Islamic Banking in Somalia; Challenges and Opportunities

Islamic Banking in Somalia; Challenges and
Opportunities
DAUD DAHIR HASSAN (MATRIC NO: LC00052000040)
THESIS SUBMITTED IN FULFILMENT FOR
MASTER DEGREE OF BUSINESS
ADMINISTRATION IN ISLAMIC BANKING AND
FINANCE
FACULTY OF BUSINESS ADMINISTRATION
LINCOLN UNIVERSITY COLLEGE
2018

I
DEDICATION
I dedicate this thesis to my lovely parent my mother Fatima Yusuf Mohamed and My
father Dahir Hassan Musse and my dear Raqiyo Shire Ibrahim for their endless love,
support and encouragement.

II
DECLARATION
I hereby declare that this thesis is my own work and effort and that it has not been submitted
anywhere for any award. Where other sources of information have been used, they have
been acknowledged.
Signature: ……………………………………….
Date: …………………………………………….

III
CERTIFICATE OF APPROVAL
We hereby declare that this thesis is from the student’s own work and effort, and all other
sources of information used have been acknowledged. This thesis has been submitted with
my approval
SUPERVISOR:
SIGNATURE………………
DATE: …………………….

IV
ACKNOWLEDGEMENT
First and foremost, praise is to Allah the Almighty, on whom ultimately we depend for
sustenance and guidance. Foremost, I would like to express my sincere gratitude to my
advisor Prof. Mohamed Said for his continuous support of my thesis study and research,
for his patience, motivation, enthusiasm, and immense knowledge. His guidance helped
me in all the time of research and writing of this thesis. I could not have imagined having
a better advisor and mentor for my study. Besides my advisor, I would like to thank and
recognize the contributions of Mr Awil Nour: PhD candidate at Anadolu University, Dr
Mohamed Hassan: Associate Professor at Mogadishu University and Mr. Abdifitah Bayle
Lecturer at East Africa University.
Special Thanks due to my dear brothers and sisters with their continuous support and daily
encouragement as I would like to thank whole and rest of my family. I would like to say
thank you. Last but not the least, I would like to thank my dear friend Abdikarem Ibrahim
and all my friends for their contribution due to the completion of my thesis.
Extraordinary gratitude to Lincoln University College Administrators, lecturers and
classmates, I would like to express my deepest appreciation to the great authors whom I
quoted their articles, thank you. Lastly I would like to thank the participants in my survey,
who have willingly shared their precious time during the process of Questionnaire.

V
Abstract
Nowadays, we hear about the emerging of Islamic banking in Somalia. The most
important purpose of this study was to gain the challenges and opportunity that are facing
Islamic banking in Somalia.
The methods and procedures used in gathering data was primary and secondary data.
Document review questions and personal interviews were used to gather data for the study.
Research papers on Islamic banking, textbooks, magazines, and websites were used to
analyze information for the purpose.
Questionnaire were prepared with the help of some banking experts and structured in a way
that would enable everyone to answer and contribute something. The questionnaire was
originally developed in English and was translated to Somali language so that Somali
speaking participants could understand very well.
To be specific, research finding shows that The absence of Shariah advisory board in the
country, lack of active central Bank and Lack of Financial institution, Lack of awareness
and proper understanding is one of the challenges that facing Islamic Banking in Somalia.
On the other hand, the research findings show that there are greater opportunities in the
Somalia for Islamic banks because the social acceptance for Islamic banking and finance
in the country is higher compared to conventional banks, and the existing of some informal
practice of Islamic banking products facilitates to have a formal Islamic banking system.

VI
Abbreviation latter
FI: Financial Institution
CBS: Central Bank of Somalia
BisB: Bahrain Islamic Bank
IFSB: Islamic Financial Services Board
AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions
IDB: Islamic Development Bank
IIFM: International Islamic Financial Market
IILM: Islamic Liquidity Management Corporation
IMF: International Monetary Fund
LC: Letter of Credit
SSB: Salam Somali Bank

VII
List of Tables
Table 1: Gender of the respondent
Table 2: Marital Status of the Respond
Table 3: Level of Education of the respondent
Table 4: Age of Responder
Table 5: Location of respondent
Table 6: Have you heard about Islamic Banking
Table 7: Somalia is ready for implementing Islamic banking system
Table 8: Is there a clear Islamic financial institution in Somalia
Table 9: Is there any financial Institution in Somalia that provides financial
Table 10: Have you ever been a customer of an Islamic Bank in Somalia
Table 11: reasons which motivate people to deposit in Islamic bank
Table 12: Do you thing Islamic financial services are relevant
Table13: Islamic Banks in Somalia are providing enough retail products
Table 14: Islamic Banks in Somalia are contributing in removing society’s inequalities
Table 15: Islamic banks and financial institutions in Somalia are free from exploitation
Table 16: Products of present Islamic Banking activities in Somalia are less practiced
comparing to other countries in Middle East

VIII
Table 17: Current global trends in Financial Services will have positive manifestations on the future
of Islamic banking in Somalia
Table 18: Risk associated with Islamic bank and Finance can be minimized
Table 19: Social acceptance for Islamic banking and finance in the country is higher compared to
conventional banks
Table 20: Islamic banks will capitalize the Availability of profitable projects in the area of
infrastructure, agriculture and trade financing in Somalia
Table 21: evaluate the efficiency and performance of Islamic Banks in Somalia especially
the last decade
Table 22: Local Community has awareness about Islamic banking system
Table 23: There is inadequate education and knowledge about Islamic banking and finance in
Somalia
Table 24: Awareness about Islamic financial system is low and it is difficult adopt it recently
Table 25: Absence of Sharia advisory board in the country is one of the obstacles that bankers must
face
Table 26: Lack of Islamic Financial regulation is One of the challenges that facing Islamic Banking
in Somalia
Table 27: Lack of active and functional Central bank have an effect on Islamic Banks in Somalia
Table 28: Islamic Banks in Somalia provide variety of mode of service; (E-banking and Mobile
Banking)
Table 29: Service offered by Islamic Banks in Somalia are efficient and time effective

IX
Table 30: Islamic Banks in Somalia are so-called Islamic Banks and do not offer wide variety of
products and services?
Table 31: There are many procedures/regulations that are needed to be followed in Islamic Banks
in Somalia

X
List of Figures
Figure 1: Gender of the respondent
Figure 2: Marital Status of the Respond
Figure 3: Level of Education of the respondent
Figure 4: Age of Responder
Figure 5: Location of respondent
Figure 6: Have you heard about Islamic Banking
Figure 7: Somalia is ready for implementing Islamic banking system
Figure 8: Is there a clear Islamic financial institution in Somalia
Figure 9: Is there any financial Institution in Somalia that provides financial
Figure 10: Have you ever been a customer of an Islamic Bank in Somalia
Figure 11: reasons which motivate people to deposit in Islamic bank
Figure 12: Do you thing Islamic financial services are relevant
Figure13: Islamic Banks in Somalia are providing enough retail products
Figure 14: Islamic Banks in Somalia are contributing in removing society’s inequalities
Figure 15: Islamic banks and financial institutions in Somalia are free from exploitation
Figure 16: Products of present Islamic Banking activities in Somalia are less practiced

XI
Figure 17: Current global trends in Financial Services will have positive manifestations on the
future of Islamic banking in Somalia
Figure 18: Risk associated with Islamic bank and Finance can be minimized
Figure 19: Social acceptance for Islamic banking and finance in the country is higher compared to
conventional banks
Figure 20: Islamic banks will capitalize the Availability of profiFigure projects in the area of
infrastructure, agriculture and trade financing in Somalia
Figure 21: evaluate the efficiency and performance of Islamic Banks in Somalia especially
the last decade
Figure 22: Local Community has awareness about Islamic banking system
Figure 23: There is inadequate education and knowledge about Islamic banking and finance in
Somalia
Figure 24: Awareness about Islamic financial system is low and it is difficult adopt it recently
Figure 25: Absence of Sharia advisory board in the country is one of the obstacles that bankers
must face
Figure 26: Lack of Islamic Financial regulation is One of the challenges that facing Islamic Banking
in Somalia
Figure 27: Lack of active and functional Central bank have an effect on Islamic Banks in Somalia
Figure 28: Islamic Banks in Somalia provide variety of mode of service; (E-banking and Mobile
Banking)
Figure 29: Service offered by Islamic Banks in Somalia are efficient and time effective

XII
Figure 30: Islamic Banks in Somalia are so-called Islamic Banks and do not offer wide variety of
products and services?
Figure 31: There are many procedures/regulations that are needed to be followed in Islamic Banks
in Somalia.

XIII
Table of Contents
Dedication……………………………………………………………………………….I
Declaration……………………………………………………………………………….II
Certificate of Approval…………………………………………………………………III
Acknowledgement………………………………………………………………………IV
Abstract…………………………………………………………………………………...V
Abbreviation letters………………………………………………………………………VI
List of Tables…………………………………………………………………………....VII
List of figures……………………………………………………………………………..X
Table of Contents……………………………………………………………………....XIII
1 CHAPTER ONE: INTRODUCTION ...........................................................................
1.1 Background of Study............................................................................................ 1
1.2 Statement of the problem ..................................................................................... 4
1.3 Purpose of the Study ............................................................................................ 5
1.4 Objectives of the Study ........................................................................................ 6
1.5 Research Questions .............................................................................................. 6
1.6 Scope of the Study................................................................................................ 6
1.6.1 Geographical scope....................................................................................... 6
1.6.2 Theoretical scope .......................................................................................... 7
1.6.3 Time scope.................................................................................................... 7
1.7 Definition of Terms.............................................................................................. 7
1.8 Limitation of the Study ........................................................................................ 8
1.9 Conceptual Framework ........................................................................................ 8

XIV
1.10 Significance of the Study ..................................................................................... 9
2 CHAPTER TWO: LITERATURE REVIEW............................................................ 10
2.1 Introduction........................................................................................................ 10
1.1 Islamic Economic Model ................................................................................... 10
1.1.1 The view point of Islamic Banking............................................................. 12
1.1.2 Evolution of Islamic Banking..................................................................... 13
1.1.3 Instruments and Financial products of Islamic Banks................................ 17
1.1.4 Retail Islamic Banking Products................................................................. 28
1.1.5 Islamic Laws on Trading ............................................................................ 30
1.1.6 What is Islamic Forex Trading?................................................................ 31
1.1.7 Risk Management in Islamic Banks ........................................................... 32
1.2 Financial institutions in Somalia........................................................................ 35
1.2.1 RIEF HISTORY OF THE SOMALI FINANCIAL INSTITUTIONS ....... 36
1.2.2 Current profile of Financial Sector in Somalia........................................... 41
1.3 Islamic Banks in Somalia................................................................................... 43
1.3.1 Commercial Versus Islamic Banking in Somalia ....................................... 44
1.3.2 Islamic Finance education in Somalia ........................................................ 45
1.3.3 Opportunities of Islamic Banking in Somalia............................................. 46
1.3.4 Products of Islamic Banks in Somalia ........................................................ 47
1.3.5 Growth of Islamic Finance in Somalia ....................................................... 48
1.4 Challenges Facing Islamic Banking Services .................................................... 48
1.4.1 Lack of Awareness and understanding ....................................................... 48
1.4.2 Regulatory Challenges................................................................................ 48
1.4.3 Lack of Supportive Institutional and Market links ..................................... 49
1.4.4 Use of Advanced Technology and Media................................................... 49

XV
1.4.5 Need for Professional Bankers.................................................................... 50
3 Chapter three: methodology ...................................................................................... 51
3.1 Introduction........................................................................................................ 51
3.2 Research design.................................................................................................. 51
3.3 Population and sampling.................................................................................... 51
3.3.1 Study population......................................................................................... 51
3.3.2 Sample of the study..................................................................................... 52
3.4 Sampling procedure............................................................................................ 52
3.5 Data Collection................................................................................................... 53
3.5.1 Instrumentations.......................................................................................... 53
3.6 Quality control of the study................................................................................ 53
3.6.1 Validity ....................................................................................................... 53
3.6.2 Reliability.................................................................................................... 53
3.7 Data Analysis ..................................................................................................... 54
3.8 Ethical Considerations........................................................................................ 55
3.8.1 Permission to conduct the research............................................................. 55
3.8.2 Informed Consent........................................................................................ 55
3.8.3 Confidentiality and secrecy......................................................................... 55
4 CHAPTER FOUR PRESENTATION, ANALYSIS AND INTERPRETATION OF
DATA ............................................................................................................................... 56
4.1 Overview............................................................................................................ 56
4.2 Characteristics of respondent ............................................................................. 56
4.2.1 Gender of Respondents............................................................................... 57
4.2.2 Marital status............................................................................................... 58
4.2.3 Educational Level ....................................................................................... 59

XVI
4.2.4 Age of Respondents .................................................................................... 60
4.3 General Awareness about Islamic Banking in Somalia ..................................... 61
4.3.1 Have you heard of Islamic Banking and finance? ...................................... 61
4.3.2 Is Somalia ready for implementing Islamic banking system...................... 62
4.3.3 Is there an Islamic financial institution governed by Islamic Banking?..... 64
4.3.4 Islamic Financial institutions provide Financial Service............................ 65
4.3.5 Being a customer of Islamic Bank.............................................................. 66
4.3.6 Reason motivate people to deposit money in Islamic Bank ....................... 67
4.3.7 Role of Islamic Banks on Economic Growth ............................................. 68
4.3.8 Products of Islamic banks........................................................................... 69
4.3.9 Islamic banks contribute removing social inequalities............................... 70
4.3.10 Islamic banks are free from exploitation, discontentment and strife.......... 71
4.3.11 Products of local banks compared to banks in middle east ........................ 73
4.4 Opportunities of Islamic banks in Somalia. ....................................................... 74
4.4.1 Relation between global Financial trends in and future of Islamic Finance74
4.4.2 Risk Associated with Islamic Banks in Somalia......................................... 75
4.4.3 Social acceptance of Islamic Banking in Somalia ...................................... 76
4.4.4 Islamic bank and available profitable projects............................................ 77
4.4.5 Evaluation for performance of Islamic banks in Somalia based on perception
79
4.5 Challenges of Islamic Banking in Somalia ........................................................ 80
4.5.1 Awareness of Local Community ................................................................ 80
4.5.2 Inadequate education about Islamic Finance.............................................. 81
4.5.3 Awareness of Islamic Finance in Somalia.................................................. 82
4.5.4 Absence of Sharia Board of Advisors......................................................... 83

XVII
4.5.5 Lack of Islamic Financial regulation in Somalia........................................ 84
4.5.6 Absence of effective central bank have an effect on Islamic banks in Somalia
86
4.5.7 Islamic Banks in Somalia provide variety of mode of service ................... 87
4.5.8 Efficiency and effectiveness of service offered by Islamic Banks in Somalia
88
4.5.9 Banks in Somalia are so-called Islamic Banks ........................................... 89
4.5.10 Procedures that Islamic banks are needed to follow................................... 90
5 CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS. 92
5.1 Overview............................................................................................................ 92
5.2 Findings.............................................................................................................. 92
5.2.1 Opportunities of Islamic banking in Somalia ............................................. 93
5.2.2 Challenges of Islamic Banking in Somalia................................................. 94
5.3 Conclusion.......................................................................................................... 95
5.4 Recommendations.............................................................................................. 96
References……………………………………………………………………………………………………………………………….98
Appendix (1): Questionnaire……………………………………………………………………………………………………101
Appendix (2): Glossary of Islamic Banking………………………………………………………………………………107

1
1 CHAPTER ONE: INTRODUCTION
1.1 Background of Study
Islamic Banking refers to a system through which finance is provided in the form of money
in return for either equity or rights to share in future business profits, or in the form of
goods and services delivered in return for a commitment to repay their value at a future
date.1
The Islamic finance industry has expanded rapidly over the past decade, growing at 10-
12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2
trillion, covering bank and non-bank financial institutions, capital markets, money markets
and insurance (“Takaful”). Over the past decade Islamic finance has emerged as an
effective tool for financing development worldwide, including in non-Muslim countries.
Major financial markets are discovering solid evidence that Islamic finance has already
been mainstreamed within the global financial system – and that it has the potential to help
address the challenges of ending extreme poverty and boosting shared prosperity
(Alawode, 2015).
In 1979, the first Islamic and Commercial Bank, Faisal Islamic Bank started in Egypt. It
provides funding to support financial activities through Zakat fund. It was followed by the
establishment of Bahrain Islamic Bank (BisB) in the same year, the first Islamic
commercial bank in Kingdom of Bahrain. The milestone of Islamic banking and financial
1
This definition is derived from the keynote address delivered by Dr. Mabid Ali Al-Jarhi, the then Director of the Islamic
Research and Training Institute, at the Conference on Islamic banking and finance held at Brunei, Darussalam, Brunei
and jointly organized by IRTI and the University of Brunei during 5-7 January 2004.

