ABSTRACT

The purpose of this paper is to investigate the role of Financial on Economic Growth
in Somalia, usually financial institutions play a vital role for economic growth, so it is
one of most priorities. After the collapse of central government in 1991 the overall
economic of the country was declined although financial institutions especially the
remittances “Hawala Institution” take part in economic growth of the country.
Remittances from the Somali Diaspora in abroad are primarily intended for
supporting the needs of the households in Somalia and those families and relatives
who are still in refugee camps in Africa and in other parts of the world. A survey
conducted by UNDP estimates that more than 25-32% of families in Somalia receive
Remittances from abroad (World Bank, 2015). The problem to be directed in this
paper is around poor of financial institutions and in some instances improper
financial service offered by poor financial institutions in Somalia. The methods and
procedures used in gathering data was primary and secondary data. Documents
review questions and personal interviews were used to gather data for the study. To
be specific, research finding shows that there is no financial rule and regulation
governing financial transactions, although, for the last three-decade remittance
companies played an important role for the economic growth sending the money
from abroad to families and business entities furthermore remittances help
households to get money from their relatives in abroad to cover daily life business
firms send, receive and collect money using though the remittances.

Impact of Financial Institutions on Economic

Growth in Somalia
IMPACT OF FINANCIAL INSTITUTIONS ON ECONOMIC GROWTH IN SOMALIA

1.0 Introduction
Generally financial institutions play a vital role for economic growth, so it is one of most
priorities. financial institution is a term refers for the combination of banks, remittances
“Hawala” and microfinance institutions each of them plays an important position for the process
of economic growth. In the last two decades the link between financial institution (FI) and
Economic growth has generated a great deal of interest among academics, policy makers and
economists around the world. Financial institutions become much more effectives and plays vital
character for economic growth. In black continent Africa it’s same as the other parts of the world
even if it’s less developed and there is a lack of valuable financial institution which plays
important part for the economic growth but in Somalia since the central government was
collapsed in 1991 the overall economic of the country was declined although financial
institutions especially the remittances “Hawala” take part in the economic growth in punt-land
and in Somalia generally.

This study of financial institutions and its impact of economic growth in Somalia have been used
to the following variables to analyze how financial institutions and economic growth are related
to each other. Bank, remittance “Hawala” and microfinance institutions, Gross domestic
production, employment rate and national income are independent and dependent variables
respectively that we have analyzed.

1.1 1.1 Problem of the study and Research Objectives

The problem to be directed is around the poor financial institutions and in some instances
improper financial service offered by poor financial institutions in Somalia, this normally results
to failure of economic growth. Deficiencies in the financial institutions are the major cause of
poor economic growth Ellison and Orozco (2007). Are the Financial institutions in a position to
influence the economic growth of the state? Lack of existence of important part of financial
institutions including; credit union, insurance companies, mutual fund, pension fund and many
others in a building up market can lead the economy to decline.

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This paper will analyze how effective and successful financial institution will bring economic
growth in punt-land and how it will contribute the improvement of the economic in the state.
One of the most critical obstacles to financial institutions is informality. The poor often live and
work in the informal sector, lacking legal ownership of land, homes and business. Half of
Somalia people live in informal settlement in urban area alone, meaning that they cannot use
their land as collateral on a loan; often they lack address they could associate with a bank
account or credit application. Entrepreneurs can face high fees, inefficient and sometimes corrupt
procedures, and burdensome regulation that essentially make it too costly to incorporate legally
the result are enforce contract or declare bankruptcy.

The main research objectives of this study is to assess the impact of Financial institutions on
economic growth in Somalia Hence, the specific research objectives of this paper are:

 To examine the relationship between banks and economic growth in Somalia.

 To establish the effect of remittances “Hawala” on economic growth in Somalia.
 To examine the relationship between the microfinance institutions and economic growth
in Somalia.

2.0 Literature review

Speciously, Somalia’s banking and financial system has been heavily impacted by the political
confusion that has engulfed the country’s recent history. Consequently, there are no proper
functioning banks in Somalia, although certain money remittance companies claim to be banks
and provide some basic financial services.

Historically in recent years the number of commercial banks in Somalia was massively
increasing, this encourages the habit of saving and investing and it increases the liquidation and
mobilization of resources in the market (Poutziouris, 2013)

Since the collapse of the Somali state and economy in the 1990s, Somalia has become even more
dependent on remittances from family members working abroad. Today, remittances are by far
the largest solitary source of hard currency entering the country, and are vital to the country’s
limited ability to feed and sustain itself. One study estimates that remittances to Somaliland
alone (which is home to about 1/6 of the total population in Somalia, which is estimated at about
fifteen million people) reach as much as US $500 million per year – two times the value of

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livestock exports in a normal year (Ahmed, 2000). Another study calculates that remittances
constitute nearly 30% of the income of urban households in the northern towns of Hargeisa,
Burao, and Bosasso. Remittances to southern Somalia are less well-documented.

