'. As stated
by Bernanke (1983), Keeley (1990), Calomiris and Mason (2003a, b) and the global
financial crisis, banks' risk-taking behavior affects economic and financial
fragility.Brunnermeir (2009), Greenlaw et al. (2008) and Taylor (2008) provide an
exhaustive overview of the causes preceding and accompanying the global financial crisis.
Dimitri Vitas (1990) also believes that good regulation and supervision will minimize the
negative impact of moral hazard and price shocks on the banking system, thereby leading to a
reduction in bank failures and banking system distress.
It has been postulated that if these functions are efficiently carried out, the economy would
be able to mobilize meaningful level of savings and channel these funds in an efficient and
effective manner to ensure that no viable project is frustrated due to lack of funds.
24
that the national (and global) economy hold on banks, it is important for regulatory agencies
to maintain control over the standardized practices of these institutions.
Supporters of such regulation often base their arguments on the "too big to fail" notion. This
holds that many financial institutions (particularly investment banks with a commercial arm)
hold too much control over the economy to fail without enormous consequences.
This is the premise for government bailouts, in which government financial assistance is
provided to banks or other financial institutions who appear to be on the brink of collapse.
The belief is that without this aid, the crippled banks would not only become bankrupt, but
would create rippling effects throughout the economy leading to systemic failure.
Secondly, it is the factor of moral hazard that induces the risk-taking behaviour of the banks
(Demirgüç-Kunt and Detragiache, 2002),
as this would lead the banks to have more opportunities to engage itself in wide range of
activities (Boyd et al., 1998). The first to quantify “moral hazard” issue by relating the value
of deposit insurance4 with that of a put option on the FDIC Merton (1977). In this regard,
Pennacchi (2005) has evoked significant concerns of moral hazard as that induces the banks
to invest in off-balance sheet portfolios with high systematic risk. Likewise, Bhattacharya et
al., (1998) too have held the view that government deposit insurance affects the behaviors of
banks, which was further acknowledged by Bühler and Koziol (2004).
The Federal Government appears to have had an implicit policy not to allow banks to fail,
A key role of regulation is to prevent crises or to mitigate their effects. The present system
failed to do so. Inadequate regulation around the world also played a part as the crisis
unfolded. There should, however, be no rush to action. The financial sector is unlikely to
embark soon on risky new adventures. The main objective of policy should be to change the
regulatory regime in order to make future crises on this scale less likely without stifling
innovation.
25
least cost in terms of reduced competitiveness, discouragement of innovation or
encouragement of avoidance.
We use the term “regulation” to refer to the rules that govern the behavior of financial
intermediaries (commercial banks).
LICENSING
(b) Describe himself (in whatever terms) as authorized to transact banking business; or
(C) behave, or otherwise hold himself out, in a manner which indicates (or which is
reasonably likely to be understood as indicating) that he is authorized to transact banking
business,
Unless he holds a valid license granted under this Act for carrying out the specific banking
business;
(2) Any person who contravenes subsection (1) commits an offence and shall on conviction
be liable to pay a fine not exceeding 5 penalty currency points for every day on which the
offence continues or to imprisonment for a term not exceeding 3 years, or both.
(3) A bank which, at the commencement of this Act, holds a valid license to carry on banking
business in Somalia issued under the Financial Institution Decree Law No. 37 of 23 Nov.
1989 shall be deemed to have been granted a license under section8
(1) Whenever the Central Bank has reason to believe that a person is transacting or holding
himself out as transacting banking business without a license, the Central Bank shall, at all
times (a) have full and free access to the premises at which that person is suspected of
26
transacting or holding himself out as transacting banking business without a license or at
which that person may have any books or records including electronic records; and
(b) have the power to examine, copy or take possession of any books, records, computers and
other electronic storage medium of that person in order to ascertain whether or not that
person has violated, or is violating, any of the provisions of this Act.
(2) Any refusal to allow full and free access to such premises or to submit such books, or
electronic records or equipment shall be prima facie evidence of the fact of operation without
a license.
(3) Any person who obstructs any Central Bank officer or agent in the performance of the
duties under this section commits an offence and shall be liable on conviction to pay a fine of
20 penalty currency points or imprisonment for a term of not less than 2 years, or both
(1) A person shall not, unless licensed by the Central Bank under the provisions of this Act,
use the word 'Bank' or any of its derivatives or any other word indicating the transaction of
banking business, or the equivalent of the foregoing in any other language, in the name,
description or title under which it transacts business in Somalia or make any representation
whatsoever that it transacts banking business;
(2) Any person who contravenes subsection (1) commits an offence and shall be liable to pay
a fine not exceeding 5 penalty currency points for every day on which the offence continues
or to imprisonment for a term not exceeding 3 years, or both.
(1) Every applicant for a license, other than a public entity, shall be incorporated as a limited
liability company under the Companies Act no………. or a body corporate under similar
laws of another jurisdiction;
(2) Every person intending to transact banking business in Somalia shall apply in writing to
the central bank for a license using the form prescribed and shall together with the
Application ,pay a non-refundable application fee to be prescribed by the central bank, and
submit the following document s.
27
(a) The Memorandum and Articles of Association duly certified;
(c) Duly certified authority from the Board of Directors authorizing the submission of the
application;
(f) a business plan for at least 3 years (including the assumptions underlying the projections
and a sensitivity analysis on varying assumptions) detailing the nature of business and
services proposed, financial projections, internal control and risk management systems (for
credit, liquidity, foreign exchange, interest rate, operational and other risks);
(g) Capital structure including source of initial capital and a demonstration of the financial
ability to meet the ongoing capital requirements;
(h) Audited financial statements for 2 years from companies already in any other business,
and most recent management accounts showing the current trading results of the applicant;
and
(i) Any other information that the Central Bank may request from the applicant from time to
time.
(3) A person who knowingly or recklessly furnishes any document or information which is
false or misleading in a material particular, in connection with an application for a license
falling within subsection (2), commits an offence and shall be liable on conviction to pay a
fine not less than 30 penalty currency points or to imprisonment for a term not exceeding 3
years, or to both.
(1) The Central Bank shall evaluate every application for a license and satisfy itself as to the
ability of the applicant to fully meet the prudential, capital, regulatory, management and
corporate governance requirements for the efficient, safe and sound running of the Banking
business.
