The Horn Of Africa States: The Financial Squeeze – OpEd

There is a financing squeeze on the Horn of Africa, just “as is” in the rest of other African regions. These result, in the main, from mostly man-made economic risks, mostly perception and actual. They emanate from mismanagement, which portends conflicts and hence socio-economic and political risks. Who would lend to places where there are wars and other catastrophes, all the time? Money is cowardly by nature and abhors risks. Climate change, in the form of droughts, famines, and floods, adds to the spectra of issues that plague the region and the continent. 

Financial institutions are generally averse to any risk. The funds that banks and financial institutions deploy belong to depositors which they are expected to keep safe and sound. Before they extend any financing, they need to know if the funds will come back and if a borrower will have the ability to pay them back along with the returns expected of them on time and as agreed. This the credit risk of the matter.

Banks make money because they lend away other people’s monies entrusted with them. Essentially, they borrow from depositors, which they probably compensate little or none and charge their borrowers higher thus profiting, in the main, from the difference between what they pay to depositors and what they earn from borrowers. They also make monies from investment banking and wealth management for rich people and families.

Financial institutions require stable environments, strong legal infrastructures and structured regulatory systems to operate. The risks they take include credit risks, operational risks, liquidity risks and other risks. Their failure will generally affect millions of people who may have entrusted their funds with them. No wonder many banks, even local ones avoid lending to the region and the continent because of both perceived and actual risks they face in the conduct of their business.

The Horn African banking system was inherited from colonial times and did not evolve much as in other parts of the world. There is generally a weak legal infrastructure coupled with poor creditor rights and hence inefficient enforcement rights. A government might just violently change and then there is no recourse to a stable legal system. There is also political instability and conflicts that mark the region. The banking and financial systems of the region prefer to deal with the governments and the upper echelons of society, which thus causes the banking and financial system to have no depth of consequence. Most of the populations, therefore, do not enjoy the services of banking and financial institutions, and when available, it is usually prohibitively expensive.

In Ethiopia, the financial system is mostly government owned, although over the past three decades a number of private institutions have come into the market but their activities were generally limited by a number of other extra-financial factors such as government controls and inability to expand within the country’s ethnic infrastructure. In Somalia, it is almost anarchic and without a central bank to regulate the system. There is no legal currency in the country and all the local money supply is all illegal and forged. The economy is thus managed through the United States dollar, which is the basis of all transactions, even buying a cup of coffee. In Eritrea, the system is entirely government owned. It is only in Djibouti where a modicum of a normal banking system prevails with a central banking institution playing the real role of such a regulatory institution and system involving mostly privately owned banks and financial institutions and even foreign banks operating in the country.

It is perhaps good to mention here that a financial system makes movement of monies between savers and borrowers easy, while at the same time ensuring that funds are efficiently deployed to support economic growth and hence development. While there is some modicum of such financial systems in the region, as is in the rest of the continent, one must also point out, there is still a squeeze in the availability of capital and finance in the region. 

Capital and/or finance is one of the main factors of production, which also include land and there is plenty of it in Africa and the region, labor which is similarly large and available and entrepreneurship, which although available, lacks mostly the capital.

This is relative, of course, to other regions of the world such as Europe, the Americas, and Asia, where scattered capital in the hands and pockets of millions of households in these economies are channeled through the banking and financial systems to the productive sectors of those economies. This is not the case in the Horn of Africa States region and/or the rest of the continent.

In the region, a large part of capital remains scattered and remains lazy and unemployable in the economic sectors of the economy, which, therefore, increases unemployment, reduces tax collections of the states and hence leads to the inabilities of governments to provide the services the citizens need. It is how dissatisfaction with governments arise which then leads to internal conflicts and the cycle is repeated year in year out, government in government out and it all boils down to lack of capital and finance.

Foreign financial institutions shy away from taking risks on the region and the continent as the local ones also appear to lack the capacity not only to penetrate their own markets but also color themselves with their political leanings, the tribe and clan. 

The continuing conflicts and the unsettled political set up of the region are, therefore, a resultant product of the lack of capital and the squeeze of finance in the region and beyond in the continent. Where is there is a better availability of capital such as Nigeria, South Africa and Egypt, there seems to be growing economies although each economy has its own specific problems.

The banking and financial systems are also hurt by the fake statistics given on the region and generally on the continent in measures like the GDP, the Per Capita Income, the size of the businesses and the like. When one, for example says, the population of Somalia is 19.2 million according to Worldometers.com today, the 2^nd of November 2024, one should ask how this number was obtained and calculated. 

It must be based on some previous statistics. No census of substance has ever been made on Somalia and Somali populations for decades, probably five to six decades. In 1960, the population was estimated to be about 3.6 million, which should probably make it some thirty million today. But that one fake Worldometers.com number is used to determine the destiny of whole populations which remain uncounted and outside economic calculations. This number is important as it is the basis of the per capita income of the country.

Another fake statistic which does not help is the Gross National Product of a country. In Somalia for, instance, at least over fifty percent of the population is rural and nomadic or agro-pastoralist. Their productivity is not in the statistics. No records are available on how much they produce and contribute to the economy, but a number is picked up out of the blue to represent the Gross National Product of the country, which then produces a low GDP and a low Per capita Income. This starts to paint the country at a level which is basically not factual or true.

No one denies that there is poverty in the country, but there is poverty everywhere. Only the poverty in Somalia and other countries of the region and the continent are more pronounced than they really are. It is how banks and financial institutions also shy away from lending to the region and to the continent because the fake statistical numbers produced stand in the way.

Countries of the region, therefore, become marked and eternally painted the poor countries, which only roots more the inabilities of the populations to reverse this constantly repeated character assassination of the region. This affects how the international banking systems and even the local banking systems view the region and the people of the region. It is how unemployment is created and how governments become unable to collect taxes from its citizens or at least from those who are able to pay and provide to those who fall below certain levels of income. 

When an economy is financed and running at say medium speed or even perhaps declining, stimulating policies are made by governments to encourage more production. This may involve governments borrowing funds from the banking system and embarking on infrastructure projects or other sectors such as education facilities and health facilities to create employment and regenerate the economic production cycle. 

These issues for the time being seem to be outside the orbits of governments in the region. In the case of Somalia, for example, governments seem to be more politicized than they should be, which translates into personal preservation than national preservation, the unfortunate story of many African governments. They work on how to stay in power longer than to manage the economies and finances of their countries and hence development.

The financial squeeze on the region has many other causes, but the fact remains that it does exist. Lenders are unable to provide the necessary financing when there is really a need for such financings. The resources of the region thus remain generally unexploited and underutilized, which only keeps the poverty levels worsening by the year.