2
institution in Malaysia started in 1983, when Bank Islam Malaysia Berhad was founded.
The establishment of Bank Islam in Malaysia is a significant of development of Islamic
banking in Malaysia. In 1991, Bahrain realized that there is a need to set up an accounting
and auditing standard to standardize and regulate the operation for Islamic Financial
Institution. Hence, the accounting and auditing standard was established. Malaysia formed
an Islamic Financial Services Board (IFSB) in 2002 to regulate the Islamic financial
services industry by established a supervisory standard and principles that compliance with
Shariah. The industry has set up international regulatory institutions to guide operations
around the world, although it has been difficult to ensure standardization of Islamic
products across different countries. The Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), based in Bahrain, issues international standards on
accounting, auditing, and corporate governance, while the Islamic Financial Services
Board (IFSB), based in Malaysia, is in charge of standards for supervision and regulation.
Some factors appear to be correlated with the diffusion of Islamic banking, namely the
principles of risk-sharing that underlie financing, the growth of oil-rich economies, the
presence of Muslims in the population, an enabling legal framework, and economic
integration with Middle Eastern countries or proximity to Islamic financial centers (Imam
and Kpodar, 2010; Ilias, 2010; Alam, 2012). A key driver behind interest in Islamic finance
today is the possibility of tapping the international sukuk market, which does not require a
domestic Islamic financial system (e.g., Japan has issued sukuk, as well as many others
countries). At the same time, the development of Islamic banking in some countries might
facilitate risk sharing and improve financial inclusion.

3
In light of Africa’s bright economic prospects and rapidly growing population, where
currently more than 1 billion people call it home, the continent boasts relatively untapped
potential for Islamic finance. While still comparatively underdeveloped, Islamic finance
has recently made significant strides into the continent. Several countries in Africa are
already planning sukuk debuts for this year, including Tunisia, Egypt, and Kenya. This
follows first-time sovereign sukuk issues by South Africa and Senegal in 2014 and Nigeria
in 2013, highlighting the key role of governments in spearheading the development of the
industry. On the consumer front, Islamic finance can be utilized as a strategic tool to tap
into the unbanked population in Africa, while addressing the issue of financial inclusion in
several ways. For example, risk-sharing contracts inherent in Islamic finance
complemented with the redistribute instruments such as zakat, sadaqah, qard al-hassan and
waqf can create an enabling environment for economic and social development, which
bodes well for overall growth (Al-Aboodi, 2015).
However, the Somalia’s financial system has been decimated by the last two decades of
conflict. In January 1991, all state institutions that provided services and regulated the
economy collapsed, including the Central Bank of Somalia and the entire banking system.
Somalia has developed Financial Institution Law No. 130/2012, which provides the general
guidelines of financial institutions operations, both Islamic and conventional. This situation
leaves the financial industry to accommodate and to be open for conventional financial
institutions.
After the collapse the Somalia Economy was deeply depending on Money Transfer
Companies (Hawala System) which have arisen with the hope to fulfil this gap and deliver
some of basic banking services. As a result, Hawala System becomes the major financial

4
institutions in the country due to their faster and cheap service charges, growing public
trust and the reliability on its service and due to having agencies across the world, which
are handling up to $1.6 billion in remittance annually to the home land (CIA world fact-
book statistics, 2012). The role of the Hawala system is not ended with transferring money
from overseas to back home, but it plays important role in trade and local investment
financing since there is no investment and commercial banks in Somalia. Moreover, the
Hawala system acts as a saving bank by accepting the public deposits in its current and
saving accounts.
1.2 Statement of the problem
After the collapse of the central government of Somalia in 1991, the country hasn’t had a
formally effective banking system that provides basic banking services except Hawala
business for money transfer services and small unstructured deposits. Though effective
Banking policies and regulations are not still yet in place, but, in recent years a number of
private commercial banks operating under the Islamic banking principles have emerged.
However, there are several unique challenges facing Somalia’s banking industry, such as
lack of technical experts, lack of comprehensive and appropriate financial instruments and
supportive infrastructures, limited public financial knowledge capacity, limited funding
capacity and so many others.
(Yussuf, 2014) researcher “Islamic Banking in Somalia; challenges and opportunities and
found that “The prime challenges facing Islamic banking in Somalia is Lack of qualified
Islamic banking personnel, so this study recommended Further training and Islamic finance
education should be given to bank personnel to up skill them to offer quality service and
appropriate advice to bank customers”. Yussuf concentrated on the absence of qualified

5
Islamic banking personnel and lack of sharia advisory board, However, unlike that my
study will cover up the following aspects that previous research doesn’t attempt to covers;
Financial regulations, customer awareness and financial products offered by Islamic banks
in Somalia.
However, in this study, the researcher will examine the major challenges experienced by
Islamic financial institutions in Somalia, more specifically the following challenges;
The effect of the absence of effective and comprehensive Financial regulation that controls
the operations of Islamic Banks in Somalia.
Although a number of Islamic banks are currently operating in Somalia, but the majority
of public don’t have bank accounts and they don’t involve banking transactions, therefore,
this paper will examine public perception and attitude towards Islamic Banking.
Currently, the existing banks offer limited products and service to their clients, therefore,
the researcher will investigate why banks failed to offer complete and diverse products and
service tailored to the different client’s needs.
1.3 Purpose of the Study
The purpose of this study is to investigate the Challenges and opportunities of Islamic
banks in Somalia, using historical resulting knowing of Islamic banks in Somalia, in this
study the agents of Challenges and opportunities of Islamic banks in Somalia will be
defined the Customer’s Perception, Awareness, Regulation and Limited product of Banks
as independent variables of the study while the Challenges and Opportunities of Islamic
Banks in Somalia are the dependent variable of the study.

6
1.4 Objectives of the Study
The general objectives of the study were to examine the challenges and opportunities of
Islamic banks in Somalia, the study was tested to realize the following specific objectives:
1. To establish the effect of Customer perception on Islamic Banks in Somalia.
2. To figure out the regulatory situation of Islamic financial institutions in Somalia.
3. To investigate the product of Islamic Financial institutions in Somalia.
1.5 Research Questions
In order to achieve the objectives of the study and to properly address the research problem,
some research questions were designed accordingly.
1. How does customer perception effect the Islamic Banks in Somalia?
2. How is the regulatory situation of Islamic Bank institutions in Somalia?
3. Does Islamic Banks offer a variety and sharia matched Islamic Products?
1.6 Scope of the Study
1.6.1 Geographical scope
This study was conducted to investigate the challenges and opportunities of Islamic Banks
in Somalia consists all its territory, mainly eight major cities which are Mogadishu,
Hargaisa, Bosaso, Kismayo, Galkaio, Baidoa, Baletwaine and Garoe.

7
1.6.2 Theoretical scope
This study was focusing on Islamic Banks in Somalia; Challenges and Opportunities, in
terms of Customer perception, situation of Financial regulatory and product of Islamic
Banks in Somalia.
1.6.3 Time scope
The study on Islamic Banking in Somalia; challenges and opportunities was conducted for
the last year.
1.7 Definition of Terms
Central Bank of Somalia: is the monetary authority of Somalia. Among other duties, it is
in charge of ensuring financial stability, maintaining the internal and external value of the
local currency, and promoting credit and exchange conditions that facilitate the balanced
growth of the national economy (Central Bank of Somalia, 2018). Within the scope of its
powers, it also contributes to the financial and economic policies of the State. The Central
Bank of Somalia was founded in April 8, 1950. After the state collapse in 1991 the Central
Bank of Somalia was re-opened in 2009 by Transitional Federal Government as part of its
campaign to restore national institutions (AFDB, 2009).
Sukuk: it is defined as certificates of equal value representing undivided shares in the
ownership of tangible assets, usufructs2 and services or (in the ownership of) the assets of
particular projects or special investment activities. In addition to that Sukuk can be
2
Use of benefit of an asset

8
considered as undivided shares in the ownership of underlying assets (tangible or
intangible) relating to a particular project or investment activity by AAOIFI.
1.8 Limitation of the Study
The potential limitation in conducting this study includes but not limited to; lack of relevant
and exhausted related research works on the subject. The other important limiting factor
that is worth of mentioning lies with the participants of the study. Most of the participants
don’t have clear understanding about the intents of the study and there is inherent risk of
extreme reservations in full participation, if any, due to the high sensitivity and versatility
when it comes to religious matters, especially this time around.
Possible limitations in conducting this study include but not limited to; respondents were
suspicious of possible investigations by competing firms similarly there is possibility of
dealing with respondents who could not respond in English.
1.9 Conceptual Framework
In the study, the theoretical framework is needed in order to know the relationship from
one variable to the other variables. A variable is anything that can take on differing or
varying value. In the theoretical framework there are two variables are used to identify
for each other which is:
 Dependent variable (criterion variable) - is the primary interest to the researcher.
 Independent variable (predictor variable) - is one that influence the dependent variable
in either a positive or negative way
The schematic diagram for the theoretical is as follow:

9
Independent Variables Dependent Variables
1.10 Significance of the Study
The findings of the study will be useful in many ways and too many parties. This study of
Islamic Banks in Somalia; Challenges and Opportunities is expected to give an investment
tip to both current as well as potential investors to target this untapped market which will
help in improving the economy, living standard of citizens as well as competition and
efficiency.
This study is to show some important points about the challenges and opportunities of
Islamic Banks in Somalia and became useful material to reference by other researchers to
undertake a further detailed investigation on the subject and providing relevant empirical
evidences. This study will help the people to become aware of Islamic banking in Somalia
and also lead more Masters students to continue research from where I left over or eliminate
the mistakes I did or part I left.
The results of the study will help the disenfranchised Muslim community in general and
the business community in particular. It will also benefit those concerned policy makers to
formulate necessary and solution-oriented policies that will in fact have a benefit to all
citizens.
Awareness of the
customer
Perception
Regulatory situation
Challenges &
Opportunities of
Islamic Banking

10
2 CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
In this chapter, the related literature will be reviewed and discussed. The literature
concerning the prospects and challenges of Islamic Banking in Somalia and elsewhere will
be presented. The relevant literature will be collected from different secondary sources and
it includes material about the Islamic economic model, evolution of Islamic banking, key
financial instruments, and Islamic banking literature versus practice, empirical evidences
on Islamic banking, challenges as well as the need for Islamic banking in Ethiopia will be
analyzed in the following sections of this chapter.
1.1 Islamic Economic Model
The Islamic Economic Model aims to guarantee individual liberty, freedom of choice,
private property and enterprise, the profit motive and possibilities of unlimited effort and
reward. On the other hand, it seeks to provide effective moral filters at different levels of
life and activity and established institutions in the voluntary sector, as well as through state
apparatus to ensure economic development and social justice in the society.
Some of Islamic Financial experts argue that early Islamic theory and practice formed a
"coherent" economic system with "a blueprint for a new order in society, in which all
participants would be treated more fairly". Michael Bonner, for example, has written that
an "economy of poverty" prevailed in Islam until the 13th and 14th centuries. Under this
system God's guidance made sure the flow of money and goods was "purified" by being
channeled from those who had much of it to those who had little by encouraging zakat

11
(charity) and discouraging riba (interest) on loans. Islam does not prescribe a particular
economic system but provides the core elements and principles, which form the basic
philosophy of a system or an economy. Islam provides primarily normative principles for
economics and finance. However, it is not devoid of positive economic statements or
hypotheses. Several areas of economics are truly positive and cannot be different in an
Islamic or in any other framework. The Islamic economic model has been developed over
time based on the rulings of Sharia on commercial and financial transactions. The Islamic
financial framework, as seen today, stems from the principles developed within this model,
some of which are outlined below (Saidat.A.Otiti, 2018):
 Any predetermined payment over the actual amount of principal is prohibited
Only good loans are allowed in Islam whereby the lender does not charge any
interest or additional amount over the money lent.
 A lender must share in the profits or losses arising out of the venture for which
the money was lent Islamic finance is based on the belief that the provider of
capital and the borrower should collaborate to a certain extent in business ventures.
However, as the hoarding of wealth is discouraged, agents must choose whether to
invest their money with some risk or let their money devaluate under inflation.
 Money cannot be made from just having money is only a medium of exchange,
a way of defining value. It has no value in itself and therefore should not be allowed
to create more money. Money is viewed as potential capital as opposed to capital.
 Uncertainty and risk is prohibited Ideally, under this rule, any transaction entered
into should be free of uncertainty, risk and speculation. No information

12
asymmetries should exist between lender and borrower. With this, parties cannot
predetermine a guaranteed profit.
1.1.1 The view point of Islamic Banking
Islamic Banking is a System that only offers products that conform to the sharia, or
Islamic law. For example, in Islamicbanking, checking and savings deposits do not accru
e interest. They either lie dormant until withdrawal or areinvested. Because this involves
higher risk than conventional banking services, various highly technical productshave bee
n developed to mitigate risk and generally imitate "regular" banks as much as possible wh
ile still complyingwith Islamic law. Considerable debate exists as to whether these Islami
c banking products are in fact sharia-compliant (Farlex Financial Dictionary, 2018).
The establishment of the Islamic Development Bank (IsDB) in 1975 was a watershed
moment for Islamic banking, coming just after the establishment of the first major Islamic
commercial bank—the Dubai Islamic Bank—in the United Arab Emirates. The success of
the latter led to the establishment of a series of similar banks, including Faisal Islamic Bank
(Sudan) and Kuwait Finance House (Kuwait)—both in 1977. As early as the late 1970s,
steps were taken in Pakistan for making the financial system compliant with Sharia
principles. The legal framework was then amended in 1980 to allow for the operation of
Sharia compliant profit-sharing financing companies, and to initiate bank finance through
Islamic instruments. Similarly, Iran enacted a new banking law in August 1983 to replace
conventional banking with interest-free banking. The law gave banks a window of three
years for their operations to become compliant with Islamic principles. Sudan’s efforts to
align its entire banking system with Sharia principles began in 1984. The financial
infrastructure, including standards setting and regulatory institutions, has also been

13
catching up with the rapid growth of Islamic financing. International standard-setting
institutions were established to guide the operations of the industry around the world,
although standardization of Islamic products across different countries remains a
challenge. Since 1991, the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI), based in Bahrain, has been issuing accounting, auditing, and Sharia
standards for financial reporting at Islamic financial institutions. The Islamic Financial
Services Board (IFSB), established in 2002 in Malaysia, is responsible for issuing
supervisory and regulatory standards and guidelines.3 It also promotes the adoption of
these standards and guidelines by relevant regulatory authorities. In 2001, the International
Islamic Financial Market (IIFM) in Bahrain was mandated to develop guidelines for the
issuance of Islamic financial instruments and to encourage active secondary market
trading. Most recently in 2010, the Malaysia-based International Islamic Liquidity
Management Corporation (IILM) started issuing short-term Sharia-compliant financial
instruments to facilitate cross-border Islamic liquidity management (Mumtaz Hussain,
Asghar Shahmoradi, and Rima Turk , 2015).
1.1.2 Evolution of Islamic Banking
Since the mid-70s Islamic banking and finance has expanded to about 70 countries
encompassing most of the Muslim world; about 55 developing and emerging market
countries and 13 other locations around the world, including Australia, Bahamas, Canada,
Cayman Islands, UK and Switzerland.
Early experiments with Islamic Banking took place in Malaysia in the mid-1940s, in
Pakistan in the late 1950s and Egypt’s Mit Ghamr Savings Bank (1963) and Nasser Social
Bank (1971). In the Arab world the 1st modern experiment with Islamic banking was

14
undertaken in Mit Ghamr, Egypt in 1963. The experiment combined the idea of German
Savings banks with the principle of rural cooperative banking within the general
framework of Islamic financing, to cater for those unwilling, for religious reasons, to deal
with the conventional banks. It however operated invariably undercover for fear of being
labelled as ‘Islamic Fundamentalism’ which would have been anathema to the political
reign. Infact, in 1976, Mit Ghamr Savings bank was closed and its operation taken over by
the Natioanl Bank of Egypt and made interest based. Nine other such banks were taken
over within the same period in Egypt.
Similar political antagonism to Islamic financial institutions, occurred elsewhere in the
Muslim world; Iraq, Oman, Syria and even Saudi Arabia. Two institutions that however
survived this early period were the Nasser Social Bank established in 1971 in Egypt and
Tabung Hajj, established in 1963 in Malaysia. Nasser Social Bank operated as a public
authority with autonomous status but without specific reference to Islam in its Charter
while Tabung Hajj was set up in 1963 initially as The Muslim Pilgrims Savings
Corporation to help would-be pilgrims save towards Hajj - it gradually evolved into a non-
bank financial institution, the success of which provided the needed impetus for
establishing a full-fledged Islamic bank in Malaysia: - Bank Islam Berhad (BIMB) was
thus established in 1983. From the mid-70s a new era was witnessed in the history of
Islamic Banking in the wake of oil wealth. Energy price rises provided the financial capital
to support an expansion of both conventional and Islamic Banks and oil resources enabled
a wide range of institutions to participate in the social and economic development of
Muslim countries, the result was a change in the political climate in many Muslim countries
hence largely dispensing the need to operate Islamic financial institutions under cover.