28
(2) The Central Bank shall also require to be satisfied that the shareholders, directors and
management are fit and proper persons within the meaning of the fit and proper criteria
prescribed in the second schedule to this Act.
(3) In considering an application for a license, the Central Bank shall require to be satisfied
as to:
(b) The professional competence and integrity of the proposed management and directors;
(c) The adequacy of its capital structure (both minimum and ongoing) and the earning
prospects;
(e) The public interest which will be served by the granting of the license; and
(f) Any other matter which the Central Bank may in its sole discretion consider as relevant.
(4) The Central Bank may upon receipt of the application for a license by notice to the
applicant in writing request the applicant for additional information or clarifications to assist
in the evaluation process.
(5) Every applicant, requested for additional information or clarifications, shall submit such
information or clarifications in full within the period so specified in the request notice.
(6) The Central Bank shall where an applicant fails neglects or omits to submit the
information or clarifications, place the evaluation of the application for a license on hold
until such a time when the information so requested shall have been provided in full.
29
(3) Where a conditional license is granted, the Central Bank, May from time to time, add,
vary, revoke or substitute such conditions as it may consider appropriate and the bank shall
comply with those conditions.
(4) The Central Bank shall before taking any action under subsection (3) of this section;
30
(2) The Central Bank may prescribe different license fees in respect of different classes or
categories of banks and the fees shall apply uniformly to those classes or categories.
(3) An applicant that fails to pay the prescribed license fees on the due date shall incur a
penalty double the amount payable as the license fee and the penalty shall be payable to the
Central Bank before the renewal of a license for a subsequent year.
9. Amendments or Restrictions to a license
The Central Bank may with notice, at any time amend or impose restrictions on any license
issued under this Act if:
(1) The licensee requests the amendment or restriction and the Central Bank considers the
request appropriate; or
(2) The Central Bank considers the amendment necessary for compliance with the provisions
of this Act or desirable to protect depositors or public interest.
10- Revocation of the Licenses issued under this Act
(1) The Central Bank may by order revoke, a license issued under this Act
(a) If the Central Bank is satisfied that the holder of that license (licensee)
(i) Has ceased to transact the licensed business in Somalia;
(ii) Has furnished information or documents to the Central Bank, in connection with its
application for a license, which is or are false or misleading in a material particular;
(iii) being a branch of a foreign bank incorporated outside Somalia, has had its license or
authority to operate revoked by the supervisory authority which is responsible, under the
laws of the country where the bank is incorporated, formed or established;
(iv) proposes to make, or has made, any composition or arrangement with its creditors or has
gone into liquidation or has been wound up or otherwise dissolved;
(v) Is in the opinion of the Central Bank, carrying on its business in a manner detrimental to
the interests of its depositors or customers;
(vi) Is unable to pay its liabilities to its depositors or the public as they mature;
(vii) Has contravened the provisions of this Act in a manner which is serious or persistent;
(viii) Has without the consent of the Central Bank amalgamated with another entity or sold or
otherwise transferred its assets and liabilities to another entity;
(ix) Has failed to comply with any direction given by the Central Bank;
31
(x) Has been convicted of any offence under this Act or any of its directors or officers
holding a managerial or executive position has been convicted of any offence under this Act
or ceased to be a fit and proper person within the criteria set under this Act;
(xi) Has failed to commence operations within twelve months from the date of the issue of
the license; or
(xii) Has been engaged in money laundering or financing of terrorism.
(b) If, after consultations with the Minister, the Central Bank considers that it is in the public
interest to revoke the license.
(2) The Central Bank shall, before revoking any license under subsection (1), serve a notice
in writing on the licensee to show cause why the license should not be revoked and
specifying a date, not less than 21days after the date of the notice, upon which the revocation
will take effect.
(3) An order of revocation shall not take effect until after the expiration of a period of 21
days mentioned in subsection (2).
(4) A person served with a notice under subsection (2) may, upon receipt of the notice, make
written representations to the Central Bank to justify why the license should not be revoked.
(5) The Central Bank shall, upon revoking a license under subsection (1), immediately
inform the licensee of the revocation.
(6) The Central Bank shall cause, to be published forthwith in the Official Bulletin the name
of every licensee whose license is revoked under this section,
(7) The Central Bank shall, upon revocation of the license, take over control of the business
of the licensee and wind up its affairs.
11. Branches of foreign banks
(1) A foreign Bank which intends to carry on banking business in Somalia through a branch,
may on the form prescribed by the Central Bank apply to the Central Bank for a license to set
up a branch in Somalia.
(2) The application shall be accompanied by all the information prescribed in section 6 and in
addition thereto, the Central Bank may request such other information in relation to its
operations in the foreign country, any group which the applicant forms part of, the nature and
extent of supervision exercised or to be exercised by the supervisory authority of the foreign
bank's country of domicile.
32
(3) The Central Bank shall evaluate the application in accordance with the provisions of
section 7 of this Act.
(4) The Central Bank shall, in evaluating the application, seek a no objection from the
banking supervisory authority in the foreign banks home country.
(5) The provisions of sections 7, 8, 9, 10, 11, 12 of this Act shall apply to an application for a
license under this section mutatis mutandis.
(6) The Central Bank shall not grant an application in terms of subsection (2) unless it is
satisfied that appropriate arrangements are in place for the supervision of the branch by the
foreign supervisory authority in the foreign bank’s country of domicile.
(7) A foreign bank which conducts the banking business by means of a branch in Somalia
without a license commits an offence and the provisions of section 3 subsection (2) shall
apply.
12. Publication of list of Banks and branches
The Central Bank may, from time to time, publish a list of banks and branches of foreign
banks:
(1) In the Official Bulletin; or
(2) In such other manner as the Central Bank determines.
13. Location of the Branches outside Somalia
(1) A bank shall not open a branch outside Somalia unless it has obtained prior approval of
the Central Bank.
(2) A bank shall not close any of its branches outside Somalia without seeking the approval
of;
(a) The Central Bank; and
(b) The regulatory authority of the country where the branch is located.
33
PART TWO PRUDENTIAL REQUIREMENTS
Minimum Capital Requirements
(1) A bank shall maintain, at all times, the minimum cash capital unimpaired by losses, in
such ratio to all or any assets or to all or any liabilities or to both such assets and liabilities of
the bank and all its offices in and outside Somalia as may be prescribed the Central Bank by
regulations but which shall in no case be less than USD 5,000,000 (Five million United
States Dollars).
