Introduction
Somalia’s financial system is facing a test that reaches far beyond the inconvenience of finding banknotes. When the state collapsed in 1991, the formal banking sector disappeared with it. For roughly two decades, hawala networks—informal money-transfer businesses—carried diaspora remittances to families, financed imports and kept domestic commerce moving while conventional banks and public institutions were largely absent. Many of those operators have since evolved into licensed money-transfer companies, commercial banks and digital-payment providers, while the Central Bank of Somalia has been substantially rebuilt.
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That progress is now under strain. Somalia is experiencing a serious shortage of cash in circulation, particularly physical US dollars—the currency in which most people save, conduct business and receive payment. The formal financial system does not hold enough dollars to meet demand. Several pressures have arrived at once. The disruption to global oil supply that began in early 2026 has pushed up fuel and freight costs in an economy that imports almost all its energy and a large share of its food. A dispute over the federal government’s mandate, the rejection of constitutional amendments by two federal member states and armed clashes in Mogadishu have heightened political and security risks. Local, diaspora and international investors are delaying commitments, while significant funds have moved out of the country. Underlying these pressures is a structural trade deficit: Somalia buys substantially more from the world than it sells.
A shortage of cash is not merely an everyday inconvenience. It is the environment in which financial systems can begin to fail. The global financial crisis of 2007–08 demonstrated that institutions may appear healthy shortly before they collapse, that a liquidity shortfall can bring down a bank within days, and that the disorderly failure of one interconnected institution can damage an entire economy.
The collapse of Northern Rock in the United Kingdom and Lehman Brothers in the United States remain the clearest examples. The number of banks, branches, accounts and digital transactions indicates how much Somalia’s financial sector has expanded. It does not, by itself, show whether the system can absorb the shock now developing. This article considers how the squeeze emerged, which lessons from 2008 are most relevant, and what the Central Bank, financial institutions and government can do to preserve stability and begin rebuilding confidence.
Anatomy of the current squeeze
An external shock to an import-dependent economy
The conflict involving Iran from late February 2026 and the disruption of shipping through the Strait of Hormuz, the route for roughly a fifth of global oil trade, created what the International Energy Agency called the largest supply disruption in the history of the world oil market. Brent crude climbed above US$115 a barrel at the end of March. Although prices declined after the April ceasefire, they have remained volatile and traffic through the strait has recovered only slowly.
Somalia feels the impact through several channels. It imports almost all of its petroleum products, primarily from or through the Gulf. Fuel prices influence the cost of electricity—much of it still produced with diesel—as well as transport, water pumping and food distribution. As a result, more expensive fuel and freight raise the dollar cost of nearly every import and push up the price of many services produced inside the country. In its April 2026 assessment, the World Bank said higher oil prices were likely to weaken private consumption and growth. It projected GDP growth of 2.8 per cent for 2026, with risks weighted to the downside.
A dollar economy without its own source of dollars
Most countries can respond to a shortage of cash by allowing the central bank to issue more of the national currency. Somalia faces a different constraint. The economy has been dollarised for more than three decades, and the Central Bank cannot create the currency in which most deposits, prices and debts are denominated. The physical dollar supply depends on inflows from diaspora remittances, humanitarian and development assistance, export receipts, foreign investment and banknote shipments arranged by banks and money-transfer companies through correspondent institutions.
Every one of those channels is under pressure. Exports, led by livestock, declined in 2025, even as imports continued to increase. The World Bank characterises the trade deficit as structurally large, averaging close to 60 per cent of GDP, and puts the current-account deficit at 9.6 per cent of GDP in 2025. Cuts in foreign aid have reduced a major source of foreign exchange. Remittances remain the principal buffer for households, but an increasing proportion arrives as electronic balances rather than physical notes. At the same time, dollars are leaving the country to pay foreign suppliers, settle imports and, increasingly, to meet the demand of savers moving assets abroad.
The result is a growing divide between electronic circulation and physical cash. When notes become difficult to obtain, the same amount displayed in an electronic account may no longer feel equivalent to the amount available in banknotes. Customers who cannot convert balances into cash can quickly lose faith in the institutions holding their money.
Political and security risk
The dispute over extending the federal mandate beyond May 2026, Puntland State and Jubaland’s rejection of the constitutional amendments, and the fighting in Mogadishu in June have intensified concerns about policy continuity and property security. The Deputy Governor of the Central Bank estimated that the June disruption alone caused US$3.8 million in direct losses to business and services. The wider economic cost is harder to measure but potentially greater. Uncertainty over who will govern, and which rules will apply, has encouraged businesses to defer investment and hold assets in forms that can be moved quickly.
