10/25/2021
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INTERVIEW: Somalia’s governor on rebuilding its central bank


Thursday July 8, 2021
By Dan Hardie

Governor Abdirahman Mohamed Abdullahi discusses reviving Somalia’s war-damaged economy, re-creating a payments system, and dealing with remittances


Photo: Central Bank of Somalia

How did your career begin?

That goes a long way back, to 1986. I started working at the ministry of finance in Somalia, as a young officer in the revenue department. That’s where I gained my interest in finance. I eventually built my career in financial management in both the public and private sectors.

When did you leave Somalia?

I left in 1989, just before the peak of the civil war. The civil war was already going on, but Mogadishu was relatively under the control of the central government. I’ve been away for a long time. That has been a challenge. But it’s also a blessing, in terms of gaining experience and a quality education, and bringing back that wealth of knowledge and skills from the West, which is very critically needed here in Somalia.

Did you work in Norway to begin with?

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Yes, I have dual citizenship. I have lived for most of my adult life in Norway. That’s where I got my education and where I had most of my working experience, before I moved to the United Kingdom, first as a graduate student at the University of Liverpool, and then working in the financial sector in London. I was the regional manager [for East Africa] for a large remittance company, working for just over three years in London.

In 1991, the Central Bank of Somalia stopped functioning because of the civil war, along with a lot of the country’s other governing institutions. Is it accurate to say there was no central bank until 2001?

That’s correct. State function collapsed, so all the institutions went with it. For over 10 years, there was no central bank or any other public institution. The re-establishment of public institutions started very gradually, because of the political instability. There was prolonged civil war. The resumption of the central bank took much longer than expected. Even the current law governing the Central Bank of Somalia was only enacted in 2012.For a society that does not have a functioning central government or a central bank, it is very difficult to have an economic recovery. And that is why, among the institutions Somalia needed, the recovery of the central bank was key.

The central bank has re-emerged gradually. Initially, it was mainly as a fiscal agent for the government. But over the last two years, we have put a lot of effort into having a policy-oriented, well-functioning central bank. We have laid the ground, and we have a four-year strategic plan. With the help of external expertise, from institutions like the World Bank and International Monetary Fund, we have a plan for the emerging financial sector in the country. My role has been to put that strategy into reality over the last two years.

When did you return to Somalia?

That was four years ago, in early 2017. I was the principal public financial policy adviser to the prime minister, Hassan Ali Khaire, for just over two years, before I was appointed to this post.

Abdirahman Mohamed Abdullahi began working at Somalia’s finance ministry in 1986. He left the country in 1989 as Somalia’s civil war intensified, spending the next 27 years in Norway and the UK. He holds a bachelor’s degree in business administration from the Norwegian University of Science and Technology and a master’s in finance and international banking from Liverpool John Moores University. Abdullahi worked in the private sector, and for non-governmental organisations working in Yemen and the Horn of Africa. He returned to Somalia in early 2017 to serve as the prime minister’s senior adviser on public finances. In April 2019, the president appointed him governor of the Central Bank of Somalia.

What kind of work did you do?

We mainly did public finance reform. When the prime minister took office in 2017, there were 22 public entities collecting revenue. We managed to put them all under one office in the ministry of finance. We put a control system in place where the public accountability of the revenue collectors is safeguarded.

Somalia is under a debt relief process with the IMF, and I was the main support for the prime minister in that process. We had to undertake a number of reforms to get that process through, to reach the decision point on what they call the Heavily Indebted Poor Countries [HIPC] programme. So, I was constantly engaging with the central bank, or the ministries of finance, planning and commerce, to see whether they had undertaken the reforms agreed to within the deadline. We did that in a record time. Somalia has become the first country to reach the IMF decision point in under four years. Even Liberia, which held the record before us, took much longer.

Which are the most challenging conditionalities of the HIPC initiative?

There are a number of them. One of the conditionalities was not to spend more than you receive in revenue. In other words, you are not allowed to borrow, either internationally or domestically. You are not allowed to accumulate arrears or delay payments – you have to pay everything on time. This, in effect, means you cannot do any investment in critical services the government should provide to the public – in education, in health care, in infrastructure – unless you have the money for it. And we know the government does not have enough revenue to deliver a budget surplus, as it’s supposed to do. It’s very challenging when you are restricted by a programme like that over time, not one year or two or three.

