Mogadishu is also gearing up for oil and gas production in the next three years.
A year ago, the Kenyan and Somalia governments signed the Joint Commission on Co-operation Agreement in financial regulation, investments and security.
In an interview with Bloomberg, Governor of the Central Bank of Somalia Bashir Issa Ali said that he has held licensing talks with KCB Group and CBA, which are competing with Gulf lenders seeking to operate in Somalia, where a paltry 4 per cent of the population is banked.
“Banking is one of the most promising sectors in Somalia and these banks are expressing interests. We will license only reliable lenders who are willing to partner with local financial institutions,” said Mr Ali.
Somalia, which has suffered decades of war and political strife, has largely been without a dependable banking system through that time. The country’s population of about 12 million people has largely depended on the blackmarket and money transfer firms that handle close to $1.5 billion annually in remittances.
High political risk
It is, however, not clear what strategy the two Kenyan lenders will employ to enter into the Somalia market, with its high political risk. It is understood that the Qatar National Bank is among lenders awaiting a licence after successfully setting up shop in South Sudan in 2014.
Last year, Equity Bank also announced its intention to enter the Somalia market but did not offer details on the timelines.
KCB Group CEO Joshua Oigara told The EastAfrican that KCB’s entry into new markets is part of the lender’s 2015-2019 strategic plan, with no imminent markets under consideration.
“Somalia is part of the plan and nothing has been decided on the market at this point in time,” said Mr Oigara.
In April, the KCB chief executive had said that the lender may consider entering the Democratic Republic of Congo, Somalia and Djibouti by 2020 as it seeks to strengthen its position in East Africa.
Somalia is slowly becoming an investment focus after it announced that it could start oil and gas production in 2020.
Last year, Somalia President Hassan Sheikh Mohamoud announced that his country is in discussions with BP Plc, Royal Dutch Shell and Exxon Mobil Corp over oil and gas exploration. It will need a sophisticated financial banking system to accommodate the investment flow that the mining sector will attract.
Thirteen pending licences
Somalia has six banking institutions with an asset base of $194 million against deposits of $143 million. Out of them, only the Premier Bank, which set up shop in Mogadishu last year, meets the minimum capital requirement of $5 million. According to the International Monetary Fund, there are 13 pending applications for commercial banking licences.
The country’s central bank has been in operation for the past seven years but has largely failed to bring most Somalis into the formal banking system or attract banks due to its weak financial policies and systems.
In June last year, Premier Bank partnered with MasterCard and SWIFT to deliver global online financial services including automated teller machines.
The country also for the first time in 20 years saw the IMF complete its first economic consultation on the country.
“Economic activity is estimated to have expanded by 3.7 per cent in 2014, driven by growth in agriculture, construction and telecommunications,” said the IMF in a statement.
Last week, Mr Ali announced that the country would with help from World Bank embark on a major technology overhaul, which will see it implement a new core banking system. The project’s first phase, which will cost $2.5 million, is due to be completed by mid-next year and will be undertaken by Swiss IT consultancy firm Sofgen.
“It is our expectation that once we complete these projects, we will then be able to play our role as a central bank more effectively. This will also now provide a foundation to formally host more banks in our banking system,” Mr Ali said, adding that the country is working with the IMF to have its own currency by the start of next year, which will replace the dollar.
Somalia GDP
The World Bank and IMF estimates Somalia’s GDP at about $6 billion in 2015, six times the pre-war period (1985-1990) average of $1 billion.
“Consumption remains the key driver of GDP with gross fixed capital formation accounting for only 8 per cent of GDP in 2015. The economy is highly dependent on imports with the share of exports to GDP being only 14 per cent. Imports account for more than two thirds of GDP, creating a large trade deficit, mainly financed by remittances and international aid,” World Bank said in its April review of the country.
The East African
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