Investor reluctance and capital flight
Capital flight in Somalia is usually quiet rather than spectacular. A trader may keep working capital in Dubai or Nairobi instead of a Mogadishu bank. A family in the diaspora may postpone a construction project. A company may pay overseas suppliers ahead of schedule, or an investor may retain profits outside Somalia. Each choice can be sensible from an individual perspective. Collectively, however, such decisions remove deposits and cash that the domestic financial system needs to fund trade and extend credit.
The banking sector has limited room to absorb that outflow. Somalia’s 13 licensed commercial banks held total assets of approximately US$1.8 billion and customer deposits of about US$1.43 billion at the end of 2023. Deposits represented around 5 per cent of GDP, one of the lowest ratios in Africa, while private-sector credit stood at roughly US$404 million. Many banks have limited paid-up capital. A small, concentrated and thinly capitalised banking system has little capacity to withstand a prolonged withdrawal of deposits.
Lessons from 2008 that apply now
Northern Rock: liquidity, not only capital
Northern Rock grew its mortgage business rapidly and relied heavily on short-term wholesale funding rather than retail deposits. When international money markets froze in 2007, the bank could no longer refinance itself. The Bank of England stepped in as lender of last resort, but the public disclosure of that support prompted depositors to queue outside branches in the first run on a British bank in more than a century. The government guaranteed deposits and placed Northern Rock into public ownership in February 2008.
Northern Rock’s defining weakness was not a lack of capital but a failure of funding. That distinction is central to Somalia’s situation. Capital absorbs losses; liquidity enables an institution to pay obligations when they fall due. A Somali bank may meet its minimum capital requirement and still collapse if customers demand cash that it does not possess. In a cash-constrained economy, supervisors must track each institution’s physical-currency holdings and readily available foreign balances, the concentration of deposits among a small number of customers, the maturity gap between financing and deposits, exposure to connected parties, and the ability to survive a wave of withdrawals or the loss of a correspondent banking relationship.
Lehman Brothers: confidence and disorderly failure
Lehman Brothers’ bankruptcy in September 2008 transformed a severe market disturbance into a global emergency. Counterparties no longer knew which contracts would be honoured, what collateral was reliable or which institutions remained financially sound. They responded by hoarding cash. Credit became scarcer and more expensive, asset prices fell and economic activity contracted. The consequences extended far beyond Lehman’s shareholders: businesses lost working capital, households lost jobs and governments intervened on an extraordinary scale.
Somalia is displaying an early version of that pattern. As confidence fades, households and companies keep cash outside the formal system, banks lend less and retain more liquidity, and trade slows. Lehman’s failure also draws an important line between two forms of protection. Shareholders and managers should bear the consequences of poor decisions, because that is the basis of market discipline. Deposits, payments, remittances and trade finance for essential goods are different. Those services must be protected from a disorderly collapse.
“Too big to fail” and “too essential to stop”
The phrase “too big to fail” refers to an institution whose disorderly collapse would inflict unacceptable damage on the financial system and wider economy. The expectation of a rescue can create moral hazard, while allowing a highly connected firm to fail without preparation can impose enormous costs on everyone else. After 2008, the preferred response became an orderly resolution framework: shareholders absorb losses, management can be removed, critical operations continue, insured depositors retain access to their money and public funds are used as sparingly as possible.
For Somalia, “too essential to stop” may be the more useful idea. A bank, remittance company or mobilemoney operator does not need a large balance sheet to become systemically important. If millions of people depend on one platform for wages, remittances, household purchases and commercial payments, a liquidity shortfall or outage at that provider becomes a national concern. As more activity shifts to digital platforms during a cash shortage, the risks created by such concentration increase.
Institutions, not individuals
Before 2008, responsibility for Britain’s financial stability was divided among the Bank of England, HM Treasury and the Financial Services Authority. Under pressure, coordination proved inadequate. Subsequent reforms returned prudential supervision to the Bank of England, established the Financial Policy Committee and the Prudential Regulation Authority, and included an open, merit-based process for appointing a new Governor, Mark Carney, who began his term in July 2013. The lesson is not that one appointment can guarantee stability. A central bank needs a clear mandate, sufficient legal authority, dependable data, skilled personnel and leadership chosen transparently and on merit. Those institutional foundations matter most when confidence is in short supply.
