FINANCIAL SECTOR DIAGNOSTIC STUDY FOR HARGEISA, SOMALILAND

Supply side analysis
The survey indicates that a few finance service providers are available on the market, providing limited loans and savings facilities to small and medium enterprises as well as groups of low income and small scale entrepreneurs, particularly women, and low salaried workers. Products offered by service providers include use of Murabaha1, Mudaraba2 and Qardul Hassan 3as instruments of financing their clients. Murabaha mode of financing has the highest share of clients whereas the clients consuming Qardul Hassan mode of financing have relatively small proportion. Average size of loans offered is about US$ 500 for low income borrowers and as much as US$ 45,000-300,000 for larger borrowers. To a limited extent, non-financial services such as skills training, financial literacy and record keeping trainings, marketing and business management trainings are provided to clients.
Over the past 15 years, a number of international NGOs and multilateral organizations have set up microcredit programs, particularly targeting low-income women and formerly displaced persons. Savings-led models that build upon traditional hagbed savings groups also exist and continue to be common in both rural and urban areas.
Dahabshiil is the main supplier of formal financial services. It offers remittances, checking, savings, and debit cards (e-cash). They are about to launch a mobile money product called E-
Dahab. In terms of “credit,” the company provides overdraft services. For businesses that have a good history with Dahabshiil, during which they can show their consistent business activity, Dahabshiil will offer overdrafts of $100,000-$300,000 regularly, and even up to $1 million which requires the signature of the CEO. Using Islamic finance practices, interest is not charged on this overdraft.. Loans are offered based on assessment of applicant and how applicant is known by Dahabshill. These are short period loans of up to 12 months. Currently Dahabshiil has issued some 500 loans with a value of $500m . About 70% of the portfolio is in goods and the rest mainly in real properties.

Demand side analysis
In addition, demand side analysis targeting both households and businesses has been undertaken to establish the need for financial services and products; levels of access to financial services and products; landscape of access in terms of transactional, credit, savings and insurance products. The study also analyses the drivers and barriers of financial inclusion (rich, poor, in urban and rural areas).
Survey results reveals that households have an income of US$ 407 per month from various sources and spend an average of US$ 281 per month on various expense items, leaving disposable income of US$ 140 per month which could be saved or used for other forms of investments. Out of 164 respondents, only 16% had formal accounts, mostly with the remittance companies. The accounts are mainly used for receiving payments for work done or trade and savings and for remittance from family members elsewhere. However majority (84%) do not have accounts, mostly attributed to the perception of not having enough money to save (74%); expensive services (8%); interest charged/riba 6%); lack of trust of financial institutions (4%); others lack necessary documentations such as ID card etc (4%) and distance factor (2%). There are those who feel that they do not need to own accounts because someone else in the family has an account (2%). Deposits and withdrawals to the accounts are mainly done 1-2 times a month (12%) or 3-5 times (2%), mainly over the counter (9%), mobile phones (4%);
cheque (2%) and ATM (1%).

About 44% of the households save money in one form or another while 56% do not save. The main reasons for saving are to buy goods and services (46%); pay school fees (21%); buying house (19%); saving for emergency, especially health purposes (7%); for extension or renovation of house (4%) and for performing last rites/marriage (1%); and to buy livestock or farm inputs (1%). Amongst those who save, there is higher preference to save with hagbeds (25%); banks of remittance companies (22%); 17% save using the mobile money service. Other forms of savings include keeping in the strong room at home (13%); keeping with the shopkeeper (13%); or keeping with the family or friend (7%) or saving in form of property e.g. livestock (4%).
Hagbed (also referred to as rotating savings and credit associations-ROSCA) form of saving and access to funds are common amongst households due to the trust placed on such models. About 44% of households use ROSCA (hagbed), and contribute frequently. In terms of gender,
more female than male contribute frequently to ROSCAs i.e. at 24% and 11% respectively. The main reasons is to save on periodic basis (23%); to purchase household goods (5%) for unexpected emergency/events (4%); and 2% to purchase fixed assets (land, houses, and cars) while 1% indicate that formal institutions financial institutions are located too far.
There is limited borrowing by households within Hargeisa Municipality, as only 30% have borrowed money while 70% have not. Borrowing is mainly from friends (18%); purchase of goods and services on credit (3%); (3%) borrowed from employers; 2% from hagbed while the remaining 2% borrowed from remittance companies and or deposit takers or private money lenders. The main reasons for borrowing has been to buy goods and services (11%); none (10%); to pay school fees and related expenses (5%); emergency and health purposes (3%) and for building, extension or renovation of house (1%).
Money transfer is also common amongst households. About 45% confirmed that they have sent and received money within Somaliland in the past 12 months. Out of these, 27% have used mobile phone money transfer services (zaad), while 14% have used the services of remittance companies (hawala); and 4% have used friends or family members to send money. This indicates an emerging trend of technology in accessing financial services, especially mobile money services. 27% of respondents use mobile money services (zaad) mainly for sending or receiving money; 23% use it for paying goods and services; 15% for saving money while 3% use it for buying airtime.

Access to finance services by businesses
About168 business people were interviewed from 5 districts of Hargeisa Municipality. Most of the businesses interviewed are general retail businesses such as shops, butchery, hardware etc. as indicated by 84% of respondents. Other important businesses include dairy businesses (8%); khat trade (2%); fish business (2%) barber/beauty salons (2%) and automobile/motorcycle repair (1%). They can be categorized as small and micro enterprises (58%); 33% are medium enterprises while 10% are large enterprises. These businesses are owned sole proprietor businesses (86%); 13% are partnerships and 1% company owned.
The businesses seemed profitable and on average, all businesses make monthly sales of US$ 10,724 per month. Specifically, large enterprises have monthly sales of over US$ 62,919 and make profits of US$ 7,313; medium enterprises have monthly sales of US$ 11,384 and a profit of about US$ 3,404. Small and micro enterprises have monthly sales of US$ 10,724 and make an average monthly profit of US$ 2,063.
Most of the businesses had important documents held in the business name, namely tax registration documents (33%); operating licenses (32%); and certificate of registration (29%). Other documents include government tax (4%); and audited tax account (1%).

