Exploring the Advantages of Investment Bills in Somalia Despite Security Risks

1. Introduction

Somalia Investment bills are regulated by the Central Bank in Somalia. The governing principle for these banks was promulgated in 2017. The capital market, due to current insecurity factors, is in the regeneration stage. There were a few privately funded investment companies regulated by the nation's central bank with strong capital adequacy ratios. Investment bills in these companies have a normal maturity period of 30-90 days, depending on the agreement conditions with the investment customer. Despite risks, these policies are attractive due to the regulations in the bank for these investors.

This paper, within the following framework, is undertaken to demonstrate the attractiveness of these investment bills despite the stressful economic conditions in Somalia. Firstly, it outlines the potential investors for these investment bills, the interest rates most investors are looking for, the most profitable risk of these investment bills, the impacts of these securities on the overall economy, especially concerning the demand deposit implication from these accounts. Finally, the paper will demonstrate the macroeconomic impacts of these investment bills in Somalia.

An important note is that this is the first time that investment bills are implemented in Somalia. Due to the lack of similar experience, there is a gap in academic information on the introduction of these policies and the experience in most economies. This paper is of high quality due to the relation of the information that would solve the problem closely related to the Somali community. The previous research was on challenges concerning financial or monetary policy, which was different from the investment policy against the risk. There is no similar finance research done on this topic. These are the main objectives mentioned for this paper. Therefore, our approach in this paper is to treat bills (investment) as a potential option which covers the risk for the investors, potential real economy impacts, and finally the regulations enacted to buy those securities.

1.1. Background of Somalia

The Federal Republic of Somalia is located in the Horn of Eastern Africa. Before the civil war, the Somali economy was injured because of the private loans of the country and the commercial trade relation ruins. But in the first quarter of 2013, a law on financial institutions charged by the Transitional Federal Parliament and signed by the President was recognized with this recognition. That was possibly after the passing of 19 years. Certainly, the first initiative on this sector was something like an initiative of a 5-star government. However, the exception about Daarulaman City sent a light of hope. The consequences of the government became ready for the solution of interest-free finance. However, almost none of the interest-free solutions were determined. During that era, it was not expected that a bank breaks and treasury is lost credit.

Despite this disadvantage, the Financial Institutions Law has great effects on the country and on the world. According to the election of this law, the definition of a bank is decided through permission of recognition that is authorized by the central bank of Daarulaman City. Because of this decision, 23 associations that offer exchange service and 16 associations that offer saving fund services get a letter of permission from every region. The number of this style of finance increased. Furthermore, the definition of financial loan and value service is appeared. What’s more, the development possibilities of the country's economy increased and doings are recorded. For example, two banks opened and it was demarcated part of a territory that was known deposit with consignment. According to the 10th Sound Fund Invoice, the restricting of receiving and giving essential trader funds that recognized in ordinary sense were re-recognized. Bank and Financial Institutions Evolvements Invoice were recognized in the third quarter of 2013. After this development, the inactivity of the regulation system were re-crecuya and further increases were met.

1.2. Definition and Overview of Investment Bills

Investment bills are well-known means for depositors to receive their money after a relatively short period. They are used by large credit institutions. They sell bills to raise funds. For bills, new securities are created for each sale, while no new deposit is generally created for the collection of funds, but the balance sheet is thus also that of the short-term risk, which are relatively liquid, deposits and other monetary liabilities such as checks of current accounts, which are payable in the short term or the longer but near term. While the risk deposit and liquid assets can be used as the main reasons for creating the crisis of credit, instruments such as individual investment bills have not been openly available for small depositors or are not covered in the event of massive withdrawals because the banks were not sure how they could extinguish these particular bills quickly without a liquid security.

2. Security Risks in Somalia

Somalia has long been associated with instability and insecurity. Investors' sense of concern for security in Somalia influences the duration and location of their investment. For investment to succeed in Somalia, it is important to minimize risks and offer a more peaceful and attractive environment for investment. Providing social security, legal arrangements that minimize insecurity, and developing a legitimate and effective government responsible for providing the basic security of its population are required to provide a conducive and peaceful environment for business and investment in Somalia.

Another risk is insecurity, which stems naturally from violent conflict resulting from an absence of functioning government institutions and a lack of a functioning judiciary. This fosters violent conflict and harms economic growth. These illegal activities are the most obvious symptoms of the broader problems with the criminal justice system, jurisdiction, and the lack of alternative dispute settlement mechanisms and trust in the judicial system as a whole. Finally, there are long-standing issues of political extremism, and the insecurity in which these individuals operate makes them willing and able to provide services that protect economic interests.