Mogadishu is unquestionably the largest recipient of remittances; it probably accrues a similar

level of remittances as does Somaliland. In the town of BeledWeyn, with a population of about
50,000, an estimated US $200,000 per month is received in remittances, for a monthly average of
US $4 per town dweller. Our best estimates are that remittances nationally probably total
somewhere between One billion to 1.3 billion US dollars per year [ CITATION Aby16 \l 1033 ]

Microfinance institutions in Somalia Despite the many benefits, microfinance institutions face a
range of challenges that limit their reach, especially in predominantly Muslim countries. One
challenge is providing microfinance services under sharia, or Islamic law, which restricts the
charging of interest for loans. Certain banks and microfinance institutions started to provide
microfinance service for poor people including Somali Development and Reconstruction Bank
and many others but the main challenge they face was absence of proper functioning financial
legal framework and lack of trust among the beneficiaries.

Microfinance is already enabling some of the poorest Somalis to plan for the future and to be
more resilient to the shocks of conflict and famine. The expertise of companies like Dahabshiil
and their experience of working in such regions will be essential if these innovations are to live
up to their early promise [ CITATION Dua12 \l 1033 ]

2.1 Role Banks can play Economic growth

Banks are financial intermediaries that accept deposits and make loans. Banks offer several
advantages in connecting borrows and lenders. By pooling the funds of thousands of different
depositors they are able to make large loans beyond the means of any individual investor. In
addition, because they deal in such a large volume of loans, their costs to making a loan are
smaller than for a single investor. Banks make a variety of different kinds of loans. They lend
money to businesses for capital improvement projects, called commercial and industrial loans.
They lend money to consumers for projects such as auto and college loans, called consumer
loans, and also to purchase a house, called a real estate loan, or a mortgage. Banks make profits

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by the spread between the interest rate on the loan that they make and on the deposits that they
take (thiel, 2001).

2.2 Role of Remittance of Economic growth

The alternative remittance system or Hawala operates outside of, or parallel to conventional
banking or financial institutions. It was developed in India, before the introduction of Western
banking practices, and is now a major remittance system used around the world (Sandhu, 2001).
This system of remittance is no longer referred to as an "underground banking", as it is now
operating with full legitimacy and it is openly advertised in a variety of media, such as ethnic
newspapers and Internet websites.

The major distinctive feature of this informal banking system that differentiates it from other
forms of remittance systems is trust and the extensive use of connections such as family or clan
relationships in the processes of money transactions. Trust is therefore a very important
component in Hawala banking system. It is now well established that Hawala firms are honest
and trustworthy in their dealings with their customers. Breaches of trust are extremely
uncommon and rare. Hawala are informal money transfer companies that Transfer funds both
domestically and internationally.

2.3 Role of Microfinance on Economic Growth

Lesser-developed economies do not have access to financial technologies because
perspective borrowers lack collateral; institutions do not want to pay high monitoring, screening,
and enforcement costs; and because risks are very high in populations that suffer from severe
illness, malnutrition, and low levels of education. Microfinance is a wide variety of economic
interventions that aim to improve poor people’s access to financial technologies.

The model of the Grameen (Village) Bank of Bangladesh is the most well-known and discussed
model in the literature. Muhammad Yunus, a Bangladeshi economist who founded the Grameen
Bank in 1976, won the 2006 Nobel Peace Prize. As of 2007, the bank has 7.3 million members in
over 74,000 villages. Total assets are nearing $1 billion, the recovery rate is 98.4%, and profits
are at $20 million. The distinguishing features of the Grameen model are joint liability, forced
savings, and ‘non-financial products’ that aim to change the social and economic infrastructure

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of Bangladesh and other poor countries (Levine, 2012). Achieving balanced and inclusive
economic growth is a key challenge faced by policymakers in countries around the world.

3.0 Research Methodology

A descriptive research design ware used to get a deeper information and high analytical approach
to develop solutions, purposive and simple random selection was conducted on Somalis who met
the research selection criterion such as financially literacy, current political awareness, business
connection, strong Somali roots and were resident in Somalia. The sample size for the study was
(N= 25) In total we had 17 questions in our study. The researcher used interview and
questionnaire research instruments which are structured set of questions designed to generate the
information required for specific purpose which is suitable in large population with short time

3.1 Population and Sampling of the study

The target population for this study is totaled to sixty individuals with different qualifications
from different institutions. While the sample size will be 25 individuals coming from different
sections of the selected study population.