15
A visible achievement arising from oil-related resource boosting is the establishment of the
Islamic Development Bank (IDB) in 1975.IDB was established by Saudi Arabia and other
Organization of Islamic Conference (OIC) member countries, with the objective of
fostering the economic development and social progress of the member countries and
Muslim communities individually as well as jointly in accordance with the principle of
Sharia. Despite its multilateral origins, it gave momentum to the Islamic Banking
movement generally, being followed soon afterwards by both private and government
Islamic institutions; for instance, Dubai Islamic Bank established in 1975; Faisal Islamic
Bank, Egypt established in 1977 and Bahrain Islamic Bank established in 1979. An
important development in the 80s is the restructuring of the whole financial system of Iran,
Sudan and Pakistan to accord with Islamic precepts: - Iran in March 1984, Sudan in July
1984 and Pakistan a gradual transition from 1977.
Another important development in the 80s is the establishment of two groups of companies;
Dar al-maal al-Islam in 1981 and Al-Baraka group in 1982. Dar al-maal al-Islam was
founded in Bahamas, headquartered in Geneva and operates 10 Islamic banks, 7 Islamic
investment companies, 7 trading companies and 3 Takaful (Islamic Insurance) companies
in 15 countries around the world while Al-Baraka group was established in Saudi Arabia
in 1982 and currently has activities in 43 countries. It has over 2000 companies including
15 Islamic banks and several Islamic insurance companies. The expansion of Islamic
banking has basically taken two forms:
 Restructuring of the whole financial system of the country to accord with Islamic
precepts as obtain in Iran, Sudan and Pakistan.

16
 Islamic financial institutions operating alongside conventional financial
institutions either autonomously or as ‘window’ within the conventional set up.
In this respect, a number of financial institutions have located at international
level both within and outside of the Muslim countries.
This is the case with banks such as Citibank (U.S.A), ANZ (Australia), ABN Amro
(Netherlands), Goldman Sachs (USA), HSBC (UK), Deutsche Bank (Germany), Societe-
Generale (France), Saudi-American Bank (U.S.A – Saudi), Saudi-British Bank (UK-
Saudi). As it were, there are to date, over 200 Islamic financial institutions in over 70
countries around the world with total asset base in excess of US$230billion (Saidat.A.Otiti,
2018).
Table 1 Evolution of Islamic Banking and Finance in Modern History3
3
Source Khan (1996); IDB (2005)

17
1.1.3 Instruments and Financial products of Islamic Banks
When the Idea of Islamic finance was put into practice on a large scale, few of Islamic
financial instruments did exist. The pioneers of the idea were not given blueprint of Islamic

18
finance in practice. Most of Islamic financial instrument as one sees today were developed
in the daily practices of Islamic finance and banking. From time to time, these instruments
have been developed according to nature of business of particular Islamic financial
institution and needs of particular markets. Since Islamic finance industry is growing
broader and more sophisticated, Islamic financial instruments are also growing in variety.
Although, a great number of financial instruments are claimed as Islamic but not all of
them are acceptable from a strict Sharia point of view. Some of the instruments were not
unanimously accepted and some were rejected by Sharia scholars.
1.1.3.1 Mudarabah (trust financing)
"Mudarabah – Trust financing" is a special kind of partnership where one partner gives
money to another for investing it in a commercial enterprise. The investment comes from
the first partner who is called "rabb-ul-mal", while the management and work is an
exclusive responsibility of the other, who is called "mudarib (Usmani, 1998).
Under the principle of ‘no pain no gain’, no one is entitled to any addition to the principal
sum if he does not share in the risks involved. The Mudarabah’ is a contract, with one
party providing 100 percent of the capital and the other party providing its specialist
knowledge to invest the capital and manage the investment project. The rabb-ul-mal may
specify a particular business for the mudarib, in which case he shall invest the money in
that particular business only. This is called al-mudarabah al-muqayyadah (restricted
mudarabah). But if he has left it open for the mudarib to undertake whatever business he
wishes, the mudarib shall be authorized to invest the money in any business he deems fit.
This type of mudarabah is called 'almudarabah al-mutlaqah" (unrestricted mudarabah).

19
Further, 'Mudaraba' is venture capital funding of an entrepreneur who provides labor while
financing is provided by the bank so that both profit and risk are shared.
1.1.3.2 Musharakah (partnership contract)
The literary meaning of Musharakah is "sharing". The root of the term "Musharakah" in
Arabic comes from the word ‘Shirkah’, which means 'being a partner'. It is used in the same
context as the term "shirk" meaning "partner to Allah". Under Islamic jurisprudence,
Musharakah means "a joint enterprise formed for conducting some business in which all
partners share the profit according to a specific ratio while the loss is shared according to
the ratio of the contribution". It is an ideal alternative for the interest based financing with
far reaching effects on both the production and distribution of wealth in the economy. The
connotation of this term is limited than the term "Shirkah", more commonly used in the
Islamic jurisprudence. For the purpose of clarity in the basic concepts, it is pertinent at the
outset to explain the meaning of each term, as distinguished from the other (Meezan Bank’s
Guide to Islamic Banking, 2018).
1.1.3.3 Murabahah (mark-up)
Murabaha is a particular kind of sale and not a financing in its origin. Since Murabaha is a
sale transaction, rules of Shariah regarding sale should be understood. Where the
transaction is done on a “cost plus profit” basis i.e. the seller discloses the cost to the buyer
and adds a certain profit to it to arrive at the final selling price (Siddiqui, 2016). The
distinguishing feature of Murabaha from ordinary sale is the seller discloses the cost to the
buyer and a known profit is added. This concept refers to the sale of goods at a price, which
includes a profit margin agreed to by both parties. The bank is compensated for the time

20
value of its money in the form of the profit margin. This is a fixed-income loan for the
purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit
determined by the profit margin. Islamic banks are supposed to take a genuine commercial
risk between the purchase of the asset from the seller and the sale of the asset to the person
requiring the goods. Title to the goods financed may pass to the bank's client at the outset
or on deferred payment.
1.1.3.4 Bai' al 'inah (sale and buy-back agreement)
bai’ al inah refers to an arrangement that involves sale of an asset to the purchaser on a
deferred basis and subsequent purchase of the asset at a cash price lower than the deferred
sale price or vice versa, and which complies with the specific requirements of bai’ al inah
(BNM, 2013). Bai' al inah‟ is a financing facility with an underlying buy and sell
transactions between the financier and the customer. The financier buys an asset from the
customer on spot basis. The price paid by the financier constitutes the disbursement under
the facility. Subsequently the asset is sold to the customer on a deferred-payment basis and
the price is payable in instalments. The second sale serves to create the obligation on the
part of the customer under the facility.
1.1.3.5 Bai' bithamanajil / BBA (deferred payment sale)
A contract that refers to the sale and purchase transaction for the financing of assets on a
deferred and an installment basis with a pre‐ agreed payment period. The sale price will
include a profit margin. This concept refers to the sale of goods on a deferred payment
basis at a price, which includes a profit margin agreed to by both parties. Like ‘Bai'-al-
'inah’, this concept is also used under an Islamic financing facility. Interest payment can

21
be avoided as the customer is paying the sale price which is not the same as interest charged
on a loan.
1.1.3.6 Ijarah (Lease Financing)
Ijarah in Islamic banking and finance can simply mean leasing or hiring. These two
interpretations are used interchangeably in the literature, but the focus in this section is on
the former definition. The term ijarah originates in the Arabic verb ‘ajara’ which denotes
‘rewarding’ or ‘recompensing’. Literally, ijārah is derived from the noun ‘al-ajr’ which
means compensation, reward, consideration, return or counter value (al-‘iwad) against the
use of an object. From a juristic (fiqh) definition, ijarah refers to a contract to utilize a
lawful benefit against a consideration (Al-Zuhayli 2002). In ijarah, the right to use the
object is transferred to the hirer, not its ownership. Hence, ijarah is a sale of usufruct not
of a physical entity. Technically, ijarah is an agreement between two parties, one being the
owner of the asset, who gives possession of the assets for the use of the other party, the
hirer, on an agreed rental over a mutually agreed period. It is also defined as transferring
the usufruct of a particular property to another person in exchange for a rent claimed from
him (Usmani, 2002).
1.1.3.7 ‘Ijarah thumma al bai' (hire purchase)
Literally, Al-Ijarah Thumma Al-Bai’ (AITAB) means to lease, hire, or rent ending with
purchase (Khir, 2008). Researcher Jalil (2013) has given simplest explanation about
AITAB which is ‘hire goods and then purchase’. ISRA (2012) have defined AITAB or
Islamic Hire Purchase is an Islamic vehicle financing feature, which is based on two
combinations of Sharia concepts, Ijarah (leasing) and bay’ (sale). AITAB was first

22
implemented by Bank Islam Malaysia Berhad in 1995 (Abdullah and Dusuki, 2004).
Almost all of the Islamic banks in Malaysia are using AITAB for buying motor vehicles.
But the mechanism of AITAB does not comply 100% Sharia principles. The bank
generates a profit by determining in advance the cost of the item, its residual value at the
end of the term and the time value or profit margin for the money being invested in
purchasing the product to be leased for the intended term. The combining of these three
figures becomes the basis for the contract between the Bank and the client for the initial
lease contract.
1.1.3.8 ‘Ijarah-wal-iqtina’
According to many Islamic financial scholars, the uncertainties of the global economy in
present times have led to many businesses and individuals leaning towards Islamic banking
methods. Grounded in the principles prescribed by the Sharia, these banking practices are
widely perceived to be sound and the financial transactions involved within each,
transparent, easy to understand, and beneficial to all parties who have entered into the
contract. And rightly so. In such a scenario, it is only natural that there should be extensive
research into the working principles and benefits of each mode of Islamic financing, and
particularly the ijara wa iqtina, one of the most popular kinds of ijara lease contracts
(ijaracdc, 2018).
1.1.3.9 Istisna (Manufacturing contract)
Istisna’a is a contract whereby a party undertakes to produce a specific thing which is
possible to be made according to certain agreed-upon specifications at a determined price
and for a fixed date of delivery. This undertaking of production includes any process of

23
manufacturing, construction, assembling or packaging. In Istisna’a, the work is not
conditioned to be accomplished by the undertaking party and this work or part of it can be
done by others under his control and responsibility. Istisna’a, an instrument of pre-
shipment financing and it is a contract where the deal can be referred to something not in
existence at the time of concluding the contract, while Murabaha is an order to buy goods
or commodities which are in existence in hand or possible to be found in the market (ISDB,
2002).
1.1.3.10 Bai Salam
Bay’ al-salam is a sale of an object, which is not available at the time of the conclusion of
the sale, but will be delivered in the future on a fixed future date. The price is, however, to
be paid immediately during the session of the contract. In other words, the transaction is
called bay’ al-salam, when it is a sale for an agreed price with immediate payment for a
determinate thing, to be delivered in the future on a fixed date (Nawawi, 1999). In other
words, salam or salaf is the sale of a deferred item in exchange for an immediate (forward)
price. It is the sale of a liability whose characteristics are described in exchange for a price
or capital-sum paid in advance. The Maliki school defined bay’ alsalam as a sale in which
the capital-sum (price) is paid in advance and the object of sale is deferred to a specified
term. Whereas, the Shafi’i and Hanbali school defined the forward contract as a contract
over described merchandise sold as a deferred liability on one party, in exchange for a price
that is received during the contract session. Bay’ al-salam was allowed by the Holy Prophet
Muhammad s.a.w. subject to certain conditions. The basic purpose of this sale was to meet
the needs of small farmers who needed money to grow their crops and to feed their families
up to the time of harvest. After the prohibition of riba, they could not take usurious loans.

