By Guleid Osman
Saturday October 3, 2026
Introduction
When the Somali state collapsed in 1991, the formal banking system collapsed with it. For the next two decades, money moved through hawala networks, informal transfer businesses that carried diaspora remittances to households, financed imports and kept domestic trade running while conventional banks and public institutions were largely absent. Many of those businesses have since become licensed money-transfer operators, commercial banks and digital-payment providers, and the Central Bank of Somalia has been substantially rebuilt.
That progress is now being tested. Somalia is experiencing a severe shortage of cash in circulation. Physical US dollars, the currency in which most Somalis save, trade and are paid, are scarce, and the formal financial system holds too few of them. Several pressures have converged. The disruption to global oil supply that began in early 2026 has raised the cost of fuel and freight for an economy that imports almost all of its energy and much of its food. A dispute over the federal government's mandate, the rejection of the constitutional amendments by two federal member states and armed clashes in Mogadishu have deepened political and security risk. Local, diaspora and international investors have become reluctant to commit new capital, and a significant amount of money has left the country. Beneath all of this lies a structural trade deficit, Somalia buys far more from the rest of the world than it sells.
A cash shortage of this kind is more than an inconvenience. It is the condition under which financial systems fail. The global financial crisis of 2007–08 showed that institutions can look sound shortly before they collapse, that a loss of liquidity can bring down a bank within days, and that the disorderly failure of one connected institution can damage an entire economy.
Northern Rock in the United Kingdom and Lehman Brothers in the United States remain the clearest illustrations. The number of banks, branches, accounts and digital transactions shows how far Somalia's financial sector has grown. It says little about whether the system can withstand the shock now under way. This article examines how the current squeeze developed, which lessons from 2008 apply most directly, and what the Central Bank, financial institutions and government can do now to keep the system stable and begin restoring confidence.
Anatomy of the current squeeze
An external shock to an import-dependent economy
The conflict involving Iran from late February 2026 and the disruption of shipping through the Strait of Hormuz, through which roughly a fifth of global oil trade passes, produced what the International Energy Agency described as the largest supply disruption in the history of the world oil market. Brent crude rose above US$115 a barrel at the end of March. Prices eased after the April ceasefire but have remained volatile, and traffic through the strait has been slow to recover.
Somalia is exposed to this shock on several fronts. It imports almost all of its petroleum products, largely from or through the Gulf. Fuel determines the cost of electricity, much of which is still generated with diesel, as well as transport, water pumping and food distribution. Higher fuel and freight costs therefore raise the dollar cost of almost every import and the price of almost every domestic service. The World Bank's April 2026 assessment expected higher oil prices to reduce private consumption and growth, and projected GDP growth of 2.8 per cent for 2026 with risks tilted to the downside.
A dollar economy without its own source of dollars
In most countries, the central bank can ease a shortage of cash. Somalia is different. The economy has been dollarised for more than three decades, and the Central Bank cannot issue the currency in which most deposits, prices and debts are denominated. The supply of physical dollars depends on what flows into the country, diaspora remittances, humanitarian and development assistance, export earnings, foreign investment, and the banknote shipments that banks and money-transfer businesses arrange through their correspondents.
Each of these channels is under pressure. Exports, dominated by livestock, contracted in 2025 while imports continued to grow. The World Bank describes the trade deficit as structurally large, averaging close to 60 per cent of GDP, and estimates the current-account deficit at 9.6 per cent of GDP in 2025. Reductions in foreign aid have removed a significant source of inflows. Remittances remain the most important buffer for households, but a growing share arrives as electronic balances rather than banknotes. Meanwhile, cash leaves the country to pay for imports, to settle with foreign suppliers and, increasingly, as savings moved abroad.
The result is an economy in which money continues to circulate electronically while physical dollars become scarce. Where cash is scarce, a gap can open between the value of an electronic balance and the same amount in banknotes, and customers who cannot obtain cash begin to lose confidence in the institutions holding their money.
Political and security risk
The dispute over the extension of the federal mandate beyond May 2026, the rejection of the constitutional amendments by Puntland and Jubaland, and the fighting in Mogadishu in June have raised questions about the continuity of policy and the security of property. The Deputy Governor of the Central Bank estimated the direct cost of the June disruption alone at US$3.8 million in lost business and services. The larger cost is indirect. Uncertainty about who will govern, and under what rules, has led businesses to postpone investment and to hold their assets in a form they can move quickly.
