Africa has recently become one of the newest investment locations in recent years. Since the World Economic Forum designated Africa as home to more than half of the world’s fastest-growing economies, it is no longer being discussed in terms of “deficits” and “gaps,” but rather in terms of opportunities, prospects, ventures, and innovation.
Regarding Somalia, it’s one of the nations that foreign investors are checking out and are interested in its commercial opportunities and business information. The majority of foreign investors have been focused on extracting and exporting natural resources. But then after going there, they changed their opinions on mining and natural resources, and now focus on telecommunications, financial institutions, retail, and other business services. So far, the Bank of Egypt and Turkey’s Ziraat Katilim, which are both state-owned, have expressed interest in entering the Somali financial institution sector. And the board of the Central Bank of Somalia has granted those banks’ applications for a license, making them the first foreign banks to do business in Somalia.
Turkish Ziraat was founded in 2014 with the consent of Turkey’s Banking Regulation and Supervision Agency (BDDK) with a capital of 675 million Turkish Liras funded solely by the Treasury. With the BDDK’s ruling in 2015, it got an operating license. The Bank of Misr was established in 1920 by a pioneering economist and financial expert, Mohamed Talaat Harb, who also popularized the concept of investing national savings for economic and social growth. As a result, Banque Misr became the first bank to be owned entirely by Egyptians. It now employs more than 20,000 people and serves more than 13 million customers throughout Egypt. Its total paid-up capital is EGP 15 billion.
Applying the Foreign Direct Investment Policy to the Country
Allowing foreign investment is a novel concept in Somalia, and after decades of war and upheaval, this is the first time the government has publicly said that it has guaranteed banking licenses to two international banks, which will add value to the development of the Somali financial sector and contribute to the growth of the economy. This could have both positive and adverse consequences for the country’s current private banks and the economy as a whole.
So far, the Central Bank of Somalia has licensed 13 local commercial banks. Some offer a service known as Hawala, a money transfer system applied in regions such as the Middle East and the Horn of Africa, and other basic banking services like collecting deposits, while others offer Telegraphic Transfer, foreign exchange, Islamic financing, and other investments. Despite the challenges of correspondent banking and Letter Credits, these are the most lucrative and profitable areas of operating banks.
According to the country’s experience, the presence of foreign banks may encourage more competition, enhance loan distribution, and make it simpler to access global capital markets. However, there are costs associated with opening a foreign banks. For instance, if foreign banks attract the most lucrative segment of the local market, this might put pressure on domestic banks and encourage them to take more risks. Thus, there is conflicting information about the contribution of foreign banks to stability and prosperity. As a result, when a foreign bank enters the country, domestic banks’ performance changes.
The Benefits and Disadvantages of Foreign Bank Entry
Globally, there has been a lot of research done on the benefits and drawbacks of entering foreign banks. These are the advantages, as outlined by the World Bank in 2002.
- The domestic banking industry has become more efficient as a result of foreign bank participation. Competing tends to drive down prices and boost profits (World Bank, 2001; Claessens, Kunt, and Huizinga, 1998).
- Since it is anticipated that the evaluation and pricing of credit risks will be more sophisticated, the distribution of credits to the private sector may be improved. And this might promote more development (Levine, 1996).
- The presence of international banks contributes to the development of a domestic regulatory and legal framework for banking and increases overall transparency.
- Foreign banks are expected to provide more stable sources of credit as they can look to their parent companies for additional funding and have easier access to international markets. As a result, domestic financial markets are less vulnerable to domestic shocks.
- Foreign banks can reduce the costs associated with the recapitalization and restructuring of banks after the crisis.
- Foreign banks may provide developing nations with much-needed funding as well as technical skills and product innovation in developing countries.
Furthermore, foreign bank involvement reduces the likelihood that a nation will go through a banking crisis, according to Demirguc-Kunt, Levine, and Min (1998). They suggest that the presence of foreign banks reduces domestic banks’ operating expenses and earnings. Foreign banks also boost overall economic growth by improving domestic banks’ performance.
FOREIGN BANK ENTRY DRAWBACKS
The effects of foreign bank participation on emerging nations are a hot topic of discussion. Critics of foreign bank entry argue that foreign banks can cause the local banking industry to become unstable for a variety of reasons. Here, we’ll look at the main disadvantages of accessing a foreign bank.
- Domestic banks can be tempted to take on more risk if the value of their franchises declines as a result of foreign banks entering the market (Hellmann, Murdock, and Stiglitz, 2000).
- More advanced services and products attract foreign banks, the most profitable part of domestic markets. Hence, riskier sectors will be served by national banks.
- Some economic sectors’ ability to receive credit may be hampered by an expanded presence of foreign banks.
- Foreign banks can increase financial instability by withdrawing from host countries or by contagion from problems in their country of origin.
- Due to their differing aims and commercial focuses, international banks’ lending practices sometimes disregard domestic priorities.
According to some evidence, foreign banks in emerging nations typically generate higher profits, higher interest margins, and higher tax obligations than domestic banks. The situation is reversed in developed countries, though. Another intriguing finding is that when international banks enter the market, domestic banks’ profitability and operating costs decrease.
Furthermore, local banks in Somalia confront unique difficulties because of the political and economic instability, in addition to the standard difficulties that international banks’ presence often brings to the host nation. For instance, correspondent bank relationships are those in which one bank offers financial services to another bank, frequently one that is located abroad and acts as an intermediary or agent for another bank by handling wire transfers, conducting business transactions, accepting deposits, and compiling paperwork. This is a crucial part of the global payment system, particularly for cross-border transactions, and our local banks frequently declined to grant a license for correspondent relations to many nations; yet, some of them permitted limited services due to an undisclosed internal policy. However, it can be difficult for local banks to compete with international banks that operate cross-border, as they do not have access to certain services offered by foreign banks
Zainab Mohamud Mohamed, Real-estate & Investment Banker
Very interesting.. keep it up. We’ll done.
Just an observation….banking is facing many fast moving challenges globally and this article raises more questions than answers. Why? because in all research about current issues, one expects to learn what is going on now, unless the topic is about history or some ancient phenomenon.
Please refer to the current thinking on banking, a lot has happened over the last 20 years on this area… the latest refence in your article.
The entry the foreign bank it is not good for somali people because they are making all serves about import and export properly.