24
Therefore, it was allowed for them to sell the agricultural products in advance (Usmani,
n.d.).
1.1.3.11 Musawamah (Bargaining on Price)
Musawamah is a general and regular kind of sale in which the price of the commodity to
be traded is bargained between the seller and the buyer without any reference to the price
paid or cost incurred by the former. Thus, it is different from Murabaha in respect of the
pricing formula. Unlike Murabaha, the seller in Musawamah is not obliged to reveal his
cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are
valid for Musawamah as well. Musawamah can be used where the seller is not in a position
to ascertain precisely the costs of commodities that he is offering to sell. From a juristic
point of view, Musawamah can be either cash or credit sale, but when used by banks it will
generally be a deferred payment sale in which they will bargain with clients on the price of
goods/assets. They will add their profit margin to their cost but will not be required to tell
their clients the details of cost price and their profit in any transaction (Shah, 2008).
1.1.3.12 Qard Hassan (Benevolent loan)
In Islam, the principle of Qard al-Hasan is a mechanism for welfare and not for purposes
of business transactions. It is a loan that is free from usury, and given to charitable causes.
The borrower is only required to repay the amount borrowed. (Ahsan 2007) Al-Qard in
Arabic or al-Qat`u means the deduction. It is called qard, as it cut a certain portion of
property lender. Hasan is also the Arabic word, which comes from grace. Ihsan means
loving others. Qard al-Hasan is a loan which is returned at the end of the agreed period
without any interest or share in profit or loss. Qard al-Hasan is a noble act because of non-

25
profit material returns. It is highly encouraged in Islam because it can help people in need
from being oppressed by the borrower. It aims to foster love, brotherhood and unity.
According to Farooq (2007), in financing Qard al-Hasan, an additional amount that is
required is prohibited. However, the borrower can pay more if not specified in the contract.
While there are some differences of opinion on some issues regarding the implementation
of this principle such as the issue of management costs, early repayment according to
demand of creditors, the need for guarantors and others (Wan Nor Aisyah Wan Yussof,
Abdul Ghafar Ismail, Shofian Ahmad , 2015).
1.1.3.13 Takaful (Islamic Insurance)
Takaful Insurance is generally based on the concept that the negative impact of a specific
incident is distributed among a group of persons instead of making the person who
experienced the loss to bear its results alone. The means to achieve this is to establish a
common fund to which everyone exposed to a specific risk may contribute in such a way
that indemnity will be paid from that fund. In this type of insurance, the Insured seeks
guarantee from a group of persons who are participants in the insurance. At the same time,
he supports other members when they are faced with losses. Members who share in this
Insurance insure each other's losses on the basis of legitimate cooperation and Takaful
(Sabbagh, 2012).
1.1.3.14 Hibah (Gifts)
Hibah refers to a transfer of ownership of an asset from a donor (wahib) to a recipient
(mawhub lahu) without any consideration. Gifts to depositors are given entirely at the

26
discretion of the Islamic banks on the basis of the minimum balance. These gifts may be
monetary or non-monetary and are based on the banks‟ returns.
This is a token given voluntarily by a debtor to a creditor in return for a loan. „Hibah’
usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on
savings account balances, representing a portion of the profit made by using those
savings account balances in other activities. It is important to note that while it appears
similar to interest, and may, in effect, have the same outcome, Hibah’ is a voluntary
payment made (or not made) at the bank's discretion, and cannot be 'guaranteed‟. However,
the opportunity of receiving high, Hibah’ will draw in customers' savings, providing the
bank with capital necessary to create its profits; if the ventures are profitable, then some of
those profits may be gifted back to its customers as, Hibah’.
1.1.3.15 Sukuk’ (Islamic Security)
Sukuk are financial instruments similar to bonds and also shares that are compliant with
Islamic law. Since their inception in 2002, Sukuk markets have experienced dramatic
growth rates attracting the attention of investors, analysts and researchers alike. Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines Sukuk as
being: “Certificates of equal value representing undivided shares in the ownership of
tangible assets, usufructs and services or (in the ownership of) the assets of particular
projects or special investment activities.”4
4
The AAOIFI Shari'ah Standard (17) on investment Sukuk

27
There are three requirements for a Sukuk to be considered in compliance with the Sharia
law5
. First, the certificates must represent ownership in tangible assets, usufructs or
services from revenue-generating firms. Second, payments to the investor come from after-
tax profits and third, the value repaid at maturity date should follow the current market
price of the underlying asset and not the original invested amount. Sukuk comes in many
different forms, as financiers are not restricted to create their own variations (Visser, 2009),
However, fundamentally the parties within a Sukuk issuance are the firm (the obligor or
originator), the Special Purpose Vehicle (SPV)and the investors that buy the Sukuk. The
SPV is a bankruptcy-remote entity, separate from the originator, which issues Sukuk
certificate.
1.1.3.16 Islamic equity funds
Islamic investment equity funds market is one of the fastest-growing sectors within the
Islamic financial system. Currently, there are approximately 100 Islamic equity funds
worldwide. The total assets managed through these funds currently exceed US$5 billion
and is growing by 12–15% per annum. With the continuous interest in the Islamic financial
system, there are positive signs that more funds will be launched. Some Western majors
have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is
on products and not on addressing the needs of investors. Over the last few years, quite a
5 Godlewski, C, Turk-Ariss, R, & Weill, L. ,Sukuk vs. conventional bonds: A stock market

28
number of funds have closed down. Most of the funds tend to target high net worth
individuals and corporate institutions, with minimum investments ranging from
US$50,000 to as high as US$1 million. Target markets for Islamic funds vary; some cater
for their local markets, e.g, Malaysia and Gulf-based investment funds. Others clearly
target the Middle East and Gulf regions, neglecting local markets and have been accused
of failing to serve Muslim communities.
1.1.4 Retail Islamic Banking Products
There are three types of account which are commonly known in the Islamic Banks. These
are: Current Account, Saving Account and Investment account. The Sharia principles
applicable to current account is Alwadiah while saving account are Alwadiah, Mudarabah
and AlQard Hassan. However, AlQard is commonly offered by Islamic banks in the Middle
East. The Sharia compliant of current account based on the Alwadiah Yad Dhamanah (safe
custody) principle which refers to a contract between the owner of funds (account holder)
and the bank for safe keeping purposes.
1.1.4.1 Current Account/deposit
Alwadiah Current Deposit is a deposit product operated according to Islamic Sharia where
the depositor will deposit money in the Bank in the form of ‘Amanat’ and thus expects on
profit or loss. The Bank takes permission from the depositor to use the deposit according
to Islamic Sharia but guarantees that the amount deposited would be available to depositors
whenever s/he demands. If Bank does loss using this deposit, then bank will incur all

29
responsibilities. Since depositors do not take any risk of loss, so they cannot demand any
profit (TrustBAnk, 2018).
Current deposit account is a form of demand deposit that offers users safe keeping of their
cash deposit, and the choice to be paid in full upon demand. Current account deposit
facilities are usually offered the either individuals or companies. It also shares similar
features with saving deposit as it permits for the cash to be withdrawn at any time. The
main point of departure between current deposit and s saving deposit is the presence of
cheque book and multi-functional card used in the former.
If the account holders were to withdraw more than what is sufficient in their balance, there
will also be no charges incurred. In the US, current deposit is prominently known as
checking account or demand deposit. The three common structures of a current deposit in
Islamic financial are Qard wadiah yad dhamanah and mudarabah current deposit.
Generally, no return is given in this deposit in the ground that such deposit takes the form
of loas given to Islamic banks and the loan cannot carry any return. They are kept as
amanah. Bank shall guarantee the principal amount of deposit. A further condition for such
such an incentive is that they should not to be offered regularly. This is because, with the
passage of time, the practice will become customary and, in return, take on ruling benefits
stipulated in a contract of deposit (Ayub, 2007)
1.1.4.2 Savings Account/deposit
Alwadiah’ structures are also used for higher return savings account. Banks may as they
see fit pay the savers a return, depending on their own profitability. This seems to be
allowed as the bank's payment, if any, is level and is not determined in advance. All Islamic
bank operate savings deposit account, however, the operation of these accounts vary at

30
different banks. Generally, a saving deposit permits costumer to deposit and withdraw their
money at any time and does not require a minimum balance in deposit account. It does not
have maturity date; therefore, the cash can be withdrawn at any time based on the
costumer’s demand (Irsyid, 2007). Generally, Islamic financial institution structure their
saving deposit account based on sharia principle, either form of qard, wadiah yad damanah
or mudarabah saving deposit.
1.1.4.3 Investment Account/deposit
The investment deposit is usually known as profit and loss sharing (PLS) account or
simply, the investment account. The ratio of profit distribution between the bank and
depositor shall be agreed at time of accounting opening subject to the sharia that a partner
may agree on ration of profit and losses have to be shared strictly in the ratio of capital
(Ayub, 2007). The main point of departure between the investment deposit and both saving
and current deposit is the former is normally structured based on either the Mudarabah and
Wakalah bi istismar principle which do not entail a guarantee of either principal or the
return of profit. Nevertheless, the investment account holders have an opportunity to earn
more attractive returns although there is also like hood having to bear the risk of capital
losses (ISRA, 2013).
1.1.5 Islamic Laws on Trading
The Qur'an prohibits gambling (games of chance involving money) and insuring one’s
health or property (also considered a game of chance). The hadith in addition to prohibiting
gambling (games of chance), also prohibits 'bayu al-Gharar' (trading in risk, where the
Arabic word ''Gharar'' is taken to mean "risk" or excessive uncertainty). The 'Hanafi

31
madhab' (legal school) in Islam defines ''Gharar'' as "that whose consequences are hidden."
The Shafi legal school defined ''Gharar'' as "that whose nature and consequences are
hidden" or "that which admits two possibilities, with the less desirable one being more
likely." The Hanbali school defined it as “that whose consequences are unknown” or “that
which is undeliverable, whether it exists or not”. Ibn Hazm of the Zahiri School wrote
''Gharar is where the buyer does not know what he bought, or the seller does not know what
he sold”. The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that Gharar is
the sale of probable items whose existence or characteristics are not certain, due to the
risky nature that makes the trade similar to gambling. Other modern scholars, such as Dr.
Sami al-Suwailem, have used Game Theory to try and reach a more measured definition
of Gharar defining it as "a zero-sum game with unequal payoffs".
1.1.6 What is Islamic Forex Trading?
Shari’a – Islamic - law, prohibits interest payments (forex-learning-site, 2013;
dailyforex.com, 2013). However, rollover interest6
is an integral part of forex trading:
So the question on one Islamic forex website is:” How can a Muslim forex trader
from Saudi Arabia or United Arab Emirates trade currencies without violating
religious/Sharia law? The answer is to find a forex broker willing to offer an
‘Islamic’ forex account with no overnight interest. Such swap-free accounts are
usually offered only to Muslims in order to prevent widespread abuse. To substitute
6
Rollover Interest: Rollover is the interest paid or earned for holding a position overnight. Each currency has an interest
rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but also
their two different interest rates. If the interest rate on the currency bought is higher than the interest rate on the currency
sold, then rollover is earned (positive roll). If the interest rate on the currency bought is lower than the interest rate on the
currency sold, then rollover will be paid (negative roll). Rollover can add a significant extra cost or profit to a currency
trade (Murphy, 2009).

32
for the revenue from a missing swap, Islamic forex brokers charge a flat fee for
this service” (forex-learning-site, 2013 online). As explained by Islamic forex
brokers: “If you are Muslim respectful of religion, you want to trade currencies here
is the solution that is halāl. Here is a list of the best forex brokers offering an Islamic
trading account to Muslim customers. An Islamic account allows Muslim traders to
open accounts without interest during the night, which is not prohibited
by Islamic law Sharia (topforexbrokersonline,2013online).
1.1.7 Risk Management in Islamic Banks
Risk arises when there is a possibility of more than one outcome and the ultimate outcome
is unknown. In business Dictionary risk is defined as a probability or threat of damage,
injury, liability, loss, or other negative occurrence that is caused by external or internal
vulnerabilities, and that may be neutralized through preemptive action.7 According to
Wikipedia, ‘Risk is a concept that denotes a potential negative impact to some
characteristic of value that may arise from a future event, or we can say that "Risks are
events or conditions that may occur, and whose occurrence, if it does take place, has a
harmful or negative effect’. Exposure to the consequences of uncertainty constitutes a risk.
In everyday usage, risk is often used synonymously with the probability of a known loss.
Also (Ross, Westerfield and Jordan -2007) explained that risks can be classified into
systematic and unsystematic components. The systematic risk is one that influences a large
number of assets, each to a greater or lesser extent. Because systematic risks have market
wide effects, they are sometimes called market risks. The unsystematic risk is one that
affects a single asset or a small group of assets. Because these risks are unique to individual
companies or assets, they are sometimes called unique or asset-specific risks.

33
1.1.7.1 Different types of risks in Islamic banking
Islamic banks carry different types of risks, some of them exists only on any Islamic banking. And
others are common between both Islamic and conventional banks (Thijs, 2012)
The below figures clarifies both types and a definition of each type:
Table 2: Different types of risks7
Types of Common risks Both Islamic and conventional banking
Credit risk The potential that a counterparty fails to meet
its obligations in accordance with agreed terms
and conditions of a credit-related contract
Market risk The potential impact of adverse price
movements such as benchmark rates, foreign
exchange rates, equity prices on the economic
value of an asset
Liquidity risk The potential loss arising from the Bank’s
inability either to meet its obligations or to fund
increases in assets as they fall due without
incurring unacceptable costs or losses
Operational risk The potential loss resulting from inadequate or
failed internal processes, people and system or
external events
Types of Unique risks Islamic banking Only
7
Source: Jeroen P.M.M. Thijs, Chief Risk Officer. risk management in Islamic banking. bank Islam Malaysia Berhad

34
Sharia noncompliance risk Risk arises from the failure to comply with the
Sharia rules and principles
Rate of return risk The potential impact on the returns caused by
unexpected change in the rate of returns
Displaced Commercial risk The risk that the bank may confront
commercial pressure to pay returns that exceed
the rate that has been earned on its assets
financed by investment account holders. The
bank foregoes part or its entire share of profit
in order to retain its fund providers and
dissuade them from withdrawing their funds
Equity Investment risk The risk arising from entering into a
partnership for the purpose of undertaking or
participating in a particular financing or
general business activity as described in the
contract, and in which the provider of finance
shares in the business risk. This risk is relevant
under Mudarabah and Musharakah contracts.
Inventory risk risk arising from holding items in inventory
either for resale under a Murabaha’ contract, or
with a view to leasing under the ijarah contract

35
1.2 Financial institutions in Somalia
Somalia’s financial system has been decimated by two decades of conflict. In January
1991, all state institutions that provided services and regulated the economy collapsed,
including the Central Bank of Somalia and the entire banking system. The commercial
bank liabilities that had survived the 1989 bankruptcy of the only commercial bank in the
country disappeared. The country has also been suspended from accessing global financial
markets, a situation that compromises the leverage of the Transition Federal Government
(TFG) in domestic as well as international financial markets8
. The situation in Somaliland
provides a more detailed view of the incipient nature of financial services in Somalia. The
Bank of Somaliland, which was in its inception a regional arm of the Central Bank of
Somalia, currently operates itself under a Somaliland 1994 “Constitutive Law”. So far, the
Bank of Somaliland is not in a position to perform key central bank functions, as it has not
developed the typical in addition, past circulation of counterfeit currency (by individuals)
has led to inflation and hyperinflation and an increasingly dollarized system within the
Somali economy. In December 2006, the Central Bank of Somalia reopened its offices in
Mogadishu and Baidoa, but it continues to have limited functionality. It is operating under
Decree Law No 6 of 18 October 1968 (although a draft Central Bank Bill and Banking Bill
have been developed). An incipient central banking authority has evolved in Puntland and
Somaliland, through two regional banks. These have several branches and offer some
commercial banking services, such as deposit accounts and trade finance. While their
primary function as central banks remain (as it should be) acting as the treasurer of their
8
Somalia relations with international creditors were frozen in late 1980s. As of 2007, Somalia’s national debt stood at
US$ 3.3 billion (of which 81% is arrears), comprising 40% owed to multilaterals, 46% owed to Paris Club creditors and
14% owed to non-Paris Club creditors.

36
respective regional governments, the fact that they also offer commercial banking services
creates an undesirable conflict of interest with their role as central banks (ICS, 2010).
1.2.1 RIEF HISTORY OF THE SOMALI FINANCIAL INSTITUTIONS
Following are the banks operated in Somalia and owned by foreign investors and public
entities (CBS, 2018):
1920: The first bank opened in Southern Somalia was the Banca d’Italia (Central Bank of
Italy) which established its branch in Mogadishu.
1925: The bank opened also another branch in Kisimayo on the 2nd
November 1925.
1930: The British Government opened in Northern Somalia the Government Savings Bank
with the objectives to encourage the people to save parts of their
income
1932: In Mogadishu a branch of Cassa di Risparmio di Torino, an Italian Commercial
Bank, opens its office.
1936: A branch of Banco di Roma, an Italian commercial bank, was
established in Mogadishu. In the same year Banca d’Italia opened its third branch in
the city of Merca.
1938: Banco di Napoli took over the branch of Cassa di Risparmio di Torino branch in
Mogadishu.
1941: All Italian banks were closed by the British Administration.

