When I once said to a seasoned consultant that the conventional banking bill which has been in the House of Representatives for almost five years would be debated and possibly passed in a parliamentary session in late 2014, he shook his head in sneaking suspicion that the bill will be passed into a law any time soon. “I have been listening to the same promise for four years now – yet to no avail.” He ran out of optimism as he witnessed first-hand the lack of enthusiasm by the MPs in passing such a crucial, yet highly controversial, bill.
Since I joined the Bank of Somaliland as the director of the Bank Supervision Unit, in August 2013, my office has usually been quite, partly because of the long delay in passing that bill. Some colleagues at the Bank still ask me about the supposed role of my Unit. When I often reply that the Unit will be responsible for the supervision of commercial banks, remittance operators, and other financial service providers, and will have to play a key role in financial sector development and stability, they smile in sympathy for the poor man – and move on. What an ambitious role! And as things stand at the moment, building an acceptable regulatory and supervisory capacity will remain an uphill task for quite some time.
For the past two years, the challenges we faced while engaging in dialogue with remittance operators was less technical – though, admittedly, the technical gap in my Unit is as huge as when I joined the Bank two years ago. But the main test we have faced has had to do more with confidence: winning the hearts and minds of skeptical remittance operators – the stakeholders whose understanding of the need for regulation is indispensable if Somaliland were to move on to the next stage of financial development. But their skepticism was not without grounds.
Describing the economic landscape of what remained of Somalia in World Development in 1997, Jamil Mubarak wrote: “Surprisingly, in some areas, the local economy is thriving and is experiencing an unparalleled economic boom raising the question of whether absence of government is a blessing in itself.” Jamil’s description is relevant because the socialist-type of state that Siad Barre imposed on the Somali people was unfit with the character of the entrepreneurial Somali nature. “….[W]hen the state collapsed,” writes Jamil, “the informal market that sustained private sector operations under Barre’s repressive policies provided a functioning system that the Somali economy could fall back.” To the Somali entrepreneur, formalizing businesses is no less than depriving a hard-won economic freedom. When your image of government is one of oppression and injustice, your compliance to its laws are costly indeed. Yet quarter of a century after the ouster of Siad Barre, the signs for the need of a responsible, visible hand of the government are emerging in post-conflict Somaliland where competitiveness in some sectors is disturbingly low, hindering balanced economic growth, whereas competition in the remittance sector has the potential to expose the economy to risks (AML/CFT risks, for instance) whose management cannot be handled with traditional tools currently at hand. There is no substitute for a good regulator, for a good government.
Anyone having seen how seeking lawful profit could have dramatic consequences under Barre’s ruthless regime and who has been fortunate enough to make fortunes in a regulatory vacuum will resist government regulation and oversight. Avoiding government regulation to the extent possible is not, after all, unnatural. But even the hasty exit of Qaran Express which went bust in 2012 has meant almost nothing to an uninformed Somaliland public. A large part of the challenge we face as ‘supervisors’ is therefore serving an oblivious public, unaware of how financial institutions operate, and the risks those institutions can pose to their uninsured deposits and to the economy as a whole.
Understanding the logic of financial regulation and supervision is fairly simple. Standard textbook models tell us that free markets usually work well in allocating scarce resources and in distributing risks and returns – until they fail (due mainly to imperfect information in the case of financial markets) – and when they fail they can impose on society social costs that far exceed private costs. Market failures – the standard textbook model tells us further – are corrected with government regulation or public ownership. An established economist will feel pride in reminding us that financial stability is a public good, the characteristic of which is that private actors will never have an incentive to provide. Very few in both the public and private sectors in Somaliland appreciate the power of such a basic economic principle. For a financial sector supervisor, this is the crucial bit missing from his recipe.
Unlike almost every other country, remittance operators in Somaliland do not only provide money transfer services but also accept deposits from the public: they operate as quasi-banks. How can a supervisor with limited resources and capacity handle the huge task of examining the books of “two companies in one”? And when I privately debated with MTO managers about the importance of segregating their customers’ funds and that they may be required by regulation to deposit those funds in separate trust accounts at commercial banks, they took two steps back as if I were about to suggest they will be brought under the control of their competitors. Remember that we have all been established as money transfer operators, they said. Your yesterday’s equals cannot be your today’s superiors. Try to convince them, and you are biased. And meeting international standards will remain a matter of choice – not an obligation – so long as Somaliland survives unrecognized.
Few of us took seriously at the time of the remittance chaos that much of the issues in the remittance crisis were around the weak supervisory and regulatory environment in remittance-dependent Somaliland and Somalia. Nothing much has changed since: the regulatory framework is as weak as it was a year ago, at the peak of the crisis. At a more personal level, an industry where my future career development lies will entertain in eerily quiet days until, perhaps, the next crisis.
Emphases in the text are my own. For comments and feedback, please feel free to contact me at firstname.lastname@example.org.
Views expressed in this post, if any, are mine, and do not necessarily represent those of the Bank of Somaliland.