Table1: Population and Sampling of the Study

Study population Target Population

Stakeholders
Male Female Male Female

Government sectors 8 4 3 2

Financial institutions 12 6 2 3

Business sectors and households 6 9 3 4

Education and research centers 7 8 5 3

Sub Total 33 27 13 12

Total 60 25

4.0 Result and Findings

4.1 Profile of Respondents

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This section gives the characteristics of the respondents in cross tabulations and graphs in
relation to job title, highest level of education, gender and age of the respondents.

Profile of Respondents Frequency Percentage

Gender
Male 13 52%
Female 12 48%
Age
26 - 35 10 40%
36 - 45 10 40%
45- 55 3 12%
Above 55 2 8%
Marital Status
Single 10 40%
Married 12 48%
Divorce 2 8%
Widowed 1 4%
Educational Level
Certificate 2 8%
Diploma 4 16%
Bachelor Level 10 40%
Master Level 9 36%
Table2: It is observed that the 52% of the respondents were males since there was 48% female
of the respondent. While number of male respondents were 13 out of 25 participants as well as
female respondent number was 12. Regarding to the age of respondents is it showed that 40% of
the population ware between 26 to 35 and 36 to 45 where 12% ware between 45 to 55 and the
remaining 8% was above 55 which means only two participants ware above that age. Concerning
the marital status shows that the 40% of the respondent were single which means 10 of total
respondents, where 48% of the respondents were married which means 12 of total respondent
and where 8% of the respondent were Divorced which means 2 and other remaining participants
were 4% was widowed which means 1 persons of the respondents. This table also indicates that
the majority of the respondents are Bachelor level, 40% of the participants were Bachelor degree
level. While 36% of them were master level, and the 16% of were diploma and remaining 8%
were secondary level students.

4.2 Research findings

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The first objective of this study was to examine the relationship between banks and economic
growth in Somalia. All the relevant variables were tested as mentioned earlier and the results
revealed that banks play significant role in economic growth and majority of respondents
strongly agreed that since the central government collapsed the state doesn’t have legally and
properly working central banking so the economic situation and supply of money in the market
was not noble as well as the state doesn’t have internationally recognized bank therefore it
resulted for economic decline however absence of development it plays an effective role for
economic reject.

The second objective of the study was to establish the effect of remittances “Hawala” on
economic growth in Somalia. The result indicates that the majority of participants strongly
agreed that there is a strong relationship between remittances and economic growth knowing that
for the last three decade remittances was play an important role for economic growth via sending
the money from abroad to families and business entities furthermore remittances help households
to get money from their relatives in abroad to cover daily life business firms send, receive and
collect money using though the remittances.

The third objective of this study was to examine the relationship between the microfinance
institutions and economic growth in Somalia. All the relevant variables were tested to achieve
this objective. Consequently, the results of the study reveal that microfinance institutions can be
the most appropriate method by which poverty can be eliminated, create jobs and opportunities
although they are considered a new phenomenon in Somalia.

5.0 Conclusion and Recommendations

In this paper, the researcher has explained the impact of financial institutions on economic
growth in Somalia, Financial institutions perform an important role in the development process,
particularly through their role in allocating resources to their most productive uses.

It is recommended to develop and implement legal financial framework and strategies to

International financial institutions and foreign investors. The state has to collaborate financial
institutions to motivate and mobilize society to build and increase the habit of society in banking
and financial institutions. Somali remittances in most countries do not have license to operate
and send money but they have an account from other banks to send money in Somalia so that the

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study will recommend them to take license in order to transfer money in a legal way. The study
will recommend International Financial organization and other related bodies to help the state in
order to improve the quality of existing microfinance institutions and craft new ones.
6.0 References
Bank, W. (2015, March 31). Financial Sector "Islamic Finance". Retrieved from Work Bank:
http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance

CEO, D. D. (2012, January 20). PRNewswire. Retrieved from http://www.prnewswire.co.uk/news-

releases/dahabshiil-ceo-gives-lse-lecture-on-value-of-remittances-144567005.html

Toure, A. (2016). World Bank Makes Progress to Support Remittance Flows to Somalia. Washington:
The World Bank .

Ahmed, I. (2000). Remittences and their impact in Somaliland. Hargaisa: hargaisa pringting press.

Levine. (2012). microfinance in africa: way for economic development. Akra: akra African printer.

sandhu, k. l. (2001). remittances and illegal migrant in USA. Virginia: south Virginia print centre.

thiel, k. (2001). Banks and nonbank financial institutions. paris: APR Publication Centre.

Poutziouris, P. C. (2005). Finance and Growth: Theory and Evidence. Oslo: NBER Working Paper.