State-run Development Banks: A Priority For Somaliland

Your-Excellence; first and foremost, I am diehard supporter of your initiatives aimed at curbing the inflation and the overvalued US dollar. In particular, I applaud your Excellency on the implementation of the Somaliland Shilling Mobile-Money Program. This step will illuminate 50% of the challenges we face in this front.

Secondly, I intend to draw your kind attention to the role played by the Small Somaliland Foreign Ex-changers. These guys are the secret of Somaliland. Their model provides the fundamentals of free trading, and open/floated exchange market and should be supported and nurtured at all times. Your Excellency please don’t listen to the propagators of the “Foreign Exchange Restrictions Model” which is a recipe for failure and the cause of all the disasters of the Third World.

Thirdly, your government has recently announced that the State will open its own commercial banks. In this front, I have the feeling that we are copying the model adopted by some of neighboring failure-borne countries. It is true that our foreign exchange challenges are similar to those faced by most of the African countries.  However, it is not true that the corrective measures and the remedies we need should be copied from these unsuccessful states.

I strongly believe the Government should not open commercial banks, which should continue to be private sector institutions on the following grounds:

Small Foreign Exchange Dealers in Hargeisa, Somaliland

A commercial bank requires business model operations and unusually efficient management. History shows that governments have, over the years, failed in the operation of profitable commercial banks – we are no exception.

Besides, there are no obvious benefits the State or the citizens in having Government commercial banks – may be some bureaucrats could reap some benefits. The supporters of government commercial banks should explain to us the benefits of these institutions for the Nation. Will they be Islamic or conventional banks?

The concept of opening of Government-owned commercial banks is in controversy with our Constitution which stipulates that the Government should not undertake any commercial business. For instance, the Central Bank of Somaliland is engaged in the supervision of the commercial banks. If the government owns its commercial bank, the authorities of the Central Bank will be soft on their affiliates. This will create conflict of interest, which in turn will seriously jeopardize the interests of the privately owned commercial banks. It is just like opening government owned telephone providers.

We are not going to reinvent the wheel. We should start from where successful players have ended – we should not mimic the losers or talk about Siyad Bare banks.

In the free enterprising world, governments normally have only state-owned development banks, while commercial banks are private enterprises. For instance, in the United States, which is the world’s largest economy, there is only one state-owned commercial bank: The Bank of North Dakota, which was opened in 1919 on populism agenda of those days.

In the Gulf, Saudi Arabia has more than 20 private commercial banks, but none government-owned commercial banks. Instead, they have scores of non-profit government development banks that are involved in financing major infrastructure projects. These banks also own major shares in the Saudi Arabia’s giant Companies that employ thousands of young men and women. On top of that, the government development banks also extending interest-free loans to the citizens to finance Housing, Small to Medium Enterprise (SMEs), Agriculture etc

Given our current circumstance, the Government of Somaliland lacks resources needed to finance the envisaged development projects. Opening government owned commercial banks will not help us finance these long term projects. Furthermore, there is no point for government to be involved in trade financing, short term lending, and day to day banking services, which are the role of private –owned commercial banks. However, there is one route that could help us circumvent the obstacles that we face provided we have the guts to insist on staying our agenda – no matter what!!!!

Your Excellency MR. President, in this context, I am fully aware you have the resolve and the determination to pursue any nationally beneficial agenda and urge you to seriously consider the following Model:

The government should establish Somaliland Development Bank which will be entrusted with financing the country’s development projects.  For instance, the government intends to acquire 50% share in Hargeisa Electricity Project under Public Private Partnership basis.  The Development Bank will finance the Government share of this project by issuing initial capital of SlSh.50 billion which is equivalent to US$5 million. The Government issued Bonds would be purchased by the Commercial banks, the local business community, Somalilnad Diaspora, ordinary citizens within the country, and international investors..
The bonds for Development Bank, let us say, would yield a return of 10% per year. However, in order to avoid the question of Riba (debt usury and/or trade usury); the bank will distribute the profit to the bondholders in the form of food tickets etc. to be given the needy as Sadaqa. Alternatively, the Bonds will in the form of Sharia complaint SUKUK (Islamic bonds)

Similarly, government bonds could be issued to finance various projects like farm tractors to be leased to farmers and fishing boats for fishermen.

Finally, in addition to providing the cash needed to finance the national development projects, issuing of Somaliland Shilling denominated Bonds will also have another unintended benefit for the overall wellbeing of the economy. For instance, doing this enables the government to reduce the volumes of Somaliland Shilling in circulation and thereby contributes to the strengthening of the local currency against the US dollar.

Hassan Abdi Yousuf
Horn Economic Research Center
Hargeisa, Somaliland