(2) The Central Bank shall make prudential regulations prescribing:
(a) The Minimum paid up cash capital required for any person to commence or to continue to
conduct Banking business in Somalia.
(3) A licensed entity operating in Somalia shall not directly or indirectly reduce its paid-up
capital without the approval of the Central Bank.
(4) Any licensed entity which fails to comply with any requirement prescribed under
subsections (1) and (2) shall immediately notify the Central Bank.
(5) Where any licensed entity fails to comply with any provision of this section, the Central
Bank may, by notice in writing to that entity.
(b) Give such directions to the licensed entity as the Central Bank considers appropriate, and
the licensed entity shall comply with such directions; or
(c) Direct the entity to draw up within a specified time a capital reconstitution plan
acceptable to the Central Bank.
(6) The Central Bank may, by notice in writing, require any bank in Somalia to maintain
capital funds in Somalia of such amount (not being less than the minimum prescribed in
34
section 16 subsections (1) and (2), as the case may be) and in such manner as the Central
Bank considers appropriate, having regard to the risks arising from the activities of the bank
and such other factors as the Central Bank considers relevant.
(d) Such other matters relating to capital requirements as it may deem necessary; and
(2) The Central Bank may by notice to any licensed entity prescribe higher on-going capital
requirements for a specific licensed entity in line with the risk profile of such entity.
(3) Where an entity fails to meet the capital adequacy ratios prescribed under subsection (1) it
shall forthwith notify the Central Bank of that contravention.
(4) Every manager or officer who, knowing of a contravention of subsection (1) fails to
report the contravention to the Central Bank commits an offence and is liable on conviction
to a fine of 2 penalty currency points for every day on which the violation continues.
(5) The capital requirements prescribed by the Central Bank in this section shall be
formulated in accordance with internationally accepted standards on capital adequacy.
(a) The minimum holding of liquid assets by licensed entities; (b) The method of
computation of minimum holding of liquid assets;
35
(d) Such other matters relating to holding and computation of liquid assets as it may deem
necessary; and
(2) A licensee that fails to comply with the minimum holding of liquid assets requirements as
prescribed by the Central Bank under sub section (1) shall immediately report such failure to
the Central Bank and shall pay, to the Central Bank, a civil penalty of one-tenth of one
percent of the amount of the deficiency for every day on which the deficiency continues.
(3) For the purposes of this section “liquid assets” means all or any of the following:
(a) Notes and coins which are legal tender in Somalia and any other currency prescribed by
the Central Bank;
(b) Balances held at the Central Bank as may be approved by the Central Bank;
(c) moneys at call and balances at banks in Somalia other than the Central Bank after
deducting balances owed to those banks;
(d) Marketable Government securities that are held by the bank for trading purposes;
(e) uncommitted balances at banks outside Somalia withdrawal on demand and money at call
outside Somalia after deducting there from balances owed to banks outside Somalia, if the
balances and money at call are in currencies which are freely negotiable and transferable in
international exchange markets consistent with the articles of agreement of the International
Monetary Fund;
(f) Commercial bills and promissory notes which are eligible for discount by commercial
banks or by the Central Bank; and
(g) Any other asset that the Central Bank may by prudential regulation approves.
(6) The Central Bank shall allow reasonable time after a minimum holding is prescribed or
increased under subsection (1) of this section to enable a bank to comply with the
requirement.
36
(7) Every manager or officer who, knowing of a contravention of subsection (1) fails to
report the contravention to the Central Bank commits an offence and is liable on conviction
to a fine of 2 penalty currency points for every day on which the violation continues.
(8) Where a bank is not in compliance with the minimum amount of liquid assets, it shall not
grant any new or additional loan or credit accommodation to any person without the prior
written approval of the Central Bank.
Accounts
(a) To keep proper books of accounts and proper financial records in relation to the accounts
which show a complete, true and fair state of affairs of the bank;
(b) To prepare in respect of each financial year a statement of accounts showing the state of
affairs and income and expenditure of the Bank; and
(c) To ensure that all accounts and financial records comply with International Accounting
Standards (as revised from time to time) and with all applicable laws.
(2) The books of accounts shall be kept at the principal place of business of the bank and at
the branches of each bank in the English language or any other language approved by the
Government.
(3) A bank shall prepare annual accounts based on a financial year covering a period of 12
months ending on 31st December of every year.
(1) A bank shall within three months of the end of its financial year, submit to the Central
Bank a true and full yearly statement of its accounts covering all its operations as certified by
its external auditor, and approved by the board of directors together with the external
auditor’s report and the management letter.
(2) The accounts shall be signed by the chairman of the board, the chief executive officer of
the bank, and the secretary.
37
(3) The Central Bank may make regulations prescribing the form and content of accounts to
be submitted under this section.
(4) A bank which fails to submit the accounts required under subsection (1) in the period
specified shall, unless an extension is granted by the Central Bank under subsection (7) pay a
penalty of 5 penalty currency points for each day on which the default continues.
(5) The Central Bank shall review the accounts submitted and may:
(b) direct the bank and its external auditors to amend or rectify the accounts;
(c) reject the accounts and order the bank and its external auditors to re-issue and re-audit the
accounts; or
(d) Request the bank and its external auditor for any further information as it may deem
necessary.
(6) Where the Central Bank issues an order or direction under subsection (5), a bank and the
external auditor shall comply with the order or direction and re-submit the accounts in such
period as shall be specified by the Central Bank.
(7) The Central Bank may for reasonable cause and upon application by a bank extend the
period for submission of accounts specified in sub section (1) or publication of accounts for
such period as the Central Bank shall determine which extension shall in any case not exceed
90 days from the date prescribed.
(8) An application for extension under subsection (7) shall be submitted by a bank to the
Central Bank no later than 30 days before the end of the period prescribed and shall be
accompanied with such documentary evidence to support the reasons why the bank is unable
to comply with the deadline.
(9) The Central Bank shall have the discretion to reject an application for extension with
reasons and its decision shall be final.
38
21. Publishing of Accounts
(1) A bank shall within four months of the end of its financial year publish, in the official
bulletin and a widely circulating newspaper, accounts of all its operations as certified by its
external auditor and approved by the Central Bank.
(2) If any bank fails to comply with the requirements of subsections (1) within four months to
the end of its financial year, it shall be liable to pay a penalty of 5 penalty currency points for
every day when such default continues, except when an extension to the period has been
granted by the Central Bank.