However, only 26% of businesses have and use accounts with the formal institutions, while 74% do not. The accounts are mainly for receiving money or payments for work or selling of goods and services (15%). About 10% use it for savings while 1% use accounts for receiving money or
payments from the government. Most of the transactions are done on daily basis (13%), especially over the counter (6%), mobile phone (4%) or through cheque (2%) and ATM (1%). Transactions are also done on monthly basis as indicated by 9% of the traders, in this case mostly through cheque (5%), over the counter (1%). About 4% of the traders transact with their accounts on weekly basis, while only 1% transact once in 3 months.
For those who do not operate accounts with the formal financial institutions, various reasons were given. About 33% claim not to have any money; 15% don’t trust financial institutions while 13% claim that service fee or premiums are too expensive. Other important reasons include interest charged/riba (5%); financial institutions are located far away (4%); or someone else in the family has an account already (4%). Lack of necessary documentation such as ID card, wage slips etc. was a reason for only 1% of the traders interviewed.
In addition to ownership of accounts, 33% of the traders who have accounts with money transfer companies belong to Hagbed, while out of the 74% that do not have accounts, 46% are not in ROSCA/Hagbed. The main reason why traders are in hagbed is mainly for them to save on periodic basis (26%); and for the unexpected event or emergencies (3%). Other reasons are attributed to the high cost of maintaining formal accounts (1%) and the fact that formal financial institutions are generally located far away (1%).
The usage of mobile money transfer is high amongst traders. About 161 (96%) use mobile money services. However, the usage is higher amongst traders aged between 18-30 years (53%) and 31-40 years (31%). The usage amongst age group of 41-60 years is 12%, while the rest are above 60 years.
Traders save their money (63%) mainly for buying goods and services (39%); buying houses (13%); to pay school fees and related expenses (5%); for building extensions or renovation (3%); to buy livestock or farm inputs (2%); or for emergency/health purposes (1%) ; and for performing last rites or marriage (1%). Most of the saving is done through mobile money service popularly known as zaad (18%) the hagbed (16%); banks, mainly remittance companies (14%); and keeping in the strong room at home (8%). Others save with shopkeepers (5%); keep with family or friends (1%) and saving in form of livestock or property (1%).
Most of the traders in Hargeisa Municipality have not borrowed money in the last 12 months. This constitutes 65% of the total number of traders interviewed. However, for those who have borrowed, about 19% have been buying goods from suppliers on credit; while 10% have borrowed from family or friends. About 4% have borrowed from hagbed while the remaining 3% have borrowed from employers, microfinance institutions or remittance companies. The main purpose of borrowing has been to buy goods and services as indicated by 27% of the traders; However, about 3% borrow for emergency or health purposes; 2% borrow for buying house; 2% for building extension or renovation purposes and 1% borrow to pay for school fess and related expenses.
In terms of gender, more men than women traders have access to financial services. Majority of men (24%) have accounts with the formal money transfer companies as opposed to 2% women. In mobile phone money transfer, about 79% of the users are men in comparison to 17% women. About 24% of men use hagbed services compared to 8% of women. There are various factors which affect women in accessing financial services, some of which are religious or cultural.

Policy and regulatory framework
Policy and regulation analysis of the finance sector (institutional, product, market and prudential regulation) has been undertaken to understand the finance market and how it is currently regulated. The study acknowledges efforts in developing policy and laws to facilitate access to financial services, such as Banking Act; Micro finance act. However, gaps have been identified in the development and enforcement of policies, legal, regulatory and institutional reforms for the finance sector.
• The policies are piecemeal in nature (i.e. sector specific and delinked from each other) and not anchored on a whole financial sector system.
• All policies and laws have not been operationalised due to lack of resources, capacity challenges etc. and thus not effectively used;
• The policy and regulatory instruments are weak, without supportive infrastructure;
• New emerging technologies like mobile phone and banking services is taking up root in Somaliland and gaining public trust amongst population. However, there challenge in developing policies and laws that keep up with technology pace. This opens an opportunity for finance service providers in developing self-policing practices for this industry in the absence of government interventions.
• Are weak and inadequate in client protection
• The country’s own institutional capacity for statistical information generation for policy is limited. Lack of information is very much reflected in inadequacies in policy formulation. One is not sure if even the available limited information is validated for its reliability and authenticity.

Therefore Development Partners should consider supporting development and operationalization of a whole financial sector framework for the country. For example, establishing policies; building legal and regulatory framework; building other financial infrastructure; developing key institutions; and developing/upgrading skills. Development partners may support the government and private sector players in designing client protection laws; improve regulation and supervision of financial institutions; and development of prudential regulation and supervision (in general), and self-regulation. Development partners should support development of regulations that promote access to financial services through technology advancement.
In order to reach financial inclusion, programs and strategies put in place should (i) address full financial product suite; (ii) products provided with quality; (iii) reaching all who can use the services; (iv) in a diverse, competitive marketplace; and (v) to an informed clientele. However, reflecting on each of these pillars draws attention to the gaps that exist on both the quantity
side (excluded population) and the quality side (existing clients with poor services). Therefore, to achieve financial inclusion in Somaliland, efforts are required through intervening in the following areas (i) Financial education and literacy; (ii) product range, informed by understanding client needs; (iii) technology-enhanced delivery channels; (iv) client protection;
(v) institutional capacity building; and (vi), sound policy and regulatory framework.

1.0 INTRODUCTION
1.1 Background to the study
There is a significant demand for financial services from both individuals and small-medium businesses, which remains unsatisfied, even at basic levels in Somaliland. This could be partly attributed to the fact that there are few formal financial institutions operating in Somaliland, including the Central Bank and the remittances companies, which have extensive networks of agents that service all towns and villages, as well as major cities in countries populated by the Diaspora.
The principal pillar of the current financial system in Somaliland is the remittance industry, which offers money exchange, remittance services, checking accounts as well as overdraft facilities for a small number of trusted customers. While commercial banks and formal microfinance institutions do not exist in Somaliland, there are a few NGOs that offer microfinance services to a limited segmented of the business community. These include donor programs supporting income generation projects that provide small grant capital for starting micro, small and medium enterprises (MSMEs)4.
Investors have expressed an interest in establishing formal banking operations in Somaliland, but have been constrained by the absence of a sound legal and regulatory framework, a strong property rights culture, enforceable collateral contracts, accessible credit information systems and related financial infrastructure.
The financial sector development is dependent on a sound legal and regulatory framework and the ability of central banks to provide the necessary support and supervisory functions. However, no legal framework has been established for banks, and no banking supervision function and regulatory skills have been developed within the Bank of Somaliland. Without a clear legal framework enforced by a functioning regulator, there is little scope for attracting private sector investors to establish banks and other financial institutions across Somaliland. There have been attempts by the Somaliland Parliament to introduce a new banking law that would strengthen its regulatory functions in support of a functioning commercial banking system. If this proposed banking law is passed it would allow these remittance companies to evolve their financial services within Somaliland.
The objectives of this initiative is to help create basic financial institutions that can work with low income Somalis, special target groups such as retired civil servants, unemployed youth, etc. and provide financing to create MSME that create jobs and livelihoods to the target groups so that unemployment (and social ills linked to it) is reduced and Somalis get decent income that the government has not been able to provide at present by way of social protection, pensions and other traditional means of helping retiring civil servants, youth entering the job market,
women who face specific barriers to wage and self-employment, and others who are able and ready to work.
There is very little valuable documented study on the demand, supply and regulatory sides of financial access; and, therefore, this diagnostic study is carried out in order to establish the policy and regulation as well as the market development needs of Somaliland. To achieve financial inclusion in Somaliland, there is urgent need for clear information of financial services providers and distribution networks as well as their efficiency and outreach, in particular in the rural agricultural/ pastoralist and urban informal sectors.

1.2 Objectives of study
As per the Terms of Reference (TOR), this study is to provide a solid information base in order to facilitate/catalyse a collaborative domestic process led by the Somaliland Ministry of Planning and Development that will, in turn, serve as the basis for planning and implementing actions and programs that will access to financial services to at least 50% of the population in the next five years.
The diagnostic study takes a holistic look at the financial sector current capacity and gaps for banking, insurance, microfinance and SACCOs as well as non-financial sector social economy service providers such as producer and marketing cooperatives, by identifying market opportunities, policy imperatives as well as potential market and regulatory barriers to exploit these opportunities.
The diagnostic study forms the basis of a broader process whereby local stakeholders drawn from financial institutions, relevant government ministries e.g. finance, planning, commerce; and international/local development organisations are engaged and supported to remove barriers and promote financial inclusion. The process will catalyze the involvement of a wide range of stakeholders ranging from policy makers and regulators to market players, intermediaries and different entities that can represent the currently excluded population. Particular attention will be given to involving parties that are relevant but are not typically involved in specific sector discussions.
The output of this study is a diagnostic report that provides a road map on how to make the financial sector policy more inclusive and recommendations on how to provide financial services, while meeting the needs of the various actors. The report also provide framework for capacity building for both the supply side and demand side stakeholders.

