The problem that people bring up most often in Somaliland is the absence of commercial banking. Even when people bring up issues other than banking, they are usually the kinds of issues that can only be resolved through the large investments made possible through a commercial banking system. The energy sector is no different. Many of Somaliland’s opportunities are hampered by the lack of access to investment capital.
The World Bank conducted a study in 2012 to assess how easy or difficult it was to conduct business in different parts of the world. Hargeisa was one of the 184 economies analyzed for the report and ranked 174 out of 184. The largest challenges faced were “starting a business,” “getting credit,” “protecting investors,” and “resolving insolvency,” where they ranked 175th, 184th, 181st, and 183rd, respectively. These issues are tied to the current lack of access to finance in Somaliland and reflected an “incomplete regulatory framework.”
Currently, there are no commercial banks in Somaliland; rather, there are money transfer agents that fill a small void and allow Somali diaspora to send money to family and friends still living in Somaliland. Dahabshiil and Salaam Financial Services both use Islamic-style banking, or Sharia compliant finance. One of the characteristics of Islamic banking is that interest rates are considered Haraam, or sinful, and are not allowed. There are ways around this, and one individual I interviewed said that it came down to “semantics.” However, the largest hurdle is that the existing lenders are primarily transfer agents, and are unable to issue debt and facilitate large-scale investments.
In my interviews with business owners, they claimed that they would be unable to take out loans of any amount from either lender, and the burden of securing capital would fall squarely on the business owner’s shoulders. When reviewing the attractiveness of certain investments, this forces businesses to be much more selective. Certainly, Somaliland entrepreneurs have been able to work around this hurdle, but it proves far more difficult when reviewing the challenges facing the energy sector.
Again, I would refer readers to the investment comparison of wind energy and diesel energy.
The Somaliland government has proposed, and is still in the process of discussing, two pieces of legislation that could make significant improvements in the areas that I have been discussing. The first is the Electric Energy Act, which would create an electric regulatory commission to oversee the utilities and manage rate-setting. The second is the Commercial Banking Act, which would relieve some of the stricter regulations around the finance industry and draw in banks to the area and create much-needed access to capital and investment.
However, in many of the interviews that I have conducted, there have been differing degrees of optimism regarding how soon they could be passed. Some have predicted that both acts could be passed within a month, and others still claim that they will not pass before at least another year. Both were expected to have been passed some time in 2013 or earlier. Some have claimed that local transfer agents are lobbying against the Commercial Banking Act to prevent increased competition, desiring to remain the sole source of “finance” in the country. Likewise, others have claimed that utilities and others close to the Electric Energy Act are trying to prevent some of the more ambitious pieces of the legislation from remaining in the final version. I was unable to secure a draft of the legislation to verify what changes may or may not be at issue.
Regardless of how and when the legislation passes, it seems clear that is will be a critical piece of Somaliland’s development.
I recently was able to present the preliminary findings of my survey to a group of journalists and politicians at Abaarso Tech University. This information will be used for my Masters thesis over the coming months.