The Somali banking sector is undergoing a quiet transformation and could mark one of Africa's most ambitious financial overhaul corners. Over the past decade, the country has made progress in rebuilding banking institutions, adopting digital innovation and introducing the much-anticipated reforms. But this advancement comes with liquidity constraints, dollar challenges and governance challenges that could undermine fragile profits.
The country is at a crossroads as the Central Bank of Somali (CBS) tightens its regulatory framework and new laws reshape the financial environment. Can the Somali banking sector bring meaningful and inclusive growth? Or will systemic weaknesses hinder trust in sectors that desperately need public trust?
The Somali financial sector has grown rapidly over the years. There are 13 licensed banks active in the country, including the largest bank (IBS), Premier Bank, Salaam Somalia Bank, Dahabushiille International Bank and Amal Bank.
According to the US International Trade Agency (ITA), there are seven remittances known as Hawaras, which are publicly available, and seven remittance businesses that are permitted to send and receive money through informal networks and channels. Three licensed mobile payment service providers are linked to the largest of seven mobile network operators.
Financial services are controlled by informal conglomerate groups, each containing banks, remittance businesses, mobile payment service providers and mobile network operators. Most banks use the “Islamic model” to provide commercial retail banking, trade finance and investment services. Despite this growth in the banking sector, access to financial services is low and is significantly limited to urban areas. The ITA points out that Somalia's income is generally low, with 55% of households being supported by remittances primarily through Hawarasa and mobile payment service providers.
85% of adults have mobile phones, and 82% of adults use mobile phones for financial transactions, usually mobile payments. Less than 9% of adults have bank accounts, primarily in urban and rural (fixed agriculture) areas, with minimal access to banks in nomadic (grazing) areas. Only 26% of households receiving loans primarily from merchants and traders are from banks only.
According to the World Bank, remittances from the Somali Diaspora donate roughly $2 billion a year. This represents about 30% of the country's GDP. Much of this flows through mobile money platforms like Halmoud's EVC Plus. This is a daily fixture, especially in Mogadishu, throughout Somalia.
The challenges of fluidity
Although the banking sector in Somali is expanding, many banks face hurdles in effectively managing liquidity. Liquid assets are available, but deploying them efficiently remains a challenge as they need to be consistent with limited investment channels and the framework of Islamic banks.
Regulatory reforms led by the Central Bank of Somali (CBS) are beginning to address structural gaps, but the system has important mechanisms such as deposit insurance, which are important to build depositor trust and long-term stability. Continuing progress in these areas is essential to strengthening trust in the formal financial system.
The Dollar Dilemma
One of Somalia's most difficult challenges is its almost dependence on the US dollar. After the collapse of the Somali shilling in the 1990s, the dollar became the currency of everyday life. This stabilized pricing, but limits the ability of central banks to implement monetary policy and exposes the economy to external shocks.
CBS outlined plans to gradually reintroduce Somali shillings, starting with a controlled financial framework under low-denominational notes and the arrangements of the Monetary Commission. This limits the issuance of currency supported by foreign reserves. However, deploying a new currency requires important political adjustments, public trust and logistics preparation. This can demonstrate the challenges in the current environment of Somalia.
Recognizing the interests, CBS has been strengthening its regulatory activities since 2021. All commercial banks and mobile money operators are licensed and key macropridence regulations are in place, including capital adequacy ratios, liquidity compensation requirements and reporting standards.
Somali Parliament is considering important legislation, including the revised Central Bank Act, Financial Institutions Act, the National Payment Systems Act, and the Insurance Act. They provide a legitimate backbone for the modern financial sector, allowing supervision independence, consumer protection and sector diversification. Additionally, CBS has made great strides in fighting money laundering and anti-money laundering with new guidelines and national risk assessments that align the framework of new guidelines and international norms.
This is particularly important for remittance operators to restore banking relations and ease international transactions.
Perhaps the most promising development lies in Somalia's rapid digital transformation. According to the World Bank, mobile money is almost ubiquitous, with over 70% of the adult population using it for everything from paying utility to buying markets. Mobile banking apps and digital wallets are closing the formal information gap, especially for young people and urban people.
In 2021, Somalia launched its first real-time national payment system (NPS) and connected all banks for interbank transfers. In the first year alone, the system processed more than $1 billion in transactions. A nationwide QR code standard, an interoperable mobile banking platform, and a switch system that integrates ATMs and POS transactions is currently under development.
Digital identity is also progressing. Somalia's early national identity system is integrated with the financial sector and enables electronic knowledge (e-kyc) protocols that can support greater inclusion and regulatory compliance.
The Somali banking sector stands on the brink of a vital change. It shows that it will drive momentum through digitalization, legal reforms and increased regulations, but liquidity constraints, limited financial inclusion and dollar dependence reveal that these reforms are becoming vulnerable.
The path to a stable and comprehensive financial system requires more than infrastructure. It calls for accountability, transparency and bold public policy choices. If done correctly, banks could be the basis for Somalia's broader economic recovery. It provides not only services but also the trust, dignity and opportunity of the country, long defined by its absence.
Continuous challenges
Despite reforms, systematic weaknesses persist.
Governance and monitoring gap: Ensuring that strengthening regulatory oversight, strengthening internal controls and ensuring lending practices are guided by sound financial principles to support the long-term stability of the banking sector.
Trust Deficit: Due to the lack of a deposit protection mechanism, many Somalis still prefer to maintain their savings in cash or mobile money wallets.
Rural Exclusion: Most banking services are concentrated in urban areas. Few women, herders and internally displaced people are banked.
Dollar dependence: Without local trust in shilling, the dollar will last, limit monetary policy and reduce access to local currency credits.
Policy Recommendations
Establishing deposit insurance: Introduces basic deposit protection mechanisms to protect depositors and restore trust in the banking system.
Implementing Prudential Regulations: Central banks need to strengthen surveillance, require regular audits, and punish institutions that violate customer trust.
Accelerating digital integration: Supports expanded interoperability between banks and market production organizations (MMOs), E-KYC rollout via National ID, and expands digital literacy programs.
Local currency support introduction: A gradual reintroduction of Somalischling, supported by a monetary committee and extensive public education, is essential.
Enabling credit infrastructure: Establish credit bureaus, collateral registration, and public guarantees to improve access to credit for small and medium-sized businesses and households.
