Access to Finance: An Emerging Challenge for SMEs in Somalia

After a long period of experiencing civil unrest, Somalia has maintained an internationally recognized government, become relatively stable, and gradually improved year after year. The business sector has been upgraded, which has enabled start-ups to shine and compete with other international businesses. Furthermore, small and medium-sized startups are the most businesses that have been growing in the country in recent times, which is mainly driven by the youth.

According to the Somalia National Bureau of Statistics labour force survey report 2019, the Somali population is youth dominant with such a large youth population, about 67.6 %were outside the labour force. Unemployment, which is very common in the country, has caused the youth to leave their country in search of basic needs. Nowadays, there has been a wide range of innovation efforts in which the youth are joining the business sector to find a better solution to the widespread unemployment in the country.

“SMEs play a significant role in the social and economic development of our country, in terms of job creation for youth, income opportunities for families, as well as increased innovation and domestic production. Despite the known importance of SMEs in the country’s development as a whole, SMEs are facing widespread problems related to access to finance, which has had a severe impact on their early phases. In this article, I will discuss the financial challenges SMEs face – and how to overcome them.”

Although most of the businesses that started in Somalia in recent years are SMEs, many of them are led by young people who believe that innovation and entrepreneurship are the only ways to get out of unemployment. On the other hand, there are also booming incubation centres in the country such as SIMAD iLab that encourage young Somalis to turn their creativity into a real business by giving them very important training related to how to harness innovation and start a business, and also how to manage the business growth and sustain success.

Perhaps, the incubation centers have improved much for SMEs’ challenges, especially in terms of business management and innovation development, but access to finance is one of the problems that most entrepreneurs complain about. While, much of incubators start their businesses with small amounts of money that they get from their own savings or from their angel investors or families, and they always face financial inadequacy which makes them unable to pay for rent, electricity, and taxes and also the wages of their limited staff.

Indeed, it is very clear that access to finance is the biggest economic hardship that entrepreneurs face nevertheless the biggest economic losses have been experienced during the COVID-19 pandemic, and the following shutdowns, and limitations of activity around the world that have caused that medium and small business in our country to have a huge impact on all aspects. Especially on both the supply and demand sides.

Additionally, although much of SMEs have been financially improving and recovering well, emerging obstacles, including the ongoing foreign conflicts and the severe and prolonged drought conditions in our country, are again testing the resilience of the MSMEs in Somalia and leading sometimes to bankruptcy due to expensive electricity and a scarcity of supply chain.

Hence, Access to finance is the most important instrument for the growth of SMEs and with access to external investment, entrepreneurs can appreciate their full growth potential and allowing them to innovate, improve efficiency and effectiveness and enlarge new marketplaces, and contribute job creation opportunities among youth.

Unfortunately, two high-risk characteristics cause barriers to access to finance in Somalia. The first one is internal challenges. Most start-ups, here in Somalia, are informal, striving to obtain financing. Many SMEs don’t have clear financial plans, proper business skills, legal requirements of registrations and business licenses and bank accounts, and information on funding opportunities. The second one is external challenges, in Somalia, getting financial investment is very restricted while banks and other financial institutions believe that providing finance for small and medium-sized enterprises is riskier than financing large firms. Collateral requirements, high-profit rates, complicated application procedures, bank charges, lack of assessing SMEs’ risk, limited repayment period, very limited communication, and absence of government financial regulations are making it tough for small and medium enterprises to investment access. 

Nonetheless, SMEs can’t afford to make real progress due to access to finance, resulting in the majority of SMEs being unable to find funds to invest in their business ideas to play a major role in the efforts to achieve sustainable economic development in our country.

Thankfully, in recent years some of the country’s banks including Premier Bank, Dahabshiil Bank, International Bank of Somalia (IBS), and Salaam Somalia Bank have offered investment opportunities for small businesses. First of all, Salaam Somali Bank is the first privately-owned bank in Somalia that has earmarked US$4 million for Somali entrepreneurs between 2022 and 2024 to finance SMEs and promises to distribute through the Salaam Entrepreneurs Fund (SEF) by providing early-stage growth financing, with a specific focus on women and young entrepreneurs under 30 into three kinds of investment; free microfinancing (up to $3,000), start-up financing (up to$50,000) and SME investment (above $50,000) across technology, renewable energy, farming, fishing, and livestock areas. Furthermore, in 2014, as part of its corporate social responsibility, Dahabshiil set up MicroDahab, a microfinance institution to help small-scale business people. The amount of funding provided ranges from $500 to $15,000 and the maximum repayment period is two years (24 months) while the annual profit rate is 10%. Moreover, like other banks, Premier Bank has a certain department that inspects the ideas of entrepreneurs which has benefited many entrepreneurs including youth and women. Finally, IBS bank also provides a wide range of Investment for small and medium businesses in two ways, the first is microfinance called (Qardhul Hasan), a group-based model where several entrepreneurs come together to apply for financing with zero charges and the other one is Micro-investment, relationship-based banking for individuals and small businesses with 7% profit rate. The amount provided is between $500 to $1,000 and $1,000 to $3,000, respectively, and both should be paid within 12 months.

Indeed, the financial institution’s support is not enough SMEs in Somalia. Lack of access to financial resources is the most severe obstacle facing for SMEs’ businesses to thrive and this undermines that many SMEs can’t afford to contribute to economic growth and job creation opportunities among youth. Therefore, to enhance the accessibility of finance by SMEs and make access to finance easier, I recommend the following to tackle these financial challenges, first, SMEs should take giant steps to formalize and registrar their business and improve their skills in financial management and business development to avoid financial risks and they must also ensure to open banks accounts, build associations and network and seek information about funding opportunities from financial institutions. Second, Financial institutions should play a greater role in facilitating financial accessibility for SMEs by reducing the current collateral requirements, high-profit rates, and complicated application procedures and increasing the repayment period, and at the same time giving priorities in the financing of the small and medium-sized enterprises rather than large firms. Third, Incubation centres and training institutions should help entrepreneurs with financial plans and management skills in the early stage to get the necessary personal and professional growth and technical knowledge as regards business setting Finally, Governments should develop policies favourable to SMEs development in terms of accessibility of finance and put them in their development agenda. Similarly, government and international donors should put in place funding programs and financial schemes to assist SMEs.

Conclusively, the biggest challenge that small and medium-sized enterprise’s face is the lack of financing which affects their growth and performance. Yet, in Somalia, the majority of SMEs are unable to acquire the financing they need to reach their potential growth and sustainability. Although some of the country’s banks have been realized to finance SMEs in fact this investment is not enough for the SMEs’ business in Somalia. Therefore, SMEs, business incubations and training centres, financial institutions, government, and international organizations should work together to develop and create a favourable environment for SMEs to get access to finance.

Ali Farah Abdullahi, Partnerships Builder Lead, SIMAD iLab

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