Strengthening Somalia’s Financial Sector: The Emerging Role of Non-Bank Financial Institutions

Policy
Briefs
June 2025
010/2025
Strengthening
Somalia’s Financial
Sector: The Emerging
Role of Non-Bank
Financial Institutions

June 2025
CBS Policy Briefs info@centralbank.gov.so www.centralbank.gov.so @CBSsomalia Central Bank of Somalia ©2025 In the case of quotation, please refer to this Publication as follow: - Central Bank of Somalia (CBS) Policy Briefs: June 2025 Mogadishu – Somalia To request a complimentary copy of this report, an electronic copy is available at www.centralbank.gov.so 55 Corso Somalia P. O. Box 11 Mogadishu, Somalia

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Strengthening
Somalia’s
Financial
Sector: The
Emerging
Role of
Non-Bank
Financial
Institutions
Policy Research & Analysis Division Research and Statistics Department Monetary, Financial, Regulatory Policy Group Central Bank of Somalia June 2025

Executive Summary
Somalia’s financial sector has undergone substantial transformation in recent years, driven by progressive reforms from the CBS to improve stability, financial inclusion, and regulatory oversight. Central to this transformation is the emergence and expansion of NBFIs, including MFIs, insurance companies, money transfer operators, and mobile money service providers. These entities play a growing role in enhancing financial accessibility, particularly for underserved communities, women, youth, and small businesses. The CBS has led several landmark reforms including the introduction of a national payments system, IBAN implementation, a digital eKYC framework, the adoption of the SOMQR code standards and the launch of the Somali Instant Payment System (SIPS). Complementary legislative reforms was enacted such as the Takaful Act 2025and amendments to the Financial Institutions Law 2025 reflect Somalia’s alignment with global standards and its commitment to financial resilience. The National Payment Bill is currently under the parliament review and will be enacted soon, Microfinance institutions have expanded significantly, offering tailored financial products and services, particularly to low-income populations. However, challenges persist, including high operational costs, credit risk due to lack of collateral, and limited financial literacy. The insurance sector, while nascent, has shown promise, particularly through the adoption of Sharia-compliant Takaful insurance. The number of licensed providers has grown to twelve by 2024, expanding services in health, construction, and livestock insurance. While the sector remains underdeveloped, initiatives like the Takaful Act and increasing diaspora investment signal its growing relevance. A regional comparison with East African Community (EAC) countries shows Somalia lagging behind in regulatory sophistication and market development. Unlike peers like Kenya and Rwanda, Somalia was lacking robust frameworks for NBFIs and continued to rely heavily on informal mechanisms. Despite recent legislative progress, Somalia’s NBFI sector still faces several key challenges, including limited credit infrastructure due to the absence of credit bureaus and asset registries, weak KYC/AML enforcement due to the slow rollout of the national identification, absence of capital market compounded by high lending cost; underdeveloped insurance and remittance integration frameworks;, and low levels of financial literacy across all demographic groups. The policy recommendations from the study emphasize the need for regulatory enhancement through risk-based supervision, tiered KYC frameworks, and strengthened regulatory capacity; development of financial infrastructure, including a national credit bureau and interoperable payment systems; support for microfinance and SME lending via community-based models and digital credit scoring; acceleration of currency reform alongside public education on the new Somali Shilling; development
of the insurance sector with a focus on rural outreach and Sharia￾compliant products; improved remittance oversight to integrate diaspora flows into formal financial systems; and nationwide financial literacy campaigns targeting youth and women.

1. Introduction
   Somalia’s financial sector has made remarkable progress in recent years, moving towards greater stability, inclusiveness, and integration into the global economy. The Central Bank of Somalia (CBS) is at the forefront of this transformation, demonstrating a strong commitment to rebuilding and modernizing the country’s financial infrastructure. This commitment includes a multifaceted approach focused on strengthening regulatory frameworks, enhancing financial stability, and improving the overall resilience of the financial system. To promote financial inclusion, the CBS is implementing a series of reforms designed to empower individuals and small businesses, particularly those in underserved communities.