(3) A bank may not publish its accounts except in such form and with such content as the
Central Bank shall approve.
(4) The Central Bank may by regulation prescribe, in conformity with International
Accounting Standards/International Financial Reporting Standards, the formats of the
financial statements (balance sheet, income statement, statement of comprehensive income,
statement of changes in shareholders’ equity and statement of cash flows), the notes to the
financial statements and the report on operations that a bank and a banking group (on a
consolidated basis) is required to prepare and publish.
(1) The Board of directors of a Bank shall appoint annually an external auditor whose
principal duty shall be to examine the books and records and to prepare and submit to the
shareholders a report on the annual balance sheet and profit and loss account of the bank, and
of its results for the period then ended.
(2) Every such report shall contain an opinion stating whether or not the balance sheet and
profit and loss account give a true and fair view of the state of affairs of the bank and of its
results for the period then ended, and contain such other matters and information as may be
prescribed from time to time by the Central Bank by regulation.
(3) Notwithstanding the provisions of any other law no person shall be appointed or re-
appointed as an external auditor of a bank unless the Central Bank approves the appointment.
39
(4) Every bank shall submit to the Central bank the name of the person proposed for approval
as external auditor.
(5) The Central Bank may request for such information as it shall deem fit for purposes of
evaluating the approval request.
(7) A person who has been the external auditor of a bank for 3 consecutive years shall not be
eligible for re-appointment until after the lapse of 2 years.
A person:-
(3) being a firm in which a director of a bank has any interest as partner or director; or
Shall not be eligible for appointment as the external auditor for that bank.
(1) The Central Bank may by written notice order a bank to remove any person from the
position of external auditor if the Central Bank is satisfied that the external auditor:
(a) Has failed to adequately and properly execute the functions and duties of the external
auditors required under this Act or any regulations made under this Act;
(b) does not meet the criteria for a fit and proper person set out in this Act;
(c) has reasonable grounds for believing that the bank is insolvent, or there is a significant
risk that the bank will become insolvent; or the bank has failed to comply with the prudential
40
requirements under this Act; or knowing existing facts about the bank which may materially
prejudice the interests of depositors, fails to report to the Central Bank;
(g) Fails to disclose any direct or indirect interests which may constitute a conflict of interest
in respect of such auditor’s duties.
(2) The Central Bank shall before issuing the order in subsection (1) give written notice to:
Allowing them a reasonable opportunity to submit representations on the matter within the
period specified in the notice.
(3) The Central Bank shall consider the representations and make its decision.
(4) The decision of the Central Bank shall be communicated to the external auditor and to the
bank.
(5) If the Central Bank removes an auditor under this section, the board of directors of the
bank shall propose another person as auditor under the provisions of section 24.
(1) Every external auditor shall be appointed for an initial period of 12 months covering the
financial year of the bank, and may thereafter be renewed for a maximum of two successive
periods.
(2) Except where the current period of engagement has expired, a bank shall not, without the
prior written approval of the Central Bank, remove any person duly appointed as external
auditor under this Act.
(3) The resignation of the external auditor shall not take effect until then Central Bank has
granted its approval of the resignation.
41
26. Duty of the external auditor to report to the Central Bank.
(1) A person who is or has been an external auditor of a bank shall have a duty to inform the
Central Bank immediately he becomes aware or has reasonable grounds to believe that:
(a) the bank is insolvent, or there is a significant risk that the bank will become insolvent;
(b) the bank has failed to comply with the requirements of this Act or the regulations made
under this Act;
(c) there are existing facts about the bank which may be detrimental to the interests of
depositors
(2) A person, who is or has been an external auditor of a bank, who fails to comply with the
provisions of subsection (1) commits an offence and shall on conviction be liable to pay a
fine of not less than 20 penalty currency points or to imprisonment for a term not less than 3
years, or both.
(3) A person convicted under subsection (2) shall cease to be a fit and proper person, and
shall be removed as the external auditor of the bank without any requirement for further
notice.
(4) The reporting in good faith by an external auditor of information in terms of subsection
(1) (a) (b) or (c) of this section, and section 29 subsection (1) shall in no circumstances be
held to constitute a contravention of any provision of the law or a breach of any provision of
any code of professional conduct to which such auditor may be subject, or any contract
provisions on confidentiality.
(5) No right of action in law shall accrue to any person against an external auditor who has in
good faith submitted to the Central Bank any information required under subsection (1).
(1) The Central Bank may, in writing, direct an external auditor or an internal auditor to carry
out such assignment in relation to the bank and its operation as the Central Bank may
consider appropriate.
(2) Any costs for assignments ordered under this section shall be met by the bank.
42
28. External auditors access to information.
(1) The external auditor shall have access to any records, files or data of the bank, including
management information and the minutes of all committees of management and of the board
and its committees, whenever it is relevant to the performance of his duties.
(2) A person who fails, refuses or neglects to provide any information, to the external auditor,
requested for under subsection (1), or obstructs the external auditor in the performance of his
duties under this Act commits an offence and shall on conviction be liable to pay a fine not
exceeding 10 penalty currency points or imprisonment not exceeding 2 years or both.
1) The board of directors of a bank shall appoint amongst its members an audit committee of
the Board.
2) The following persons shall be disqualified for appointment as members of the audit
committee of the Board:
(b) any person employed by the holding or subsidiary company of the bank; and
3) The committee shall meet at least once every quarter, of the financial year of the bank, and
at such other times and with such frequency as the business may require.
(i) To ensure that there is in place within the bank effective internal control and financial
reporting policies and procedures, management information systems and auditing processes;
(ii) to facilitate and promote communication, regarding the matters referred to in paragraph
(i) of subsection (a) or any other related matter, between the board of directors and the chief
executive officer, the external auditor, and internal auditor;
43
(b) Procure the recruitment of the internal auditor and consider any matters related to his
remuneration, performance and dismissal;
(c) Approve the terms of reference for the internal audit function, and monitor the execution
of the internal audit program;
(d) Promptly review all the internal audit reports and the implementation of the
recommendations;
(e) Consider and make recommendations to the board on the appointment, re-appointment
and independence of the external auditor;
(f) meet with the external auditor at least twice each financial year, once at the planning
stage, where the scope of the audit will be considered, and once post audit at the reporting
stage, and ensure that any external auditors management letters and managements responses
are reviewed;
(g) Review the consistency of the accounting policies on a year to year basis;
(h) review the banks financial statements, make comments thereon concerning accuracy,
unusual transactions, lack of clarity in disclosures, significant adjustments, going concern
assumption, compliance with International Accounting Standards, compliance with this Act,
insider transactions and any other matter deemed of significance;
(j) To determine the nature and extent of any non-audit services that the external auditor may
or may not provide to the bank; and
(k) Perform such further functions as may be assigned by the board or the Central Bank from
time to time.