Does that explain why Somalia has requested another 680,000 in Special Drawing Rights from the IMF in the past few weeks?

Yes, it’s urgent. If Somalia wants to rebuild itself, there is this huge need for public service, in terms of healthcare and education. We also have some security issues in the country. Security policy-makers are doing their best. But to me, as a non-security person, I see economic recovery as the best way to fight extremism. When you create hope, when people have food on the table, when there is some employment for the youth population we have, then it will be easy for the security personnel to do their job.

How were you nominated for the job of central bank governor?

President Mohamed Abdullahi Mohamed nominated me in 2019. All that was needed was a cabinet proposal to the president, and his decision is final.

Did you ask for the job of governor?

I hadn’t envisaged being a central bank governor. I have a lot of experience in finance and financial management, but I’ve never been a central banker before. Obviously, I could not say no, because this was a duty. I thought I had what it takes to undertake this challenging position, and to use my long experience and my time in the West to build this institution.

When you arrived at the central bank, what was your first impression?

This was an institution that needed a lot of reform to deliver its responsibilities. It was obviously providing fiscal services to the government, but, apart from that, there weren’t policies and functionality in place. So I knew the magnitude of the task that was in place.

What are your priorities for reforming the central bank?

We want to rebuild the credibility of the institution, to regain the public trust so there is a policy-maker and a regulator that are reliable and supporting the challenges facing the financial sector of the country.

There are a lot of things that must be very difficult for a central banker in Somalia …

I thought about that when I was appointed, actually. One of the most challenging decisions currently for any central banker in the world is to be in Somalia right now, as I understood when I took this position. But that is part of my motivation.

Who are the local lenders?

We currently have 13 commercial banks licensed by the Central Bank of Somalia, which are the only ones that are authorised to lend money to the public. Some of them are barely establishing themselves – others have been there for a while. They need a lot of support. They see the reforms of the central bank, and our engagement, with a lot of hope and excitement.

We have our licensing department, which is currently receiving high-quality training from IMF experts, undertaking the monitoring and supervision of these banks. We have frequent on-site and off-site examinations, and we monitor the access to loans and the riskiness of the loans these banks are dealing with.

There are some reforms we are still doing that are needed to make loans much more accessible to small businesses, and [to] those people who cannot afford the high collateral requirements from some of these banks. These reforms include the asset register or other necessary legislation that we need to have in place to ensure financial inclusion, including access to loans.

Are there other, informal systems of credit, such as mobile lending?

Mobile money is very significant in Somalia. Mobile [phone] penetration in the country is among the highest in the African continent. Over 70% of Somali adults have use of a mobile money service. It has been in place for a while, but had never been regulated before January this year. This is one of the key reforms the central bank has achieved. Mobile money provides financial inclusion, but the licences we issue currently do not allow them to provide loans. We are working to further the requirements, and there will be a time when we will consider whether mobile money can also be part of the lending [sector]. But currently, there are no informal lenders in the country.

How important is mobile money compared with banknotes and coins?

Very important – it has a lot of advantages that conventional cash transactions do not have, and it provides financial inclusion. It’s a higher bar, for example, to have bank accounts in Somalia. You have to have some sort of income, or you have to provide a certain level of acceptance for the requirements of the commercial banks.

For mobile money, you can deposit one dollar, if you have it, or the equivalent, in a mobile wallet or a mobile money account. It does not involve physical cash or requirements that come with that. You have an account, and then you will be able to transact with businesses, to pay for a transaction, to give money to someone, or to transfer, or to keep in your account. It’s a blessing for Somalia.


Central Bank of Somalia officials, governor Abdullahi (fifth from left) and executives from telecoms firm Somtel mark the country’s first mobile money licences being awarded


The Somali shilling, the domestic currency, seems to have largely fallen out of use during the peak years of the civil war, between 1991 and 2001. Then it was gradually re-established. How much of a priority is it for you to re-establish the use of the shilling?

It’s one of our top priorities. The Somali economy is largely dollarised, and the Somali shilling has not been printed or issued by the central bank since 1990. If you don’t have your own currency, it’s very difficult to conduct a monetary policy.