2.1. Historical Context

Before discussing the role of investment bills in Somalia, it is essential that we revisit the historical experience of the Islamic Banks in Somalia because the banking system is proven to be beneficial when it comes to resource mobilization, resource allocation, and self-discipline towards the economy. Ever since the collapse of the central government of Somalia in 1991, the country has begun a journey in which the economy and politics were entirely disjointed. It is a journey of survival. At its very worst, the national economy breaks up into a few local economies, with each local economy divided into countless private economies that depend on different services to meet their daily needs. One of the vital services among many that are essential to ensuring that the economy works is the banking sector. Without the banking sector, it can become a challenging task for individuals to meet their day-to-day needs. Residents need to have a way of doing financial transactions, both locally and internationally. Without a banking system, such transactions are nearly impossible, given the level of security risk in the country. This might provide an opportunity for those who wish to exploit severely disrupted financial systems, which can potentially bring credit grinders to the countries and, therefore, pose a new security threat to countries that are already dealing with insecurity.

Over the past few decades, Non-Governmental Organizations and private businesses were fulfilling most of the financial transactions in Somalia. NGOs send the financial aid to their staff members by using money carriers (also known as xawilas). Despite the security risk that comes with it, the business community decides to operate a process in which they do their financial transactions, both internationally and locally, by sending their money using khat carriers. Given this significant security problem, the Somali people adopted electronic money. Alas, electronic money is another problem for many people who do businesses in non-electronic areas. Large amounts of money are difficult to be sent by mobile bankers, and it already incurs a service fee. However, today, Somalia is not the same as it was ten years ago. The wiser community arranges a way to fulfill the required financial services according to their need. It dedicates it to a completely different system, known as a banking system. There are a few numbers of licensed traditional banks that provide services for the Somali community. These licensed banks managed to do business within a restricted environment with limited resources. Despite the limited resources, they are doing well in the evolving banking sector in Somalia. Many organizations, especially those that receive their daily bread from the Somali people, have paid attention to the way that banks operate; however, no action has been taken.

2.2. Current Situation

The largely ineffective regulation of Somalia’s financial sector and the absence of any form of authoritative financial policy has led to a situation fraught with risks and orthodoxy. The complete absence of a monetary or fiscal policy, instead relying on dollarization of the economy with massive events of the importation of new currency, leads to where any move to monetary policies is restricted to being exercises in foreign policy. The lack of an active central bank and any existence of a policy creates an adverse economic environment. The dollar reserves used as currency are limited to static calculations of demands and activity. Widely held tacit and intrinsic benefits from the dollars have been highlighted as a protective hoarding and external incorporation problem unlawfully channeled through the hawala (money transfer) system.

Bank supervision and regulatory powers frequently rely on self-regulatory mechanisms. For instance, every exchange operating in Somalia is required to be a member of the Somali Forex Bureaus Association with a strict obligation to abide by the Association’s exchange-rate-setting regime. Profit-making exchange bureaus are given monopoly powers to exploit the people responsible for the daily re-injection of remittances into the local economy. Such practices have been a major cause of the failure of the already illegal and under-capitalized banks, and the largest since 1991. Interest-free loans and weak property collateral are seen as universal financial business practices associated with Christian investment bills at the Commercial Bank of Ethiopia and Union of Arab Banks. Banks play vital roles in supporting trade and insulating the BOT reserves. Somali businesses are unable to access any form of commercial banking services from for-profit-making financial institutions currently clustering around the Dhahabshiil bank for recovering capital gained against imported black market currency. These wide monopolies explain the unsatisfactory nature of the domestic financial services businesses resting with the growth and foreign remittances, foreign currencies, and conservation of funds within the dollarized economy.

3. Advantages of Investment Bills

Investing in Somalia presents challenges due to security risks, but the investment bill offers advantages. Aid donations and payments are in place, and governing policies have no concept of profit or loss. This means there is no detailed financial account of money allocation. The investment bill reflects company performance over time and can enhance public spending responsibility, transparency, market development, policy changes, and aid delinking from security-related activities.

Furthermore, investment bills can encourage greater engagement of Somali intellectuals, government, and international development partners. This can provide opportunities to work with privatized companies reflecting company performance over time. This may enable local intellectuals and diasporas to contribute to their home countries' development and capitalize on corporate earnings budgets for reconstruction or development work after years of funding depletion.

3.1. Economic Development

The economic advantage of investment bills adoption in Somalia is multifaceted. First, the economic development of Somalia will speed up given that the commercial and investment bills provide a high level of economic activity. They also provide an organized way for money to flow into Somalia from abroad, shaking up capital and creating more job opportunities. Investment bills, on the other hand, give a 10-11 percent return on investments, which is high and unmatched to other investments. In addition, the merchants without investment opportunities currently would also benefit as infrastructure, airports, roads, warehouses, and so on would need to be built.