Investor reluctance and capital flight
Capital flight in Somalia rarely takes the form of large, visible transfers. It happens when a merchant keeps working capital in Dubai or Nairobi rather than in a Mogadishu bank, when a diaspora family postpones a construction project, when a company pays foreign suppliers in advance, or when an investor leaves profits offshore. Each decision is rational for the individual. Together they drain the domestic system of the deposits and cash it needs to finance trade and lend to business.
The banking sector is poorly placed to absorb this. Somalia's 13 licensed commercial banks held total assets of about US$1.8 billion and customer deposits of about US$1.43 billion at the end of 2023. Deposits equal around 5 per cent of GDP, among the lowest ratios in Africa, and credit to the private sector stood at about US$404 million. Many banks operate with limited paid-up capital. A small, concentrated and thinly capitalised system has little capacity to withstand a sustained outflow of deposits.
Lessons from 2008 that apply now
Northern Rock: liquidity, not only capital
Northern Rock expanded its mortgage book quickly and funded it largely through short-term wholesale markets rather than retail deposits. When international money markets seized up in 2007, it could no longer refinance itself. The Bank of England provided emergency liquidity as lender of last resort, but once the support became public, depositors queued outside branches in the first run on a British bank in more than a century. The government guaranteed deposits and took Northern Rock into public ownership in February 2008.
Capital was not Northern Rock's central problem; funding was. That distinction is the most important lesson for Somalia today. Capital absorbs losses; liquidity allows an institution to meet its obligations as they fall due. A Somali bank can satisfy its minimum capital requirement and still fail if depositors demand cash it does not hold. In a cash-scarce economy, supervisors need to watch each institution's holdings of physical currency and liquid foreign balances, the concentration of its deposits among a few large customers, the mismatch between the maturity of its financing and its deposits, its exposure to connected parties, and its ability to withstand a wave of withdrawals or the loss of a correspondentbanking relationship.
Lehman Brothers: confidence and disorderly failure
The bankruptcy of Lehman Brothers in September 2008 turned a serious disturbance into a global emergency. Counterparties became uncertain about contracts, collateral and one another's financial health, and they hoarded cash. Credit became scarce and expensive, asset prices fell and economic activity contracted. The damage reached well beyond Lehman's shareholders, businesses lost access to working capital, households lost jobs and governments intervened on a very large scale.
Somalia is already showing an early version of the same behaviour. When confidence weakens, businesses and households keep cash outside the system, banks lend less and hold more liquidity in reserve, and trade slows. The Lehman case also separates two things that are often confused. Shareholders and managers should bear the consequences of poor decisions, since that is how market discipline works. Deposits, payments, remittances and trade finance for essential goods are a different matter. These services need protection from a disorderly collapse.
"Too big to fail" and "too essential to stop"
"Too big to fail" describes an institution whose disorderly failure would cause unacceptable damage to the financial system and the economy. An expectation of public rescue creates moral hazard; allowing a highly connected firm to fail without preparation imposes very large costs on everyone else. The policy answer that emerged after 2008 was the orderly resolution regime, under which shareholders absorb losses, management can be replaced, critical operations continue, insured depositors keep access to their money and the use of public funds is kept to a minimum.
In Somalia, the more useful concept is "too essential to stop". A bank, remittance company or mobilemoney operator does not need a large balance sheet to be systemically important. If millions of people rely on one platform for salaries, remittances, household purchases and business payments, a liquidity shortfall or outage at that platform becomes a national problem. During a cash shortage, as more of the economy moves onto digital platforms, that concentration grows.
Institutions, not individuals
Before 2008, responsibility for UK financial stability was divided between the Bank of England, HM Treasury and the Financial Services Authority, and coordination proved weak under stress. The reforms that followed returned prudential supervision to the Bank of England, created the Financial Policy Committee and the Prudential Regulation Authority, and were accompanied by an open, merit-based recruitment of a new Governor, Mark Carney, who took office in July 2013. The lesson is not that one appointment guarantees stability. A central bank needs clear mandates, adequate legal powers, reliable data, capable staff and leadership selected openly and on merit, so that its decisions command confidence at precisely the moment confidence is scarce.