How a liquidity squeeze can become a banking crisis
Several channels could transform the current cash shortage into a wider financial crisis:
• Cash runs. Once customers believe an institution may be unable to provide cash, they will seek to withdraw before others do. A run at one institution can rapidly spread to others with comparable business models or common ownership.
• A gap between electronic and physical money. If agents or merchants begin charging a premium for cash, or refuse to exchange electronic balances at face value, trust in digital money and the institutions supporting it will deteriorate.
• Maturity mismatch. Banks that use demand deposits to fund multi-year property or trade projects face pressure when customers withdraw funds while borrowers postpone repayment.
• Connected exposures. Banks, money-transfer companies, telecommunications operators and trading businesses are frequently tied together through shared ownership. Financial stress at a trading group hit by rising import costs can quickly reach an affiliated bank.
• Deteriorating asset quality. Higher fuel and import prices, weaker demand and political disruption may push borrowers into arrears, especially importers, transport companies and property developers.
• Correspondent banking. Losing a correspondent relationship would eliminate one of the limited channels Somali institutions use to obtain dollars and pay for imports. None of these outcomes is unavoidable. All become easier to contain when authorities detect the risks early and intervene before confidence fractures.
Applying Basel III proportionately
Basel III, developed by the Basel Committee after the 2008 crisis, calls for higher-quality capital, buffers that can be accumulated during good times and released under stress, a straightforward leverage ratio, a Liquidity Coverage Ratio requiring enough high-quality liquid assets to withstand 30 days of severe stress, a Net Stable Funding Ratio that limits dependence on short-term funding, and stronger oversight of systemically important banks. The framework was designed chiefly for large, internationally active institutions. Somalia should view it as a longterm objective to be introduced in stages, rather than a complete rulebook to adopt immediately.
Most Somali banks operate according to Islamic finance principles. The standards of the Islamic Financial Services Board, which tailor Basel capital and liquidity requirements to Shariah-compliant institutions, therefore offer a practical basis for adapting the framework.
The current squeeze points to the first priorities. Liquidity requirements should come before more complex rules: a straightforward ratio covering physical cash and immediately available foreign balances, limits on deposit concentration, expectations for stable funding and regular stress tests. These measures should sit alongside a clear definition of eligible regulatory capital, credible minimum capital requirements, a simple leverage ceiling, restrictions on large and related-party exposures, and transparent disclosure of financial and risk information.
Meeting a requirement on paper does not make a bank safe. An institution may submit every required return while overstating assets, concealing its ultimate owners, concentrating lending among related parties or funding long-term loans with deposits that can be withdrawn on demand. Effective implementation requires dependable data, independent audits, competent supervisors, enforceable corrective measures and boards willing to take responsibility for risk.
Immediate priorities: the next twelve months
1. Close liquidity monitoring
The Central Bank should obtain frequent—ideally daily—information from banks, money-transfer companies and major mobile-money operators on cash holdings, foreign balances, deposit movements, large withdrawals and obligations coming due. Every institution should maintain and test a contingency funding plan explaining how it would respond to a sudden surge in withdrawals or the loss of a correspondent relationship.
2. Coordinated management of cash supply
Banknote availability should be handled as a national financial-stability issue. The Central Bank can coordinate with banks, money-transfer companies and their correspondent institutions to organise US dollar shipments, lower transport costs and distribute cash among regions rather than allowing it to accumulate at a handful of firms. Transparent rules governing cash-withdrawal fees would also help prevent a premium on physical notes from fuelling panic.
3. Safeguarded and interoperable digital payments
Digital payments can ease Somalia’s dependence on scarce banknotes, but customers must trust that electronic balances are fully supported. Mobile-money operators should keep customer funds in safeguarded accounts separate from their own resources and provide regular reports showing the backing for those balances. Providers considered systemically important should maintain redundant systems, tested disaster-recovery plans and strong cybersecurity. Interoperability between networks would allow customers to transfer funds more freely and reduce reliance on a single platform.
4. Protecting trade finance for essential imports
Fuel, food and medicine must continue to enter the country. The authorities and development partners should consider trade-finance and guarantee mechanisms—including letters of credit and risk-sharing facilities—that enable banks to fund essential imports without using up their limited cash reserves.
5. A small, rules-based emergency liquidity facility
The Central Bank should create a facility for solvent institutions facing temporary liquidity pressure. Assistance should be secured against eligible collateral, limited to a defined period and paired with enhanced supervision. Because Somalia is dollarised and has limited reserves, the facility would need to begin on a modest scale and might require carefully designed international support. It must not become a way to disguise insolvency or protect shareholders from losses.