37
1943: The Barclays Bank DCO, a British Commercial Bank, was opened in Mogadishu,
This Coincides when the British Government Army took control the southern regions of
Somalia.
1950: Italian commercial banks, such as Banco di Roma and Banco di Napoli re-ope-ned
their branches in Mogadishu.
1950: The Italian Trusteeship Administration (A.F.I.S.) established on 8th
April, 1950 a
new currency institution regulator “Cassa per la circolazione monetaria della Somalia”
with its head quarter in Rome. Main functions of the new institution were:
 Treasury services
 Advances to A.F.I.S. for short term loan
 Issuance of circular cheques and current accounts cheques
 Acceptance of deposits from the public
 Buy and sell foreign currencies and gold
 Buy and sell government bonds
 Re-discount commercial bank’s bills
 Invest its assets, except cash kept as guarantee
The establishment of two public commercial banks.
On the 1st
January, 1971 two commercial banks were established:
 Somali Savings and Credit Bank
 Somali Commercial Bank

38
1952: In Hargeisa for the first time was opened a branch of National Bank of India, a
commercial bank owned by the British Government.
1954: The National Bank of India opens another branch in Berbera.
1954: In Mogadishu was established the first Government owned bank the “Credito
Somalo” founded by Decree No.2 of 22 February 1954 issued by A.F.I.S.; its main
objectives were to extend financial support to the small farmers, livestock, and small scale
industries and handcrafts sectors. By Law No. 10 of 30 September 1956 the Credito Somalo
was authorized to accept savings from the customers. According to the Law No.28 and 29
dated August 1957 and Law No.1 of 18 February 1959, within the Credito Somalo were
established two autonomous departments: housing credit Department, and medium and
long term loans facilities Department. The capital of the Credito Somalo was So.Shs.
7,500,000 of which So.Shs. 6,300,000 was paid by A.F.I.S. and A.S.E.S. (Agency for
Economic Development of Somalia), and So.Shs. 1, 200, 000 paid by banana plants
cultivators companies (S.A.C.A. and S.A.G.). The bank opened also branches in Kisimayo,
Baidoa and Merca.
1960 Was established the Central Bank of Somalia named “Somali National Bank” by
Decree No.3 of 30 June, 1960 and converted into Law No.2 of 13 January, 1961.
The Somali National Bank has been authorized to extend to its activities to all the regions
of the Republic of Somalia and opened the following branches:

39
Hargeysa 20 August 1961
Berbera 27 January 1962
Kismayo 5 November 1962
Bosaso 26 March 1963
Qardho 26 March 1963
Burao 29 March 1963
Galkaio 5 November 1963
Baidoa 4 January 1965
Beled Weyne 6 January 1965
The Somali National Bank being a Central Bank was not allowed to carry commercial
banks operations, but, due of non-presence of commercial banks in most of the regions of
the country, the Government of Somalia enacted Decree No.264 of 3 November, 1962
authorizing the Somali National Bank the authority to engage in commercial banking
operations.
1961: Banque de Port Said, an Egyptian commercial bank, opened a branch in Mogadishu,
and operated until 7th of May, 1970.
1968: The Somali Development Bank was established by Decree No.2 of 28 February
1968. Art.3 of the Law states that the bank main purpose to its establishment is to play a
significant financial role to all economic sectors in medium and long term loans, in
particular agriculture, industry, mining and tourism. The Somali Development Bank as per

40
Art. No. 5 of its foundation act was not allowed to accept deposits or savings from the
depositors.
1968: in Mogadishu the National and Grindlays Bank established a new branch and also
the bank were operating in Hargeysa and Berbera.
1968: The Credito Somalo was closed due of liquidity crises and all its assets and liabilities
were transferred the to the Somali National Bank. The two banks were autonomous
institutions with legal personalities and a capital of So.Shs. 2,500,000 each of which 50%
paid by the Somali Government and 50% by the Central Bank of Somalia. The two
institutions were fully owned by the Government, with same objectives and activities
(commercial banks), their operation were based on deposits and savings and short term
loans. In 1975 there was a change to the structure of banking system in Somalia. The two
commercial banks were amalgamated into the Commercial and Savings Bank of Somalia,
at the same time, the Somali National Bank was renamed the Central Bank of Somalia. In
1990 following an agreement with the I.M.F. on 1st
July, 1990 implementing the free
private oriented economy, a new commercial bank was established “Somali Commercial
Bank” by Presidential Decree No. 4 of 16 December, 1989, with a capital of So.Shs. 2
billion divided into two thousand shares of one million So.Shs. Each. One billion was paid
jointly by the Government and the Central Bank of Somalia and one billion left to the
private investors of which only 22 shares were subscribed.
Finally, the under listed banks were operating in Somalia at 30 December, 1990:
1. Central Bank of Somalia.
2. Commercial and Savings Bank of Somalia.

41
3. Somali Development Bank.
4. Somali Insurance Company.
1.2.2 Current profile of Financial Sector in Somalia
Somalia has been without a formal commercial banking and financial institutions sector
since the overthrow of Siad Barre’s government in 1991. Immediately prior to the civil
war, Somalia’s formal financial sector was composed of:
 Central Bank of Somalia
 Commercial and Savings Bank
 Somali Development Bank; and
 Somali Insurance Company.
At present the financial sector is composed of the Central Bank of Somalia, Somali
Remittance Companies, and Micro-finance institutions (as pilot projects in the North-
Western Regions-Somaliland and in the North-Eastern Regions-Puntland).
Regulation
The Central Bank is currently operating under the 1968 Act, No. 6 of 19th October, which
specifies the roles and responsibilities of the Central Bank. These include acting as a fiscal
agent to the treasury, supervising commercial banks and others financial institutions,
issuing currency etc (FoA, 2018).

42
Money supply:
In the absence of formal commercial banking activities, the credit creation and therefore
money creation by the commercial banks does not exist in the economy at present. Under
such circumstances, all economic transactions in the country are being handled through
cash payment to settle obligations in domestic trade, including transactions that involve
large sums of cash, which could have been otherwise settled through other means.
Inflation and exchange rates:
The economy is deeply dollarized in view of weak confidence in the local currency, with
prevalent use of counterfeits. Alongside the Somali shilling, the US dollar is widely
accepted as a medium of large and high value transactions even for local trade exchange.
Remittance Companies.
The Remittance companies supported with spin-off activities in telecommunication sector
are the main medium for much of the hard currency movements to and from the country
and they provide the infrastructure of trade and commerce in Somalia and abroad. The
remittance companies are the only financial services providers in the country for the
majority of households and for the whole for the private sector.
No commercial banks are operating in Somalia. It has been reported that some regional
banks are in discussions with the Somali Remittance Companies with regard to joint
ventures. The local Somali business community is also exploring the possibilities of
launching commercial banks that could also provide service to the private sector.

43
Challenges facing the Financial sector of Somalia (Jama, 2018)
The following are challenges facing the financial sector of Somalia
1. The insecurity resulting from the civil war
2. Lack of an effective formal banking sector.
3. Lack of effective financial operating framework
4. Lack of skilled staff
5. Inadequate legal framework
6. There is no formal financial sector in the country
7. Lack of stock market and securities exchange
8. Lack of insurance companies
9. Weak regulatory framework
10. Inadequate security
11. High operation cost
1.3 Islamic Banks in Somalia
The Islamic banking and finance industry has been growing at an exponential pace
generally, with assets displaying a robust growth of about 15-20 percent annually. As
Somalia endeavors to reconstruct its shattered economy, a viable commercial banking
sector will be crucial. Many literatures propose that a well-developed financial system
plays an independent role in encouraging long run economic growth. Somalia financial
system is growing faster in the last few years. As of now, there are six licensed Islamic
banks in Somalia (CBS) five of which are from Mogadishu and one from Garoe (Amal

44
bank). It is believed that there are more than these registered ones since the other
autonomous states have their own central banks. Somaliland, which is a self-declared state,
has its own central bank that runs and regulates its financial affairs. In addition, there are
14 Hawala, which is a method of transferring money without any actual movement.
Transactions between Hawala brokers are done without promissory notes because the
system is heavily based on trust. Another institution, which is prominent in Somalia, is
Takaful Company “Islamic insurance” (Jama, 2018).
1.3.1 Commercial Versus Islamic Banking in Somalia
Conventional commercial banks prefer to lend to low-risk activities and are reluctant to
finance high risk projects, even if such projects present better investment opportunities and
they are less willing to finance small firms that don’t have adequate collateral. In contrast,
fostering serious economic development is an inherent key objective of Islamic banks as
they seek to maximize social benefit. Islamic banks should therefore work hard to
overcome shortages and difficulties to help the economy to progress to a higher stage of
self-sustained development, resulting in a favorable effect on socio economic harmony due
to equal income distribution. From above analysis, it is obvious that Islamic banking
system is more suitable to the financial services needs of Somalia due to its dire need for a
financial system with strong inclination to social justice and financial inclusion. In the
coming section, we will briefly look at the underpinning principles of Islamic finance with
the objective of evaluating its suitability to Somalia’s financial services’ needs. Both
conceptually and theoretically Islamic finance is rich in certain desirable socio-economic
goals such as social justice, equity, the alleviation of poverty and human well-being
(Chapra, 1985). The modern conventional banking system in Islamic countries is a product

45
of colonizers using the support of financial institutions for mining, agriculture and
manufacturing (Beck & Levine, 2003). The initial banks were predominantly used for the
funds of foreigners and as a means to increase foreign owned industries that spread through
imperial rule. We will now be looking at the available options for Somalia in this respect
with the objective of evaluating the various possible models of establishing a practical,
sustainable and feasible banking system in Somalia. However, it is worth noting in this
context that Somalia had no central monetary authority for over fifteen years between the
outbreak of the civil war in 1991 and the subsequent reestablishment of the central bank of
Somalia in 2009. Paradoxically, the nation’s payment system is fairly advanced primarily
due to the wide spread existence of private money transfer operators that have acted as
informal banking networks. Hence, one of the quickest and the most practical ways of
establishing a functioning banking system in Somalia is the conversion of the existing
Hawala companies into Islamic banks as we will discuss in the following section
(Warsame, 2016).
1.3.2 Islamic Finance education in Somalia
Somalia education system is privatized since the collapse of the central government in
1991. Prior to Somali civil war, the government mainly controlled the education system.
Somalia had only one public university located in Mogadishu and enrolled approximately
4000 students each time (Hoehne, 2010). Currently, there are more than 50 higher
education institutions of different sizes and capacities functioning across the country
(HEIs). These institutions enroll over 50,000 students; especially given the prolonged
periods of insecurity experienced in parts of the country they lack regulation and quality
control. In 2014, the Somali National University was reopened. The number of schools and

46
universities increased rapidly in a short period. The commencement of university courses
is based on the demand of the students who can afford the tuition fees charged according
the founder’s desire. Islamic finance education was formerly taught in the mosque mainly
by the Somali clerics and was focused on the Shari’ah aspect of transactions, but was
lacking in the financial and law aspects of the transaction. Despite the growth of Islamic
banks in Somalia, higher education learning has yet to tap into the growing need for Islamic
finance education. There are two universities offering IFE in Somalia currently. These are
Darul Hikmah University and Badar Universities. Darul Hikmah University has its
program under INCEIF global university of Islamic finance in Malaysia. The first batch of
around 50 students graduated from this university. The courses are designed by INCEIF
and the mode of study is online, but Darul Hikmah University only coordinates the
program. The other university is Badar University in Somaliland, which offers degrees in
Islamic banking and finance. Unlike Darul Hikmah University, this university plans its
own curriculum and disseminates learning to students. Apart from these two universities,
some colleges and institutions offer diploma and certificates of one-year duration and offer
some seminars and counseling to the industry players in some regions (Jama, 2018).
1.3.3 Opportunities of Islamic Banking in Somalia
Most of the universities in Somalia now offer courses in conventional banking and finance
and yet there are no conventional commercial banks in Somalia. The graduates of these
programs would have difficulty during the employment process. However, Islamic finance
can take advantage to boost this emerging industry. The Somali people, due to their faith,
favor ethical based financing and transactions. In addition to this, about 100% of Somalians
are Muslims, which serves a basic platform for Islamic Finance to grow. Since there is

47
sanity coming up in the polity now, this will be an added benefit for IFB industry to
establish their operations in the country. To conclude, this review will support the objective
of making Somalia becomes a financial hub in East Africa. There is a vital demand for
academic and practical training in this developing sector. However, lack of harmonization
of curriculum and regulations between the universities remains a challenging issue. This
may create obstacles to the development of Sharia compliant banking system (Jama, 2018).
1.3.4 Products of Islamic Banks in Somalia
Islamic Banks in Somalia offer an Islamic savings and current accounts. The savings
accounts offer profit sharing and can be specialized in specific sectors of the economy,
upon the client wish, while current account is for everyday money usage. FSB Islamic loan
products are geared towards larger projects, like building and renovation financings. Trade
Financings are also available to facilitate importing goods to the Somali market.
 The bank can finance new real estate (property development) by Istina,
 Financing of old real estate is set up through Diminishing Mushakara,
 agriculture production is financed by Salam contracts,
 Equipments are financed through Murabaha Purchase Order financing,
 Business Expertise like running a restaurant is financed by Mudaraba financing.
Clients can also invest in safe fixed return products like Treasury Murabaha deposits
accounts or by investing together with the bank in some of its associated business
(Musharaka) like Islamic finance operator (Takaful), which are riskier but carry more profit
rates if it is successful. The bank’s aim is to move Somalia towards modern and more

48
secure cashless society together with the mobile phone and internet-based banking facilities
(FSB, 2012).
1.3.5 Growth of Islamic Finance in Somalia
In 1970s was the time that Islamic banking system emerged in Somalia. Islamic Banking is interest
free banking governed by the principles of Islamic Shari’ah (LAYLA ABDULLAHI, MOHAMED
HASSAN, AMIN HASSAN, 2016) .In the modern era Islamic banking is growing very fast due
to its optimistic impact on every individual, industry and the economy as a whole. As
Islamic banking is not only covering the credit worthiness and the ability to pay the loans
and the profits as and when it is due, it also increases the worth of the project which is
directly proportionate to the profit of the project. Ultimately, projects grow at a rapid speed
and business are getting bigger and bigger (Shahzad, 2012).
1.4 Challenges Facing Islamic Banking Services
1.4.1 Lack of Awareness and understanding
Despite the growth of Islamic banking over the last 30 years, one of the main challenges
facing Islamic banking is the poor understanding about its operations in the Muslim and
non-Muslim world.
1.4.2 Regulatory Challenges
The relationship between Islamic banks and monetary authorities is a delicate one.
Whatever the goals and functions are, Islamic banks came into existence in an environment
where the laws, institutions training and attitude are set to serve an economy based on the
principles of interest. For example, the operations of Islamic banks are on a profit and loss
share basis (PLS), which actually does not come fully under the jurisdiction of the existing

49
civil laws. In non-Muslim counties (i.e. countries with less than 50% Muslim population),
central banks are very stringent in granting licenses for Islamic banks to operate. Islamic
banks must also meet the additional requirements of other government and non-
government authorities. (So, apart from legal constraints, there are economic measures that
result operations of Islamic banks in non-Muslim world difficult)102 (Visser, 2009).
1.4.3 Lack of Supportive Institutional and Market links
Islamic banking is at an early stage of learning and experience, lacking the flexibility to
choose arrangements which best suits their need in reacting to structural shifts in the
economic setting as well as changes in consumer preferences. For example, Islamic banks,
without having an interest-free money and capital market, will not have adequate
instruments to meet the pre-condition for liquidity management and effective maturity
transformation. So, adequate financial mechanism still has to be developed, without which
financial intermediation, especially the risk and maturity transformation, will not be
performed properlyMoreover, however well integrated it may be, any system cannot thrive
exclusively on its built-in elements. It has to depend on a number of link institutions and
Islamic banking is not an exception to this rule. They also need research and training
forums in order to promote entrepreneurship amongst their clients. Such support services
properly oriented towards Islamic banking are yet to be developed in many countries
(Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk , 2015).
1.4.4 Use of Advanced Technology and Media
Many Islamic banks do not have the diversity of products essential to satisfy the growing
needs of their clients. The importance of using proper advanced technology in upgrading

50
the acceptability of a product and diversifying its application cannot be over emphasized.
Given the potentiality of advanced technology, Islamic banks must have to come to terms
with rapid changes in technology, and redesign the management and decision-making
structures and, above, all introduce modern technology in their operations. Many Islamic
banks also lack the necessary expertise and institutional capacity for Research and
Development (R & D) that is not only necessary for the realization of their full potential,
but also for its very survival in this age of fierce competition, sophisticated markets and an
informed public. Islamic banking cannot but stagnate and wither without dynamic and
ongoing Programmes. In addition, Islamic banks have so far not used the media
appropriately. For example, even Muslims are not very much aware that the Islamic
banking is being practiced in the world. Islamic banks have not ever used an effective
media to publicize their activities (Olad, 2012).
1.4.5 Need for Professional Bankers
There is a need to institute professionalism in banking practice to enhance management
capacity by competent bankers committed to their profession. Because, the professionals
working in Islamic banking system have to face bigger challenge, they must have a better
understanding of industry, technology and the management of the business venture. They
also have to understand the moral and religious implications of their investments with the
business ventures. There is also a need for banking professionals to be properly trained in
Islamic banking and finance. Most banks‟ professionals have been trained in conventional
economics. They lack the requisite vision and conviction about the efficiency of the Islamic
banking (Olad, 2012).