In the first phase of our currency reform, one key area will be to mop up the widespread counterfeits in the country. We want to regain the role of the central bank as the sole issuer of legal tender. If we don’t do that, someone else will fill that gap. We are doing this for the sake of the nation and the poorest part of our society – those who currently use the Somali shilling. In order to have a US dollar in Somalia, you must have a job that pays your salary in US dollars, or a business that generates dollars, or be lucky enough to have a friend abroad who can send you remittances in dollars. But if you have none of these, if you are poor or an internally displaced person, it will be very difficult. For these people, they need Somali shillings. The majority of their daily life involves shilling transactions.

Currently, all commercial banks and mobile money providers don’t accept Somali shillings because they don’t trust the currency in circulation. But that will change once the central bank starts the reform of the currency. We are well under way in making the preparations for what we call ‘the currency exchange’, the first part of the currency reform. When we feel the time is right, we will reissue the shilling.

The economy is largely dollarised, but people are still using both real and fake Somali shillings. You’ve also got quite a small formal banking sector. Does the Central Bank of Somalia have a monetary policy?

Not currently. Right now, we are establishing the foundations for the monetary policy. But to have a fully fledged monetary policy, which is a necessary instrument, you need to have your own currency.

For a country that has not issued its own currency in over 30 years, it is an extraordinary challenge. We need to make sure that all the risks are identified, and that risk mitigation and management instruments are in place. That’s why we are utilising the support of the highly experienced experts from the IFIs [international financial institutions]. We want to get it right. If you get it wrong with a project like this, you do much more harm than good.

We are not de-dollarising either – I want to make the point. Our economy will be largely dollarised for the foreseeable future. We see a dual currency as the solution. It’s part of my personal commitment to the nation.

Is lack of access to credit a major restriction on growth at the moment?

Access to credit is critical to development in any country – and, in Somalia, it is even more so. The surveys undertaken by the World Bank have identified a huge gap in the supply side of the market. There are a significant number of small businesses and people who want to borrow that are restricted by the current limited access to loans, mainly because of high collateral [requirements]. It’s all about the risks involved. We are going to work with other government agencies to establish a credit bureau, and also a collateral registry, and the laws that facilitate and make it easier for banks to manage risks.

The hawala system is very important in Somalia because, among other reasons, there’s a great Somali diaspora, and a lot of people sending remittances back to the country. Does the central bank play any role in hawala?

People associate hawala with [a] very old, antiquated, paperless system – where it’s a trust-based service. But what we have in Somalia are money transferring businesses. The central bank has licensed 10 money transfer businesses – we call them MTBs, rather than hawala. But, yes, it’s a very, very important player in our economy. The remittance inflow into Somalia accounts for more than 25% of our GDP. It is very critical to our balance of payments. It’s also a lifeline for many Somali households. They rely on remittances sent by family and relatives abroad, to send their kids to education, to have access to medicine and healthcare.

The central bank is playing a very active role. First of all, we support and regulate the MTBs that are providing the service – to make sure they comply both with the country’s current rules and regulations, but also with international standards. We also engage with international partners to facilitate their remittances outwards, and make sure the flows are not disrupted. As you may know, the remittance [sector] faces some challenges in the UK and other countries. Most of the [foreign] banks have withdrawn from the remittance market because of the increasing risk to firms. They want to disengage with remittances, which they see as a business that doesn’t provide much income to them and has some risks in it.

One of the critical challenges facing these remittance companies, who have done a remarkable job for the last 30 years for the Somali society and people, is to have banking access abroad. We are engaging with regulators in the UK and the US and other remittance-sending countries for the Somali diaspora, to ensure we have the necessary regulations in place. We are addressing the gaps and the anti-money-laundering and terror-financing [AML/CFT] risks. We have a very robust, international-standard money-laundering law in the country. We have also revised, as part of our reforms of the central bank, our AML/CFT regulations to ensure compliance by the MTBs and the banks.

I also twice a year engage very directly with most of our international partners, in a forum called the Somalia Remittances Stakeholder Advisory Council. I co-chair an event with the World Bank every six months, to highlight the importance of the remittance flow to Somalia, to help our partners to understand the reforms undertaken in the country, and support us in addressing the challenges.

How significant for Somalia was developed-world banks’ move away from engagement with the remittance business?

It has had a major impact – it has created additional costs for the providers. But they have been remarkably resilient, despite all these challenges and the lack of banking access.

