SOMALILAND’S BANKING SYSTEM: CHALLENGES AND MITIGATION STRATEGIES

The banking sector in Somaliland has its roots in traditional Hawala (remittance) systems, which historically served as the primary financial institutions for cash deposit-taking, credit, and lending. Over the past ten years, Somaliland has experienced significant growth in its banking industry, marked by the emergence of commercial banks. Today, the sector comprises the Central Bank of Somaliland and five fully operational commercial banks, playing a crucial role in the country’s financial landscape. The Somaliland Constitution mandates that the country’s financial industry adhere to Sharia-compliant principles, ensuring that both the Central Bank of Somaliland and commercial banks operate in accordance with Islamic finance regulations. This framework prohibits Riba (interest), Gharar (excessive uncertainty), and other activities considered Haram under Islamic law. Despite significant progress in recent years, Somaliland’s entire banking sector, including the Central Bank of Somaliland and commercial banks, remains in its early stages of development, facing the challenges of inadequate regulatory frameworks, limited financial infrastructure, and low public trust.

This paper critically examines the key challenges and structural gaps facing Somaliland’s banking sector and explores reform strategies aimed at enhancing its stability, efficiency, and growth. The paper recommends some necessary policy interventions and financial infrastructure improvements needed to strengthen the sector. Furthermore, it highlights global best practices and their applicability to Somaliland’s unique Sharia-compliant banking framework, offering a roadmap for sustainable financial sector development.