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The Horn of Africa States: The Regional Financial System: Reforming or Failing

October 9, 2023

By Dr. Suleiman Walhad
September 10th, 2023


A Bit of both. A healthy financial system takes money from those who have savings to those who need to put them to use. The banking system in the Horn of Africa States, much like those of the rest of the continent, did not serve the general population of the region but the governments and a few elites. Indeed, the system was originally designed to serve only the colonial administrations and a few of those expatriates and locals who served them in the process of their colonial administrations. In time, the colonial administrations were replaced by local governments, but the services of the financial system did not spread and stayed confined to the governments and the elites of the region.

In this regard, there were changes in the system lately as the financial system spread to the populations of the region, although it still, remained constrained since the banking and financial system takes a cue from their counterparts in other parts of the world. While there is nothing wrong with applying have same rules of the game, each country and region has its own peculiarities, that are specific to it, which therefore requires adoption and necessary manipulations to serve its markets, while maintaining the core principles.

The financial systems of the region were further constrained through the restrictions and constraints imposed by international systems far ahead of the financial ecosystems of the region. They had to deal with networks that were fully controlled by others and had to deal with formulae the systems could not handle. The basics of the story were that most companies and corporations big and small in the region do not themselves carry any accounting systems that would allow them to be assessed and evaluated professionally.

Major corporations stayed owned by governments, which weighed heavily against proper financial evaluations when making financial decisions. Politics played significant roles in the decision-making process of the financial institutions of the region for a long time. Note the economies of the region were mostly command economies, with a socialist orientation. The decision-making processes, thus continued to be based on politics and avoided taking responsibility, passing the buck to others.

During the past decades, the process seems to have been transformed. Private capital came to the financial system, which has now moved to serving more people, dealing with competition that did not exist before, and financing a wider range of customers than had hitherto been the case. In this regard, the financial system has transformed itself slowly, although its contribution to the reduction of poverty and the growth of the economy stayed low and minimal.

The financial systems in the region in the past remained confined to a few commercial banks, and a few insurance companies, and thus remained shallow, restrained more by deposit requirements beyond the earnings of most citizens of the region. The coming of investment and development financial institutions in addition to private involvement added color to the general financial system and in this respect, the system also showed some reforms taking place although the region still does not have any capital markets and/or leasing companies of repute.

Despite the spread of banking and other financial institutions, the system still, remains far short of serving the total population, and in particular, the lower income groups. This is further hampered by inadequate financial infrastructures, although lately, mobile banking has come to the region, where in some parts, such as the Somali landscape, there appears to be no one, not receiving some kind of financial service through mobile banking. This is mostly in terms of money transfers and even paying for their bills.

Credit and investments remain at rudimentary levels and hence growth remains limited. The contribution of the financial system thus falls far short of their counterparts in other parts of the world, where the financial systems contribute to the general economic growth, playing significant roles in this regard.

Now that finance has also got involved in the private sector with private parties creating new financial systems, they appear to be attempting to become drivers of the general agenda of countries and governments. They have not reached that level yet, but the signs are clear where some of the major financial institutions in the region appear to be involved in steering the general agenda of governments. They are no longer confined to their traditional roles of intermediation.

This would appear to be dangerous as they hold the region’s wealth in their coffers which they can deploy as they see fit. Some of the institutions, in jurisdictions with inadequate governance infrastructures, appear to be overly using depositors’ monies to create their corporations involved in many activities from trading to housing to manufacturing and hotel-building without adequate oversight from central banks.

In essence, while there seems to be a reform process in the financial systems, some unruly activities seem to be committed. This perhaps is due to inadequate oversight on the part of governments and central banks in the region. The system although spreading has not yet achieved an optimal level serving the total population and hence shows weaknesses drawn from its past infrastructures.


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