This remittance flow has been a lifeline. It has been obstructed – although not completely – and the restrictions have impacted the level of support it provides to the economy. It’s still going on, but this has added a lot of unnecessary costs that shouldn’t have been there if the banking access was available.

The reforms we’re putting in place will convey to our partners abroad that we have put in place all the international standards needed to combat illicit transactions and financial crime. Somalia needs re-engagement with the global financial system. To do that, we need major financial reforms.

One of them is the national payment system that we are about to launch in June. This will create a financial infrastructure – a transformative facility that will allow the commercial banks and other platforms to operate under the central bank payment and clearance system. It has [an] RTGS [real-time gross settlement system], it has an automatic clearing system, it has all the necessary infrastructure and the latest state-of-the-art technology being introduced in the West.

How will you reintroduce a national payment system?

Work on the national payment system has been going on over the last three years – so it’s not something we are suddenly introducing. We engaged constantly with experts from the World Bank, who are providing significant technical assistance and financial support. The technology is costly, and the Central Bank of Somalia is still not capitalised sufficiently to undertake an investment of this size. We have the technologies already agreed and the regulations are also in place. All we need is the law, which we must pass through parliament. In the meantime, we will use regulations and the Central Bank of Somalia Act to regulate this sector until the law is passed.

The national payment system has three components, and all of them will be launched together. Currently, our commercial banks are not interconnected. This is one of the components of the upcoming payment system. We are all excited: the sector cannot wait. The engagement testimony has been very encouraging. We have a big launch effort [to come], when hopefully we finalise the final testing of things we are doing.

So, right now, there’s no legal way to transfer money between one commercial bank in Somalia and another – is that correct?

That’s accurate. Any bank cannot collect the cheque for another or cannot make an online transfer, because they are not interconnected. That will change in June – hopefully forever.

Who works for the Central Bank of Somalia?

We have around 150 staff. Almost all of them are very young, under the age of 35: trainable, hungry to learn, and that’s an advantage for the future of this organisation. Our policy is to recruit home-grown future central bankers of Somalia. We have already recruited over 15 people through a competitive process. These [people] are the future of the central bank. We needed to get experts to train them, mentor them. And that’s why we are being successful, in close co-operation with our partners – the likes of the World Bank and IMF. We’ve got highly experienced experts: legal advisers, strategic advisers, change management specialists, communications experts and risk managers.

What could central banks in other countries in the developed world do to help the Central Bank of Somalia?

Most importantly, to facilitate the remittance flow to the country, where de-risking is disproportionately affecting Somalia. We have a financial intelligence agency – what we call a financial reporting centre – that’s also working closely with the central bank, supporting the compliance of the remittances. Somalia has also undertaken a national risk assessment on the AML/CFT area. We’ve become a member of FATF [Financial Action Task Force] and we are looking forward to mutual assessment and a national risk assessment in the next couple of years, when FATF will undertake a necessary audit of Somalia’s activities. The central bank is playing a key role in that.

There is a very difficult security situation in Somalia, including Mogadishu. How does that affect your work?

Security is a challenge in Somalia – no doubt about that. But I think it has improved significantly in the last few years, thanks to the government and the work it is doing in the security sector. For the central bank, obviously, we take the necessary precautions. And, again, I think the work we are doing is also radically supporting the improvement in security.

You have a four-year term as governor. Would you serve a second term if you were asked to?

Well, definitely – despite the challenges and the work we have done – if I am asked. But I am not the one to decide this. It is up to the government when that time comes. But now, that is not in my mind at all. I am only focused on my tenure and the work that I’m planning to undertake.

What would you hope to see happen with the central bank and the Somali economy over the next two to three years?

As I said, I’m optimistic. I rely on our staff, our partners. So, I firmly believe that will have tangible results in the next two years. You will see a central bank that has the necessary governance structure and policy-oriented decision-making process. We are also making sure that the regulations to respond to systemic risk, and the capacity and know-how, will be there in two years’ time.

I think you will also see Somalia’s financial sector engaging with the global financial world much more than it does today – not only the remittance flow, but also our commercial banks will have more access to correspondent banking, to provide currency exchange and other services that will help businesses to develop. I’m not saying every single challenge we are facing will be removed in the next 24 months. But a significant change and progress for the next two years – that’s my firm belief. We will see whether we succeed.

This interview took place on May 17, 2021. The transcript has been edited for length and clarity.



 





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