The document discusses the impact of financial institutions on economic growth in Somalia, highlighting the significant roles of banks, remittances ('hawala'), and microfinance institutions. It identifies challenges such as the lack of a proper banking system and the prevalence of informality, which hinder economic progress. The study aims to examine the relationships between these financial entities and economic indicators like GDP, employment, and national income, ultimately advocating for the development of legal frameworks to enhance financial services in the region.

1. Mr. Daud DahirHassan
MBA – Islamic Finance
1
IMPACT OF FINANCIAL INSTITUTIONS ON
ECONOMIC GROWTH IN SOMALIA
1.0 Introduction
Generally financial institutions play a vital role for economic growth, so it is one of most priorities. financial
institution is a term refersfor the combination of banks,remittances “Hawala” and microfinance institutions
each of them plays an important position for the process of economic growth. In the last two decades the
link between financial institution (FI) and Economic growth has generated a great deal of interest among
academics, policy makers and economists around the world. Financial institutions become much more
effectives and plays vital character for economic growth. In black continent Africa it’s same as the other
parts of the world even if it’s less developed and there is a lack of valuable financial institution which plays
important part for the economic growth but in Somalia since the centralgovernment was collapsed in 1991
the overall economic of the country was declined although financial institutions especially the remittances
“Hawala” take part in the economic growth in punt-land and in Somalia generally.
This study of financial institutions and its impact of economic growth in Somalia have been used to the
following variables to analyze how financial institutions and economic growth are related to each other.
Bank, remittance “Hawala” and microfinance institutions, Gross domestic production, employment rate
and national income are independent and dependent variables respectively that we have analyzed.
1.1 Problem ofthe study and Research Objectives
The problem to be directed is around the poor financial institutions and in some instancesimproper financial
service offered by poor financial institutions in Somalia, this normally results to failure of economic growth.
Deficiencies in the financial institutions are the major cause of poor economic growth Ellison and Orozco
(2007). Are the Financial institutions in a position to influence the economic growth of the state? Lack of
existence of important part of financial institutions including; credit union, insurance companies, mutual
fund, pension fund and many others in a building up market can lead the economy to decline.
This paper will analyze how effective and successful financial institution will bring economic growth in
punt-land and how it will contribute the improvement of the economic in the state. One of the most critical
obstacles to financial institutions is informality. The poor often live and work in the informal sector,lacking
legal ownership of land, homes and business. Half of Somalia people live in informal settlement in urban
area alone, meaning that they cannot use their land as collateral on a loan; often they lack address they
could associate with a bank account or credit application. Entrepreneurs can face high fees,inefficient and
sometimes corrupt procedures,and burdensome regulation that essentially make it too costly to incorporate
legally the result are enforce contract or declare bankruptcy.
The main research objectives of this study is to assess the impact of Financial institutions on economic
growth in Somalia Hence, the specific research objectives of this paper are:
 To examine the relationship between banks and economic growth in Somalia.
 To establish the effect of remittances “Hawala” on economic growth in Somalia.
 To examine the relationship betweenthe microfinance institutions and economic growth in Somalia.

