Somalia’s financial system has certainly evolved dramatically over the past decades. It was shaped by a combination of political upheavals, complete institutional collapse of the state, warlordism, unfettered religious violence, continuing corrupt governance structures, and the continuing but slow and gradual efforts at recovery and reconstruction. The country’s state organs collapsed in early 1991 and ever since, Somalia has navigated through unique and complex financial journeys in this modern world of the twenty first century. Understanding these and the challenges of the country’s financial evolution and landscape requires a really deep dive into its historical context. It is the story of this article.
The collapse of the state led to the disintegration of all the national institutions and the country literally remained a virtual entity in the list of the United Nations Organization but effectively, remained without a government in the normal sense of the word. The formal financial system of the country was one of the most critical casualties of the collapse. The Central Bank of Somalia collapsed and so did the commercial banks, the development banks, and the insurance companies of the country, at the time. It was, indeed, left dry without a central bank to regulate financial transactions or monetary policy, issue currency and/or oversee banking activities.
There developed then a vacuum in financial governance in the country without precedence with far-reaching consequences. Somalia was cut off effectively from the global financial system and was left with no reliable mechanisms for both domestic and international transactions. Businesses and people and even aid organizations were forced to adapt to a stateless economic environment.
The Rise of Informal Financial Networks
The collapse of the formal financial systems revived the traditional Islamic Hawala System, which always existed in the country from the eighth (8th ) century when its was formally formally recognized under Sharia (Islamic law) as a valid method of transferring debt obligations. It is a culturally embedded, trust-based, and historically significant financial system, which reflects the ingenuity of early Islamic economic thought. In Somalia, it became a savior of its financial world, handling all financial transactions from domestic transfers to billions of United States Dollars in international remittances from the Somali diaspora, and aid agencies.
A number of money transfer companies using the Hawala system arose in the country. These Hawala operators offered several advantages in the conflict-ridden, infrastructurally deficient and unsecure environment as the country represented. They were fast, cost-effective, and operated on the basis of personal trust and community reputation. Despite the lack of formal regulation, hawalas enabled commerce to continue, families to receive support from relatives abroad, and humanitarian agencies to fund operations within Somalia.
However, the reliance on the informal system of hawala was not without challenges and risks. In the absence of a formal regulatory system or organs, the hawala system was vulnerable to misuse, including potential involvement in money laundering and terrorism financing. There was no consumer protection against abuse of consumers and/or consumers’ funds by the operators. It still continues as the operators use the funds entrusted with them for their own businesses without formal sharing of the profits the operators generate from these funds with the actual and ultimate owners/depositors of the monies. Additionally, the lack of consumer protections and accountability makes the system less stable in the face of economic shocks or disputes.
NGO and Diaspora Remittances
Since the collapse of the State organs, Somalia’s economy survived largely through external support, mostly remittances. The Somali diaspora, scattered across the globe (West Asia, Europe, North America, South and East Asia, and South and East Africa), played a critical role in keeping families afloat. Somalis currently live in over 140 countries of the 193 official UN member states.
According to estimates from the World Bank, remittances accounted for nearly 14.85% of Somalia’s GDP in 2023 compared to 16.74% a year earlier. The earlier years were higher, and the trend shows that the percentage of remittances to the country’s estimated GDP will still decline further. But remittances certainly played a pivotal role in maintaining the country’s economy over the past three decades. International non-governmental organizations also adapted to this unique financial system of hawala. Many collaborated with local hawala operators to distribute aid. Despite the risks, this model provided an essential lifeline to millions of Somalis.
Reestablishment of the Central Bank of Somalia (2009)
In 2009, as part of broader state-building efforts, Somalia took a significant step toward restoring its financial governance with the reestablishment of the Central Bank of Somalia (CBS). The CBS never really served as a primary regulatory authority for monetary policy, financial supervision, and the issuance of currency. It was also involved in commercial banking before the collapse of the state and was a deposit taker.
