The Horn Of Africa States: Financing The Region’s Future Economic Development – OpEd
Now that the first quarter of the 21st century has drawn to a close, Africa still finds itself largely excluded from global economic decision-making processes. Meaningful participation of the continent in these forums is essential for its long-term prosperity and, to borrow the overused phrase, may be “sustainable economic development.” Economic decisions include finance and money, and it is where Africa still lags behind other continents and more so the Horn of Africa States region.
The region is, indeed, marked by financial fragility in the form of limited domestic savings and growing fiscal deficits. Its debts to the world beyond the region burden it more, although multilateral institutions continually come to assist the region, and help manage its fragile financial system.
Along with the withdrawal and shying away of international financial institutions from the region, the financial sector is still navigating through a multitude of challenges including conflicts over power sharing, imported terrorism, external interferences, and limited physical presences in many parts of the region. It has managed some of these challenges partially through digital innovation in the form of mobile banking and fintech, and mobilization of the private sector.
This is a step in the right direction, where self-sufficiency is the key. The region is geopolitically located and it must, therefore, learn how to live with foreign presence and mange those external forces not in the ways it has handled itself in the past but in innovative ways, relying on its own means, which are not as limited as many make them to be. It is only that the region looks for solutions for its challenges from beyond the region and does look inwards.
It is where finances come in. Substantial incomes are generated by the large population of the region through local processes such as farming, livestock industry, trade, small-scale manufacturing, tourism, and indeed, remittances from its large diaspora. These resources are scattered in the large population of the region, which records some 170 million and growing. If managed well, it can generate much larger wealth.
It is clear that an amalgam of finance and technology has, in recent years, revolutionized the financial services industry and the region is not behind in this industry. Somalia and Djibouti, and even Ethiopia are all engaged in this dynamic sector of techno-financial services.
The overall financial services industry in the region remains, however, small but can grow to much larger volumes should better approaches and government encouragement through better regulatory systems be deployed. Banking penetration in the region despite the fintech industry still remains small, somewhere at less than 30%. Through deliberate policy frameworks, the region can leapfrog its way to a new financial ecosystem, unencumbered by the underdeveloped legacy banking systems.
The funding provided by the region’s financial sector, remains much smaller than what they should be doing. They fall far short of the possibilities at their disposal. It is understandable to some extent, since the region is conflicted. But some of the conflicts arise from the lack of opportunities for the growing youthful population and it is where there is need for the financial sector to come in, finance small and medium enterprises and engage the youth in useful economic activities in the place of tribal, clan, and other unnecessary conflicts.
The region did make significant advances in the financial sector, mainly through fintech. However, the funding of local economic sectors like farming, fishing, livestock, and others, falls far short of what is required. Most financing activities go to real estate, which is not actually as productive as it appears to be.
This dynamic has led to an ever-widening financing gap across the region, underscoring the urgent need for a more deliberate and coordinated response. To meaningfully close this gap, it is essential to mobilize domestic private sector financial institutions, while also strengthening the role of government-owned financial institutions in expanding access to credit.
Small and medium enterprises, which are the backbone of regional economic growth, job creation, and innovation, cannot wait for never-coming external actors to meet their financing needs. In reality, foreign financial institutions, including multilateral lenders, are unlikely to prioritize or directly serve smaller enterprises at scale.
The responsibility, therefore, rests primarily with national and regional financial systems to design targeted instruments, reduce perceived lending risks, and channel capital more effectively toward underserved businesses. Without decisive action to crowd in local capital and enhance institutional commitment, the financing gap will persist, constraining the region’s broader economic potential.
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