2. Mr. Daud DahirHassan
MBA – Islamic Finance
2
2.0 Literature review
Speciously, Somalia’s banking and financial system has been heavily impacted by the political confusion
that has engulfed the country’s recent history. Consequently, there are no proper functioning banks in
Somalia, although certain money remittance companies claim to be banks and provide some basic financial
services.
Historically in recent years the number of commercial banks in Somalia was massively increasing, this
encourages the habit of saving and investing and it increases the liquidation and mobilization of resources
in the market (Poutziouris, 2013)
Since the collapse of the Somali state and economy in the 1990s, Somalia hasbecome even more dependent
on remittances from family members working abroad. Today, remittances are by far the largest solitary
source of hard currencyentering the country, and are vital to the country’s limited ability to feedand sustain
itself. One study estimates that remittances to Somaliland alone (which is home to about 1/6 of the total
population in Somalia, which is estimated at about fifteen million people) reachasmuch asUS $500 million
per year – two times the value of livestock exports in a normal year (Ahmed, 2000). Another study
calculates that remittances constitute nearly 30% of the income of urban households in the northern towns
of Hargeisa, Burao, and Bosasso. Remittances to southern Somalia are less well-documented.
Mogadishu is unquestionably the largest recipient of remittances; it probably accrues a similar level of
remittancesas doesSomaliland. In the town of BeledWeyn, with a population of about 50,000, an estimated
US $200,000 per month is received in remittances, for a monthly average of US $4 per town dweller. Our
best estimates are that remittances nationally probably total somewhere between One billion to 1.3 billion
US dollars per year (Toure, 2016)
Microfinance institutions in Somalia Despite the many benefits, microfinance institutions face a range of
challenges that limit their reach,especially in predominantly Muslim countries. One challenge is providing
microfinance services under sharia, or Islamic law, which restricts the charging of interest for loans. Certain
banks and microfinance institutions started to provide microfinance service for poor people including
Somali Development and Reconstruction Bank and many others but the main challenge they face was
absence of proper functioning financial legal framework and lack of trust among the beneficiaries.
Microfinance is already enabling some of the poorest Somalis to plan for the future and to be more resilient
to the shocks of conflict and famine. The expertise of companies like Dahabshiil and their experience of
working in such regions will be essential if these innovations are to live up to their early promise (CEO D.
D., 2012)
2.1 Role Banks can play Economic growth
Banks are financial intermediaries that accept deposits and make loans. Banks offer several advantages in
connecting borrows and lenders. By pooling the funds of thousands of different depositors they are able to
make large loans beyond the meansof any individual investor. In addition, because theydeal in such a large
volume of loans, their costs to making a loan are smaller than for a single investor. Banks make a variety
of different kinds of loans. They lend money to businesses for capital improvement projects, called
commercial and industrial loans. They lend money to consumers for projects such asauto and college loans,
called consumer loans, and also to purchase a house, called a real estate loan, or a mortgage. Banks make
profits by the spread between the interest rate on the loan that they make and on the deposits that they take
(thiel, 2001).
2.2 Role ofRemittance ofEconomic growth
The alternative remittance system or Hawala operates outside of, or parallel to conventional banking or
financial institutions. It was developed in India, before the introduction of Western banking practices, and
is now a major remittance system used around the world (Sandhu, 2001). This system of remittance is no

3. Mr. Daud DahirHassan
MBA – Islamic Finance
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longer referred to as an "underground banking", as it is now operating with full legitimacy and it is openly
advertised in a variety of media, such as ethnic newspapers and Internet websites.
The major distinctive feature of this informal banking system that differentiates it from other forms of
remittance systems is trust and the extensive use of connections such as family or clan relationships in the
processes of money transactions. Trust is therefore a very important component in Hawala banking system.
It is now well established that Hawala firms are honest and trustworthy in their dealings with their
customers. Breaches of trust are extremely uncommon and rare. Hawala are informal money transfer
companies that Transfer funds both domestically and internationally.
2.3 Role ofMicrofinance on Economic Growth
Lesser-developed economies do not have access to financial technologies because perspective borrowers
lack collateral; institutions do not want to pay high monitoring, screening, and enforcement costs; and
because risks are very high in populations that suffer from severe illness, malnutrition, and low levels of
education. Microfinance is a wide variety of economic interventions that aim to improve poor people’s
access to financial technologies.
The model of the Grameen (Village) Bank of Bangladesh is the most well-known and discussed model in
the literature. Muhammad Yunus, a Bangladeshi economist who founded the Grameen Bank in 1976, won
the 2006 Nobel Peace Prize. As of 2007, the bank has 7.3 million members in over 74,000 villages. Total
assets are nearing $1 billion, the recovery rate is 98.4%, and profits are at $20 million. The distinguishing
features of the Grameen model are joint liability, forced savings, and ‘non-financial products’ that aim to
change the social and economic infrastructure of Bangladesh and other poor countries (Levine, 2012).
Achieving balanced and inclusive economic growth is a key challenge faced by policymakers in countries
around the world.
3.0 Research Methodology
A descriptive researchdesign ware usedto get a deeperinformation and high analytical approach to develop
solutions, purposive and simple random selection wasconducted on Somalis who metthe researchselection
criterion such as financially literacy, current political awareness,business connection, strong Somali roots
and were resident in Somalia. The sample size for the study was (N= 25) In total we had 17 questions in
our study. The researcher used interview and questionnaire research instruments which are structured set
of questions designed to generate the information required for specific purpose which is suitable in large
population with short time
3.1 Population and Sampling of the study
The targetpopulation for this study is totaled to sixty individuals with different qualifications from different
institutions. While the sample size will be 25 individuals coming from different sections of the selected
study population.
Table1: Population and Sampling of the Study
Stakeholders
Study population Target Population
Male Female Male Female
Government sectors 8 4 3 2
Financial institutions 12 6 2 3
Business sectors and households 6 9 3 4
Education and research centers 7 8 5 3
Sub Total 33 27 13 12
Total 60 25