1.3 Scope, approach and Methodology
1.3.1 Scope and approach
Somaliland finance sector is mainly in the hands of private sector and has been operating in unregulated environment. An effective protection of the rights of investors and a framework of known legal rules are conducive to stronger economic development. However, developing effective legal and regulatory models in Somaliland may be a challenge given the inadequacies
in resources (both financial and skills) by the government in implementing the framework. A legal or regulatory system may need to be designed differently to take this and other factors into account.
A supply side analysis was undertaken to cover the full financial service product, provider and distribution landscape (including both formal and informal financial providers, informal and formal channels of finance products distribution, informal and formal financial products being provided on the market (in terms of costs, access and targeted population). A number of providers of financial service providers have been interviewed, such as money transfer agents like Dahabshiil, Kabaa, mobile phone companies and a few NGO microfinance providers.
In addition, demand side analysis targeting both households and businesses has been undertaken to establish the need for financial services and products; levels of access to financial services and products; landscape of access in terms of transactional, credit, savings and insurance products. The study also analyses the drivers and barriers of financial inclusion (rich, poor, in urban and rural areas).
Policy and regulation analysis of the financial sector (institutional, product, market and prudential regulation) has been undertaken to understand the financial market and how it is currently regulated. In this category, a review is being undertaken on the policy and supervisory mandates, authority and objectives; find out the defacto/de jure institutions. The study aims to build on what the World Bank has done in this area and review the Central Bank Law and draft Commercial Banking Law to assess the depth that these legal instruments go towards increasing financial inclusion and if not, to make necessary recommendations.
The findings will be presented to a stakeholder workshop in Hargeisa for review, comments, inputs and validation. Based on the recommendations and input from the stakeholder consultation develop a proposal for financial inclusion for Somaliland.

2.0 OVERVIEW OF FINANCIAL SECTOR IN SOMALILAND
2.1 SOCIO-ECONOMIC CONTEXT
Somaliland, which was a British Protectorate until 26 June 1960, became a part of the Somali Republic on 1 July 1960 and independent Republic of Somaliland (RoS) on 18 May 1991. It is a democracy with a multi-party system. It is located in the Horn of Africa. It shares its boundaries with the Gulf of Aden in the north, Somalia in the east, the Federal Republic of Ethiopia in the south-west, and the Republic of Djibouti in the north-west. Somaliland covers an area of 137, 600 sq km with a coastline of 850 km in length. Geographically, the country consists of thirteen regions, viz., Awdal, Maroodi-jeeh, Saahil, Togdheer, Sanaag, Sool, Gabiilay, Salal, Oodweine, Saraar, Buhoodle, Hawd, and Badhan, which together consist of 81 districts. It had an estimated population of 3.85 million in 2009, of whom 55 per cent constituted nomads and the rest urban and rural residents. The country has a population density of just 29 per square km in 2009 (RoS, 2010).
With the absence of macroeconomic data it is extremely difficult to pin down the Gross Domestic Product (GDP) of Somaliland. However, there are various estimations, based on statistical projections, of the GDP of Somalia provided in different reports which can be used as a reference in determining the GDP of Somaliland. For instance, the World Bank’s socio- economic survey of 2002 gives the figure US$1.6 billion as the GDP of Somalia. In another report (2006), the World Bank estimated the GDP at $1.3 billion. Most of the international institutions use these reports as a source. But according to the latest CIA Fact Book figures for Somalia GDP in PPP prices is given as $5.896 billion, and the per capita income as $600. The nominal GDP at the official exchange rate is estimated at $2.372 billion which implies a GDP per capita of about $2406
According to the World Bank report (2002), Somaliland’s income per capita is relatively higher compared to that of Somalia due to peace and political stability achieved which enabled faster economic growth. Across Somaliland regions income per capita ranges from $250 to $350. Assuming an average nominal per capita income $300, and $600 at purchasing parity price (PPP), and a population of 3.5 million, Somaliland’s GDP would be about $1.05 billion in nominal prices and $2.10 billion in PPP terms. Again due to dearth of reliable macroeconomic data, we can only go by estimates about the contribution of agriculture, industry and service to GDP, and according to the most common figures Agriculture (including livestock) accounts for 65%, services 25% and industry 10% of the GDP.
Livestock is not only a major source of income (60-65% of Somaliland’s GDP), employment and government revenue (30%) but also a source of foreign exchange. As far back as 1997, livestock exports earned a foreign exchange of US$ 120 million. It played such a crucial role in determining the exchange rate that a ban on imports from Somaliland by the Kingdom of Saudi Arabia and other states in the Arabian Peninsula led to a decline in dollar exchange rate of Somaliland shilling from Sl. Sh. 3487 in September 2000 to Sl. Sh. 6200 in December 2002. It also caused domestic inflation of imported commodities and led to an increase in migration from rural to urban areas, urban unemployment and urban poverty (Holleman, 2002).
Remittance is another major source of income in the state; tentative estimates ranged from US$ 93 up to 540 million per year during the 1990s (Holleman, op cit.). Remittance was instrumental in insulating the economy from adverse macroeconomic consequences of a decline in livestock exports; thus, played a major role in stabilizing the economy and livelihood of the population.

2.2 PROVIDERS OF FINANCIAL SERVICES IN SOMALILAND
Somaliland has been without a formal commercial banking and financial institutions sector and in the absence of a formal financial sector, the informal financial sector has, to some extent, filled this void. The latter has traditionally been comprised of remittance companies. The remittance sector dates back several decades. Even though the remittance sector plays a vital role in the current Somali economy, the existing financial sector can be characterized by the following:
• Virtual lack of financial intermediation i.e. deposit-taking and lending through financial intermediaries, although some limited lending does take place through non- governmental organizations in form of micro-finance;
• The economy is predominantly cash-based;
• Lack of public confidence in a banking system especially where the government is a key player. This is not surprising given that the public has lost their monies in the past. Hence, the revival of the banking system will depend on regaining public confidence to a very large extent;
• The provision of very limited banking services, such as money transfers, foreign exchange and deposit facilities, provided by the remittance companies operating formally and informally;
• The banking sector currently comprises of an active informal sector and virtually non- existent formal sector. The private sector remittance companies dominate the informal sector, whereas the formal banking sector includes the central bank.