Second, the introduction of bills promotes the financial intermediation function of banks throughout the country. Many people feel they are able to obtain financial services more rapidly and better-fitted to their requirements, like quick money transfers to far-flung relatives, etc. The other functions of banks are, of course, promoted as well. The local agricultural farmer, in particular, may gain through the ability to obtain a loan without requiring a deposit because the agricultural bills would contain an implicit deposit in them. Third, financial commissions are satisfied that financial transactions within the country are being taxed and regulated. Fourth, the relative position of the government revenue and expense of spending are maintained because the returns to the investment bills are either slightly lower or slightly higher than those of treasury and paper money, respectively. Such operations are broadly revenue-neutral, where the savings interest is a form of concession.

3.2. Diversification of Investment Opportunities

Unlike the more traditional forms of securities, investment bills allow for relatively easy diversification of investment portfolios, so that the investor can take advantage of favorable changes in market conditions in different sectors, industries, and geographical areas. Diversification of investment opportunities, as provided by the investment bills, enables individuals, business corporations, and trusts, for example, to distribute their investment funds over reasonably wide fields of commercial activities, safeguards and insures investment bills when such diversification is missing. This process tends to improve security prospects and to prevent capital losses or extreme risks. Individual bills are important in this respect, with major direct advantages to the investors.

The argument, in part, also favors the broader legal eligibility and the somewhat statutorily requested issuer diversification, because these approaches help to maintain and enlarge the stock of investment bills. Every mature security bill matures and, therefore, facilitates a comfortable course of diversification for all potential investment bill holders.

The government, through the sale of government obligations, uses the proceeds therefrom to obtain the necessary funds for its essential and temporary services, the provision of other public policies and services. For example, the maintenance of national defense or the utilization of the accumulated reserves in some form, whenever possible.

4. Case Studies

In this section of the paper, through representative case studies, we aim to explore the opportunities and challenges for investment bills in Somalia. We also set out to explore the threats that prevent the market from financing bills as liquidity management instruments. We do this through a representative case study.

The companies were selected following the criteria: (i) the geographical location - different regions; and (ii) large, medium, and small companies. Osman and Omar run very large and large companies that require managing significant operating expenses. They need significant working capital to manage the supply chain and finance short-term operating expenses.

In a support letter, the bank manager at Commercial Bank of Somalia acknowledged the company's need for financing to ensure the supply chain. He also highlighted that the company has paid its old debts to the bank, and the SCORE of the company is above 80. However, the report from the bank by SCORE model presented the company with a score of 50, and the bank's financial analysis scoring parameters under managerial reliability, measures, transparency, and shareholders'/major investors gained low accuracy.

The import bill of the company HBO is higher. The company requires letters of credit to issue the import transactions. After the bankability tests of both the import and working capital bills, it was found that the working capital bills are investment-worthy.

4.1. Successful Implementation in Other Conflict Zones

The use of project finance has been incorporated increasingly in other conflict or post-conflict situations, to a remarkable level of success. The investment instruments have taken different forms from lease financing, the main form of project financing, to a form of vendor financing in Lesotho. Lease financing, the main form of project financing, has been employed to facilitate private sector investment with significant governance implications involved in the various sectors including oil storage facilities, diamond mining, renewable energy projects, and in hotels and port development. Other project financing vehicles are available and include build-own-operate-and-transfer arrangements, a private public partnership model and some partial risk guarantee (PRG) and political risk insurance arrangements.

Using project finance techniques with non-recourse structures is particularly well-suited for projects in conflict or post-conflict situations because they can be structured in a way that effectively isolates the risks that are related from the non-war related risks. By way of political insurance, the host country off-taker, concessionaire or lender can seek protection for losses that may arise from specified politically-motivated actions which are better-understood and associated with a threat of termination of the project. This may protect against breaches due to violence, civil disorder or acts of hostility in connection within defined periods, which are generally 90 days for debt service payments and 30 days for operating expenses. Political risk insurance may also be available for loans, leases or equity from actions including the deprivation which could reflect direct or indirect involvement by government, expropriation, and nationalization.

5. Challenges and Mitigation Strategies

Security is a concern across the globe, but in Somalia it is a paramount issue that overshadows all other challenges. High security risks can lead to high costs for individuals and business transactions. An investor's first costs that they have to liquidate will depend on which security measures they can take. Studies show that crime and security risks raise transaction costs, which tend to favor larger transactions. A large transaction is often accompanied by lower unit transaction costs and may help explain why today few investments are in small to medium enterprises (SMEs) in Somalia. Therefore, it could be perceived as a vicious cycle, and SMEs will tend to invest in areas with lower security and crime risk issues such as telecommunications, electricity, and water sectors. Another issue is that investment operation includes a time investment that is not reducible. It is argued by economists that security provisions engendered by insecurity tend to slow down business operations.