4. Mr. Daud DahirHassan
MBA – Islamic Finance
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4.0 Result and Findings
4.1 Profile of Respondents
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.
Profile of Respondents Frequency percentage
Gender
Male 13 52%
Female 12 48%
Age
26 - 35 10 40%
36 - 45 10 40%
45- 55 3 12%
Above 55 2 8%
Marital Status
Single 10 40%
Married 12 48%
Divorce 2 8%
Widowed 1 4%
Educational Level
Certificate 2 8%
Diploma 4 16%
Bachelor Level 10 40%
MasterLevel 9 36%
Table2: It is observed that the 52% of the respondents were males since there was 48% female of
the respondent. While number of male respondents were 13 out of 25 participants as well as female
respondent number was 12. Regarding to the age of respondents is it showed that 40% of the population
ware between 26 to 35 and 36 to 45 where 12% ware between 45 to 55 and the remaining 8% was above
55 which means only two participants ware above that age. Concerning the marital status shows that the
40% of the respondent were single which means 10 of total respondents, where 48% of the respondents
were married which means 12 of total respondent and where 8% of the respondent were Divorced which
means2 and other remaining participants were 4% waswidowed which means 1 persons of the respondents.
This table also indicates that the majority of the respondents are Bachelor level, 40% of the participants
were Bachelor degree level. While 36% of them were master level, and the 16% of were diploma and
remaining 8% were secondary level students.
4.2 Research findings
The first objective of this study wastoexamine the relationship betweenbanks and economic growth
in Somalia. All the relevant variables were tested as mentioned earlier and the results revealed that banks
play significant role in economic growth and majority of respondents strongly agreed that since the central
government collapsed the state doesn’t have legally and properly working central banking so the economic
situation and supply of money in the market was not noble as well as the state doesn’t have internationally
recognized bank therefore it resulted for economic decline however absence of development it plays an
effective role for economic reject.

5. Mr. Daud DahirHassan
MBA – Islamic Finance
5
The second objective of the study was to establish the effect of remittances “Hawala” on economic
growth in Somalia. The result indicates that the majority of participants strongly agreedthat there is a strong
relationship between remittances and economic growth knowing that for the last three decade remittances
wasplay animportant role for economic growth via sending the money from abroadto families and business
entities furthermore remittances help households to get money from their relatives in abroad to cover daily
life business firms send, receive and collect money using though the remittances.
The third objective of this study was to examine the relationship between the microfinance
institutions and economic growth in Somalia. All the relevant variables were testedtoachieve this objective.
Consequently, the results of the study reveal that microfinance institutions can be the most appropriate
method by which poverty can be eliminated, create jobs and opportunities although they are considered a
new phenomenon in Somalia.
5.0 Conclusion and Recommendations
In this paper, the researcher has explained the impact of financial institutions on economic growth in
Somalia, Financial institutions perform an important role in the development process, particularly
through their role in allocating resources to their most productive uses.
It is recommended to develop and implement legal financial framework and strategies to International
financial institutions and foreign investors. The state has to collaborate financial institutions to motivate
and mobilize society to build and increase the habit of society in banking and financial institutions.
Somali remittances in most countries do not have license to operate and send money but they have an
account from other banks to send money in Somalia so that the study will recommend them to take
license in order to transfer money in a legal way. The study will recommend International Financial
organization and other related bodies to help the state in order to improve the quality of existing
microfinance institutions and craft new ones.
References
Bank, W. (2015, March 31). Financial Sector "Islamic Finance".Retrieved from Work Bank:
http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance
CEO, D. D. (2012, January 20). PRNewswire. Retrieved from http://www.prnewswire.co.uk/news-
releases/dahabshiil-ceo-gives-lse-lecture-on-value-of-remittances-144567005.html
Toure, A. (2016). World Bank Makes Progress to Support Remittance Flows to Somalia. Washington:The
World Bank .
Ahmed, I. (2000). Remittences and their impact in Somaliland. Hargaisa: hargaisa pringting press.
Levine. (2012). microfinance in africa: way for economic development. Akra: akra African printer.
sandhu,k. l. (2001). remittances and illegal migrant in USA. Virginia: south Virginia print centre.
thiel, k. (2001). Banks and nonbank financial institutions. paris: APR Publication Centre.
Poutziouris, P. C. (2005). Finance and Growth: Theory and Evidence. Oslo: NBER Working Paper.