2.2.1 Banking services
The Bank of Somaliland or the central bank, established in 1994, is responsible for monetary policy. It acts as a central bank and a commercial bank at the same time. It has a board of seven members chaired by the Governor. The bank (i) maintains price and exchange rate stability; (ii) promote credit and trade conditions which support balanced economic growth; (iii) support the economic and financial policies of the government where possible.
Current functions of the central bank include the following:
(i) Printing and issuing currency dependent on demand and supply of money, especially against the US dollar;
(ii) Government bank – i.e. deposits and withdrawal of all government income, mostly using a voucher/checking system;

(iii) Stabilizing exchange policy i.e. exchange policy and mopping up excess cash;
(iv) Offer some commercial banking activities where businessmen can deposit cash in return for Central Bank cheque which they can cash at any central bank branch;
(v) Control remittance companies by licensing and supervising them but lacks capacity to supervise – e.g. Dahabshill operates like a bank but without a banking license – the sector needs regulation as it grows.

The Central bank has a staff of 310, 12 branches and a presence in all the regions of the country. It has been in discussions with ILO since 2011 on issues of inclusive financial sector policy framework and the capacity of the bank to supervise the sector.
An interview with the central bank staff reveals the following issues:

(i) The country is not recognized, and therefore has no international banking relations;
(ii) Having to operate as a commercial bank undermines its supervisory and regulatory authority. Currently the Central Bank is working with the World Bank to develop a supervisory and regulatory department. This will also entail training of select staff (3) both on the job and through exchanges in Malaysia and possibly in Kenya (Islamic and conventional banking). Training for another five staff planned for Europe;
(iii) Bloated staff most of whom are old and of low education and unable to adapt to modern technology and banking. Needs to rationalize staff and to employ young well- educated new staff. Needs training for existing staff (35 young graduates with some still at the university)
(iv) IT system and modern banking technology – currently computers at the bank (10 at H/O and 2 at each branch) are used only as typewriters;
(v) Lacks internal financial management systems and capacity, especially reporting, internal audit and financial controls. Currently only able to prepare income statements and balance sheet.
2.2.2 Microfinance services
The potential of creating institutional credit and deposit services for poverty alleviation in Somaliland is quite significant. About 2 million people, or 60% of the population, are considered poor and have no access to formal financial services. According to the Microfinance Baseline Survey (2011), there are over 100,000 micro-small enterprises that provide employment opportunities to nearly quarter of a million people or 33% of the country’s total employment. Accordingly a large number of urban and rural households derive their livelihood from micro- small enterprises. Therefore, development of this sector represents an important means of creating employment, promoting growth, and reducing poverty in the long-term.
However, in spite of the importance of this sector, the baseline survey shows that provision and delivery of credit and other financial services to the sector by formal NGOs and non-financial institutions has been inadequate. According to the Baseline Survey, more than 50 private
enterprises, including 15 local NGOs, practice some form of microfinance services in almost all the major towns of Somaliland. In addition, a number of MFIs have operated in the country without appropriate legal and regulatory framework. Therefore, microfinance services have been grossly misused by some NGOs and other providers or entirely robbed by privately- organized money launders7.

An example of existing microfinance institutions in Somaliland have been described below:
a) Salaam Financial Services
Salaam is the financial services subsidiary of Telesom, whose main product line is remittance services. The company has established a registered bank in Djibouti, with representative offices in Hargeisa and Mogadishu. Salaam remittances can process wire transfers from Somaliland, by transferring money to the Djibouti Bank and doing the wire transfer from there. However, management declares that the company is still facing problems with Letters of Credit (LCs). Salaam also offers checking and savings accounts, as well as investment and microfinance loans to Telesom affiliated customers.
Investment loans are available to Telesom shareholders or require a Telesom shareholder guarantee. The loan requires a 30 percent down payment, a flat fee averaging 10 percent annual (larger loans over $100,000 may be as low as 8 percent, while smaller or riskier loans are 12 percent). There are between 1,300 and 2,000 shareholders, so this guarantee does appear to have some reach throughout Somaliland. Salaam has been offering this loan product for one year, and has given about 30 to 40 loans as at the time of the study.
Some example borrowers include food import businesses, vehicle purchases, building materials firms, housing, and land purchase. Since the program is still new, management is unsure of the level of repayment or potential challenges that may arise with delinquencies.
In addition to Salaam Financial Services, Telesom also offers Zaad domestic mobile phone money transfer and payment system. Zaad is offered as a “value-add” service, primarily to capture market share of customers and maintain customer loyalty for Telesom. There are currently no fees for using Zaad service.

b) Kabaa Microfinance Institution (K-MFI)

The mother organization, Doses of Hope was established in 1997 in Netherlands by Somali women in the diaspora. Locally in Somaliland, Doses of hope started a lending project in in 1999 with a clientele of 100 women (interviews with management). This has since evolved
into Kaaba MFI, the only MFI in the country currently with a vision to transform into an MFI bank.
Kabaa MFI has 13,000 cumulative borrowers to date (active clients in Dec 2012 were 2,000). It issues a sharia compliant loan of maximum $ 500 through groups of 25 members organized in smaller cells of five members (buys good/item and lends to borrower with a profit margin).
There exists no regulatory framework for the microfinance sector, so Kabaa remains registered as an NGO and relatively unregulated by the government. From 1999 to 2007, Kabaa engaged in conventional Grameen Bank-style microfinance. However, as the organization attempted to expand, its management declares that it was frequently confronted by community members and religious leaders who were more and more disapproving of the conventional (non-Islamic) style of its loan products. In 2008, in partnership with Oxfam, Doses of Hope began the transformation of the program into an independent Islamic microfinance institution, registered as an NGO in February 2009.
Kabaa’s main microfinance product has an average loan size of $140-200, with a maximum of $300. The Murabaha ‘mark-up’ is 8 percent, with loan terms between 4-6 months, paid either on a weekly or monthly basis. There is compulsory savings for all microfinance borrowers, but no collateral. Groups are made up of five members, who know and trust each other; and five groups make up an association. Each member must have a guarantor and if a client defaults, there is first an attempt at collection within the group, then within association, and then with the guarantor. Since its transformation to an Islamic banking model, Kabaa declares a 98% repayment rate.
The MFI plans to set up four branches in rural and urban locations of Hargeisa and Gabiley districts, with a goal to reach 5,000 active borrowers by 2012. In addition, it is exploring the possibility of offering an Islamic savings product. Some of its future goals include having a branch in all regions of Somaliland; being financially sustainable by 2015; being able to offer youth-inclusive financial services; opening a business development / business consulting department; and strengthening its management information system, particularly if and when it pilots a new savings product.

The assessment reveals the following challenges experienced by the MFI:
(i) Very limited capacity (low capital base, limited staff and systems, only two branches, limited skill base and inadequate products);
(ii) High unemployment and therefore large numbers of people in self-employment and no other bank for the poor, therefore cannot cope with the demand;
(iii) Due to lack of regulation and policy framework, vision of transforming into a bank cannot be realized;
(iv) Unable to upscale to target middle and small scale enterprise that can leverage technology and bigger employment;
(v) Unable to diversify to other sectors of the economy e.g. fisheries, livestock, dairy that require more funding;

