Does Somaliland Need Islamic Banking, Conventional Banking Or Dual Banking System?

By Mohammed Dahir Ahmed

One of the somber challenges faced by Somaliland private sector is access to finance regardless of its form-Islamic or conventional.

In a survey done by the World Bank, 48.8 percent of the firms surveyed in Somaliland indicated that access to finance as the number one constraint as far as doing business is concerned compared to a worldwide average of 16.9 percent. It is a well-documented fact that access to finance creates innovation, job creation and growth. In Somaliland, formal and regulated financial services are almost non-existent, nevertheless informal and unregulated financial services exist.

Somaliland currently faces three choices regarding the type of banking system it wants to adopt; 1. Islamic banking system 2.Conventional banking 3.Dual banking system, where conventional and Islamic banking operates side by side.

  1. Islamic Banking System

According to London securities and investment institute, Dr. Ahmed Elnagger initiated the first modern experiment with Islamic banking in 1963, in Mit Ghamr, Egypt. The Mit Ghamr savings project was based on profit-sharing and applying certain concepts of the modern credit union movement. Eventually in 1971, the Mit Grammar project became the Nasser Social Bank. In consultation with Tengku Abdul Raman of Malaysia and Prince Muhamad Faisal of Saud Arabia, Dr. Elnaggar set the framework for the creation of Islamic Development Bank by the Organization for Islamic Conference. The formative years of Islamic banking and finance were between 1975 and 1990. The two regions with the most regions with the most dynamic growth have been the GCC states and Malaysia. Islamic banking and financial principles are now applied in more than 70 countries and more than 300 institutions consider themselves to be sharia compliant.

Financial techniques applied by Islamic banking systems includes among others;

  1. Mudaraba: Profit and loss sharing partnership (investment financing).
  2. Musharaka:Profit and loss sharing partnership (joint venture).
  3. Salam:Similar to a forward sale contract, payment at spot and delivery of fungible a specified future date.
  4. Istisn’a:Progressive financing of manufactured goods.
  5. Ijara:Leasing

Presently, the Islamic Republic of Iran is the only country that adopts only Islamic banking system and prohibits conventional banking products and services. Previously Sudan and Pakistan adopted Islamic banking system only, but later adopted dual banking system where sharia-complain banking and conventional banking systems exist side by side.

  1. Conventional Banking System

All the 50 plus members of the organization of Islamic conference (OIC) allow conventional banking system except Iran, which prohibits conventional banking system.

  1. Dual Banking System.

Under dual banking system, Islamic banking and conventional banking system are allowed to exist side by side. Dual banking system is adopted by all the members of the Organization of Islamic conference (OIC) except Iran. Major Muslim countries such as Saudi Arabia, Malaysia, Egypt and Indonesia adopt dual banking system where conventional and Islamic banking system exists side by side. 

Mohammed Dahir Ahmed.

M_ddahir@hotmail.co.uk,

Mohammed holds the premier Islamic Finance Qualification (IFQ) from the London institute of securities and investment on top of other business and finance qualifications.

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