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The Horn of Africa States The Banking and Financial System (Part III)

By Dr. Suleiman Walhad
March 28th, 2023

In Part II of this series, we left with a note that basically said that the Horn of Africa States is not a perfect place and doing business in the region, is not easy, but with care and caution and adroit management, one can make significant wealth in the region, and we ended with a note that said:

“Not to unite is bad, not to want to unite is worse”

In this part III, we want to start with a quote from another mogul of business,
— Simon Mainwaring, Global keynote speaker, CEO of We First, and best-selling author. He is quoted to have said that “Effectively, change is almost impossible without industry-wide collaboration, cooperation and consensus.” Simon Mainwaring is correct for any change can only occur when people collaborate to make the change effective.

It is what the banking and finance systems of the Horn of Africa States needs to take notice. Throughout history, changes have been made with people working together, for it is the nature of man, the social animal, to be together and work together. It is the way of survival, which people realized early on that they can only live in groups, that must collaborate together, in the business of survival. Man is endowed with a great machine, the brain but not horns or poisons or big fangs with which they tear apart bodies of other animals or chew tough grass and other greens or for that matter cooked seeds and/or fruits.

The banking and finance systems that operate in the region and other parts of the world originated in Europe, but those systems have been evolving and over time, and much of the financial systems of the world appear to have been changed to help the survival of those who have the ability and capacity to manipulate it for their own survival ends. No wonder we see financial sanctions or other forms of sanctions imposed on countries and groups and/or even individuals. Less harsh methods include denial of financings because of perceived risks or charging financing at higher costs to make it almost impossible to benefit from the financing.

In much of Africa, most banks are not even local bank but foreign from other parts of the world and they do not change things for the better unless they are forced to by competition from others. It does not matter whether a bank is from Europe, the Americas or China and Asia. They are in Africa to make a buck and not to innovate or involve the populations of the continent.

Lucky is the Horn of Africa States where foreign banks are not a feature. Most financial institutions in the region are indigenous and local and hence abide by the rules set by the governments of the states of the region. Yet the states, the populations and even the banks themselves, both public and private have not benefitted much from this industry which has helped other regions of the world thrive through financing of feasible/profitable projects both public and private.

We started this series and introduced banking as the art of collecting scattered funds in a population by intermediary institutions called banks which then channel the collected funds to finance profitable projects, that make monies for both the lender and the entrepreneur and may be some of those profits would be shared by the lender with the source of the funds, the depositors.

The governments of the Horn of Africa States do rely on taxes and on aid from foreign countries or groups of non-governmental agencies to provide the services required by the populations of the region. They, therefore, only continue on the cycle of dependence on others for the tax systems and hence collections of the region are not adequate to cover all the funds needed for the services that are required by the populations and countries. Perhaps the tax system is not structured properly or perhaps corruption wastes much of those funds collected. The fact is that governments of the region, like most governments of the world, have never enough funds to carry out their duties to provide adequate services to the population or development processes that assist in the creation of further income generating projects.

The fact that the region was exposed to command economies and chaos for much of the last six decades was not helpful, and it is only in the past tens years that the region is waking up to its true situation, that it is way behind other parts of the world in addressing development of a viable society in the region. No wonder many of its youth migrate away from the region!

The banking system in the region has been improving but it still remains still unable to meet the needs of the region. The system appears to be concentrating on the private sector with only governmental banking bodies working on government projects. Although the systems have been improving in terms of banking penetration, efficiencies, innovations and especially in digital and mobile banking, it still services the higher income groups of the population. The majority of the population which is basically the low income group  and even a large part of the middle income groups are not served. They follow the measuring tools of the foreign banks.

Regulations and supervision standards also appear to have been improving but remain inadequate. The rules of the game still follow and copy the standards and measuring tools of the foreign banks, which are not truly applicable to the region. One area that truly appears to be lacking, is that it is not also geared to meet all the needs of the governments of the region, which forces and/or pushes governments to seek borrowings or conditioned aid from foreign sources at exorbitant prices, almost impossible to meet down the road. Are the central banks in the region failing in scope and capacity to lead the banking and financial systems to make them meet the needs of the region?