These efforts are beginning to yield positive outcomes, as evidenced by increased public trust in financial institutions and a noticeable rise in private sector access to credit. By facilitating access to necessary financial resources, the CBS aims to stimulate economic activities and foster entrepreneurship, which are vital for the nation’s growth. The CBS actively collaborates with various stakeholders to catalyze financial development, including government agencies, private financial institutions, and international partners. This collaborative approach aims to enhance the overall economic infrastructure through innovative solutions and technology integration, fostering a more efficient and accessible financial ecosystem1 . Such partnerships also help leverage global best practices, ensuring that Somalia can benefit from the lessons learned by other nations. Through these comprehensive initiatives, the Central Bank of Somalia is working to stabilize the financial system and lay the groundwork for a more inclusive economy that supports sustainable development and improves the livelihoods of its citizens. This study aims to provide a comprehensive review of significant developments in the financial sector over recent years. It will explore various aspects such as technological advancements, regulatory changes, shifts in consumer behavior, and the impact of global economic trends. By examining these areas, the study seeks to offer a detailed understanding of how these factors have shaped the landscape of finance, influencing both institutional practices and individual financial decision-making. The paper is organized into eight sections: The introduction sets the context for strengthening Somalia’s financial sector through NBFIs. Recent reforms 1 CBS, Quarterly Economic Review (2024 Q3). https://centralbank.gov.so/wp-content/uploads/2025/03/Quarterly-Economic￾Report_Q3_2024.pdf 2 CBS, Quarterly Economic Review (2024 Q3). https://centralbank.gov.so/wp-content/uploads/2025/03/Quarterly-Economic￾Report_Q3_2024.pdf 3 CBS, Quarterly Economic Review (2024 Q4). https://centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic￾Report_Q4_2024.pdf highlight regulatory progress. The growth of microfinance and insurance services shows expanding financial access and risk protection. Currency exchange and remittances underscore their vital role in liquidity and household support. A regional comparison offers lessons from EAC countries. The paper ends with key issues and policy recommendations to enhance NBFI development.
2. Recent Development
In recent years, CBS has achieved several significant milestones, including introducing a national payments system, regulating and supervising the mobile money sector, implementing International Bank Account Numbers (IBAN), and adopting an AML/ CFT compliance module and SOMQR Code standardization guideline. These efforts demonstrate Somalia’s progress in revitalizing its financial services sector and paving the way for a more inclusive and prosperous economy. One key aspect of Somalia’s financial sector development was the continued expansion of mobile banking and digital financial services. With the increasing penetration of mobile phones nationwide, mobile money platforms played a crucial role in improving access to financial services, especially in rural areas. This trend facilitated transactions and promoted financial inclusion among underserved populations2 . As of December 2024, Somalia’s financial sector includes thirteen domestic commercial banks, one foreign bank branch, fifteen money transfer businesses, and five mobile money service providers. Additionally, the sector has 12 registered non-life insurance companies, 22 non-deposit-taking microfinance institutions, and six money exchange bureaus3 .

Somalia’s banking sector has undergone significant transformation, driven by efforts to modernize financial systems, enhance regulatory frameworks, and promote financial inclusion. The sector play a vital role in supporting economic growth, building trust in formal financial institutions, and expanding access to banking services. Key collaborations between government agencies, financial institutions, and international partners have been instrumental in advancing reforms, improving governance, and integrating Somalia into the global financial system. The total assets of the banking sector have been increasing continuously, reflecting a significant rise in public trust in banks. The total assets of the banking sector in 2024 reached over US$2 billion4 .
2.1 Recent Reforms in the Financial Sector
Over the past decade, CBS has been actively rebuilding the country’s financial infrastructure through a series of strategic reforms to strengthen the financial sector and promote financial inclusion. In recent years, CBS has introduced key legislation to align regulatory 4 CBS, Quarterly Economic Review (2024 Q4). https://centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic￾Report_Q4_2024.pdf frameworks with international best practices, expand supervisory scope, and build a more resilient financial sector with robust risk management practices. Significant initiatives include of the Takaful Act, the amendments to the Financial Institutions Law and the Revised Anti-money Laundering and Counter-terrorist Financing Act. To further promote financial sector integrity. In late 2024, the CBS Board approved the Electronic Know Your Customer (e-KYC) regulation, standardizing KYC procedures and enabling financial institutions to digitally verify customer identities, improving operational efficiency and regulatory compliance. In partnership with the National Identification and Registration Authority (NIRA), CBS has integrated e-KYC into the national identification system, the Memorandum of Understanding (MOU) between CBS and NIRA as well the MOU between NIRA and Somali Bankers Association on electronic verification through Hubiye platform further strengthening the integrity and security of the financial system. CBS has also revolutionized Somalia’s payment ecosystem by implementing the Somali Instant
Figure 1: Structure of Financial Sector in Somalia
Sources: CBS 2024
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Figure 2:
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Figure 2:

Payment System (SIPS), facilitating real-time transactions and significantly expanding access to banking services for both urban and rural populations. In its commitment to supporting Islamic finance and broader financial inclusion, CBS has become a member of international organizations such as the Islamic Financial Services Board (IFSB) and the Alliance for Financial Inclusion (AFI). These memberships enhance CBS’s ability to align with global standards and promote inclusive growth. Another critical milestone is CBS’s joining the World Bank’s Reserve Advisory and Management Partnership (RAMP). This partnership equips CBS with essential technical expertise to improve the management of foreign exchange reserves, enhance liquidity oversight, and mitigate financial risks, all of which are vital for stabilizing the monetary system. The collective reforms currently underway are particularly timely and essential as Somalia prepares to reintroduce the Somali Shilling (SOS). This significant move represents a crucial step toward achieving long-term economic stability in a country that has faced prolonged fiscal challenges. With CBS implementing a currency board arrangement, the introduction of the new shilling will serve a vital liquidity function. They will facilitate everyday transactions, particularly for small-value payments, thereby enhancing the efficiency of financial exchanges within local communities. Furthermore, this reform is expected to encourage financial inclusion, especially for Somalia’s most vulnerable populations, including low-income individuals and those who have traditionally been marginalized from formal financial systems. By increasing access to a stable currency, the CBS aims to empower these groups, enabling them to participate more fully in the economy and improve their overall livelihoods. Overall, the reintroduction of the SOS not only symbolizes a return to a more stable monetary system but also reflects a broader commitment to fostering economic resilience and social equity in Somalia.
3. Growth of Microfinance Institutions
Microfinance institutions (MFIs) have experienced remarkable growth in recent years, expanding their services beyond small￾scale loans to include savings products and financial literacy programs. These institutions primarily target underserved populations, with a particular emphasis on empowering women and youth. By doing so, they play a pivotal role in fostering entrepreneurship, reducing poverty, and stimulating local business growth. Financial inclusion remains central to their mission. MFIs have developed targeted programs designed to enhance access to essential financial services for various demographic groups, including youth, women, small enterprises, and rural communities. Such inclusivity enables greater participation in the economy and contributes to a more equitable society. Mobile banking has further transformed the microfinance landscape. With the widespread adoption of mobile phones, MFIs have leveraged technology to facilitate greater access to financial services, enabling individuals in remote or underserved areas to access the financial services more easily. This technological advancement has been instrumental in increasing participation rates among populations that historically faced barriers to financial access. In addition to enhancing individual financial capabilities, CBS has made it a priority to support small and medium-sized enterprises (SMEs). This commitment includes improving access to credit for these businesses, fostering job creation, and driving economic growth. By providing the necessary resources and support, CBS aims to cultivate a vibrant ecosystem for SMEs, which are essential for overall economic stability and development.

The microfinance sector in Somalia plays a vital role in fostering economic development by offering financial services to individuals and small businesses that are often excluded from traditional banking systems. Despite its importance, the sector faces several significant challenges that impede its growth and overall effectiveness. One of the foremost obstacles is the limited rollout of the National identification, which restricts the ability of many potential clients to access essential financial services. Without official identification, individuals may find it difficult to open accounts, request financing, or engage in formal financial transactions. In addition to identification issues, the microfinance sector in Somalia grapples with other critical challenges. These include limited financial literacy among potential borrowers, which can lead to poor financial decision-making and high default rates. To address these challenges, Central Bank of Somalia has issued the Non-Deposit Taking Microfinance Licensing Regulation in May
2025. Prior to that, National Identification and
Registration Authority (NIRA) was established, and the ID process was rolled out. As of June 2025, ten (10) licensed commercial banks have been fully integrated and tested in this platform, remaining banks and other financial institutions will be integrated in the fourth quarter of 2025. In addition, to support an effective implementation of the eKYC regulation, NIRA has introduced online verification platform – Hubiye Platform, that has been integrated with financial institution systems. Additionally, the ongoing instability and insecurity in the region present logistical challenges, making it difficult for microfinance institutions to operate effectively and reach underserved populations. The lack of infrastructure, such as credit information sharing, collateral registry and affordable technology, further compounds these difficulties. In summary, while the microfinance sector in Somalia can empower individuals and stimulate economic growth, addressing these multifaceted challenges is crucial for unlocking its full potential and creating a more inclusive financial landscape. Additional key challenges currently facing the microfinance sector in the country include:
Figure 2: Number of Microfinance Institutions Registered (Cummulative)
Source: CBS, 2024
Figure 1:
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Figure 2:

1. Operational Costs
   The sector faces significant operational expenses, including staff salaries, administrative overhead, and outreach activities required to serve remote or underserved communities. However, high operational costs with limited financial resources often constrain their capacity to scale services and reach more vulnerable populations.