51
3 Chapter three: methodology
3.1 Introduction
This chapter provides a detail description of selected methodology which includes: study
design, population and sampling, data collection method and data analysis techniques.
3.2 Research design
In general, research design is the general plan and structure for the shape of the research
used to achieve the aim of the study. Research design provides a framework for the
collection and analysis of data. In the point that this research examines the challenges and
opportunities of Islamic banks in Somalia, descriptive design was used to get a deeper
information and high analytical approach.
3.3 Population and sampling
The target population for this study is also totaled to three hundred individuals with
different sectors and qualification. While the sample size will be Seventy-five individuals
coming from different sections of the selected study population.
3.3.1 Study population
Polit and Hungler (1999:37) refer to the population as an aggregate or totality of all the
objects, subjects or members that conform to a set of specifications. As the population size
is always very large and due to some operational problems and practical issues it is always
difficult or more often it is impossible to approach the entire universe of the population and
collect the data. The number study population is 75 people who mainly from different

52
economic sectors such as, households, financial institutions, education and research center
and government institutions.
3.3.2 Sample of the study
The process of selecting a portion of the population to represent the entire population is
known as sampling (LoBiondo-Wood & Haber 1998:250; Polit & Hungler 1999:95). Due
to the resource, cost, feasibility and other reasons the population may be unreachable or
too large to conduct the study. So, the researcher may wish to consider more feasible and
accessible groups for the population. The study sample will be selected from the above
mentioned population by proportional form.
3.4 Sampling procedure
The researcher used Yamane equation of statistical formula for calculating the Sample size.
This formula was used to calculate the sample sizes and it shown below. A 99% confidence
level and P = .1 are assumed for Equation.
There is previous research conducted by (Omar, 2016) on a similar topic of Islamic banking
in Somalia; Challenges and Opportunities where the confidence level of that research was
95%, therefore following that researcher decided to make this study more confident and
chooses a confidence level of 99%.
𝑛 = ( )
Where n is the sample size, N is the population size, and e is the level of precision. When
this formula is applied to the above sample, we get Equation
𝑛 = ( )
= 𝑛 = ( . )
= 75 Respondents.

53
3.5 Data Collection
3.5.1 Instrumentations
The researcher used both interview and questionnaire research instruments which are
structured set of questions designed to generate the information required for specific
purpose. This data collection method is selected based on its suitability to collect data in
the case of large sample size within a short period of time. The information of the
questionnaire is described in writing while the information of the interview is described in
oral explanation while the researcher is asking question and taking key notes.
3.6 Quality control of the study
3.6.1 Validity
In its purest sense, this refers to how well a scientific test or piece of research actually
measures what it sets out to, or how well it reflects the reality it claims to represent. Like
reliability, validity in this sense is a concept drawn from the positivist scientific tradition
and needs specific interpretation and usage in the context of qualitative research
(Association of Quality Research, 2018).
the researcher makes use of sampling according to Yamane sampling is a method of sample
it is a process in which every individual in the population has equal chance of being selected
in to the sample of the study.
3.6.2 Reliability
Reliability of a test instrument according to (Ogbomosho, 2006) is consistency of the test
in measuring whatever intends to measure, it involves the accuracy of both the process and
result of the measurement where that a measuring instrument is reliable if it provide the

54
same data when administrator twice or more under the similar condition, the question and
interview are reliable because it has given the researcher the desired result. Reliability
refers to the consistency that an instrument demonstrates when applied repeatedly under
similar conditions (Erlanger, 1983). The reliability of the research instruments was by
established by the researcher before analysis and consequent presentation.
3.7 Data Analysis
Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with
the goal of highlighting useful information, suggesting conclusions, and supporting
decision making. Data analysis has multiple facets and approaches, encompassing diverse
techniques under a variety of names, in different business, science, and social science
domains.
The researcher demonstrated analytical discussion of research findings based on evidence
compiled with logical and analytical arguments. Data was analyzed both quantitatively and
qualitatively. Descriptive methods were employed and data presented in the form of
frequent distribution tables, graphs and charts that facilitated description and explanation
of the study findings.
The primary data was analyzed using the application The data was presented in a useful
and organized manner suitable for analysis and also questionnaire was coded and analyzed
using Statistical Package for Social Sciences (SPSS), a computer aided programme
statistical tools after all the necessary primary and secondary data are gathered and edited
for any errors as well as omissions. Moreover, percentage analyses were used for
background information and analyzing items that measure the challenges facing Islamic
banking in Somalia.

55
3.8 Ethical Considerations
Ethical consideration is conducting research in an academic or professional setting you
need to be aware of ethics behind your research activity, Here are some specific points to
consider: Bearing in mind the ethical issues, the researcher provided the respondents with
the necessary information as regards the main purpose of the research, expected duration
and procedures to be followed, and be in position to keep privacy and not disclose the
confidentiality of respondents and researchers responsibility.
3.8.1 Permission to conduct the research
"In order to conduct research at an institution, approval for conducting the research should
be obtained before data is collected" (Mc Milan &Schumacher 1993). In this study, the
researcher first required permission Mogadishu University before collecting data.
3.8.2 Informed Consent
"Participants were given enough information pertaining to the study before data collection"
(Schulze 2002). In this study, the participants were given adequate information on the aims
of the study, the procedures that would be followed, and the possible advantages for the
participants, the credibility of the research and the way in which the results would be used.
This enabled participant to make an informed decision on whether they wanted to
participate in the research or not. No form of dishonesty was used to ensure the
participation of the participants.
3.8.3 Confidentiality and secrecy
"A researcher has to be responsible at all times and be vigilant, mindful and sensitive to
human dignity" (Gray, 1996). This is supported by Mc Milan and Schumacher (1997) who
stress that information on participants should be regarded as confidential unless otherwise
agreed on through informed consent.

56
4 CHAPTER FOUR PRESENTATION, ANALYSIS AND
INTERPRETATION OF DATA
4.1 Overview
This chapter presents, and analyses the study findings on challenges and opportunities of
Islamic Banking in Somalia. The data was collected using instruments like questionnaire,
and interview, which was highlighted under the researcher’s methodology, the data is
presented using cross tabulations tables and charts, to establish the extent to Islamic
Banking. The first section presents the response rate. This is followed by background
information about the respondents and a presentation and analysis of the study findings in
relation to the specific objectives.
4.2 Characteristics of respondent
The researcher distributed 150 questionnaires to different sectors of Society. All the
questionnaires were completed and returned back. This means that questionnaires which
have been completed represented a good response rate which was considered more enough
for the objectives of the study. This section gives the characteristics of the respondents in
cross tabulations and graphs in relation to job title, highest level of education, gender and
age of the respondents with the business firm based on the information provided by the
respondents themselves using the study questionnaire.

57
4.2.1 Gender of Respondents
Table (1): Gender of Respondents:
Source: Primary Data
Figure (1): Gender of Respondents
It is observed from table (1) and figure (1) shows that the 64% of the respondent were male
since 36% of respondents was Female. While number of male respondents were 48 out of
75 participants as well as female respondent number was 27 out of 75.
Gender Percentage Frequency
Female 36% 27
Male 64% 48
Total 100.00% 75
36%
64%
Gender of Respondents
Female
Male

58
4.2.2 Marital status
Table (3): Marital Status of respondents
Marital Status Percent Frequency
Single 48% 36
Married 44 % 33
Divorced 8% 6
Total 100% 75
Figure (3):
Table (3) and figure (3) shows the Marital status of respondents. 48% or 36 person of
respondents are single. While 44% which is 33 of respondents are married and there is a
little percentage of 8% who are separate or divorced.
Single Married Divorced
48%
44%
8%
Marital Status of Respondents
Single
Married
Divorced

59
4.2.3 Educational Level
Table (2) Educational level of respondents
Education Percentage Frequency
Diploma Level 2.6% 2
Bachelor Level 44% 33
Master Level 44% 33
PhD Level 5.4% 4
Others 4% 3
Total 100% 75
The educational level of respondents has been classified into five categories; Diploma
level, Bachelor’s degree, Master’s degree, doctoral level and others.
Figure (2): Educational level of respondents
Above illustration shows that 2.6% of the respondents held a diploma qualification, 44%
had bachelors’ degree, 44% had masters level education, and 5.4% had PhD level, while
4% of respondent ware holding other types of certificates.
0.00%
50.00%
Diploma Leve
Bachelor Level
Master Level
PhD Level
Others
2.6%
44% 44%
5.4%
4%
Educational levels of Respondents

60
4.2.4 Age of Respondents
Table 4: Age of Responder
Class Interval Percentage Frequency
20 - 30 65.3% 49
31 - 40 17.4% 13
41 - 50 10.6 % 8
Above 50 6.7% 5
Total 100% 75
The above Table and Figure shows that respondents have been classified into four groups;
between (20 – 30) years old, between (31 – 40) years old, between (41 – 50) and above 50.
Figure 4: Age of Responder
Its observed from Table 4 and figure 4 that 65.3% of respondent ware between the age of
(20 – 30) which means 49 of total respondents, 17.4% of respondent ware the age between
(31 – 40) and that stands for 13 of total respondents, 10.6% of respondent ware the age
range between (41 – 50) while the remaining 6.7% ware above 50.
65.3%
17.4%
10.6%
6.7%
20 - 30 31 - 40 41 - 50 Above 50
Class Interval

61
4.3 General Awareness about Islamic Banking in Somalia
This part discusses General Awareness about Islamic Banking in Somalia, the findings are
presented in frequencies and percentages. Respondents were asked to answer certain items
that will scale their assessment regarding awareness about Islamic banking operations. To
further respondent’s awareness and understanding about Islamic banking operations in
Somalia, it’s pertinent to look deeply in to the matter and consider relevant items for further
analysis. So, one item in awareness scale asked respondents: Have you ever been a
customer of an Islamic Bank in Somalia? In this question respondents were asked to judge
whether they have become a customer of Islamic Banking or not. The following table
shows the results for respondents and their understanding about Islamic banking operations
in Somalia.
4.3.1 Have you heard of Islamic Banking and finance?
Table (5):
Options Percentage Frequency
Maybe 2.67% 2
No 4% 3
Yes 93.33% 70
Total 100% 75

62
Figure (5):
Table 5 indicates that 93.33% of total respondents have heard Islamic banking and finance,
while 4% of respondents have not yet heard Islamic Finance whereas 2% responded that
they don’t sure if they heard Islamic finance before or not.
4.3.2 Is Somalia ready for implementing Islamic banking system
Table (6): Do you agree that Somalia is ready for implementing Islamic banking system?
Agree 49.33% 37
Disagree 2.67% 2
Neutral 10.67% 8
Strongly agree 32% 24
Strongly disagree 5.33% 4
Total 100.00% 150
0%
20%
40%
60%
80%
100%
Maybe No Yes
2.67%
4%
93.33%
Maybe
No
Yes

63
Figure (6): Do you agree that Somalia is ready for implementing Islamic banking system?
The above table (6) shows that 49.33% which is the majority of respondent ware agreed
that Somalia is ready for implementing Islamic banking system. About 32% of respondent
ware strongly agreed that Somalia. 10. 67% of respondents indicate that they don’t sure if
Somalia is ready for implementing Islamic Banking System or not, however 5.33% of total
respondent ware strongly disagreed that Somalia is ready for Implementing Islamic
Banking System while 2.67% of respondents was Disagreed that to me that Somalia is
ready for implementing Islamic Banking System. The above figures show that Majority of
respondent beliefs that Somalia is ready for implementing Islamic Banking System.
However, unlike that respondent show that in Somalia there is no Islamic Financial
Institution at which governs the Islamic Banking activities in Somalia, the result of this
question is presented in the following table.
49.33%
2.67%
10.67%
32%
5.33%
Agree Disagree Neutral Strongly agree Strongly disagree
Percent

64
4.3.3 Is there an Islamic financial institution governed by Islamic Banking?
Table (7): There Islamic financial institution at which governs the Islamic Banking
activities in Somalia
Selections Percentage Frequency
May be 18.66% 14
No 62.68% 47
Yes 18.66% 14
Total 100.00% 75
Figure (7): There Islamic financial institution at which governs the Islamic Banking
activities in Somalia
The above figures show that 62.68 which is the majority of respondents responded that
there is no Islamic Financial Institution at which governs the Islamic Banking activities in
Somalia. While 18.68% of respondents replied that there is Islamic Financial Institution at
PercentMay be
No
Yes
18.68%
62.68%
18.68%

65
which governs the Islamic Banking activities in Somalia, still there is 18.68% of respondent
who don’t distinguish whether Somalia have Islamic Financial Institution at which governs
Islamic Banking activities in Somalia or not.
4.3.4 Islamic Financial institutions provide Financial Service
Table (8): Is there Islamic Financial Institution which provides Financial Service?
Maybe 19% 14
No 16% 12
Yes 65% 49
Total 100% 75
Figure (8): Is there Islamic Financial Institution which provides Financial Service?
Table (8) shows that 65% of total respondents replied in Somalia there is Islamic Financial
institution which provide Financial service. However, 16% of respondents answered there
19%
16%
65%
Maybe
No
Yes

66
is no Islamic financial institution which provide Financial service in Somalia elsewhere
19% of total respondents do not sure if there is Islamic Financial institution in Somalia
which provide Financial service.
4.3.5 Being a customer of Islamic Bank
Table (9): Have you ever been a customer of Islamic Bank in Somalia?
Choices Percent Frequency
No 41.33% 31
Yes 58.67% 44
Total 100.00% 75
Figure (9): Have you ever been a customer of Islamic Bank in Somalia?
Above table shows that 58.67% of total respondents have an accounts in local Islamic
Banks while a large number of respondents which is 41.33% don’t have accounts in local
Islamic banks. This indicates that Islamic banks in Somalia do not attract more customers
in addition to this people are also unhappy to products that Islamic banks in Somalia offer.
41.33%
58.67%
No Yes

67
4.3.6 Reason motivate people to deposit money in Islamic Bank
Table (10): Do you think that the reasons which motivate people to deposit their money
at an Islamic Banks in Somalia are any of the following?
Profitability reasons 6.67% 5
Religious and Profitability reasons 26.67% 20
Religious reasons 44.00% 33
Their deposits are more secure 22.67% 17
Total 100.00% 75
Figure (10): Do you think that the reasons which motivate people to deposit their money at
an Islamic Banks in Somalia are any of the following?
Table (10) shows that 44% of total respondents deposit their money in Islamic banks for
religious reason, 22.67% deposit their money in Islamic banks for the reason of safety and
security of their deposit. 6.67% deposit money in Islamic banks for the sake of Profitability
6.67%
26.67%
44.00%
22.67%
P ROF IT A BILIT Y RE A S ONS RE LI GI OUS A N D
P ROF IT A BILIT Y RE A S ONS
RE LIGI OUS RE A S ONS T H E IR DE P OS IT S A RE
MORE S E C URE