2.2.3 Microcredit NGOs and Support to Savings Groups
Over the past 15 years, a number of international NGOs and multilateral organizations have set up microcredit programs, particularly targeting low-income women and formerly displaced persons. These organizations include Caritas, CARE, Danish Refugee Council (DRC), UNHCR, CCS, Norwegian Refugee Council (NRC), and IOM. In addition, K-REP – a major MFI in Kenya – also piloted a microfinance program in Somaliland. Based on research with program managers and former staff of these programs, it appears the essentially most of these programs failed because they were structured as conventional microfinance programs that demanded interest from borrowers and were eventually rejected by the community for not following Islamic banking rules. When these programs were first established, they appear to have been relatively successful. The repayment from the women appears to have been sound, but in the past ten years as Somaliland has become generally more religiously conservative, community / religious leaders that learned about the non-Islamic banking structure demanded that the women withdraw from the programs.
Some NGOs tried running microcredit programs by charging no interest. However, without proper sensitization, clients often viewed these loans as hand outs and did not repay – particularly because they were managed by humanitarian organizations that did engage in a variety of hand-out / in-kind activities as well. In addition, without proper screening or proper loan officer training, programs also ran into problems with clients claiming that they had businesses which were non-existent and clients not using loans for any enterprise activity. NGOs also found that some women who had informal market stalls could easily close their shops or move to another part of town without the loan officer being able to track them. As a result, in the past five years, all of these microfinance programs have stopped, and only one NGO (Kabaa) has transformed into an Islamic MFI.
As part of humanitarian interventions, several organizations – including CARE and DRC – moved away from credit-led microfinance to savings-led models that build upon traditional hagbed savings groups. In Somaliland, traditional hagbeds, have existed for a long time, and continue to be common in both rural and urban areas, where friends, family and neighbors (mostly women) join together for a defined period of time, contribute equal amounts to the savings of the group, and one member immediately is given the entire sum allowing each member access to a larger sum of money than he/she would generate individually. Money from hagbeds might go towards basic household needs (school fees, an outstanding debt, etc.), but usually are too small for any member to actually use to start a business. CARE and DRC are both working with hagbeds to encourage a modified version of the Village Savings and Loan (VSL) model where the group members save small amounts of money together on a weekly or monthly basis to build up a loan fund and then begin to extend small loans to group members at no interest to conform with Islamic principles.
CARE and DRC’s VSL programs are both part of cash for work programs, where community members are paid to design and build a community development project (e.g. toilets, gulleys
for erosion control, berkads, etc.) and upon payment, groups are trained on VSL methodology. Savings group structures vary from weekly to monthly contributions of 1,000 – 5,000 Somaliland Shillings (~$0.10 – $0.70), along with possible NGO capital injected into groups to expand initial loan fund availability. Small loans averaging $100 are often used by women borrows to start micro-enterprises such as small restaurants and tea stalls. CARE recently begun this program starting with 150 groups of 10-15 members each (~ 2,000 beneficiaries); while DRC had trained nearly 300 groups over the past ten years.

2.2.4 Informal value chain finance / buyer-supplier credit
In a variety of sectors – particularly in retail dominated by informal women micro-enterprises and in rural areas with poorer populations that have less access to Diaspora networks – access to any formal finance is limited. The population relies mostly upon traditional forms of saving and informal sources of credit. Most pastoral peoples have a savings strategy that centers upon the accumulation of livestock during normal and good rainfall years and the purchase of such items as gold and jewellery. Credit most often takes informal forms, such as lending and borrowing between extended family and clan members, and networks of mutual obligations that allow those facing temporary difficulties to be assisted by others. Although wealthier clan members will assist poorer people, reciprocity is a strategy that essentially operates between equals.
Informal, and often clan-based, value chain finance structures exist. In the small scale commercial agriculture sector, heavily focused in the Western region of Somaliland, traders with established links to certain farming regions sometimes provide limited embedded services in the form of inputs with expectations that these farmers will only sell their produce to them.
In these areas, qaadhaan community savings schemes are common, as well, where groups of farming families save together to invest in community infrastructure that jointly benefit all of their livelihoods activities – such as an irrigation canal.
Such traditional practices still remain the only way for these farmers to access larger sums of capital.
In retail sectors, such as selling charcoal, vegetables, meat or milk, women micro-entrepreneurs also do not have access to credit. For purchasing, groups of women who know each other and sell near each other in the market will often all go together and buy stock at the beginning of the day from the same (trusted) wholesaler or trader (e.g. a livestock lorry driver). The products will be bought on credit at a price that is agreed upon by the seller and buyer, and the women are expected to repay by the end of the day – with rather low profit margins (e.g. a retailer in Hargeisa can buy a goat for possibly $60 and expect to sell it in the market that day for $61, only earning $1 profit per animal). However, this buyer-supplier credit creates bottlenecks, particularly for smaller firms/traders since the firms advance products to buyers on credit, but then often do not have enough liquidity to repay their own suppliers and are unable to re-stock inventory.

2.2.5 Money transfer services

a) Dahabshill Group of Companies
Dahabshill is a group four comprises – (i) Somtel mobile telephone company (ii); Dahabshiil financial Services (or Dahabshiil Bank International based in Djibouti. Has presence in Hargeisa, Bosasso and Mogadishu); (iii) Dahabshiil General Trading; and (iv) Dahabshiil Remittance company (in the core business of money transfer). Its lead by a group CEO assisted by a CEO for each of the companies.
Dahabshill was created in 1970 and is the largest financial organization not only in Somaliland but throughout all of Somalia. Officially, Dahabshiil is a money transfer organization (hawaladar) with the majority of its customers being representatives of the Somali community living abroad (the senders) and Somalis living at home (the recipients).
Dahabshiil offers remittances, checking, savings, and debit cards (e-cash). They are about to launch a mobile money product called E-Dahab. In terms of “credit,” the company provides overdraft services. For businesses that have a good history with Dahabshiil, during which they can show their consistent business activity, Dahabshiil will offer overdrafts of $100,000-
$300,000 regularly, and even up to $1 million which requires the signature of the CEO. Using Islamic finance practices, interest is not charged on this overdraft, however a fee is demanded. The allowed overdraft line of credit is based on the business activity and their relationship with Dahabshiil decision makers. Such a service makes credit available to larger enterprises but generally excludes micro, small and medium enterprises.
In 2010, Dahabshiil opened an Islamic bank, registered in Djibouti. While the company waits for the Bank Act to be passed, management is planning to open a Hargeisa branch as a satellite office of the Djibouti bank. There are also plans to open branches in Burao, Bosasso and Mogadishu as well as key locations in East Africa within the next three years.

Other current services or operations include:
i. Offers savings facility open to all. No interest earned
ii. Loans offered based on assessment of applicant and how applicant is known by Dahabshill. Short period loans of up to 12 months. Currently Dahabshiil has about 500 customers with some $500m in loans. About 70% of portfolio is in goods and the rest mainly in real properties.
iii. Very low-income people receive money from relatives but these cannot access Dahabshiil loans at the moment. Has branches in 14 countries including East and Central Africa
iv. Locally, has no interbank payment as there is no clearing house. However can transfer money from one client’s account to his account with another institution.
v. Offering a debit card service accepted in about 40 trading/business places.
vi. ATM in planning and currently negotiating with credit card companies. There are no ATMs by any other institution
Dahabshiil has recently started to consider a variety of microfinance products as part of its corporate responsibility and as a way to expand its customer base. One consideration is to manage both group and individual products through its mobile money product E-Dahab, with average size of $300.