(2) The audit committee shall prepare a report, to be included in the annual accounts and
financial statements for every financial year describing how the audit committee carried out
its functions; stating whether the audit committee is satisfied that the auditor was
independent of the bank and commenting, in any way the committee considers appropriate,
44
on the financial statements, the accounting practices and the internal financial control of the
bank.
(1) Every bank shall set up an independent internal audit function, and appoint a
professionally qualified and competent person in the field of auditing as the internal auditor.
(a) Examine and evaluate the appropriateness and effectiveness of the internal control
systems and of the manner in which assigned responsibilities are fulfilled;
(b) review and report on the banks compliance with internal policies;
(c) report on the reliability (including integrity, accuracy and comprehensiveness) and
timeliness of financial and management information;
(d) evaluate compliance with this Act, regulations made there under, supervisory directives,
and any other laws;
(f) make an assessment of the bank’s internal capital adequacy and its compliance with
regulatory capital ratios; and
(2) The internal auditor appointed under this section shall have a direct reporting line to the
audit committee of the board.
(3) The internal auditor shall, upon request, be allowed access to any records, files or data of
the bank, including management information and the minutes of the board and its committees
and of all committees of management.
(1) A person who is or has been an internal auditor of a bank shall have a duty to inform the
Central Bank and the audit committee immediately he becomes aware or has reasonable
grounds to believe that:
45
(a) The bank is insolvent, or there is a significant risk that the bank will become insolvent;
(b) The bank has failed to comply with the requirements of this Act or the regulations made
under this Act; or
(c) There are existing facts, about the bank, which may be detrimental to the interests of
depositors
(2) Any person who is or has been an internal auditor of a bank who fails to comply with the
provisions of subsection (1) commits an offence and shall on conviction be liable to pay a
fine of not less than 20 penalty currency points or imprisonment for a term not less than 2
Years.
(3) A person convicted under subsection (2) shall cease to be a fit and proper person, and
shall be removed as the internal auditor of the bank without any requirement for further
notice.
(4) The reporting in good faith by an internal auditor of information in terms of subsection
(1) (a) (b) or (c) shall in no circumstances be held to constitute a contravention of any
provision of the law or a breach of any provision of any code of professional conduct to
which such auditor may be subject, or any contract provisions on confidentiality.
(5) No right of action in law shall accrue to any person against an internal auditor who has in
good faith submitted to the Central Bank any information required under subsection (1).
(1) The external auditor and the internal auditor shall consult regularly.
(2) The external auditor shall have access to relevant internal audit reports and be kept
informed by the internal auditor of any significant matter that comes to the internal auditor’s
attention which may affect the work of the external auditor.
46
2.4 BANKINGSUPERVISION
Pettway and Sinkey (1980) have generally discussed that on-site bank examination has been
the backbone of the supervisory process conducted by both U.S. Federal and state banking
agency. It includes the regular visit on banks followed by the interviews with management,
evaluating the accuracy of the financial statements, accounting records, internal controls and
the compliance with law and regulations. At the end of the exam, the bank supervisors assign
the composite rating for those supervised banks based on the summary of findings collected
through the on-site inspection. Such composite rating is basically determined in line with the
CAMEL rating system.
Banking supervision in U.S. is primarily conducted by the Federal Reserve in addition to its
role as of monitoring the monetary policy. On the contrary, such role is assigned to a single
financial supervisory agency rather than to the central bank, in United Kingdom and Japan.
The banking supervision mainly ensures that the commercial banks operate in a safe and
sound manner, and do not take the excessive risks. It also makes sure that those banks
operate in accordance with federal banking regulations. The Fed examines the safe and sound
of financial stability in banks through the on-site bank examination with the support of the
CAMEL rating, and in complement with the off-site monitoring (Bernanke, 2007).
The annual on-site bank inspection was officially mandated for most commercial banks
under the adoption of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA). Nevertheless, it is not necessary to conduct the bank examination every twelve
months because it is performed every twelve to twenty-four months according totheir
inspection priority. Such priorities are given to financially problematic banks and thereby
lower priority given to banks which are well-capitalized and have acceptable earnings.
However, the work of Gilbert et al. (2002) argued that despite the fact that on-site
examination is an effective tool; it is costly and burdensome since the supervisors have to be
involved in daily operations and it may take a long of time. Thus, it is supported with the off-
site surveillance. Moreover, Cole and Gunther (1998) found that the CAMEL rating
47
improved forecast accuracy, but only of the examination which had occurred during the
previous six months.
The financial market, admittedly, changes rapidly over years so bank examination is required
to be conducted more frequently. It results in the bank supervisor relying more often on the
off-site surveillance to complement the on-site inspection. However, it provides up-to-date
and reliable financial information, and offers the basis for financial evaluation of the bank
between examinations. Off-site surveillance highlights the risk exposure based on the annual
or quarterly financial data, and it helps the banks ‘supervisors schedule the exams on those
suspected banks.
Gilbert et al. (2002) suggest that most of the off-site surveillance is based on the call reports
(reports of condition and income filled by Banks) which is produced by the bank supervisory
agencies, for the quarter prior to the examination. Off-site monitoring is conducted between
on-site examinations in the supervisory cycle. The bank supervisors go through the results of
on-site inspection and suggest the potential full-scope examinations, if necessary; and they
also compares the bank’s performance to that of its peer in the industry. Two commonly used
off-site tools are supervisory screens and econometric models:
Supervisory screens include financial ratios from periodic balance sheets and income
statements, which play an important role in off-site surveillance.
Econometric models gather information from financial ratios. These models rely on
statistical tests rather than human judgment to summarize the bank condition.
Off-site surveillance is also helpful due to the fact that it is less costly than the on-site
supervision program, and new information can be updated frequently through quarterly
financial statements and the basis for financial assessment between examinations is given.