Structural priorities: rebuilding confidence
6. Risk-based supervision and a credible resolution framework
Supervisory attention should reflect the risks posed by each institution, with tougher requirements for larger and more interconnected banks, remittance companies and payment providers. Oversight must go beyond formal compliance to examine business models, funding arrangements, technology dependence, beneficial ownership and transactions with affiliated firms. Legislation should permit early action at a troubled institution, including replacing management, transferring deposits and sound assets to another institution, creating a temporary bridge bank or winding down non-essential activities. Major institutions should develop recovery plans, while authorities should prepare resolution plans explaining how essential services would continue if an institution failed.
7. Depositor protection
A deposit-guarantee scheme, introduced gradually and financed mainly through industry contributions, could reduce the risk of panic among smaller depositors. It should be part of a broader financial safety net, not a replacement for sound supervision. Deposit insurance without effective oversight can encourage institutions to take excessive risks.
8. A credible path to the Somali shilling
The Central Bank’s preparations to reintroduce the Somali shilling under a proposed currency-board arrangement represent an important move toward monetary sovereignty. But timing and credibility will determine whether the effort succeeds. Introducing a new currency while the market lacks both dollars and confidence—and without full reserve backing and clear convertibility rules—could intensify the flight to dollars that the policy seeks to reverse. The shilling should be issued only once the reserves, legal framework and governance arrangements for the currency board are established and open to public verification.
9. Conditions for investment
Investors return when they believe their funds are secure and recoverable. That requires enforceable contracts, effective commercial courts, modern insolvency and secured-transactions laws, a creditinformation system and collateral registry, consistent taxation at federal and state levels and, above all, a political settlement that lowers the risk of conflict. Properly regulated Shariah-compliant investment vehicles could direct diaspora savings into productive projects at home, provided they operate transparently and under effective supervision.
10. Narrowing the trade deficit
The trade deficit is the main structural source of dollar outflows, and reducing it will take time. The process can begin with higher-value exports—including processed livestock products, fisheries and agricultural goods—along with improved standards and certification for overseas markets and a lower dependence on imported fuel. Expanding solar and hybrid power, backed by a sound regulatory framework for independent power producers, would reduce diesel imports, bring down electricity costs for households and businesses and ease one of the largest recurring demands on Somalia’s limited dollar supply.
11. Central-bank independence and accountability
The Governor and other senior officials should be selected through a transparent, merit-based process and insulated from short-term political pressure, particularly amid the current political dispute. Appointees should have expertise in banking, economics, payments, regulation and crisis management. Independence must come with accountability: regular reporting, audited financial statements, parliamentary scrutiny and published assessments of financial stability. Prompt publication of monetary and financial data would itself contribute to restoring confidence.
Conclusion
Somalia’s hawala system reflects the resourcefulness that kept remittances and trade moving for years in the absence of functioning public financial institutions. Regulated banks and digital-payment providers represent the next chapter of that history. The current cash shortage—compounded by an external oil shock, political uncertainty, capital flight and a structural trade deficit—is the most serious challenge the modern system has yet confronted.
The events of 2007–08 showed which risks deserve attention. Northern Rock failed when its funding dried up, not because it lacked capital. Lehman Brothers demonstrated how a confidence shock at one institution can travel through an entire economy. The response to both crises established that authorities must protect essential services without shielding shareholders and managers from the consequences of failure.
Somalia cannot control oil prices or settle its political dispute through financial regulation. It can ensure, however, that institutions monitor liquidity rigorously, hold sufficient cash, protect customer funds and remain capable of orderly resolution if they fail. Those steps would limit the damage from the current shock and create the conditions for investors to return when circumstances improve. Confidence is now Somalia’s financial system’s scarcest resource—scarcer even than dollars. It will return when depositors, businesses and investors believe their money is secure, the rules are applied consistently and the authorities have prepared for trouble before it arrives.
About the author
Guleid Osman Mohamed has more than 20 years of experience in banking, financial-sector regulation, AML/CFT compliance, payment systems and economic regulation. He previously worked at HSBC, served as Chief Executive Officer of the Somali Bankers Association and was a Banking Expert at Somalia’s Financial Reporting Center. He holds a bachelor’s degree in economics and a postgraduate qualification in Banking and Finance from the University of Leicester and is a PhD candidate in Leadership and Sustainable Economic Development. The views expressed in this article are his own.