68
purpose while 26.67% deposit money in Islamic banks for both religious and profitability
reasons.
4.3.7 Role of Islamic Banks on Economic Growth
Table (11): Islamic financial services are relevant and have a role to play in the
development and growth of the Somali economy
May be 12% 9
No 12% 9
Yes 76% 57
Total 100% 75
Figure (11): Islamic financial services are relevant and have a role to play in the
development and growth of the Somali economy
12%
12%
76%
May be
No
Yes

69
Table (11) illustrates that 76% reach agreement that Islamic Financial service have a role
to play in the development and growth of Somali economy, 12% do not see any relevance
that Islamic Financial service have to play in local economic growth while 12% of total
respondents may not sure if Islamic Financial service have a role to play in local economic
growth.
4.3.8 Products of Islamic banks
Table (12): Current Islamic Banks in Somalia provide enough retail products.
Agree 18.67% 14
Disagree 40.00% 30
Neutral 33.33% 25
Strongly Agree 4.00% 3
Strongly Disagree 4.00% 3
Total 100.00% 75
Figure (12) Current Islamic Banks in Somalia provide enough retail products.
18.67%
40.00%
33.33%
4.00%
4.00%
Agree Disagree Neutral Strongly Agree Strongly Disagree

70
Table (12) demonstrates that 40% of participants Disagreed that Current Islamic Banks in
Somalia provide enough retail products, only 18.67% of respondents agreed that Products
of local Islamic banks are enough. 4% strongly disagreed that current Islamic banks in
Somalia provide enough retail products also 4% of respondent ware strongly agreed that
current Islamic banks in Somalia provide enough retail products. However, 33.33% of
respondents which is a large number do not sure if current Islamic banks in Somalia offer
or provide enough retail products.
4.3.9 Islamic banks contribute removing social inequalities
Table (13): Current Islamic Banks in Somalia are contributing in removing society’s
inequalities and improving general standard of living.
Agree 33.33% 25
Disagree 26.67% 20
Neutral 20.00% 15
Strongly agree 9.33% 7
Total 100.00% 75
Agree
Disagree
Neutral
Strongly agree
Strongly
disagree
33.33%
26.67%
20.00%
9.33%
10.67%

71
Above Table indicates that 33.33% agreed that Islamic Banks in Somalia are contributing
in removing society’s inequalities and improving general standard of living. 26.67% of
respondents disagree that Islamic banks are contributing in removing society’s inequalities
and improving general standard of living. 20% of respondents don’t sure where Islamic
banks are contributing in removing society’s inequalities and improving general standard
of living or not. 10.67% of respondent strongly disagree that Islamic banks are contributing
in removing society’s inequalities and improving general standard of living while 9.33%
of total respondent ware strongly agreed that Islamic banks are contributing in removing
society’s inequalities and improving general standard of living.
4.3.10 Islamic banks are free from exploitation, discontentment and strife
Table (13): Islamic banks and financial institutions in Somalia are free from exploitation,
discontentment and strife.
Agree 24.00% 18
Disagree 26.67% 20
Neutral 33.33% 25
Total 100.00% 75

72
Figure (13): Islamic banks and financial institutions in Somalia are free from exploitation,
discontentment and strife.
Table (13) shows that 26.67% of participants disagreed that Islamic banks and financial
institutions in Somalia are free from exploitation, discontentment and strife.24% of
contributors agreed that Islamic banks are free from exploitation, while a large number of
33.33% do not sure if Islamic banks are free from exploitation or not. 9.33% of
respondent Strongly disagreed that Islamic banks are free from Exploitation. While the
remaining 6.67% strongly agreed that Islamic banks and financial institutions in Somalia
are free from exploitation, discontentment and strife.
Agree Disagree Neutral Strongly
agree
Strongly
disagree
24.00% 26.67%
33.33%
6.67%
9.33%

73
4.3.11 Products of local banks compared to banks in middle east
Table (14): Products of present Islamic Banking activities in Somalia are less practiced
Agree 56.00% 42
Disagree 10.67% 8
Neutral 16.00% 12
Total 100.00% 75
This table shows that 56% of participants agreed that products of local banks are less
practiced compared to banks in middle east. 16% of respondent don’t have idea relates to
this issue, 14.67% of respondent strongly agreed that products of local banks are less
practiced compared to banks in middle east. 10.67% of respondents disagreed that products
of local banks are less practiced compared to banks in middle east while 2.67% strongly
disagreed it.
agree
Strongly
disagree
56.00%
10.67% 16.00% 14.67% 2.67%

74
4.4 Opportunities of Islamic banks in Somalia.
In this sections questions were constructed to outline the opportunities that Islamic banks
in Somalia has including; the global future of Islamic banking, limited risk associated with
Islamic banks in Somalia, social acceptance of Islamic Finance, availability of profitable
projects in Somalia and many others.
4.4.1 Relation between global Financial trends in and future of Islamic Finance
Table (15): Current global trends in Financial Services will have positive manifestations
on the future of Islamic banking in Somalia
Agree 58.67% 44
Disagree 4.00% 3
Neutral 24.00% 18
Total 100.00% 75
Figure (15): Current global trends in Financial Services will have positive manifestations
on the future of Islamic banking in Somalia
Agree
Disagree Neutral
Strongly
agree Strongly
Disagree
58.67%
4.00% 24.00%
10.67% 2.67%

75
This table shows that 58.67% of respondent agree that the current global trends in financial
services will have a positive impact on islamic banking in Somalia. 24% of respondent
don’t sure the kind of impact between two factors. 10.67% of respondent strongly agree
that there is a positive impact on global financial trends and islamic banking in Somalia.
4% of respondent disagreed that there is a positive impact on global financial trends and
islamic banking in Somalia while the remaing 2.67% similarly strongly disagreed that there
is a positive impact on global financial trends and islamic banking in Somalia.
4.4.2 Risk Associated with Islamic Banks in Somalia
Table (16): Risk associated with Islamic bank and Finance can be minimized.
Agree 59% 44
Disagree 4% 3
Neutral 16% 12
Strongly disagree 4% 3
Total 100% 75
Figure (16): Risk associated with Islamic bank and Finance can be minimized.

76
Table 16 shows that 59% of respondent agreed that the risk associated with Islamic banks
can be minimized. 16% of respondent don’t sure if risk can be minimized, 17% strongly
agreed that the risk associated with Islamic banks can be minimized. However, 4$ of
respondent disagreed that the risk associated with Islamic bank can be minimized in
addition to that another 4% of respondent strongly disagreed it/
4.4.3 Social acceptance of Islamic Banking in Somalia
Table (17): Social acceptance for Islamic banking and finance in the country is higher
compared to conventional banks.
Options Percent Frequency
Agree 42.67% 32
Disagree 10.67% 8
Neutral 8.00% 6
Total 100.00% 75
Agree
Disagree
Neutral
Strongly agree
Strongly
disagree
59%
4%
16%
17%
4%

77
Figure (17): Social acceptance for Islamic banking and finance in the country is higher
compared to conventional banks.
This table demonstrate that the social acceptance for Islamic banking and finance compared
to conventional banks according to respondents where 42.67% and 36% agreed and
strongly agreed respectively. 10.67% disagreed that the social acceptance of Islamic
banking in Somalia is higher compared to conventional banks, 8% of respondent don’t sure
the level of social acceptance for Islamic banking compared to Conventional banks
whereas 2.67% of respondent strongly disagreed that the level of social acceptance for
Islamic banking in Somalia is higher compared to conventional banks.
4.4.4 Islamic bank and available profitable projects
Table (18): Islamic banks will capitalize the Availability of profitable projects in the area
of infrastructure, agriculture and trade financing in Somalia.
Agree Disagree Neutral Strongly agree Strongly
Disagree
42.67%
10.67% 8.00%
36.00%
2.67%

78
Agree 48% 36
Disagree 11% 8
Neutral 20% 15
Total 100% 75
Figure (18): Islamic banks will capitalize the Availability of profitable projects in the area
of infrastructure, agriculture and trade financing in Somalia.
Table 18 indicates that 48% agreed that Islamic banks in Somalia will capitalize the
profitable projects in Somalia, 20% of respondent don’t sure if Islamic banks in Somalia
will capitalize the profitable projects in Somalia. 13% of participants strongly agreed that
Agree
Disagree
Neutral
Strongly agree
Strongly
disagree
48%
11%
20%
13%
8%

79
Islamic banks in Somalia will capitalize the profitable projects in Somalia while 11% and
8% shows the level of respondent ware disagreed and strongly disagreed respectively.
4.4.5 Evaluation for performance of Islamic banks in Somalia based on perception
Table 19: How would you evaluate the efficiency and performance of Islamic Banks in
Somalia especially the last decade?
Bad 11% 8
Excellent 4% 3
Fair 47% 35
Good 35% 26
Very Bad 4% 3
Total 100% 75
Figure 19: On your perception how would you evaluate the efficiency and performance of
Islamic Banks in Somalia especially the last decade?
11% 4%
47%
35%
4%
Bad
Excellent
Fair
Good
Very Bad

80
This table shows how respondent evaluated the efficiency and performance of Islamic
banks in Somalia 47% of respondent evaluated the performance of Islamic banks fair. 35%
of respondent evaluated their performance as good where 11% evaluated as bad. 4% of
respondent evaluated Very bad similar to that another 4% of respondent evaluated their
performance as Excellent. This shows the performance of Islamic banks in Somalia is not
in acceptable level in accordance with the evaluation of respondents.
4.5 Challenges of Islamic Banking in Somalia
In this section we are deeply focusing the several unique challenges facing Somalia’s
banking industry, such as lack of technical experts, lack of comprehensive and appropriate
financial instruments and supportive infrastructures, limited public financial knowledge
capacity, limited funding capacity and so many others
4.5.1 Awareness of Local Community
Table (20): Local Community has awareness about Islamic banking system
Agree 20.00% 15
Disagree 53.33% 40
Neutral 16.00% 12
Total 100.00% 75

81
Figure (20): Local Community has awareness about Islamic banking system
This table indicates that 53.33% of respondent disagreed that local community has enough
awareness regarding the Islamic banking, 20% agreed that local community has enough
awareness, 16% of respondent don’t sure the case while 6.67% of respondent strongly
disagree it however, 4% of respondent strongly agree that local community has enough
awareness regarding to Islamic Banking system.
4.5.2 Inadequate education about Islamic Finance
Table (21) The inadequate education about Islamic finance in Somalia.
Agree 50.67% 38
Disagree 13.33% 10
Neutral 16.00% 12
Total 100.00% 75
20.00%
53.33%
16.00%
4.00% 6.67%
Agree Disagree Neutral Strongly agree Strongly Disagree

82
Figure (21): The inadequate education about Islamic finance in Somalia
The above table shows 50.67% which is majority of respondents agreed that there is
inadequate education of Islamic finance in Somalia. 16% of respondents decided to remain
neutral while the same percentage strongly agreed however 13% disagreed that there is
inadequate education of Islamic finance in Somalia and the remaining 4% strongly disagree
the existence of inadequate education of Islamic finance in Somalia.
4.5.3 Awareness of Islamic Finance in Somalia
Table (22): Low awareness of Islamic Finance in Somalia
Agree 40% 30
Disagree 23% 17
Neutral 21% 16
Strongly Disagree 3% 2
Total 100% 75
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Agree Disagree Neutral Strongly agree Strongly
Disagree
50.67%
13.33% 16.00% 16.00%
4.00%

83
Source: Primary Source
Figure (22): Low awareness of Islamic Finance in Somalia
Above figure shows that 40% of respondents agree the low awareness of Islamic finance
in Somalia. 23% of respondents disagreed the low awareness of Islamic finance, 21% of
respondents stay neutral while 13% of respondents strongly agreed the existence of low
awareness of Islamic finance in Somalia, while the remaining 3% strongly disagree it.
4.5.4 Absence of Sharia Board of Advisors
Table (23): Absence of Sharia advisory board in the country is an obstacle to bankers.
Agree 48% 36
Disagree 15% 11
Neutral 12% 9
Total 100% 75
agree
Strongly
Disagree
40%
23% 21%
13%
3%

84
Figure (23): Absence of Sharia advisory board in the country is an obstacle to bankers.
Above figure shows 48% of respondents agreed the absence of Sharia advisory is one of
obstacles that banks face. 17% of respondents strongly agree it and 12% of respondents
remained neutral. However, 15% of respondents disagreed the absence of sharia board as
one of obstacles that banks face. Lastly 8% of respondents strongly disagreed that
absence of sharia advisory board is one obstacles that bank face.
4.5.5 Lack of Islamic Financial regulation in Somalia
Table (24): Lack of Islamic Financial regulation is the main obstacle facing local banks
Agree 56% 42
Disagree 9% 7
Neutral 7% 5
Total 100% 75
Source: Primary data
48%
15%
12%
17%
8%
Agree Disagree Neutral Strongly agree Strongly Disagree

85
Figure (24): Lack of Islamic Financial regulation is the main obstacle facing local banks
The above table and figure demonstrates that 56% which is majority of respondent agreed
that absence of Islamic Financial regulation in Somalia is the main obstacle that local
Islamic banks face, in addition to that 25% of respondent ware strongly agreed. While 9%
of respondent disagreed. However, 7% of respondent ware decided to be neutral for the
case nevertheless, that the remaining 3% of respondent ware strongly disagreed that lack
of Islamic Financial regulation is the main obstacle facing local Islamic banks.
In fact, Somalia do not have Islamic Financial bureau which govern local Islamic banks
and yet the countries financial institution failed to develop system and regulations that
govern banks in general and more specifically the Islamic banks.
Agree
Disagree
Neutral
Strongly
agree Strongly
Disagree
56%
9%
7%
25%
3%

86
4.5.6 Absence of effective central bank have an effect on Islamic banks in Somalia
Table (25): Absence of effective central bank have an effect on Islamic banks in Somalia
Agree 39% 29
Disagree 7% 5
Neutral 21% 16
Total 100% 75
Above table illustrates that 39% of respondents agreed that absence of effective and
functional central bank have an effect on Islamic banks in Somalia. 31% of respondent
ware strongly agreed that the absence of effective central bank have an effect on Islamic
banks in Somalia. 21% of respondent stayed neutral while 7% and 3% of respondent
selected disagreed and strongly disagreed respectively.
39%
7%21%
31%
3%
Agree
Disagree
Neutral
Strongly agree
Strongly disagree

87
4.5.7 Islamic Banks in Somalia provide variety of mode of service
Table (26): Islamic Banks in Somalia provide variety of mode of service; (E-banking and
Mobile Banking).
Agree 38.67% 29
Disagree 10.67% 8
Neutral 22.67% 17
Total 100.00% 75
Figure (26): Islamic Banks in Somalia provide variety of mode of service; (E-banking and
Mobile Banking).
Table 26 proves that 38.67% of respondents agreed that Islamic banks in Somalia provide
variety mode of service, in addition to that 22.67% of respondent ware strongly agreed the
case, while 22.67% remained neutral. However, 10.67% of respondent ware disagreed that
0.00%
10.00%
20.00%
30.00%
40.00%
38.67%
10.67%
22.67%
5.33%
22.67% Agree
Disagree
Neutral
Stongly Disagree
Strongly agree

88
Islamic banks in Somalia provide variety of mode of service, nevertheless that 5.33% of
respondent ware strongly disagree it.
4.5.8 Efficiency and effectiveness of service offered by Islamic Banks in Somalia
Table (26): Service offered by Islamic Banks in Somalia are efficient and time effective
Agree 22.67% 17
Disagree 30.67% 23
Neutral 33.33% 25
Total 100.00% 75
Figure (26): Service offered by Islamic Banks in Somalia are efficient and time effective
Table 27 shows that 33.33% of respondents decided to remain neutral in this case, 30.67%
of respondent disagreed that service offered by Islamic banks are efficient and time
effective, 22.67% of respondent agreed that the service offered by Islamic banks in Somalia
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
agree
Strongly
Disagree
22.67%
30.67% 33.33%
8.00%
5.33%