48
According to the central bank of Somalia, Law No. 130 of 22 April, 2012 and
(1) The Central Bank shall from time to time through its officers or any appointed agent
examine or cause an onsite and or offsite examination to be made of each bank, its financial
records, books of accounts, and all such other records as it may require in order to determine
that such bank is in a sound financial condition and that the requirements of this Act have
been complied with in the conduct of its business.
(2) For the purpose of determining the financial condition of a bank and its compliance with
this Act, protecting the safety of depositors’ funds, and to ensure that the operations of the
affiliate, associate, holding or subsidiary company of a bank will not adversely affect the
financial soundness of the bank, the Central Bank may at any time:
(a)through its officers or any appointed agent examine or cause an onsite or offsite
examination to be made of the operations and financial condition of any affiliate, associate,
holding or subsidiary company of a bank;
(b) request any affiliate, associate, holding or subsidiary company of a bank to submit to the
Central Bank with in such time as shall be specified in the request such information on its
operations the Central Bank may deem necessary; or
(c) Summon in writing the principal officers, directors, shareholders, controllers of any
affiliate, associate, holding or subsidiary company of a bank to attend any meeting and
answer any queries.
(3) The Central Bank may discuss with an executive officer, chief executive officer or
employee in charge of a risk management function of a bank or controlling company, internal
or external auditor of the bank, a member of the board of directors any matters related to
compliance by the bank with this Act, the financial soundness of the bank, the management
of the bank and any such related matters.
(4) In order to carry out an examination of a bank under subsection (1), the Central Bank may
duly authorize any person in writing to-
49
(a) Administer an oath or affirmation or otherwise examine any person, if he or she has
reason to believe that such person may be able to provide information relating to the affairs
of the bank;
(i) enter any premises and require the production of any document relating to the affairs of
the bank;
(ii) Enter and search any premises for any documents relating to the affairs of the bank;
(iii) open any strong room, safe or other container which he or she suspects contains any
document relating to the affairs of the bank;
(iv)Examine, make extracts from and copy any document relating to the affairs of the bank
or, against the issue of a receipt, remove such document temporarily for that purpose;
(v) Against the issue of a receipt, seize any document relating to the affairs of the bank,
which, in his or her opinion, may afford evidence of an offence or irregularity; or
(vi)Retain any seized document for as long as it may be required for criminal or other
proceedings.
(2) A person who fails, refuses or neglects to provide any record, document, or information
requested for under subsection (1), commits an offence and shall on conviction be liable to
pay a fine of not less than 10 penalty currency points to imprisonment not exceeding 2
years ,or both. In the case of a continuing offence to a further fine of 2 penalty currency
points for each day on which the offence is continues after conviction.
(3) If any information supplied or item produced is false in any material particular, the
financial institution or affiliate, or both, commit an offence and shall be liable on summary
conviction to pay a fine of not less than 10 penalty currency points.
50
Supervisory Standards.
(1) The Central Bank may implement in Somalia such international regulatory or supervisory
standards and practices as it may deem appropriate.
(2) The Central Bank may from time to time make regulations implementing any
international regulatory or supervisory standards and practices
2.5 Conclusions
it was natural that central banks would seek to assess the creditworthiness of banks they were
attempting to rescue. This required prior familiarity with the commercial banks’ operations
and balance sheets. Naturally, it was also in the central banks’ interests to ensure beforehand
that all commercial banks were operated in a safe and sound manner, so that they would not
easily fall into trouble. To ensure the safety and soundness of commercial banks’ operations
ex ante, many central banks found it beneficial to have a formal authority to inspect
commercial banks’ operations, examine commercial banks’ books, and possibly give
regulatory orders to the banks when deemed fit. In other words, following the assumption of
the lender-of-last-resort role, central banks started to assume formal bank regulatory and
supervisory functions. In practice, however, the bank supervisory role only became possible
when the central bank came to be regarded primarily as a public institution acting in the
public interest, rather than as another competitor bank acting to gain more profits. The notion
that central banks were public institutions acting in the public interest only became widely
accepted after 1914 in the wake of World War I, as many governments resorted to using the
central banks for their wartime financial management. Even by then, however, not all central
banks had embraced the bank supervisory role. In countries where bank rescues were funded
primarily by taxpayer money (as opposed to the central banks’ own capital), the bank
supervisory role had traditionally been put under the jurisdiction of public authorities that
had injected the most money; for example, the Ministry of Finance.
51
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
This chapter will discuss the methodology of the study. The chapter is organized into several
main parts. The first section presents research design method, the second section focused on
research population including sample size and sampling procedure, the third section provides
research instrument with the validity and reliability of the instrument, the fourth section will
discuss data gathering procedures and data process. And the section five presented the data
analysis and the section six presented ethical consideration and, while the final section will
be the limitations of the study.
This study will be conducted through quantitative and qualitative survey descriptive research
design.
This design is considered suitable because is to determine whether and to what degree a
relationship exists between quantifiable variables. So that questionnaire technique will be
used in collecting the primary data. However, this study will be used quantitative approach;
Quantitative is any data collection technique (such as a questionnaire) or data analysis
procedure (such as graphs or statistics) that generates or uses numerical data (Saunders et al,
2009).
The target population of the study will be central bank of somalia Mogadishu—Somalia,
(Management and Employees), the researcher focuses on that staff who permanently and
temporary working at the central bank os somalia. The population stands at over 40 persons.
It is from this population that the sample size will be deriving.
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3.3 Sample Size
The researchers used Solvents formula to calculate the sample size, with maximum
N
acceptable error 5 %. n = 1+ Ne 2
40
2
n= 1+ 40 ( 0.05 ) =36
The researcher decides to use non-probability sample technique to make sample frame. For
probability sample the researcher use purposive sampling the researcher concisely decides
who to include sample. The major purpose of technique will use to collect focused
information from target respondents.
53
3.5 RESEARCH INSTRUMENT
This study will be used questionnaire instrument as tool for collection data, which used in
quantitative research and questionnaire was adapted from (Tandoh, 2011).
Before data entry into computer a series of pretest were conducted the data scanning and
scrutiny technique were employed from available questionnaires from respondents to
examine and validate the survey instrument so as to ensure content reliability and validity.
