Somaliland has been well functioning as a de facto nation for the last almost 27 years in which noteworthy progress such as democratization, establishment of government institutions and relatively deep rooted peace have been achieved. The democratic political setting and reliable security that Somaliland has managed to achieve are difficult tasks that couldn’t be realized in neighboring Somalia and many overseas countries. Furthermore, these accomplishments have been attained in a very challenging environment with insufficient resources, experience, and outside help. However, this remarkable triumph is not still worthwhile for international community, and consequently the world is reluctant to recognize Somaliland as an independent state. Apart from this success, the country is facing severe economic conditions and poor living standards for which appropriate government policy has not been made since Somaliland regained its independence.
These economic problems persist mainly because of lack of financial resources and conducive fiscal and monetary policy that can contribute to economic growth and job creation. The local fund that can be used for investment is very low since there is no financial market. Besides, the country is not able to attract foreign investors due to poor infrastructure and the absence of internationally recognized government. With these problems, much could have been done if the government had initiated effective monetary and fiscal policies.
The fiscal sector of Somaliland is working and government collects different taxes for which it uses to finance provision of dissimilar services. However, up till now government tax collection is not working properly because the collection of important taxes are not started yet and the needed level of many others is not generated. Monetary policy is one of the areas where Somaliland government is incompetent, and furthermore, the central bank experiences two main obstacles which are lack of necessary financial resource and fully qualified personnel.
The successive governments have consistently failed to nominate the right person for the central bank and this is one of the reasons our nation has failed to control the exchange rate. Moreover, all the officers of the central bank either had no sufficient knowledge or experience to run such kind of indispensable institution which its effectiveness greatly affects the performance of the economy. In addition to that, the central bank has no foreign reserves to tackle monetary problems such as the undesirable exchange rate that we have been encountering for the last years. Shortage of private banks also aggravates Somaliland’s monetary problems, because private banks are very important instrument by which monetary policy is implemented. In this century, monetary policy and banking systems became panacea for many economic problems, and for that reason every nation tries to come up with successful central bank interventions in the many market.
However, there are two types of banks: Conventional banks and Islamic banks. Conventional banks rest on the debtor-creditor connection which could be between 2 depositors and banks or banks and borrowers, and interest rate is the price of the credit in these banks. Differently, Islamic banks are shariah compliant financial institutions which their activities are all based on Islamic faith and principles, besides interest and oppression based dealings have no place in this system. Every monetary policy, whether it stands on conventional banking system or Islamic one, is trying to achieve full employment, sustainable economic growth and stable price through which nations attain prosperity and good living standards.There are some Muslim countries like Malaysia which established interest-free banking system and thereby healthy economy, thus Islamic banking system can be competent and applicable.
Islamic banks use different Shariah-compliant tools in the place of interest rate and still can perform financial intermediation tasks that conventional banks do. The most familiar model is twotier Mudarabah system in which depositors save their funds at the Mudarabah account of the bank with an agreement to receive percentage of the profits made by the bank which then enters into Mudarabah agreements with entrepreneurs who want to make investment. In this system, the Islamic banks have incentive for both households and investors to deal with the banks as households get return from their savings and investors obtain credit for which they can use their investment purposes. In both of these two banking systems, central banks play a regulatory roles by which different economic goals such as stable price, full employment and economic growth could be achieved. In this regard, Somaliland needs efficacious central bank and suitable legal framework, otherwise the monetary policy of the country will be incompetent forever. Finally, the Somaliland government should understand that effective money market is good alternative method through which the nation can achieve the desired economic goals. By Mohamed Kunle