2. High Credit Risk and Loan Defaults
   The informal nature of many businesses in Somalia makes it challenging to assess creditworthiness. Borrowers often lack collateral, increasing the risk of loan defaults and financial losses.

3. Low levels of financial literacy
   Low levels of financial literacy among the population pose a significant challenge. Many potential clients often face difficulties in accessing affordable and sustainable funding sources.

4. Complex application requirements
   Complex application requirements, such as the need for guarantors and collateral, create significant barriers to microfinance adoption. BOX 1: IMPACT OF MICROFINANCE FUND The CBS microfinance fund originated from a $3 million donation by the State of Kuwait (Kuwait Fund for Arab Economic Development) to the Federal Government of Somalia in 2013. This fund was designated to promote financial inclusion and support small-scale investors. Building on this opportunity, CBS launched a microfinance project in January 2017, introducing a free loan scheme distributed through licensed commercial banks. Acting on behalf of CBS, these banks were tasked with distributing small-scale loans to individual entrepreneurs and small and medium-sized enterprises (SMEs). Implemented in five phases, the microfinance project demonstrated significant outreach and impact. With a total of 11,040 direct beneficiaries and considering Somalia's average household size of five, the initiative indirectly benefited approximately 55,200 individuals. The fund targets vulnerable groups such as unemployed individuals, small entrepreneurs, and farmers, who often face barriers to formal financial services due to collateral requirements and low-income levels. The initiative notably promoted financial inclusion, economic empowerment, and self-employment, especially among youth and women. Of the direct beneficiaries, 66% were women and 34% were men. Young adults aged 30 and below accounted for 33% of recipients, those aged 31–40 at 30%, and the 41–45 age group at 23%. These figures underscore the fund's role in empowering individuals across various life stages, strongly emphasizing support for emerging entrepreneurs and those in their most productive working years. Beyond individual impact, the fund played a pivotal role in fostering entrepreneurship and sustaining small businesses, thereby contributing to local economic development. A survey of beneficiaries revealed that all respondents used the funds either to expand existing businesses or to launch new ventures. Specifically, 70% of recipients used the funds to grow their current businesses, while 30% used them to start new ones. The fund supported a diverse range of sectors, including SMEs, service providers, small livestock traders, as well as agricultural and health centers across all Somali federal member states. A sectoral breakdown of microfinance fund utilization shows that SMEs accounted for the largest share at 75%, followed by Food & Restaurants (13%), Agriculture (5%), Health Sector (3%), Livestock (2%), Fishing (1%), and other categories (1%). This distribution highlights the fund's wide-reaching impact across critical economic sectors, demonstrating its importance in supporting both business development and broader socio-economic resilience.

5. Emergence of Insurance Services
   The insurance industry in Somalia is gradually evolving and demonstrates promising growth potential despite being in its nascent stages. Over recent years, several new insurance companies have entered the market, introducing a diverse portfolio of products aimed at meeting the unique needs of the Somali population. These offerings include health insurance, construction insurance, and livestock insurance, reflecting the country’s economic activities and cultural practices. To foster this expansion and safeguard consumer interests, regulatory frameworks are being developed to ensure that the industry operates with integrity and transparency. By 2024, the number of registered insurance companies in Somalia is expected to reach twelve, marking a significant increase as more businesses recognize the value of insurance as a financial service. A major milestone in this progress was the introduction of the Takaful Act in 2025. This legislation, designed to promote Sharia￾compliant insurance practices. The passage of the Takaful Act not only reflects an effort to diversify insurance offerings but also aims to build trust and encourage participation among communities that have previously been hesitant to engage with conventional insurance products. This development is positioned to transform the landscape of insurance in Somalia, creating a solid foundation for its future growth. Aspect Details Origin $3 million grant by the State of Kuwait to the Federal Government of Somalia in 2013 Purpose Promote financial inclusion and support small-scale investors Launch Date January 2017 Loan Scheme Free loan scheme distributed through licensed commercial banks Direct Beneficiaries 11,040 Indirect Beneficiaries Approximately 55,200 Target Groups Vulnerable groups such as unemployed individuals, small entrepreneurs, and farmers Gender Distribution 66% women, 34% men Age Distribution 30 and below: 33%, 31-40: 30%, 41-45: 23% Fund Usage 70% to expand existing businesses, 30% to start new ones Sectoral Breakdown SMEs: 75%, Food & Restaurants: 13%, Agriculture: 5%, Health Sector: 3%, Livestock:
   2%, Fishing: 1%, Other: 1%
   Figure 3: Number of Registered (licensed) Insurance Companies
   Source: CBS, 2024
   Source:
   Figure 3:
   Source:

Despite ongoing challenges, the sector holds significant potential for growth. The increasing demand for risk management, driven by personal and business needs, presents a significant growth potential. Additionally, the Somali diaspora, which has shown considerable investment interest, could play a vital role in supporting the development of the insurance market. The rise in digital financial services offers new avenues for expanding insurance coverage, particularly in underserved areas. Furthermore, the potential for Sharia-compliant insurance products, such as Takaful, aligns with cultural and religious preferences, offering a pathway to increase insurance uptake. Similar to other segment of the financial sector, the insurance industry remains in its infancy. Following the collapse of the state in 1991, Somalia was left without any formal insurance system for nearly three decades. In recent years, however, the sector has begun to re-emerge, largely through Islamic insurance models known as Takaful5 . Under this cooperative system, participants contribute to a shared pool to protect one another against loss or damage. Takaful operations were introduced in Somalia for the first time in early 2018, and the first insurance company was officially registered with the Central Bank of Somalia that same year.
5. Currency Exchange Services
CBS has initiated a series of comprehensive reforms designed to stabilize the exchange rate market, focusing on the unification of exchange rate management and the restoration of confidence in the foreign exchange sector. Since 2018, CBS has taken significant steps by registering six money exchange bureaus, a move intended to formalize and regulate a sector that has historically operated in a largely unregulated environment. The revised Financial Institutions Law 2025 gives clear mandate for CBS to regulate and supervise the sector. In the 5 Chepngeno, S., Karanja, D., & Abrar, Y. “Enhancing opportunities for non-banking financial institutions and approaches in Somalia,” May 2022. 6 CBS. Annual report 2023. https://centralbank.gov.so/wp-content/uploads/2024/11/CBS-Annual-Report_2023.pdf current economic landscape, the economy is highly dollarized, and most exchange bureaus in Somalia primarily facilitate transactions in US dollars. This situation arises from the fact that CBS has not issued any currency since 1991, resulting in the country effectively becoming a dollarized economy, where the U.S. dollar is frequently used for everyday transactions and savings. This lack of a national currency has posed challenges for economic policy and financial stability. Recognizing the importance of monetary control, CBS has prioritized currency reform as a key objective. The bank has made substantial progress in this area and has reportedly completed most of the critical actions and benchmarks established in its currency reform roadmap. These steps are crucial for fostering a more stable economic environment and restoring the functionality of the national currency in the future6 .
6. The Role of Remittances in Shaping
Somalia’s Financial Sector While remittances themselves are not classified as NBFIs, but rather a payment platform, their critical role in Somalia’s economy and financial landscape warrants attention in any analysis of financial sector development. Remittances play a vital role in bolstering Somalia’s economic stability, serving not only as a financial lifeline for countless households but also as a significant catalyst for broader economic growth. These monetary inflows support millions of families, enabling them to access essential goods and services, which are crucial for their daily survival. Additionally, remittances encourage entrepreneurship and create job opportunities, thereby fostering a culture of self-sufficiency and innovation within communities. The impact of remittances extends beyond individual households; they contribute substantially to the national economy by infusing much-needed foreign currency. This influx of funds boosts consumer