3.6.2 reliability
A reliability test will conduct to evaluate the logic and internal consistency of the items by
using all variables. The reliability of the research instruments concern with the degree to
which the research will give the same result. The reliability of an instrument is the ability of
the instrument to collect the same data consistently under similar conditions.
54
degree of consistency that the instrument demonstrates. Reliability consists of both true and
error scores and it is necessary but not sufficient for validity.
3.6.1 validity
Refers to the extent to which data collection method accurately measures what it will intend
to measure or to the extent to which research findings were about what they claimed to be
about (Saunders Lawis&Thornhill, 2009). Generally,
Validity of each question or group of questions assessed rather than of the questionnaire as
whole. In order to increase validity of the questions in this research, the research will utilize
content validity index for the reason that the researcher will be create the questions as clear
as possible, measured only one thing at the time, will be given to the respondents by
researcher to avoid possible different interpretations of the main concept. English been the
languages of the research might have had some influence in decreasing the validity of
question; however, a great care will be exercised to reduce the error
This research study will use questionnaire as instrument; the questionnaire will be based on
close end and open. The researcher will visit the respondents working place to reduce
interruption for their working place, however the researcher were administering focused
group after working hours as this will the time when employees were free to spare more time
for the answering the questions. The researcher first booked an appointment with the target
respondents to ensure a high turnout rate.
This study will be applied qualitative methods for analysing; the data will be used to present
and analyse the data in appropriate way. The data will make use of Statistical Package for
Social Science (SPSS) is a computer program used for survey authoring, data mining and
55
statistical analysis. The researcher will use this program because it is convenient and simple
tool that is available for the researcher more over SPSS V.20, as a tool for analysing the data.
The method to analysis the data in this study will be quantities and qualities approach.
Quantitative deals with the numbers and charts. Frequency distribution method will used to
analyze the data which shows the distribution of scores in a sample for a specific variable.
This method gives a record number of times a score or response occurs; also its used to
represent the data either with chart and tables.
During the study, here are some of the challenges that the researcher may encounter:
In this study the researcher considered the ethical issues throughout the research project, and
kept the openness, privacy and confidentiality of the respondent. To keep the ethical issues
data given by the respondent used only for academic purpose. This research was fully
conducted ethically and all copyright observed and where permission is required to reproduce
materials was sought. Because of the confidentiality, privacy and informed consent may be
ethical problem of the study (Oso & onen, 2008).
56
CHAPTER FOUR
4.0 Introduction
This chapter represents the presentation, analysis and interpretation of findings (data) about
the effect of customer care on organizational performance’ Then data presentation and
analysis under this heading was presented using the complete research data found from the
target population, major findings will be presented in terms of statement of narration and
tabular and conclude discussions by interpreting findings.
This section of the study presents the demographic characteristics of the respondents those
who participated in the study. The shape of the demographic characteristics is comprised to
the gender, age, marital status, educational level and experience of the respondents as
summarized in tables below:
Respondents asked to specify their Gender. Their responses are summarised in Table 4.1.1
Source:primary data,2018
Table 4.1.1 As above mentioned the table shows that the most of the respondents 25 (69.4%) were
male and 11 (30.6%) were female. therefore the researcher indicates that the majority of the
respondents were male.
57
4.1.2 Age of the Respondents
Respondents were also asked to specify their Age. Their responses are summarised in Table 4.1.2.
Source:primary data,2018
Table 4.1.2 As above mentioned the table shows that the most of the respondents 8 (22.2%) were
20-30 years, 18 (50.0%) were 31-40, 7 (19.4%) were 41-50 and 3 (8.3%) were above 51 years.
therefore the researcher indicates that the majority of the respondents were 31-40 years old.
Respondents were asked to specify the degree of their educational level respectively. Their responses
are summarised in Table 4. 1.3
Source:primary data,2018
Table 4.1.3 As above mentioned the table shows that the most of the respondents 1 (2.8%) were
secondary, 15 (41.7%) were bachelor degree ,16 (44.4) were master degree and 4 (11.1%) were
58
PHD degree. therefore the researcher indicates that the majority of the respondents were master
degree.
Respondents also asked to specify their Experience. Their responses are summarised in Table 4.1.4
Source:primary data,2018
Table 4.1.4 As above mentioned the table shows that the most of the respondents 8 (22.2%) were less
than 2 year, 16 (44.4%) were 3-5 years, 9 (25.0%) were 6-10 years and 3 (8.3%) were above 11years.
therefore the researcher indicates that the majority of the respondents were above 3-5 years.
Source:primary data,2018
Table 4.1.5 As above mentioned the table shows that the most of the respondents 9 (25.0%) were less
than 1 year, 17 (47.2%) were 2-4 years, 7 (19.4%) were 5-7 years and 3 (8.3%) were above 8years.
therefore the researcher indicates that the majority of the experience of the respondents were 2-4
years.
59
4.2 Data Analysis
After background information have been asked the respondents, the researchers went ahead
to present the findings of the variable one which was “ To examine the role of monetery
policy on commercial banks at central bank of somalia” the following table indicates the
results of this variable.
After objective one of the thesis have been asked the respondents, the researcher went ahead to
present the findings of the objective two which was “ role of banking supervision on commercial
banks at the central bank of somalia in Mogadishu-Somalia” The following table indicates the results
of this objective.
60
Effective regulation and will go a long Way in minimizing the
negative impact of moral Hazard, thereby leading to reduction in 3.17 1.276
bank failure.
Effective banking regulation encourages quality services and
3.25 1.079
promotes an efficient and competitive banking system.
The regulators of banks have helped in protecting depositors’
funds by restricting certain banking activities and minimizing
3.50 1.159
bank Losses through the Banks and Other Financial Institution
Act (2012).
** Expression is **
Total Average Mean faulty ** Expression is
faulty **
61
Table 4.2.3 According to the above table, the respondents were asked four questions about
the variable three of the study, which is “To determine banking regulation which is
dimension three of the role of the central banking of somalia in Mogadishu Somalia.” show
that the most of the respondents neutrally agreed that banking supervision influences
commercial bank performance which was indicated by mean value of (M=3.50) and standard
deviation of (SD=1.30).
62
CHAPTER FIVE
5.0 Introduction
This chapter focuses on summarizing of the research findings, major challenges met during the study
and as well as the corrections of what have been found during of the research gathering data. In other
words this chapter covers the conclusion of the research and its recommendations. The study aims to
investigate the role of cental banking in commercial banks in Mogadishu-Somalia.