How a liquidity squeeze can become a banking crisis
Several channels could turn the present shortage of cash into a broader financial crisis:
• Cash runs. If customers believe that an institution cannot pay out cash, they will try to withdraw before others do. A run on one institution can spread quickly to others with similar business models or shared owners.
• A gap between electronic and physical money. If agents or merchants begin to charge a premium for cash, or to refuse conversion of electronic balances, confidence in digital money and the institutions behind it will weaken.
• Maturity mismatch. Banks that have financed multi-year real-estate or trade projects with demand deposits are exposed if depositors withdraw at the same time as borrowers delay repayment.
• Connected exposures. Banks, money-transfer businesses, telecommunications companies and trading firms are often linked through common ownership. Stress in a trading group hit by higher import costs can pass rapidly to an affiliated bank.
• Deteriorating asset quality. Higher fuel and import costs, weaker demand and political disruption will push some borrowers into arrears, particularly importers, transporters and real-estate developers.
• Correspondent banking. The loss of a correspondent relationship would close one of the few channels through which Somali institutions obtain dollars and pay for imports. None of these outcomes is inevitable. Each is far easier to manage if the authorities identify it early and act before confidence breaks.
Applying Basel III proportionately
Basel III, the Basel Committee's response to the 2008 crisis, combines higher-quality capital, buffers built up in good times and drawn down under stress, a simple leverage ratio, a Liquidity Coverage Ratio requiring enough high-quality liquid assets to survive 30 days of severe stress, a Net Stable Funding Ratio limiting reliance on short-term funding, and closer supervision of systemically important banks. It was designed mainly for large, internationally active banks. Somalia should treat it as a longterm direction adopted in stages rather than a rulebook to be imported at once.
Because most Somali banks operate on Islamic finance principles, the standards of the Islamic Financial Services Board, which adapt Basel capital and liquidity requirements to Shariah-compliant institutions, provide a practical reference for that adaptation.
The present crisis makes clear where to begin. Liquidity rules should come first: a simple liquidity ratio covering physical cash and readily available foreign balances, limits on deposit concentration, expectations on stable funding and regular stress testing. These should be accompanied by a clear definition of eligible regulatory capital, robust minimum capital requirements, a simple leverage limit, limits on large and related-party exposures, and transparent financial and risk disclosure.
Compliance on paper is not enough. A bank can file every required return and still be unsafe if its assets are overstated, its ultimate owners are unidentified, its lending is concentrated among connected parties, or it funds multi-year loans with deposits that can be withdrawn on demand. Effective implementation depends on reliable data, independent audits, qualified supervisors, enforceable corrective action and boards that accept responsibility for risk.
Immediate priorities: the next twelve months
1. Close liquidity monitoring
The Central Bank should collect frequent, preferably daily, data from banks, money-transfer businesses and major mobile-money operators on cash holdings, foreign balances, deposit movements, large withdrawals and maturing obligations. Each institution should be required to maintain and test a contingency funding plan setting out how it would meet a sudden wave of withdrawals or the loss of a correspondent relationship.
2. Coordinated management of cash supply
The supply of banknotes should be treated as a matter of national financial stability. The Central Bank can work with banks, money-transfer businesses and their correspondents to coordinate the import of US dollar banknotes, reduce the cost of shipments, and ensure that cash is distributed across regions rather than concentrated in a few institutions. Clear and transparent rules on cash-withdrawal charges would prevent a premium on physical cash from becoming a source of panic.
3. Safeguarded and interoperable digital payments
Digital payments can reduce the economy's dependence on scarce banknotes, but only if customers trust that their electronic balances are fully backed. Mobile-money operators should hold customer funds in safeguarded accounts, separate from their own resources, and report regularly on that backing. Systemically important providers should maintain redundant infrastructure, tested disaster-recovery arrangements and strong cybersecurity. Interoperability between networks would let customers move money freely and reduce dependence on any single platform.
4. Protecting trade finance for essential imports
Fuel, food and medicine must continue to reach the country. The authorities and development partners should consider trade-finance and guarantee arrangements, such as letter-of-credit and risk-sharing facilities, that allow banks to finance essential imports without exhausting their cash reserves.
5. A small, rules-based emergency liquidity facility
The Central Bank should establish a facility for solvent institutions facing temporary liquidity pressure. Support should be secured against eligible collateral, limited in duration and accompanied by closer supervision. Given dollarisation and limited reserves, the facility will need to start small and may require carefully structured international support. It must not be used to conceal insolvency or to shield shareholders from losses.
