By Balal M. Cusman
Former State Minister for Foreign Affairs and International Cooperation of Somalia

Ever since I began writing about Somalia’s political trajectory and regional dynamics in the Horn of Africa, my primary focus has always been on diplomacy and security. These, I believed, were the two most urgent threats facing Somalia and the region since the collapse of the central government in 1991. In recent months though, my attention has increasingly shifted toward the deepening economic crisis, a silent force that, while less visible than political and security turmoil, is leaving scars that run deep in the economic condition of the country. What troubles me most is apparently the unholy alliance between H.E. President Hassan Sheikh Mohamud and certain private banks, where public assets (lands) are reportedly being sold mainly to the private banks behind closed doors, without transparency or due process and as result, banks are directing limited public savings into risky ventures, which not only destabilize the broader economic cycle but also risks siphoning off the already meagre liquidity circulating in the market essential for people’s daily survival.

Obviously, the Somali economy has been, over the years, standing on the edge of a financial abyss. But a combination of state-facilitated land seizures, irresponsible private bank credit asset investments and a weak regulatory environment has worsened the situation and created a ticking time bomb that could detonate into full-scale national bankruptcy at any time. As several opposition figures have painfully exposed, public deposits – money belonging to ordinary citizens – were diverted from private banks into the hands of the President, allegedly in exchange for state-owned land. This land, often forcefully taken from vulnerable communities, was then sold to private investors, particularly those with ties to the banking sector. The same banks, have plunged public deposits into luxury real estate construction projects across Mogadishu, hoping to sell them at high returns. But in doing so, they have not only tied up liquidity in a non-productive sector but also exposed Somalia’s financial infrastructure to catastrophic risk.

In principle, it is not illegal to sell public land, but such transactions must be conducted through open tender and any earnings must be deposited into the government account. Instead, what we have witnessed is a heart-breaking betrayal, not only was the public trust violated, but to this day, the transferred funds remain unaccounted for. Allegedly, the money is being kept under the pillow or funnelled into foreign bank accounts for personal use. However, the silence surrounding this injustice by the Somali intellectuals and international community is as disturbing as the act itself.

Knowingly, Somalia’s financial system today is entirely digital, almost every transaction, whether personal or commercial, is done via mobile money transfers linked to bank accounts. These banks, therefore, serve as both the storage vault and the operating engine of Somalia’s economy. Unlike other economies where physical cash still plays a role and monetary policy is a stabilizing tool, Somalia’s unique reliance on private digital finance means a banking collapse system would not just be a financial crisis, it would be a humanitarian catastrophe. We’ve recently seen a glimpse of this in Beled-Hawo Town, in the Gedo region, where recent conflict disrupted telecommunications. This cut off people’s access to their bank accounts effectively paralyzing daily life. In a cashless environment where nearly every transaction depends on mobile banking, families were unable to buy food, access medicine or carry out basic trade and the suffering was immediate and widespread. Therefore, the warning signs are obviously already here and we therefore, cannot afford to ignore them.

Besides, in functioning economies, central banks play a pivotal role in regulating money supply and stabilizing banking sector through mechanisms such as interest rates, bond purchases and/or quantitative easing. But Somalia’s Central Bank lacks the legal authority, institutional tools and policy infrastructure to regulate the financial system or act as a lender of last resort, as a result, private banks, have assumed an identity that betrays their actual function. Therefore, rather than supporting the productive sectors of the economy, such as manufacturing, agriculture, fisheries, or livestock sectors, they’ve turned public deposits into speculative real estate ventures and acquiring public lands.