89
are efficient and time effective. However, 8% of respondent strongly agreed that Islamic
banks in Somalia offer efficient and time effective service while 5.33% of respondents
strongly disagreed that Islamic banks in Somalia offer efficient and time effective service.
4.5.9 Banks in Somalia are so-called Islamic Banks
Table (27): Banks in Somalia are so-called Islamic Banks
Agree 33.33% 25
Disagree 20.00% 15
Neutral 18.67% 14
Total 100.00% 75
Figure (27): Banks in Somalia are so-called Islamic Banks
Agree
Disagree
Neutral
Strongly
agree Strongly
Disagree
33.33%
20.00%
18.67%
16.00%
12.00%

90
The above graph indicates that 33.33% of respondent agreed that Islamic banks in Somalia
are so-called in terms of service and regulations and some 16% of respondent strongly
agree the point, while 18.67% of them do not sure if banks in Somalia are so-called Islamic
banks or not. However, 20% of respondent disagree the case that banks in Somalia are so-
called Islamic banks and the remaining 12% of respondent strongly disagree that banks in
Somalia are so-called Islamic banks.
4.5.10 Procedures that Islamic banks are needed to follow
Table (28): There are many procedures/regulations that are needed to be followed in
Islamic Banks in Somalia
Agree 49.33% 37
Disagree 12.00% 9
Neutral 18.67% 14
Total 100.00% 75

91
Figure (28): There are many procedures/regulations that are needed to be followed in
The above table expresses that 49.33% agreed that there are many procedures/regulations
that are needed to be followed in Islamic Banks in Somalia. 18.67% of respondent decided
to remain neutral for the issue, however 16% of respondent strongly agree that there are
many procedures that are needed to be followed in Islamic bans in Somalia. Nevertheless,
that a low number of respondent 12% disagree it and 4% of respondent are strongly
disagree that there are procedures that are needed to be followed in Islamic banks in
Somalia.
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Agree
Disagree
Neutral
Strongly
agree Strongly
disagree
49.33%
12.00%
18.67%
16.00%
4.00%

92
5 CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Overview
This chapter presents the summary of findings, conclusion and recommendations of the
results from chapter four as related to the views of scholars in the literature review and the
background of the study. The summary and discussion given in this chapter, aim at
answering the research questions. The conclusion reached is based on the discussion of the
findings. The recommendations are made from the conclusion.
5.2 Findings
The major findings of the study were interpreted and presented in relation to the objectives
of the study. During the analysis of data presented in chapter four,
The researcher found out that respondents agreed the low level of awareness about the
operations of Islamic Banking in Somalia. In addition, half of the respondents, don’t have
bank accounts in Islamic banks. However, the overall low awareness score may be
attributed to lack of understanding and awareness about its nature and operations or may
be due the fact that most of the respondents are familiar with the prohibition of Riba.
Moreover, many respondents do not understand that Islamic banking is useful and
beneficial to the growth and development of the local economy and is an indication of how
wrong people think about the importance of Islamic banking in the Somali economy.
Majority of respondents have previously heard the name of Islamic Banking and agreed
that Somalia is ready for implementing the Islamic banking system yet half of respondent
do not have bank accounts even half of those who have bank accounts in local Islamic
banks told the researcher that they use Islamic banks for the sake of religious instead of

93
profitability. Most of respondent belief that Islamic banks in Somalia are not free from
exploitation, discontentment and strife. In addition to that majority of them have agreed
that products of Islamic banks in Somalia are less practiced compared to Islamic banks in
middle east.
5.2.1 Opportunities of Islamic banking in Somalia
The view of Islamic banking in Somalia looks very bright. The total Somali population is
Muslim, each of whom wants Islamic banking and offers enormous opportunities for
exploitation. To examine the opportunities of Islamic banking in Somalia, certain questions
that relates to its opportunities where addressed to the participants of this study to quantify
respondents’ assessment of the prospects of Islamic banking in Somalia.
The study further investigated the opportunities of Islamic banking in Somalia. Most of
respondents feel that Somalia is ready for implementing Islamic Banking. In addition to
that majority of respondent agreed that Islamic Financial service are relevant and have a
role to play in the development and growth of Somali economy. Islamic banks in Somalia
have a great potential opportunity since in most of respondent agreed that there is a
profitable project in the area of Infrastructures, Agriculture, livestock and trade financing.
while the risk associated with those profitable projects can be minimized as most of
respondents decided. Furthermore, the Islamic banks in Somalia are widely accepted
because the local population are Muslim and their culture is based on religion.

94
5.2.2 Challenges of Islamic Banking in Somalia
5.2.2.1 Lack of Awareness about Islamic banking
Despite the growth of Islamic banks over the last 30 years, lack of awareness has been
reported as one of the major problems facing Islamic banking. So, to assess this,
respondents were asked to rate and share their view regarding to community’s awareness
on Islamic Banking. In respond majority of respondent belief that local community does
not have sufficient awareness’ about the operations of Islamic banking.
5.2.2.2 Regulatory and supervisory Challenge
Regulatory challenges are among the main challenges facing Islamic banking in Somalia.
Therefore, for further understanding of the regulatory challenges facing Islamic banks in
Somalia, specific items have been directed to reveal respondents' assessment of the current
banking system. 39% of respondents agreed that absence of well-functioning central bank
have a negative impact on Islamic banks in Somalia. Meanwhile, according to finding of
the study most of respondent belief that lack of Islamic financial regulation is the main
challenge that face Islamic banks in Somalia. Nevertheless, that majority of respondent
agreed that nonexistence of sharia advisory board in the country have weakened the
performance of Islamic banks in Somalia.
5.2.2.3 Product and service challenge
Islamic banks generally offer a wide range of products, but local banks offer few products
and services, making it one of the main challenges facing Islamic banks in Somalia. To
over understand the product challenge facing Islamic banks in Somalia, specific questions

95
have been addressed to participants, most of respondent belief the products of local Islamic
banks are less practiced compared to Islamic banks in middle east. The other view that
examined the product challenge in Islamic banking in Somalia is that majority of
respondent confidence that the product and service of Islamic banks are not efficient and
time effective.
5.3 Conclusion
In this paper the researcher has explained the opportunities and challenges of Islamic
banking in Somalia, most of the developments of Islamic finance have taken place in the
last four years and limited, simple, uncomplicated and relatively uncompetitive Sharia-
compliant products that compared unfavorably to their conventional equivalents are
offered by few commercial banks.
The focus of this study was to get perceptions of Somali People towards this Islamic Banks
Furthermore, the proposed research seeks the real information about Islamic financial
service providers who currently operating or under documentation process which is aimed
to offer Islamic financial services to potential customers.
The literature review of this study is to investigate three elements namely; awareness,
perception, challenges and opportunity of establishing Islamic bank and finance in
Somalia. The methodology will be used in this study is survey that the researchers will
administer 75 structured questionnaires to the potential respondents to see the perceptions
of people who are living in eight major towns in Somalia. The data was analyzed with the
sophisticated statistical tools such as SPSS, and EXCELL that will be more enough to test
the reliability of the study and produce reliable findings.

96
This Study provides the ground research on the perception of Islamic bank operations in
Somalia. It also seeks the basic activities towards this emergence. The research will be
useful to practitioners as well as customers who are using the Islamic finance products. It
also opens an avenue for the future writers to dare writing on the new phenomenon.
5.4 Recommendations
After the completion of the study on the opportunities and challenges of Islamic banking
in Somalia, some recommendation was formulated on the basis of the findings obtained,
so as to help the Practitioners, policy maker and researchers.
1. After evidence of the absence of Islamic financial regulation governing Islamic
banks of respondents to this study on the opportunities and challenges facing
Islamic banking in Somalia. The researcher will recommend the federal
government drafting and developing a clear financial regulation, policies and
strategies which governs Islamic Banks in Somalia. As well as the researcher will
recommend to form sharia advisory board in the country to supervise, monitor and
evaluate the practice of Islamic banks in Somalia.
2. With regard to the findings of the lack of awareness of the Islamic banking in
Somalia it is a difficult to adopt Islamic banking in Somalia since the awareness
about Islamic Financial service is low. Therefore, the researcher will recommend
the Islamic banks in Somalia to launch awareness campaigns on Islamic banking
and finance and to offer adequate education and knowledge about Islamic finance
to the public.
3. Lastly one of the challenges that face Islamic Banks in Somalia is the limited
financial products of Islamic banks in Somalia thus, the researcher will recommend

97
the Islamic banks in Somalia to offer a wide variety of products including;
benevolent loan and other Islamic services to encourage the public and participate
the growth and economic development in Somalia, Islamic banks in Somalia should
adopt with global the technological change and offer diversity mode of service.

98
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101
Appendix (1): Questionnaire
Lincoln University College
Master of Business Administration in Islamic Banking
Questionnaire for data collection
Dear respondents,
This questionnaire is designed to collect information on the challenges and opportunities
of Islamic banking in Somalia. The information gathered will be used in a study that the
researcher is conducting entitled “Islamic Banking in Somalia; Challenges and
Opportunities”. Thus, you are kindly requested to give honest response to the questionnaire
as per your perception about the Islamic Banking in Somalia. Your contribution in this
regard will be highly appreciated and will be acknowledged at the time of submission of
the dissertation. Your respond will be used for academic purpose.
Notice:
No need to write your name
Mark the answer for multiple questions

102
Part One: Background of Respondents
1. Gender: Male Female
2. Marital Status: Single Married Divorced
3. Level of Education: Diploma Bachelor Master Degree
PhD Others
4. Please Select your Age.
a. 20-30 c. 30-40
b. 40-50 d. Above 50
5. Please select your residential location
a) Mogadishu e) Garoe
b) Hargeisa f) Beletwaine
c) Kismayo g) Bosaso
d) Galkaio h) Baidoa
Part Two: General Awareness
6. Have you heard of Islamic Banking and finance?
Yes
No
7. Do you agree that Somalia is ready for implementing Islamic banking system?
A) Agree
B) Strong Agree
C) Disagree
D) Strong Disagree
E) Have no Idea

103
8. In Somalia is there a clear Islamic financial institution at which governs the Islamic
Banking activities in Somalia
Yes
No
9. Is there any financial Institution in Somalia that currently provides financial services
that are in line with Islamic banking services?
Yes
No
10. Have you ever been a customer of an Islamic Bank in Somalia?
Yes
No
11. Do you think that the reasons which motivate people to deposit their money at an
Islamic Banks in Somalia are any of the following?
Religious reasons
Profitability reasons
Religious and Profitability reasons
Their deposits are more secure
I don’t know
12. Do you think that Islamic financial services are relevant and have a role to play in the
development and growth of the Somali economy?
Yes
No
Have no idea
13. Do you agree that the Islamic Banks in Somalia are providing enough retail products?
Agree
Strong Agree
Disagree
Strong Disagree
Not Sure

104
14. Do you agree that the Islamic Banks in Somalia are contributing in removing
society’s inequalities and improving general standard of living?
Agree
Strong Agree
Disagree
Strong Disagree
Not Sure
15. Do you think Islamic banks and financial institutions in Somalia are free from
exploitation, discontentment and strife?
Agree
Strong Agree
Disagree
Strong Disagree
Not Sure
16. Do you agree that Products of present Islamic Banking activities in Somalia are less
practiced comparing to other countries in Middle East?
Agree
Strong Agree
Disagree
Strong Disagree
Have no idea

105
Instruction:
1 Stands for Strongly Agree 2 Stands for Agree
3 Stands for Have No Idea 4 Stands for Disagree
5 Stands for Strongly Disagree
Part Three: Opportunities of Islamic Banking in Somalia
S/N Questions relates to Opportunities of Islamic Banking in Somalia 1 2 3 4 5
17. Current global trends in Financial Services will have positive
manifestations on the future of Islamic banking in Somalia
18. Risk associated with Islamic bank and Finance can be minimized
19. Social acceptance for Islamic banking and finance in the country
is higher compared to conventional banks.
20. Islamic banks will capitalize the Availability of profitable projects
in the area of infrastructure, agriculture and trade financing in
Somalia.
21. How would you evaluate the efficiency and performance of Islamic Banks in Somalia
especially the last decade?
Excellent
Very Good
Good
Bad
Very Bad
Have no Idea

106
Part four: Challenges of Islamic Banking in Somalia
S/N Questions relates to Challenges of Islamic Banking in Somalia
22. Local Community has awareness about Islamic banking
system
23. There is inadequate education and knowledge about Islamic
banking and finance in Somalia
24. Awareness about Islamic financial system is low and it is
difficult adopt it recently
25. Absence of Sharia advisory board in the country is one of the
obstacles that bankers must face
26. Lack of Islamic Financial regulation is One of the challenges
that facing Islamic Banking in Somalia
27. Lack of active and functional Central bank have an effect on
28. Islamic Banks in Somalia provide variety of mode of service;
(E-banking and Mobile Banking)
29. Service offered by Islamic Banks in Somalia are efficient and
time effective
30. Islamic Banks in Somalia are so-called Islamic Banks and do
not offer wide variety of products and services?
31. There are many procedure/regulations that are needed to be
followed in Islamic Banks in Somalia

107
Appendix (2): Glossary of Islamic Banking and Finance
Amana: Deposit in trust; a widely applied term that refers to anything in the safekeeping
of another.
Bay: Sale; an agreement between two parties in which ownership of an item is transferred
from seller to buyer for a price.
Fatwa: Religious opinion under Islamic law - a formal response issued by an expert
scholar.
Dayn: A Dayn or Debt comes into existence as a result of any other contract or credit
transaction. It is incurred either by way of rent or sale or purchase or in any other way
which leaves it as a debt to another. Duyun (debts) ought to be returned without any profit
since they are advanced to help the needy and meet their demands and, therefore, the lender
should not impose on the borrower more than what he had given on credit.
Fiqi: Islamic law. The science of the Shariah. It is an important source of Islamic
economics.
Gharar: (Uncertainty) is a sophisticated concept that covers certain types of insecurity or
contingency in an agreement. The prohibition on gharar is often used as the grounds for
criticism of conventional financial practices such as short selling, speculation and
derivatives.
Mudaraba: is an investment partnership, whereby the investor (the Rub ul Mal) provides
capital to another party (the Mudarib) in order to undertake an investment activity. While
profits are shared on a pre- agreed ratio, loss of investment is born by the investor only.
The mudarib loses its share of the expected income.

108
Murabaha: Purchase and resale. Instead of lending out money, the capital provider
purchases the desire commodity from a third party and resells it at a prearranged higher
price to the capital user. By paying this higher price over instalments, the capital user has
successfully obtained credit without paying interest.
Musharaka: profit and loss sharing. It is a partnership where profits are shared as per as
agreed ratio whereas the losses are shared in proportion to the investment of each partner.
Musawamah: Musawamah is a general kind of sale in which price of the commodity to be
traded is bargained between seller and the purchaser without any reference to the price paid
or cost incurred by the former.
Riba: Interest, Usury. The legal concept extends beyond just interest but in simple terms
Riba covers any return of money on money-whether the interest is fixed or floating, simple
or compounded, and at whatever the rate. Riba is strictly prohibited in Islam.
Sukuk: Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic
equivalent of bond. However, fixed income, interest bearing bonds are not permitted in
Islam, hence Sukuk are securities that comply with the Islamic law and its investment
principles, which prohibits the charging, or paying of interest. Sukuk is a certificate of
equal value representing entire shares in ownership of tangible assets and services or the
assets of particular projects or investment activity.
Zakat: Zakat is one of the five pillars of Islam. It is obligatory for Muslims to pay their
wealth to specified categories in society when their annual wealth exceeds a minimum
level.

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