spending, which is essential for stimulating local markets and enhancing overall financial resilience in a challenging economic landscape. In 2024, Somalia witnessed total inward transfers reaching an impressive US$6.23 billion, highlighting the critical importance of remittances in the country’s financial architecture. Individual remittance alone surged to US$2,7191 million, reflecting a growing trend among the diaspora to support their families back home. Business transfers also saw a robust increase, totaling US$2,3152 million, underscoring the reliance on remittances to fund local enterprises and economic activities. Moreover, transfers from non-governmental organizations (NGOs) increased steadily, reaching US$1,0072 million, which shows these entities’ essential role in providing humanitarian assistance and development support. Overall, the steady growth of remittance inflows highlights their critical function in improving the living standards of Somali families, stabilizing the economy, and fostering a more resilient financial future for the country. This rise indicates more substantial financial support from the Somali diaspora, increased business activity, and improvements in remittance processing channels. The consistent increase in remittances indicates its significance in the economy, supporting household incomes, investments, and overall financial stability. Advancements in Somalia’s financial sector have further amplified the positive impact of remittances. Improved access to mobile money services, enhanced regulatory oversight, and increasing financial inclusion have made transferring funds through formal channels easier and more secure. This has helped to build trust in the financial system and align remittance flows with Somalia’s broader financial sector development goals.
Table 1: Remittance Inflows in Millions of US Dollars (2019-2024)
Inflow 2019 2020 2021 2022 2023 2024 Individual Remittance 1,339.3 1,642 2,101.8 2,150.9 2,181.3 2,719.1 Business 779.7 911.4 1,021.3 984.5 1,085.8 2,315.2 Grants 502.7 620.7 757.4 943.6 1,068.6 1,007.2 Other Swift Transfers 172.4 271.1 402 667.1 1,334.1 188.5 Total 2,794.2 3,445.2 4,282.6 4,746.1 5,669.8 6,230 Source: CBS, 2024
7. Regional Comparative Perspective:
EAC
NBFIs are increasingly recognized as vital pillars of inclusive financial systems across East Africa. Countries within the East African Community (EAC), including Kenya, Rwanda, Uganda, and Tanzania, have actively developed regulatory frameworks, institutional arrangements, and policy innovations to formalize and expand the role of NBFIs. In contrast, Somalia’s NBFI sector is still in a formative stage, characterized by fragmented regulation, limited supervisory capacity, and informal service delivery channels. While mobile money services and microfinance institutions are expanding rapidly, Somalia has yet to develop a cohesive legal and regulatory structure that supports their growth and integration into the broader financial sector.

Table 2: Comparative Overview of the East African Region (EAC)
Country Legal Framework NBFI Categories Covered Key Innovations Supervisory Body Kenya Microfinance Act (2006); SACCO Societies Act (2008) MFIs, SACCOs, digital lenders M-PESA integration, SASRA oversight, and digital credit licensing Central Bank of Kenya; SASRA Rwanda Law on Microfinance Institutions (2008, revised 2018) MFIs, cooperatives, e-wallets Digitization of Umurenge SACCOs, interoperable digital finance National Bank of Rwanda Uganda Financial Institutions Act (2004); Tiered regulation MFIs (Tier 3 & 4), SACCOs, mobile money Tiered licensing, agent banking Bank of Uganda Tanzania Microfinance Act (2018) MFIs, community banks, mobile lenders Agency banking, financial inclusion strategy Bank of Tanzania Somalia Financial Institutions Law (2025), with Non-Deposit Taking Microfinance Licensing Regulation 2025 Takaful Insurance, Microfinance and Money Transfer Businesses Mobile Money, Instant Payment Systems, Agent banking and other financial institutions and electronic customer verification. Central Bank of Somalia
8. Key Notable Issues in NBFI
Somalia’s NBFIs face several systemic and structural challenges that hinder their effectiveness and outreach. Key issues include:

1. Credit Risk in Microfinance
   Due to the absence of traditional collateral and most clients limited or non-existent credit history, MFIs face elevated credit risk. This restricts loan disbursements and increases default rates, making sustainable lending difficult in the long term.

2. Lack of Credit Market Infrastructure
   Somalia lacks essential credit market infrastructure such as an asset registry, credit bureau, or collateral verification systems. As a result, lenders rely on informal risk assessments and impose high collateral requirements, severely limiting access to finance for micro and small enterprises.

3. KYC (Know Your Customer) and
   Security Challenges
   Many clients lack formal identification documents or possess minimal identification. This poses a significant hurdle for compliance with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations, making onboarding and monitoring of clients difficult for MFIs and other NBFIs.

4. Unregulated Foreign Exchange
   Practices
   The absence of a formal, centralized foreign exchange market and reliance on informal money changers has led to fragmentation. Without a regulated and transparent exchange rate framework, it is challenging to maintain investor confidence or facilitate effective cross-border trade.