The company’s advantages to successfully capitalize on such new product lines include its extensive branch network, capacity for using mobile money, ability to collect people’s savings, and brand recognition in the country. Recent research found that potential microfinance customers understood that Dahabshiil is a profit-driven institution and therefore any microfinance product would be based on sound banking principles, rather than some past microcredit donor efforts which have sometimes been seen by communities as grants rather than investments or loans.
Dahabshiil faces a number of issues and challenges, namely:
• Islamic banking accepted but constrained by lack of banking law;
• Lack of insurance services;
• No audit firms and therefore cannot attain international standards;
• Has good relationship with the Central Bank, but the Central Bank needs to keep pace with or be ahead of the growth in the financial and banking sector for example need to provide the two to three local banking institutions with a clearing house facility. Also need to set up and control standards of banking practice among the institutions;
• Constrained by the country’s (and Central Bank’s) lack of international recognition.

2.2.6 Micro-insurance for MSME
Presently, there are no insurance companies in Somaliland. In most economic sectors, the clan or wealthier family members act as insurers. Thus, a member of a clan can claim compensation without paying regular insurance contributions. Later, he/she has to repay the sum to the insurer (whether this is a group or an individual), although repayment is subject to availability. Mutual insurance exists in Somaliland, although in its primordial form. People form groups and each participant contributes a sum; a member of the group receives compensation when he/she needs it.
The difficulty and expense of purchasing insurance on products being shipped into Somaliland makes it difficult to obtain letters of credit, and reduces the number of vessels/firms that are willing to ship to the Port of Berbera. Much trade is therefore channeled through Djibouti instead. The Partnership could work through the Trade and Industry Association or other associations to facilitate improved access to insurance. An exposure visit for even marginally interested insurance companies might help dispel the negative perception of Somaliland. The project could also explore partnerships with MIGA or other multi-lateral insurance providers. As a possible private sector partner for the project, Omaar International and its affiliated customers could benefit from such support, as they regularly struggle to obtain insurance for shipping products into Somaliland.

2.3 LEGAL AND REGULATORY FRAMEWORK
The financial sector is currently at an early stage of its development, and the government has already introduced some key national policies and incentives for the development of this crucial sector. The government has currently introduced new Financial Legislative Bills covering The Central Bank of Somaliland, Commercial Banks and private financial institutions operating in the country. The new financial bills are currently being debated in the Parliament
The following sections describes the existing legislative framework

2.3.1 The Constitution of the Republic of Somaliland
Article 11: The National Economy
1. The state shall lay down the national economic policy based on the principles of free enterprise and the joint working of private property, public property, the national wealth and foreign investment so as to realize the growth of productivity, the raising of the standard of living, the creation of jobs, and, in general, the advancement of the economy of the nation

2. In order to ensure that the economic system does not lead to the exclusive enrichment of a group or a small section of the public, and to avoid (both) the creation of economic classes consisting of those who are prosperous and those who are not, and the widening of the economic gulf between the urban and rural communities, the state shall ensure that social benefits and economic opportunities are provided in a just and equitable manner

3. The state shall ensure the security of foreign investment in the country. Such investment shall be regulated by Law

Article 13: Banks
1. The state shall establish a Central Bank which shall direct the monetary system and the currency of the nation. The opening of commercial and development banks shall be made possible and private banks shall be accorded preferential status.

Article 14: Taxes and Duties

1. The imposition of taxes and other duties shall be based on the interests and wellbeing of the society. Therefore, no taxes or duties which have not been determined by law shall be collected.

2. The levying, waiver and changes in taxes and other duties shall be determined by law.

3. Usury and commercial practices which are against the interests of the society and unlawful enrichment are prohibited.

2.3.2 The Somaliland Central Bank Act
The Somaliland Central Bank Act, which has been amended by the Central Bank, provides the Bank with the supervisory authority to commercial banks, specialized banks and other formal financial institutions operating in the country. The Act empowers the Central Bank to issue regulations for licensing, supervision and reporting systems for banks and other financial institutions. Formally established Microfinance Institutions tending to take savings and deposits from the public shall be subject to the regulations and supervisions of the Central Bank of Somaliland.

2.3.3 The Banking and Financial Institutions Bill
The Banking and Financial Institutions Bill once enacted into law shall regulate the commercial banks and formal financial institutions, including the microfinance institutions registered in the country.
Other approved and ongoing laws are presented below.

2.3.5 The National Development Plan
The National Development plan points to the challenges and opportunities in the financial sector. These include a (i) weak central Bank (ii) absence of financial institutions, both commercial & investment banks, insurance co. etc. (iii) inability to use monetary instruments to achieve price stability and economic growth; (iv) failure to use remittance for investment in the productive sector; (v) lack of skilled workforce, (vi) dominance of informal hard-to-tax sector in the economy, (vii) and lack of reliable data for policy making and planning purposes.
There seems to be the conspicuous lack of governance, institutions and rules to facilitate the smooth conduct of economic administration. These are precisely the issues that the NDP for 2012-2016 seeks to address when it lays emphasis on ‘right macroeconomic environment for accelerated development’ by “(i) reforming the Central Bank of Somaliland, (ii) Improving the regulatory framework for commercial banks and other financial institutions, (iii) Improving the exchange rate regime, (iv) Regulating the money exchange and remittance services owing to their importance to the economy and poverty reduction, (v) Enhancing the capacity of the Ministry of Finance, (vi) Transforming the fiscal policy unit into a fully-fledged Macroeconomics office of the Ministry of Finance.
The National Development Plan priorities and strategies for the financial sector development include strengthening the central bank, promoting the formation of commercial banks and other financial institutions by undertaking reforms in the policies, legal and regulatory and institutions.

2.3.6 National Micro-finance policy and strategies
The Ministry of Commerce and Industry has developed a National Micro-Finance Policy and Strategy to provide enabling policy and legal framework for the microfinance sector in the country. The Ministry has been mandated to promote, regulate and create enabling business environment for the private sector. It is also mandated to coordinate different interventions in the sector to ensure and facilitate a balanced economic growth in Somaliland. The Ministry has initiated on several pilot undertakings in microfinance related policies and strategies, investment climate, mapping of investment opportunities and pre-feasibility profiling, revising and updating business related laws and regulations.
This national strategy provides an institutional, legal and regulatory framework for the implementation of the National Microfinance Policy in order to build, promote and sustain viable microfinance institutions in the country.
The national microfinance strategy covers provision of financial services to households, small holder traders and farmers, and small micro-enterprises in rural and urban areas. The national strategy concerns a range of microfinance services, including savings, credit, payments, and other microfinance services.
A wide range of institutions will be involved in the provision of microfinance services, including specialized and non-specialized banks, non-bank financial institutions, rural and community based banks, cooperatives and NGOs. Some providers may focus on credit, some on savings, and others on both.

2.3.7 National Microfinance policy
This National Microfinance Policy focuses on the creation of an enabling environment for the growth and development of a suitable microfinance sector, building of sustainable microfinance institutions with the necessary capacity to facilitate microfinance services to the low-income people and their enterprises so as to enhance their income, develop their microenterprises, build their assets gradually, manage their risks better and enjoy an improved quality of life.
The Policy also provide directions and guidelines to Government institutions, donors and micro- finance stakeholders for planning, implementation, monitoring and evaluation of microfinance programs and projects so as to ensure microfinance services for the poor contribute to effective national poverty reduction strategies. The policy recognizes the regulatory and supervisory roles of the Central Bank of Somaliland, which shall put in place a variety of licensed, regulated and supervised financial institutions currently operating in the country, include commercial banks, non-bank financial institutions, community cooperatives, and microfinance institutions. As deposit-taking, these entities are required to meet prudential norms and standards.
The Government recognizes the following Policy Principles to guide institutional, technical and operational framework for the Microfinance sector.

