Written By: Mohammed Dahir Ahmed
In part one; we have seen that all members of the Organization of Islamic Conference (OIC) except Iran have in their respective countries Dual Banking system where Islamic Banking and Conventional Banking systems operate side by side by complementing each other.
Back in 2012, when the new central bank law is passed by the Parliament, the international community welcomed with enthusiasm and the news appeared in most major international news agencies. This is how Reuters News Agency reported the news; “Somaliland has passed a law that formally establishes a central bank, and is now poised to pass another to set up commercial banks in a bid to attract foreign lenders to start operating in the self-declared country by 2013. Somaliland, a breakaway state in the northeast of Somalia, remains unrecognised internationally.It has no formal banking sector and its people rely heavily on remittances from Diaspora communities in Europe, North America and the United Arab Emirates, as there no loan facilities.”The President has signed the Central Banking Act into law,” Abdi Dirir, governor of Somaliland’s Central Bank, told Reuters on Monday.”We are expecting the Commercial Banking Act to be passed in the next three to four months,” Dirir said.
Similarly the Guardian in 2012 wrote; “former British protectorate is poised to pass a banking law that will, for the first time, allow companies to operate as formal banks, offering services taken for granted throughout much of the world. Somaliland paved the way for the new banking regime when it passed a law in April formally establishing a central bank.Somaliland has gone for such a long time without a formal banking system because it has not really needed one until now, as the money-transfer system was cheap and efficient. But it is unsuitable for commercial transactions. “As the emphasis tips away from remittances to new trading relations, you need things like letters of credit, so there are gaps in the current system,” said Mohammed Yusef, chief executive of Petrosoma, an oil exploration company based in Somaliland.The law can be expected to introduce competition, which A.Rashid Duale of Dahabshil says he welcomes. “We already compete in 155 countries,” he said. Cac, a Yemeni state-owned bank, Salaam African Bank, based in Djibouti, and Banque de Dépôt de Crédit Djibouti, a subsidiary of Swiss Financial Investments, have all expressed interest in starting operations in Somaliland, which has a population of 3 million, with 1 million people living in the capital.Somaliland hopes that the new banking law will make it easier for money to flow into a country in desperate need of foreign investment. Money from remittances has been used to build hospitals, schools and other infrastructure. But much more is needed. While money is clearly flowing into construction, judging by Hargeisa’s building boom, roads are in dire need of resurfacing. Streets in Hargeisa are marked by potholes and ridges that slow traffic to a crawl.”
This was the case back in 2012,to have a Dual Banking system where Conventional and Islamic banking systems operates in the country. However, business and investment misconceptions of some parts in the society have created a new fog on the development of Somaliland financial industry and that is why the passage of Commercial Banking act is more than fours years overdue. This has costed Somaliland a lot, since jumpstarting the economy and spurring private sector investment became totally unattainable and the small, informal and unregulated financial services currently existing in the country could not sufficiently inject the liquidity needed in the market, resulting a stagnant and moribund economic growth.
In support of Dual Banking system,Malaysia’s Deputy Central Bank Governor Dr. Awang Adek clearly expounded the benefits of dual banking system and why it is needed in Malaysia and other parts of the world at the International Conference on Islamic Economics in the 21st Century as follows:
———-“First of all, through a dual banking system, Malaysian Muslims have a choice to bank in a system that is in line with their religious belief. It provided an alternative to Muslims who have restrained from using the banking system which, prior to 1983, was totally conventional.
SecondIy, a dual banking system provides a complete and comprehensive banking alternative to Malaysians. This means that a wider range of Islamic banking products and services will be made available in banking institutions which offer Islamic banking. In the dual banking system, there is not only an Islamic bank, but also other supporting banking institutions such as commercial banks, finance companies, merchant banks, takaful companies, securities firms, savings institutions, and rural co-operative bank. Islamic financial services are also available in the financial markets such as Islamic money market and the Islamic capital market. In short, all Malaysians would have no problem with the diversity and availability of Islamic products and services in the country.
Thirdly,the menu of Islamic financial products in a dual banking system tends to be more comprehensive and wider. In a competitive environment, where conventional banking tends to be a competitor, Islamic banking operators have to be innovative and creative to ensure that their products are superior to, or at least at par with the conventional products. Therefore, the elements of efficiency and innovation are vital to ensure Islamic banking will remain relevant, and able to capture a fair share of the banking system. The operators certainly cannot afford to remain complacent.
Finally, the level of sophistication in terms of Islamic banking products is prevalent in a dual banking system. It is a fact that the conventional banking system is in a sophisticated and advanced environment. Hence, Islamic banking has no choice but to keep up with the sophistication and advancement of the banking system. This element has been the plus factor on why Islamic banking products available in Malaysia are seen to be at a relatively advanced stage. As the country moves forward towards greater IT environment, Islamic banking is fortunate for being able to capitalise on the changes in the banking system. Innovation will always be an important element to motivate Islamic banking operators to be dynamic and pro-active in their pursuit to position Islamic banking in the mainstream banking.”
Bearing in mind Somaliland’s longterm economic competitiveness in the Horn of Africa and the Arabian Peninsula; Gulf countries, Djabouti, and Kenya all have Dual Banking systems. Similarly, Somalia’s Central Bank is planning to introduce Dual Banking system in his country. Therefore, economically Somaliland will not be in a competitive economic position if it adopts either Conventional Banking system alone or Islamic Banking system alone but it will be in a very competitive position by adopting Dual Banking system.
By: Mohammed Dahir Ahmed.
M_ddahir@hotmail.co.uk,;Mohammed holds the premier Islamic Finance Qualification(IFQ) from the London Institute of Securities and Investment on top of other business and finance qualifications.