5. Absence National Currency in
   Circulation
   The lack of a widely accepted, national currency undermines the foreign exchange market. Most transactions occur in U.S. dollars or old Somali shillings, weakening the effectiveness of the foreign exchange market and limiting the central bank’s influence over the NBFI sector.

6. Nascent Insurance Sector
   Somalia’s insurance sector remains underdeveloped, with limited formal providers and low market penetration. Key regulatory frameworks, including those for Takaful (Islamic insurance), are still being finalized, creating uncertainty and limiting sector growth. This lack of risk-mitigation instruments, especially for agriculture, property, and life, exposes individuals and enterprises to high financial vulnerability.

7. Limited financial literacy
   While NBFIs have increased access to financial services, financial literacy among the users remains low. Many customers are unaware of their rights, service terms, or risk exposure when entering into financial contracts or micro-loans to access financial services.

8. Gaps in Remittance Regulation and
   Integration
   While remittances are a primary source of income for Somali households and an essential
   part of the economy, the sector has limited
   prudential policies to strengthen regulatory oversight and link remittance flows with formal financial products. This limits the potential of remittances to contribute more effectively to financial inclusion and sector stability.

9. Policy Recommendations

1. Regulatory and Supervisory Reform

• The CBS should be strengthened to
  effectively regulate Non-Bank Financial Institutions (NBFIs) by providing the necessary technical and financial support. This includes enhancing its capabilities for licensing, advancing risk-based supervision, and monitoring regulatory compliance throughout the NBFI sector.
• The CBS should intensify collaboration with
  NIRA to leveraging digital identity systems, biometric verification, and community￾based referencing models to improve client onboarding while maintaining AML/CFT compliance.

2. Financial Infrastructure Development

• Integrate NBFIs and banks into a centralized,
  interoperable payment system to ensure efficiency, security, and inclusion.
• Create a National Credit Information Bureau
  to enable better credit assessment, reduce loan defaults, and facilitate lending between NBFIs and SMEs.

3. Manage risks to reduce defaults

• Encourage solidarity group lending models
  and peer-guaranteed microloans to reduce default risks and leverage community accountability to get creditors to pay.
• Implement innovative credit assessment
  tools using mobile phone usage, transaction history, and behavioral analytics.

4. Expedite the national currency project
   and encourage its usage

• Accelerate the printing and distribution
  of new Somali shillings Educate citizens and businesses on the benefits of the new Somali shilling to build confidence and encourage uptake.
• CBS, in collaboration with NBFIs, civil society
  organizations, and educational institutions, should roll out community-based digital financial education programs tailored to women, youth, and other vulnerable groups. These efforts will improve understanding of economic rights, service terms, and risk management.

5. Encourage the development of the
   insurance sector

• Provide tax breaks or technical grants
  for insurers to develop micro insurance, agricultural, property, and life insurance products.
• Collaborate with civil society and religious
  leaders to demystify insurance and promote uptake, particularly in rural and agri￾dependent communities.

6. Strengthen Remittance Oversight
   and Integration with Formal Financial Services

• The Central Bank of Somalia should
  enhance regulatory oversight and digital infrastructure for remittance service providers, including digital uplifiting and improving interoperability with other payment plaforms.

Reference
Central Bank of Somalia. (2024, Annual report 2023). https://centralbank.gov.so/wp-content/uploads/2024/11/ CBS-Annual-Report_2023.pd Central Bank of Somalia. (2024). Quarterly economic review (2024 Q3). Mogadishu, Somalia. https:// centralbank.gov.so/wp-content/uploads/2025/03/Quarterly-Economic-Report_Q3_2024.pdf Central Bank of Somalia. (2024). Quarterly economic review (2024 Q4). Mogadishu, Somalia. https:// centralbank.gov.so/wp-content/uploads/2025/06/Quarterly-Economic-Report_Q4_2024.pdf Chepngeno, S., Karanja, D., & Abrar, Y. (2022, May 31). Enhancing opportunities for non-banking financial institutions and approaches in Somalia. Support to Policy Dialogue for Investment Climate in Somalia, EU Service Contract: T05.EUTF-HOA-So-57-12. https://dai-assets.s3.amazonaws.com/projects/NBFI%20 Study%20_book_WEB%20%281%29.pdf

CENTRAL BANK OF SOMALIA info@centralbank.gov.so www.centralbank.gov.so @CBSsomalia Central Bank of Somalia