• Pursue market-oriented microfinance institutions and systems that create commercial interest and profit incentives in the provision of micro-finance services. The Government, however, encourages Microfinance Institutions to facilitate financing and development of Small-Micro Enterprises dealing with crop production, livestock, fisheries, minerals, frankincense, myrrh and gum etc. as well as industries and manufactures based on locally available raw products.
• Provide an enabling policy and legislative framework to the Microfinance sector, and therefore, no participation of Government Ministries and/or Public Agencies in the provision of microfinance services in the country.
• Promotes adoption of Islamic-based deposits, credit and risk-sharing procedures by all microfinance institutions dealing with microfinance services in the country. This is in conformity with the Article Constitution of the Republic of Somaliland that Sharia- compliant financing systems shall be adopted. The credit demand by poor households and microenterprises will be met through a variety of innovative Islamic financial systems provided through private micro-financial institutions. The sharia-complaint credit and guarantee instruments such as Mudaraba, Murabaha, Musharakah and Sales- Purchases shall be adapted by micro-financial institutions in order to ensure social values and norms of the poor people are up-held in the micro-finance sector
• Pricing is one of the most important determinations of the potential of microfinance institutions to become sustainable. Pricing should be set by the microfinance institutions themselves, not by the Government Ministries/agencies, the Central Bank, or Donors. Microfinance institutions are left free to determine price and cost of the microfinance services that they provide, based on existing market conditions, operational costs and business strategies of respective institutions.
• Delinquency control or getting loans repaid forms basic competencies required of any micro-finance institution that deals with micro-finance services. The government insists that micro-finance service providers are required to ensure delinquency control and losses of loans be maintained at a level that does not threaten the viability of the micro- finance sector and MFIs operations in the country. To ensure this, MFIs and other providers should develop and adapt the following operational principles and practices:
• All Microfinance Institutions providing deposits and credit to low-income people in Somaliland should apply best practices, experiences and commonly accepted standards and gradually build institutional, technical and operational capacities to ensure efficient and sustainable microfinance services suitable to the socio-economic needs of low- income people and their micro-enterprises.
The existing legislative framework for the National Microfinance policy is mainly based on Articles: 11, 13 & 14 of the Constitution of the Republic of Somaliland indicated above.

3.0 ACCESS TO FINANCIAL SERVICES BY HOUSEHOLDS
3.1 General characteristics of households
3.1.1 Age, gender and marital status
Fineline interviewed 164 households randomly selected from 5 districts of Hargeisa Municipality. The districts and number of respondents are as follows: 26 June (24), Ahmed Dagax (32), Ga’can Libaax (32), Kood Buur (47) and Mohamed Haybe (29). Out of these, 65% were female while 35% consisted of male respondents. Majority of the respondents are married (84%); 15% are single and the rest are divorced or widowed. These households have average of 8 family members (4 female and 4 males). Majority (47%) of household members interviewed fall within age group of 31-40 years, followed by ages of 16-30 years (34%); 41-60 years (17%) and above 60 years (2%).

3.1.2 Education level
Majority of the household respondents have no formal education and can neither read nor write. These constitute 49% of the respondents. About 18% have secondary education; 17% have primary level of education; and 15% have tertiary or university level of education.

3.1.3 Decision making at household level
Decision making is almost even at household level, though 51% of households have husbands as sole decision makers while 43% of households had wives as sole decision makers. About 7% of households make decisions jointly.

3.1.4 Formal identification
Majority of households have national identity cards as a formal identification document as indicated by 71% of households. Other important part of identification held is land title deeds (17%), driving license (5% and passport (3%) and pay slips (4%). The figure below is a summary of types of formal identification held by respondents.

3.2 Household income and expenses
Households have an income of US$ 407 per month from various sources. Notably, formal employment constitute important source of income for 51% of households; Formal employment provides an average income of US$ 381 per month per household.
Business activities provide income for 34% of households, out of which each household earn an average of US$ 296. Remittance also constitutes an important source of income for 27% of households. Each household receives an average income of US$ 264 from remittances.
About 17% of households receive an average of US$ 173 each per month from casual work. About 5% of households receive income from other sources such as livestock/dairy activities, aid from NGOs or government and other sources. The figure below is a summary of various sources of income for households in Hargeisa Municipality.
Households spend an average of US$ 281 per month on various expense items as shown in the table below. This means that each household has a disposable income of US$ 140 per month which could be saved or used for other forms of investments.

3.3 Ownership of accounts in remittance companies
Out of 164 respondents, 16% have formal accounts with the remittance companies. The accounts are mainly used for receiving payments for work done or trade and savings and for remittance from family members elsewhere. However majority (84%) do not have accounts and therefore the question was not applicable to them. The figure below is a summary of ownership of formal accounts with the remittance accounts.
For those without MTO accounts (84%), the major reasons are: don’t have enough money (74%); too expensive (8%); interest charged/riba 6%); don’t trust institutions (4%); others lack necessary documentations such as ID card etc (4%) and distance factor (2%). There are those who feel that they do not need to own accounts because someone else in the family has an account (2%).

3.4 Deposits and withdrawals
Deposits to the accounts are mainly done 1-2 times a month (12%) or 3-5 times (2%), mainly over the counter (9%), mobile phones (4%); cheque (2%) and ATM (1%). This was not applicable to 84% of respondents who don’t own accounts.
On the other hand, withdrawals are made mainly over the counter (9%), mobile phone (4%) cheque (2%) and ATM (1%). These with drawls are mainly done 1-2 times a month (8%), 3-5 times (6%), and less than 6 times (1%).

3.5 Savings services
About 44% of the households save money in one form or another. The main reasons for saving are to buy goods and services (46%); pay school fees (21%); buying house (19%); saving for emergency, especially health purposes (7%); for extension or renovation of house (4%) and for performing last rites/marriage (1%); and to buy livestock or farm inputs (1%).
While 56% do not save part of their income, the 44% who save prefer the following savings mode: About 25% save with ROSCA (hagbed); 22% save with banks or remittance companies; 17% save using the mobile money service. Other forms of savings include keeping in the strong room at home (13%); keeping with the shopkeeper (13%); or keeping with the family or friend (7%) or saving in form of property e.g. livestock (4%).

3.6 Borrowing by households
About 30% of households in Hargeisa Municipality have borrowed money for various purposes while 70% have not. About 18% have borrowed from family or friends; 7% purchased goods on credit; 3% borrowed from employers; 2% from hagbed while the remaining 2% from remittance company and or deposit takers or private money lenders. The figure below is a summary of borrowing pattern for households.
The main reasons for borrowing has been to buy goods and services (11%); none (10%); to pay school fees and related expenses (5%); emergency and health purposes (3%) and for building, extension or renovation of house (1%).