This section discovers the research result and findings derived from the distributed
questionnaires. The main objective of this study was to examine the role of central baking in
commercial banks in Mogadishu-Somalia.
The research examined the role played by monitory policy,supervisory and regulatory
authority toward healthy supervision of the operation of the banks in somalia.The study had
three objectives, the objective one of the study, which is “To examine the role of monetery
policy which is dimension one of the commercial banks in Mogadishu-Somalia “the mean
value of the questions was 3.641 which indicates strongly Agree level so this indicates that
the answer shows that there is a very good level. The objective two of this study was “ To
investigate the role of banking supervision which is dimension two of the commercial banks
in Mogadishu Somalia” the mean value was 3.36 which indicates strongly agree level so
this indicates that the answer shows that there is a very good level. The objective three of
this study was “ To determine the role of banking regulation which is dimension three of the
commercial banks in Mogadishu Somalia” the mean value was 3.5 which indicates strongly
agree level so this indicates that the answer shows that there is a very good level.
63
5.2 Conclusions
From the investigation carried out by the researcher, The study draws following conclutions.
The main objective of this study was to investigate the role of the cental bankug in
commercial banks in Mugadisho-Somalia.The study had three objectives, the objective one
of the study, which is “To examine the role of monetery policy which is dimension one of the
commercial banks in Mogadishu-Somalia, The objective two of this study was “ To
investigate the role of banking supervision which is dimension two of the commercial banks
in Mogadishu Somalia and The objective three of this study was “ To determine the role of
banking regulation which is dimension three of the commercial banks in Mogadishu Somalia.
The supervisory and regulatory activities of the central bank of somalia have impacted
positively on the commercial bank activities to their external customers.
Effective regulations and supervisions of the central bank of somalia would boost the volume
and the value of transactions witnessed i the somali banking industry.
From the analysis, most respondents were of the view that the regulatory and supervisory
functions of the central bank of somalia are rapidly growing.
Hence,we conclude that the banks and other financial institutions act 2012 (BOFIA). And the
Law No. 130 of 22 April, 2012 and Decree Law No. 37 of 23 Nov. 1989 are not in
themselves sufficient as a tool in the hands of regulator to effectively regulate the banking
sector.
64
5.3 Recommendation
Based on the findings of the study, the banking supervisory structure currently being persued
by the regulatory authoroties should stay with some slight modification.
Also banking laws, rukes and regulations should be hormonized by the CBS for adoption and
execution by all licenced banking institutions.
The cental bank supervisory authority which should have an adminstrative secretariat should
meet querterly, if not more frequently.
Any bank in member state should be able to stablish branches or subsidaries or associates
provided by offer banking services with in the subregion.
The researcher found that there is a possible area for further research which enables academic
students to make further research and they are as follows:
The impact of basel acts on commercial bank performance
The effect of international monetary fund on central bank.
65
APPENDIX (A)
REFERENCES
Quarterly,
NigerianBanking System;
Blei, (2001). the Principles of Modern Banking. Abuja: Gene Publications Limited.
Vol. 2, No. 3.
66
CBS, (2012) Law No. 130 of 22 April, 2012 andDecree Law No. 37 of 23 Nov.
1989
CBS, (2012).The Central Bank of Somalia Act Law no. 130 of 22 April
Journal.
Dimitri, Vitas (1990). “Financial Regulation: Changing the Rules of the Game”.
Economic Faulkner.
University Press.
head
Bank.
Banking
Financial Review,
67
Greenlaw et al., (2008)Banking Supervision Department (2005). “Investment
Political EconomySeries.
Quarterly, Vol. 3, p
Sound
Quarterly,
68
Llewellyn, D. I. (1988). “The Regulation and Supervision of Financial Institutions”
Publication
Bank’s Turnaround
101-112.
Oso & onen, (2008). Scope and Stres: Can Job Scobe Be Too High. The Academy
Future”.
Pettway and Sinkey (1980) Central Bank of Nigeria (2002). Banking Supervision
Annual Report,
69
Saunders et al, (2009).“The Informational Advantage of Specialized Monitors
England:
70
APPENDIX (B)
QUESTIONNAIRE
Dear participant
First, let me express my warm gratitude for your time in responding to the research questions
provided below. I’m an undergraduate student at University of Somalia (UNISO), Faculty of
Business Administrations, Department of Banking and finance, currently working on a thesis
project that measures. “The role of the central banking in commercial banks
You have been identified as one of the respondents for this study and you are kindly
requested to fill the questionnaire. The information collected will be dealt with
confidentially for scientific purpose only. Please provide complete responses to all
questionnaire items of this academic research. In case desired to follow up the
research, results will be available upon your request. If you have any questions or
inquiries, please call (+252616852680) or email me via shukriyusuf76@gmail.com.
71
Researcher
Questionnaire Form
years
How long have you Been □ Less than 1 □ 2-4 years □ 5-7 years □ 8 or above
working for this central year
bank?
Category of bank □ Top □ Middle □ junior □ Employee
management management management
staff:
Department □ Regulating □operation □
department department
□Supervision
department
Item 1 2 3 4 5
NO Monetary policy
1. The primary objective of central banks
is to Manage inflation. The second is to
reduce unemployment, but only after
they have controlled inflation
2. Central banks use contractionary
monetary policy to reduce inflation.
3 They use expansionary monetary
policy to lower unemployment and
72
avoid recession
4 Monetary policy is responsibility of
central bank
Banking Regulations
5 Bank legislation has helped in guiding
against Undue influence by the bank
directors, managers and officers over
depositors’ funds and bank activities in
general through disclosure of interest in
any particular advances or loans.
6 Effective regulation and will go a long
Way in Minimizing the negative impact
of moral Hazard, Thereby leading to
reduction in bank failure.
7 Effective banking regulation encourages
quality services and promotes an
efficient and competitive banking
system.
8 The regulators of banks have helped in
protecting Depositors’ funds by
restricting certain banking Activities
and minimizing bank Losses through.
The Banks and Other Financial
Institution Act (2012).
73
Banking supervision
74
In this section, the commercial banks performance is measured using
the Risk management procedures Indicate to what extent You are
participating in the following statements by ticking the relevantboxes.
Risk management 1 2 3 4 5
16
The internal auditor is responsible to review
and Verify the risk management systems,
guidelines and risk reports.
75