The rebuilding a central bank in post-conflict Somalia is immensely challenging. The CBS lacks the institutional capacity, infrastructure, and trained personnel required for effective governance. Moreover, it operates in an environment still plagued by insecurity, fragmented political authority, and competing financial interests. Some of the member states of the country have their own separate central banks. Somaliland even issues its own currency and operates fully independently from the Somalia state organs including the CBS.
Despite these challenges, however, the CBS made gradual progress since its inception in 2009. It began reasserting its authority by licensing banks, money transfer businesses and insurance companies, introducing basic regulatory frameworks, and working with international partners such as the International Monetary Fund (IMF) and the World Bank. The CBS has, however, not fully reintroduced the Somali shilling as a functioning currency and the U.S. dollar remains dominant in most transactions. Somaliland prints its own Somaliland Shilling separate from a Somali Shilling.
Current Financial Landscape: Dual Systems and Ongoing Challenges
Today, Somalia operates under a dual financial system, where informal mechanisms like hawalas continue to dominate, but formal institutions are gradually reemerging. A handful of commercial banks have been licensed by the CBS in recent years, including both domestic institutions and international banks returning to the market. The international banks although acquiring banking licenses have not started operating in the country. The local banks offer limited services such as deposit accounts, money transfers, and small-scale lending, mostly for housing construction and do not venture beyond that. Local banks view themselves as facilitators of services only, and not as economic producers, and even in this role, they remain inadequate.
Many other factors hamper growth of a normal banking and financial regulatory system in the country. They include among others, political instability, particularly tensions between the federal government and regional states, national insecurities as a result of the operation of terror organizations in the country, and indeed, undermining of the Somali state by some foreign countries. Corruption and weak enforcement capacity further undermine public confidence in formal banking and infrastructure gaps, such as the lack of national identification systems and digital payment networks, restrict financial inclusion.
International banks, perhaps jealous of the success of the informal hawala systems, have in an attempt to get into the business exerted pressures on Somalia’s money transfer companies, citing, of course, regulatory challenges and risks. They allowed these Somali entities to work with them ever since the collapse of the state organs when the Somalia’s financial regulatory systems did not even exist. They simply curtailed or limited correspondent relationships with Somali money transfer companies. This trend, known as de-risking, threatens to cut off the country from global financial flows. The CBS, along with international partners, has been working to implement anti-money laundering and counter-terrorism financing (AML/CFT) measures to address these concerns. But corruption and mismanagement of the country’s financial system have not helped, so far.
Opportunities for Reform and Modernization
Despite the challenges, there are promising signs of progress. Mobile money services, offered by telecom operators like Hormuud and Somtel, have rapidly expanded across the country, bringing basic financial services to millions of Somalis, who previously had no access to banking. Mobile platforms are used for payments, savings, and even credit, showcasing the potential of financial technology (fintech) in Somalia’s development.
Efforts to digitize government payments and strengthen public financial management systems are also underway. The Somali government, with support from international donors, is working to enhance the CBS’s capacity, modernize financial legislation, and improve transparency. How far the federal government has succeeded in this process is not yet as clear. It would appear the mindset of the government is mostly taken by politicking instead of focus on leaving a legacy of achievements, which touch the hearts of its people.
Institutions such as the IMF and World Bank are providing technical assistance and policy guidance. Somalia’s participation in the Heavily Indebted Poor Countries (HIPC) Initiative has been a positive step, as it resulted in debt relief in exchange for reforms, including in the financial sector.
Conclusion
Somalia’s financial system reflects the resilience and adaptability of its people in the face of state collapse, conflict, and institutional breakdown. From the dominance of informal hawalas to the slow return of central banking and commercial banking, Somalia offers a unique case study in how financial systems can survive and even evolve in the absence of a functioning state.
The reestablishment of the Central Bank of Somalia marks a crucial turning point, but rebuilding trust, expanding access, and ensuring regulatory integrity will take time. With continued politicized domestic efforts and international support, Somalia can move toward a more inclusive, stable, and formalized financial system, which is capable of supporting long-term economic development and national reconstruction.