3.6 Sending and receiving money
About 45% confirmed that they send and receive money within Somaliland in the past 12 months. Out of these, 27% have used mobile phone money transfer services (zaad), while 14% have used the services of remittance companies or hawala; and 4% have used friends or family members to send money. There was no response from 28% of households while 27% do not send money.
However, while sending or receiving money outside Somaliland in the last 12 months, 18% have used remittance companies and 30% used family members or friends. About 30% have not remitted money outside Somaliland in the last 12 months; while there was no response from 20% of respondents.
About 31% of respondents send or receive money on monthly basis out of which 9% from mobile money; and 21% from hawala and 2% from family/friends. Seventeen (17%) send or receive money on weekly basis or less mainly using mobile money (11%); 5% through hawala and 1% through family/friends. About 5% receive money only in emergency, mostly using mobile money services. Those that receive money once in every 3 months are 4%, mainly using mobile money (zaad) services.
About 25% of respondents use mobile money services (zaad) mainly used for sending or receiving money; 23% use it for paying goods and services; 15% for saving money while 3% use it for buying airtime. This was not applicable to 24% of respondents who don’t use mobile money transfer services. About 60% of respondents use mobile money transfer services more than 6 times a month, 10% use it 3-5 times while only 4% use it 1-2 times a month.

3.7 Use of ROSCA (Hagbed)
About 44% of households use ROSCA (hagbed), and contribute frequently. Responses from field indicate that 21% contribute on daily basis to the ROSCAs, 12% contribute monthly, while only 1% contribute annually. In terms of gender, more female than male contribute frequently to ROSCAs i.e. at 24% and 11% respectively.
There are various reasons why households are participating in the ROSCAs. These include: to save on periodic basis (23%); to purchase household goods (5%) for unexpected emergency/events (4%); and 2% to purchase fixed assets (land, houses, and cars) while 1% indicate that formal institutions financial institutions are located too far.

3.8 Misfortunes faced by household members
Households have faced various misfortunes in the last 12 months. The figure below is a summary of the misfortunes that befell the households. However, in order to get out of the situation, 24% received donations from friends or families while 20% used their personal savings. About 9% borrowed money while 1% sold their assets.

4.0 ACCESS TO FINANCIAL SERVICES BY BUSINESSES
4.1 General characteristics of business respondents
4.1.1 Gender, marital status and age
In total, 168 business people were interviewed from 5 districts of Hargeisa Municipality (26 June, Ahmed Dagax, Ga’can Libaax, Kood Buur and Mohamoud Haybe). Unlike households, most of the respondents were male (80%) and 20% female.
In terms of marital status, about 50% of the respondents from the business community are married while the rest are single.
Most of the respondents were aged between 18-30 years as indicated by 57% of the respondents. Those aged between 31-40 years constitute 32%, and the rest were above 40 years.

4.1.2 Education level
Most of the business people interviewed are educated or at various level of education. About 32% have tertiary level of education (including university); 27% have up to secondary level of education; while 21% are educated up to primary level of education. About 20% have no education at all. The figure below is a summary of levels of education for the business respondents.

4.2 Business activities
Most of the businesses interviewed are general retail businesses such as shops, butchery, hardware etc as indicated by 84% of respondents. Other important businesses include dairy businesses (8%); khat trade (2%); fish business (2%) barber/beauty salons (2%) and automobile/motorcycle repair (1%). These have been summarized in the figure below.

4.3 Form of business ownership
About 58% of the business interviewed is small and micro enterprises; 33% are medium enterprises while 10% are large enterprises. These businesses are owned sole proprietor businesses (86%); 13% are partnerships and 1% company owned.

4.4 Profit and losses
The following table is a summary of the purchases, expenses, sales and profits made by these businesses. On average, all business makes monthly sales of US$ 10,724 per month. Specifically, large enterprises have monthly sales of over US$ 62,919 and make profits of US$ 7,313; medium enterprises have monthly sales of US$ 11,384 and a profit of about US$ 3,404. Small and micro enterprises have monthly sales of US$ 10,724 and make an average monthly profit of US$ 2,063.
The table below depicts a profit and loss analysis of typical businesses in Hargeisa Municipality.
Most of the businesses had important documents held in the business name, namely tax registration documents (33%); operating licenses (32%); and certificate of registration (29%). Other documents include government tax (4%); and audited tax account (1%).

4.5 Ownership of bank accounts
Out of the 168 traders interviewed, only 26% use accounts with the formal institutions, while 74% do not. The accounts are mainly for receiving money or payments for work or selling of goods and services (15%). About 10% use it for savings while 1% use accounts for receiving money or payments from the government.
For those who transact through the accounts, most of these transactions are done on daily basis (13%), especially over the counter (6%), mobile phone (4%) or though cheque (2%) and ATM (1%). Transactions are also done on monthly basis as indicated by 9% of the traders, in this case mostly through cheque (5%), over the counter (1%). About 4% of the traders transact with their accounts on weekly basis, while only 1% transact once in 3 months.
For those who do not operate accounts with the formal financial institutions, various reasons were given. About 33% claim not to have any money; 15% don’t trust financial institutions while 13% claim that service fee or premiums are too expensive. Other important reasons include interest charged/riba (5%); financial institutions are located far away (4%); or someone else in the family has an account already (4%). Lack of necessary documentation such as ID card, wage slips etc was a reason for only 1% of the traders interviewed.
In addition to ownership of accounts, 33% of the traders who have accounts with money transfer companies belong to Hagbed, while out of the 74% that do not have accounts, 46% are not in ROSCA/Hagbed.
The main reason why traders are in hagbed is mainly for them to save on periodic basis (26%); and for the unexpected event or emergencies (3%). Other reasons are attributed to the high cost of maintaining formal accounts (1%) and the fact that formal financial institutions are generally located far away (1%).

4.6 Mobile money transfer
The usage of mobile money transfer is high amongst traders. About 161 (96%) use mobile money services. However, the usage is higher amongst traders aged between 18-30 years (53%) and 31-40 years (31%). The usage amongst age group of 41-60 years is 12%, while the rest are above 60 years.
In terms of gender, more men than women traders have access to financial services. Majority of men (24%) have accounts with the formal money transfer companies as opposed to 2% of women. In mobile phone money transfer, about 79% of the users are men in comparison to women, who are only 17%. About 24% of men use hagbed services compared to 8% of women. There are various factors which affect women in accessing financial services, partly of which are religious or cultural. The figure below depicts access to financial services by gender

4.7 Savings services
Most of the traders i.e. 63% save their money. The main purpose of saving is for buying goods and services (39%); buying house (13%); to pay school fees and related expenses (5%); for building extensions or renovation (3%); to buy livestock or farm inputs (2%); or for emergency/health purposes (1%) ; and for [performing last rites or marriage (1%). The table below describes the disparate reasons why traders save.
Most of the saving is done through mobile money service popularly known as zaad (18%) the hagbed (16%); banks, mainly remittance companies (14%); and keeping in the strong room at home (8%). Others save with shopkeepers (5%); keep with family or friends (1%) and saving in form of livestock or property (1%).

4.8 Credit services
Most of the traders in Hargeisa Municipality have not borrowed money in the last 12 months. This constitutes 65% of the total number of traders interviewed. However, for those who have borrowed, about 19% have been buying goods from suppliers on credit; while 10% have borrowed from family or friends. About 4% have borrowed from hagbed while the remaining 3% have borrowed from employers, microfinance institutions or remittance companies.
The main purpose of borrowing has been to buy goods and services as indicated by 27% of the traders; However, about 3% borrow for emergency or health purposes; 2% borrow for buying house; 2% for building extension or renovation purposes and 1% borrow to pay for school fess and related expenses.