In 1975, Islamic Banking was the first time officially initiated in this world. Dubai Bank was first Bank to operate as an Islamic Bank. Fortunately, Islamic Bank spread all over the world. More than 500 Banks work on this earth.
What is the Islamic Bank?
Islamic banking is an ideological discipline that draws on Shariah principles to expunge interest and other exploitative elements from the economic and financial spheres of human society; it is an equity-based system that primarily relies on profit and loss sharing (PLS) modes, namely: Mudarabah (joint venture) and Musharakah (equity participation), to perform borrowing, lending and investment functions. However, it may use some other interest-free instruments, such as:
- Murabaha (deferred payment sale)
- Ijarah (leasing)
- Bai Salam (advance payment) and
- Bai Istisna (procurement engagement)
- Bai’ muajjal (credit sale)
- Qard hassan/ Qardul Hassan (good loan/benevolent loan)
- Sukuk (Islamic bonds)
To replace the interest-based banking and finance system in its entirety, the following should be taken into account:
First of all, Somaliland located in east Africa, between the 08°00′ – 11°30′ parallel north of the equator and between 42°30′ – 49°00. It is bordered by Djibouti to the North, Ethiopia to the West and South, and Golf of Adan to the East.
Economically, livestock is the major resource of Somaliland economy, money remit from Diaspora for West countries, mineral resource, Fishery, Agriculture and Energy also play great role about the Economy of Somaliland. The amount of money transferred annually by the Somaliland Diaspora to their relatives is estimated $650 and $850 million. They remit the money through remittance as no banking system exists.
In 2009, was the first time to initiate the so- called Islamic Finance in Somaliland, operating as Islamic Banking, because, Somaliland government has not approved legally in developed Banks system, unless, the central Bank of Somaliland would become Islamic Banking system, as the parliament approved.
Islamic finance is a financial institution operating like Bank, where Deposit is made. Transfer and Investment are also without interest rate, derived from Islam jurisprudence (Fiqhi).
What are the strengths and weaknesses of Islamic Banking in Somaliland?
To begin with, Somaliland has more opportunities to establish Islamic Baking for many reasons: Firstly, Somaliland inhabitants are 100% Muslim, Sunni, Shafie sect. And in Islam Banking, free-from-interest manner is used, as interest is forbidden in Islam. Secondly, there are no other banks operating with the system.
In addition, in the last decade, economy of Somaliland has been growing gradually. As we know, the Banks play great role about economic growth, whereby, investment or transferring money all over the world, many Businessman need to deal with their suppliers through Banks in order to globalize their business.
Besides that, Somalilanders are low income level, so that, they need more investment and more opportunity to create a small business. Fortunately, Islam Banking has a product called Qardul hassan (good loan/benevolent loan), that allows to loan a money from the Bank and invests in your business, then you return without any extra money; there is no service charge or interest rate.
Another considerable reason is that , Muslim nation hate conventional Banks, when introduce the Islamic Banking in Somaliland, not faced any challenges, because there is no Banks work here, another chance was the existed many remittances transfers money all over the world. Also, based in Islamic Finance model (not interest rate), holding capital estimated millions of dollars, possibly, that remittances easily converts to Islam Banking, according dealing with foreign countries, having good reputation on their customers in all over the world.
On the other hand, some weakness exist Islamic Banking in Somaliland. One problem is that people they didn’t deal with Banking system in the last two decades.
Alarmingly, we could mention or indicate few weaknesses might face on Islamic Banking in Somaliland in this moment, such as: At first, lack of knowledge about Islamic Banking, most people they do not know what is the Islamic Banking? Unless its free from interest, Further, they do not able to classify between Muharaba and the interest loan, senior managers of the Islamic financial institutions failed to give full orientation to people.
To abridge, as we illustrated above, Islamic Banking contains many products to satisfy their customers; unfortunately, Islamic financial institution in Somaliland they didn’t use or didn’t not give many optional products to customers. For instance, one of these products was very important to the low-income nations; and it is Qard hassan/ Qardul hassan (good loan/benevolent loan).
What is the Qardul Hassan?
Qard Hassan is a loan extended on a goodwill basis, with the debtor only required to repay the amount borrowed. However, the debtor may at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan.
Consequently, the Qard Hassan plays a great role to the growing life standarding or generating small Businesses, also, not financially only, but it is a Maslaha for the Muslim people. It is very important to take into account. One can also say, internationally Qard Hassan becomes a prominent phenomenon about anti-poverty.
To put the matters in a nutshell, after the terrorist attacks in the United States on the 11st September in 2001, the US Government passed the USA PATRIOT Act to, among other reasons, attempt thwarting the financing of terrorism (CFT) and anti-money laundering (AML) making sure these were given some sort of adequate focus by US financial institutions. The act also had extraterritorial impact and non-US banks having correspondent banking accounts or doing business with US banks had to upgrade their AML/CFT processes. The Patriot Act has generated a great deal of controversy in the United States since its enactment.
To sum up, the afore-mentioned reasons make vulnerable to Islamic Banking in this region, and make it easily to introduce conventional Banks in our country. As a Somalilander, it is my duty or my responsibility to state get my voice louder and reach it further, to highlight some weaknesses and strengths in and out institutions as far as I could.
By: Mustafe Abib Mohamed
 Developments in Islamic Banking