Structural priorities: rebuilding confidence
6. Risk-based supervision and a credible resolution framework
Supervisory resources should be directed according to the risk each institution poses, with stricter requirements for larger and more interconnected banks, remittance companies and payment providers. Supervision should look beyond formal compliance to business models, funding structures, technology dependencies, beneficial ownership and dealings with affiliated companies. Legislation should allow early intervention in a troubled institution, with powers to replace management, transfer deposits and sound assets to another institution, establish a temporary bridge bank or wind down non-essential operations. Major institutions should prepare recovery plans, and the authorities should prepare resolution plans showing how essential services would continue if an institution failed.
7. Depositor protection
A deposit-guarantee scheme, introduced gradually and funded mainly by contributions from the industry, would reduce the risk of panic among small depositors. It should form one part of a wider safety net and should never be treated as a substitute for sound supervision, since deposit insurance without effective oversight encourages excessive risk-taking.
8. A credible path to the Somali shilling
The Central Bank's preparations to reintroduce the Somali shilling under a proposed currency-board arrangement are an important step toward monetary sovereignty. Timing and credibility are decisive. A new currency introduced into a market short of both dollars and confidence, without full reserve backing and clear convertibility rules, could accelerate the very flight to dollars it is intended to reverse. The shilling should be launched only when the reserves, legal framework and governance of the currency board are in place and can be publicly verified.
9. Conditions for investment
Investors return when they believe their money is safe and can be recovered. That requires enforceable contracts, functioning commercial courts, modern insolvency and secured-transactions laws, a creditinformation system and collateral registry, consistent taxation across federal and state levels and, above all, a political settlement that reduces the risk of conflict. Well-regulated, Shariah-compliant investment vehicles could channel diaspora savings into productive domestic projects, provided they are transparent and properly supervised.
10. Narrowing the trade deficit
The trade deficit is the deepest source of dollar outflows, and it can be narrowed only gradually: through higher-value exports such as processed livestock products, fisheries and agriculture; better standards and certification for export markets; and reduced dependence on imported fuel. Expanding solar and hybrid power generation, supported by a sound regulatory framework for independent power producers, would cut the diesel import bill, lower electricity costs for businesses and households, and remove one of the largest recurring demands on the country's scarce dollars.
11. Central-bank independence and accountability
The Governor and other senior officials should be appointed through a transparent, merit-based process and protected from short-term political pressure, particularly during a period of political dispute. Appointees should bring expertise in banking, economics, payments, regulation and crisis management. Independence must be matched by accountability through regular reporting, audited financial statements, parliamentary oversight and published assessments of financial stability. Timely publication of monetary and financial statistics would itself help restore confidence.
Conclusion
The hawala system is a record of Somali resourcefulness. It kept remittances and trade flowing for many years when public financial institutions were absent. Regulated banks and digital-payment providers are the next stage in that history. The present shortage of cash, combined with an external oil shock, political uncertainty, capital flight and a structural trade deficit, is the most serious test that modern system has yet faced.
The events of 2007–08 identified the risks that matter now. Northern Rock failed when its funding dried up, not because it lacked capital. Lehman Brothers showed how a loss of confidence in one institution can spread through an entire economy. The response to both established that authorities need tools to protect essential services without rescuing shareholders and managers.
Somalia cannot set the price of oil or resolve its political dispute through financial regulation. It can, however, ensure that its financial institutions monitor liquidity closely, hold adequate cash, safeguard customer funds and can be resolved in an orderly way if they fail. Those measures would limit the damage from the current shock and prepare the ground for investors to return once conditions improve. Confidence is now the scarcest resource in Somalia's financial system, scarcer even than dollars. It will return when depositors, businesses and investors see that their money is safe, that the rules are applied consistently and that the authorities have prepared for difficulty before it arrives.
About the author
Guleid Osman Mohamed has more than 20 years of experience in banking, financial-sector regulation, AML/CFT compliance, payment systems and economic regulation. He previously worked at HSBC, served as Chief Executive Officer of the Somali Bankers Association and was a Banking Expert at Somalia’s Financial Reporting Center. He holds a bachelor’s degree in economics and a postgraduate qualification in Banking and Finance from the University of Leicester and is a PhD candidate in Leadership and Sustainable Economic Development. The views expressed in this article are his own.