What should they be doing? There are challenges of unemployment or underemployment, underinvestment in profitable projects and infrastructures necessary for the success of projects, poor/improper tax collections and, of course, trust in the political/governing systems, which appear, in the region, to be tribal/clannish and all designed to serve foreigners who extend lip service aid and more foreign debt. Many people do not look at the Chinese activities as a possible disruptor of development in the future. Just like the Europeans and the Americans, Asians are also in the region to take advantage of the region’s weaknesses and draw some benefits. The Asians do not even give sub-contracts to local contractors but to their own in far distant Asia.

The regional banking and financial systems can be reformed to help them provide at least a growing share of the financing requirements of the region. The local banks are small compared to the size of the financial requirements of the region and the various infrastructural projects needed for the development of the region. However, two hands are always better than one hand to hold anything and therefore, there is a necessity for banks and financial houses in the region, private or governmental to collaborate and work together to collect investment funds and finance productive projects of the region.

Even roads and bridges, hospitals, schools and other infrastructures can be financed through borrowings from the local banking and financial institutions, which can be paid back to them through tolls and other incomes generated through the usage of the facilities financed. It is not necessary for one financial institution to take on a project alone, but banks and financial institutions can collaborate through syndications to finance together projects, be they governmental or private. The art of working together is something that needs to be developed in the region, which todate is severely lacking.

Governments in the region would need to work against corruption, a disease that kills the future of the children of the region. It is perhaps time the states of the region realized that they were at the center of the solution to political turmoil and chaos, which should not be the case. The politician should know that he/she can only serve if he or she does her job in a transparent and uncorrupt way. They should check on themselves first before they are checked and judged by others. Although this may appear wishful, this is important.

Capital is in the region, at least to a large extent and it does not have to seek capital from beyond the region. The financing of the GERD should be an example to be repeated more often. Credit should be provided locally and internally in the place of external sources.

It is fortunate the region owns a large diaspora, which must be tapped. Governments of the region should set specialized institutions to entice the diaspora to invest in the region. They already remit large amounts of funds to support their families, but they could also participate in financing of projects through specialized well-managed funds. It is another way that would help in securing the financial freedom of the region.

Neither the East nor the West are interested in the development of the region. They are interested more in the natural resources of the region, and its geostrategic location, and to keep the region as a potential market for their finished products. It is perhaps time, the region worked on what is best for the region, using its own resources to carry out the developmental projects of the region. Governments of the region should be collaborating in assuring the banking and financial systems, when it comes to projects that have cross border utilities such as ports, railways, roads and even air travel.

The central banks of the region should be working together themselves to help  build a regional financial framework that is designed to provide financing for the region’s development. These may include in the long run stabilizing prices, maintaining and attracting foreign direct investments on the merits of the projects and setting up regional rating agencies to check on and measure the qualities and risk elements of the region.  One cannot rely on the measuring methodologies of people who live in environments that are completely different from those of the region. We know that the Horn of Africa States is a region that abhors credit, while in other parts of the world, people live on credit and borrowings, way beyond their capacities and die trying to pay off their debts.

People in the Horn of Africa States region do not live on credit, at present and credit is not encouraged, although, profitable projects may require financings beyond the capacity of the promoter of projects. Nevertheless, local measuring tools of the region can be developed to assist financing local projects.

When dealing with credit, the region is not even aware that if a country receives a debt relief, it would have repercussions on its borrowing abilities in the future. Credit reliefs, debt restructurings and renegotiations all have impacts on borrowing abilities and prices. It is perhaps important for those involved in the finances of the region to be wary of all offers received from external resources including those from the IMF and the World Bank. It is sad to see some countries paying off the larger part of their tax collections just to meet interest payments related to external borrowings, instead of providing adequate healthcare, educational and other services to their populations.

There is perhaps need for the region to develop, collectively as a region and not as individual countries, a new financial framework to deal with foreign borrowings and rely more on local borrowings where prices can be determined locally. This is on the onus of the finance ministries and central banks of the region to work together and develop consensual arrangement within the region and for the region.


Through cooperation and collaboration, the region will not fall.

The Horn of Africa States Development Prospects (Part II)

The Horn of Africa States Development Prospects

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