Somalia has experienced numerous cases where business investors have paid hefty sums of money to their respective host communities for security services. One of the main challenges for investors in the Somali region has consistently been the lack of credible and reliable security services. This is key to creating an environment where businesses can invest, expand production, engage in trade, and create jobs. There are no quick-fix solutions to security challenges along the Somalia coast, where warehousing investment has grown rapidly and businesses are increasingly important drivers of local economic. Businesses and investors appear willing to remain in this challenging environment, but since many are only located in Somalia for a portion of the working year, security costs weigh heavily on companies that need to become more competitive to attract further long-term investment. A holistic approach to addressing security challenges while pushing this "Commerce is Security" investment strategy could help transform the economy.

5.1. Security Measures

Given the security threats, a variety of measures were taken during the distribution of the money. The measures included reaching agreements with different factions and initiating intelligence commitments in their areas, warnings to the people in different locations long before the money arrived, committing to keep deadlines, using stockpiles of basic commodities to back up the value and local acceptance of the notes before they were even introduced, storing the money in well-guarded locations for distribution over very short time frames within regions and by area within cities, using soldiers as escorts on land; distributing through the air into villages near enemy lines, choosing the currency printed to discourage external use, designing the notes to hinder counterfeit, not requiring identification for redemption, establishing credibility through announcing that not to redeem when the note expired would be the citizen's own "citizens' contribution to the welfare of the country," the promise of redemption after 14 days, designed signs to assure people they were not being tricked, and offered small denominations so that the initial recipients, who feared for their safety, could be fully repaid immediately to reduce the hazard should they not be fooled.

Given the precariousness of walking in the open with several billion Shillings, it is not to be unexpected that incidents of theft and reprisals happened. Within the security environment at our disposal in November 1993, it was not feasible to preclude malicious actions; but planning, organization, and flexibility could decrease the risks. Concern for a confrontation was so acute that we speculatively tested Scene 1 and found the local parties quite willing to accept the money without incident as well if we just dropped it all off at once. To satisfy both the sincerity and need to participate, we did drop it off quickly, reducing the exposure of the money carriers. When we returned, the one witness arrested for collaborating with the Zone sponsor during the scam interpreted his presence in a possible incident as a successful handover of the money. Then, from the safety of a motor engine-powered vehicle windows, we examined the results of the drop off without feeling the drop in our stomachs! Before calling the "go-team," we parked the main vehicle, secretly watched the Zone with private guards, picked up the smell in our one waged vehicle. Then, the party's changed to the back of the truck and removed the money. With the safety of the bank vault and international community watching, we executed the transfer with the dinero back in our hands.

5.2. Governmental Support

The central bank signed a deal with the Finance Ministry to introduce Islamic financial services in Somalia. Financial officials announced that preparations were in advanced stages to have the relevant legal and regulatory framework for the introduction of Islamic finance. The legislation that they were planning to introduce was legislation that would regulate Islamic banking and cash law, and these would be operationalized through the issuance of an act that would probably be called "the Financial Institutions Act" as was being proposed at that time. There was tremendous international organization support working to finalize the regulatory framework of high ability. There was commitment from the government to allow Islamic finance in the market, and the preparation was not limited to trying to launch these Islamic financial systems in the market.

The government had also made an announcement in preparation for that. They announced that when they were about to implement a government policy that instructed that all public expenditure pertaining to government operations and social services would be handled within the Islamic financial system. Islamic banks are allowed to do business transactions in all forms, as well as mobilizing cash deposits from traders and other businesses and can grant loans and provide financing to people with money charges. An Islamic deposit account is a contract between the account holder and the Islamic bank, which goes by the name of Debtor Creditor on Mudarabah, which represents the customer or the account holder who is the investor. The relationship between the two parties is strictly contract-based under the framework of a Shari'ah principle in an Islamic deposit, which is not binding with debt ownership nor the relationship of the account holder and the Islamic bank.

6. Conclusion

In summary, investment bills not only are used to minimize security challenges, but also offer benefits for governments, investors, and service consumers. Meanwhile, risk costs will not increase for the government because up to an agreed sum, investors will purchase their services for free. Also, the government's budget spending on the protective forces and the provision of the service can entwine in such a way that they can cover both simultaneously. More risk costs may induce investors and business communities to be more proactive about their peacebuilding roles and develop inclusive business plans in post-conflict circumstances to promote structural peace in a post-conflict Somalia.

Ultimately, the purpose of investment bills is not to directly minimize security challenges by financial means, but to establish a more legitimate environment with transparent rules and regulations that protect people and their investments. Economic consequences rather than sanctions are the most binding method to shape people's behavior, and direct violence is a part of risk. With investment bills, high risk for those who benefit from the current conditions can be shifted to moderate risk. Meanwhile, people's desire to protect perceived advantages of this shift may increase risk costs and amplify desirable economic development in any country, including Somalia. Such an environment makes the enemy less predictable and the environment itself more dangerous because entrapping was influenced by non-totalitarian characteristics.