To better understand the fundamentals of banking and the role that private banks in Somalia should have preferably played to create value for their shareholders while protecting public deposits, we consider the situation through the lens of one of the foundational banking, namely, the Credit Creation Theory, which stands out as the most relevant and applicable framework for understanding the dynamics of Somalia’s current banking dynamics. This theory moves beyond the simplistic notion that banks invest existing deposits regardless, particularly, in a fragile economy like Somalia, instead, it acknowledges that banks create new money through the act of lending. Ideally, by channelling money into the productive sectors of the economy such as manufacturing, agriculture, fishery and livestock to generate value, encourage savings and foster sustainable growth rather than non-productive and speculative sectors such as land blots and real estate market. Regrettably, the absence of effective regulatory oversight has led to a dangerous misapplication of this principle. This misallocation of public money has drained liquidity from crucial parts of the economy, inflated the possibility of asset bubbles and deepened systemic vulnerabilities. As a result, the very mechanism that could have driven inclusive economic growth – private banks – has instead become a source of economic fragility.

Given this reality, the Credit Creation Theory is not only the most appropriate lens through which to gauge the health of Somalia’s private banking systems but also the most urgent framework for guiding reforms aimed at restoring stability and trust, and promoting sustainable economic development in the country.

As per Richard Werner’s research (2005), banks are not passive intermediaries, they actively create money when they issue loans. In the Somali context, with its vast coastline, abundant livestock, rich agricultural potential and important geographical location, Somalia holds immense untapped opportunities in these productive sectors. These industries represent the quickest path to job creation, export revenues and sustainable economic growth but, the ongoing diversion of credit is choking productivity and pushing the country toward a dangerous tipping point. The danger is deepened when we consider the mortgage market in the country. Very few citizens can afford to buy these properties outright and those who manage to make a down payment face a high risk of default, especially in a country where income is largely informal, unstable and unprotected by social safety nets. As result, banks are left with unsellable assets and mounting liabilities. This misalignment between asset creation (real estate) and meagre consumption capacity (purchasing power of citizens) is also a textbook precursor to economic collapse. It mirrors the patterns of previous financial crises, such as the 2008 subprime mortgage crisis in the United States. As Hyman Minsky’s Financial Instability Hypothesis suggests, prolonged speculative lending and asset inflation inevitably lead to a “Minsky Moment” – a sudden market crash when assets are not sellable.

The saving power of banking lies in its ability to finance the creation of goods and services, support innovation and enable broad-based economic growth for both sides. The Somali economy can therefore be revitalized if banks are redirected, through regulation and incentives, to steer lending toward productive sectors to stimulate sustainable economic growth by providing a) Culturally acceptable credit lines specifically for the productive sectors b) Strict conditionality on these credit lines to prevent misuse, ensuring funds are used for actual production, not asset speculation, c) Regulatory development assistance to empower the Central Bank with legal, institutional and technical capacity to manage monetary policy and d) and finally implement a financial literacy and inclusive lending models that support youth, women and rural entrepreneurs with limited collateral but promising ideas.

In conclusion, despite the glaring flaws within our private banks, I still believe they are the very lifeblood of our economy, the arteries that keep it alive. It is therefore our shared duty to help steer them back onto a path of health and integrity – at least by shading alight in their miscalculations. But if we become indifferent and allow these lifelines to become clogged, with toxic, non-performing assets, empty towers no one can afford to buy, loans that will never be repaid and public money that vanishes into thin air, we are all willingly walking toward disaster with our eyes wide open. Therefore, is still hope, but only if we choose transparency over secrecy, accountability over impunity and policies that uplift the many rather than enrich the few. The future is in our hands. Urgent reform of our banking system is not just necessary, it is a moral imperative for ALL, if we want to protect our economy, our people and our future from collapse.

Balal Mohamed Cusman
Email: bcusman@gmail.com
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Balal is the former State Minister for Foreign Affairs and International Cooperation of Somalia.  
X:@BalalCusman, Skype:bcusman1
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References:

• Werner, R. A. (2005). New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance. Palgrave Macmillan.
• Minsky, H. P. (1986). Stabilizing an Unstable Economy. McGraw Hill.
• Stiglitz, J. E. (1993). The Role of the State in Financial Markets. World Bank Economic Review.
• IMF & World Bank Reports on Financial Sector Regulation in Fragile States (2019–2023).
• Somalia Central Bank Act (2012) – Reviewed for statutory limits on regulatory authority.