Housing Finance in Somalia

Introduction

Somalia, is located in the ‘Horn of Africa’, and is divided into three regions, namely; Puntland, Somaliland and South-central Somalia. While all three regions belong to the country ‘Somalia’, they are autonomously governed with each having their own governance structure.

In 2015, its population was counted at 10 800 000, having increased by 2.5 percent since 2014, and its urban population increased by 3.5 percent over the same period.  The Somali population is relatively young, 45.6 percent of the population is less than 15 years old, and 75 percent is under 30 years old.[1]  In 2015, Somalia was 39.6 percent urbanised, according to UN Habitat’s World Cities Report of 2016, this is expected to increase to 44.6 percent by 2025.  And, in 2014, 73.6 percent of its urban population lived in slums.

Following the collapse of the central state authority in 1991 the Transitional Federal Government of Somalia was established, which was succeeded by the Federal Government of Somalia (FGS) in 2012. This structure is the face of transition in Somalia and a plan for the reconstruction and development of the country has been formulated. And, in August 2016, Omar Mohamed Abdulle, chairman of Somalia’s election commission, announced that the country’s 2016 election will take place on October 30^th.  Over 14 000 delegates representing Somali clans will cast their votes for 275 members of the Lower House, while regional states will select members of the Upper House.[2]

After a 25 year hiatus from conducting reviews in Somalia, the IMF concluded the Somalia Staff Report for 2015 Article IV Consultation in June 2015.  And, it found that real GDP increased by 3.7 percent during 2014, this increase was mainly attributed to growth in the livestock and fisheries sectors, and recovery of service sectors such as telecommunications, construction and money transfer services.  And, more recently the World Bank indicated that Somalia’s GDP was US$ 5.9 billion in 2015, its highest to date, representing 0.01 percent of the world economy, up from US$ 1.3 billion in 2012.  And, its GDP composition by sector is recorded as 60.2 percent from agriculture, 7.4 percent from industry and 32.5 percent is contributed by the services sector.

Somalia’s Ministry for Foreign Affairs and Investment Promotion, is primarily concerned with Somalia’s foreign investment promotion policies.   It has recently established an investment promotion office, SomInvest, which will provide information advice and assistance to foreign investors, its key investment sectors include mineral and hydrocarbon, energy, agriculture, fisheries, ICT, infrastructure, health and livestock.[3]

In September 2013, the Federal Republic of Somalia Economic Recovery Plan 2014-2015 was approved.  Its vision is for sustained economic development and poverty alleviation, achieved through responsible macroeconomic management, infrastructure rehabilitation and equitable access to services.  And, in the short term it focuses on providing stability and critical infrastructure in support of productive sectors.

Access to Finance

For two decades since 1991, Somalia had been functioning without banks; all institutions that regulated the economy collapsed and the country was suspended from accessing global financial markets. In recent years, the banking system is starting to re-emerge.although with limited functionality. In the absence of formal and established commercial banking activities, all economic transactions are settled in cash. There are no fixed income markets in Somalia and no formal credit facilities. Somalia’s largely informal economy is characterised by major information and data gaps, making estimates of economic aggregates highly uncertain.

The Central Bank of Somalia, acts as a regulator and supervisor, and through its mission and vision, has determined six strategic goals, in an effort to develop a sound financial sector, and strategically contribute to the country’s economic development.  These strategic goals include, [1] formalisation of the private sector, [2] establishment of an effective monetary policy, [3] building a strong banking operations foundation, [4] increasing organisational effectiveness, [5] strengthening reporting and transparency and lastly, [6] promoting good governance.  These goals are planned to be executed over a six year period, from 2012 – 2018.[4]

There are currently two legislations in place with regard to the Somali financial sector, namely, The Central Bank of Somalia Act, passed in 2011, and The Financial Institutions Law 2011, passed in 2012.[5]

Currently, apart from the CBS, the Somali financial sector comprises six commercial banks with provisional licences, nine licenced money transfer firms (MTFs).[6]  As of end-June 2015, thirteen MTFs had pending applications for banking licenses. Somalia’s six commercial banks include the International Bank of Somalia, First Somali Bank, Salaam Somali Bank, Somalia’s Premier Bank and Tawakal Money Express are all new players. The four Islamic financial institutions offering mortgage/home loans are Salaam Somali Bank, Dahabshiil Bank International, Premier Bank and International Bank of Somalia (IBS).

The Somali economy remains largely dollarised, its banknotes are not readily available and thus cash is scarce.  Currency reform has been prioritised in its work with the IMF.  In January 2010, the Transitional National Government initiated the printing of Somali shilling banknotes collectively worth five trillion, at a cost of US$ 17 million.  However their delivery was halted due to concerns that insufficient preparatory work had been done, such as the development of an effective monetary policy.

The informal Hawala system is used in Somalia, which comprises approximately 17 organisations, that operate based on trust. Some of which are: Dababshill, Amal Express, Kaah Express and North American Money Transfers. Mobile Money transfers are offered by Hormuud in Southern Somalia, Somtel in Somaliland and Golis in Puntland. According to Premier Bank only three percent of Somalis are banked, and interestingly 70 percent of Somali people have access to mobile services[i].

Global Findex data revealed that there are 13 countries where at least ten percent of adults are using mobile money; all of which are in Sub-Saharan Africa.  At 58 percent Kenya has the highest level of penetration, and in five countries— Côte d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe—more adults reported having a mobile money account than an account at a formal financial institution.[7] A survey conducted by the Gates Foundation, World Bank and Gallup found that 26 percent of the population reported using mobile money transfers to pay bills, the highest rate in the world, and 32 percent use it to send and receive money.  Consequently, this has stabilised the exchange rate by reducing the demand for Somali shillings in line with its reduced supply.[8]  In Somalia, in 2014, 51 out of 100 people reported having a mobile subscription, compared to 22 three years prior, additionally approximately 40 percent of adults use mobile money accounts.  According to Hormuud, the Somali diaspora sends approximately US$ 1.6 billion annually to Somalia, to put this into perspective Somalia’s GDP was US$ 5.9 billion in 2015.  Hormuud users can transfer up to US$ 3 000 per day, throughout Southern and Central Somalia.[9]

Access to finance by households is also enabled by a growing microfinance sector. Key players include Silatech, Kaah Express, Barwaquo Microfinance Bank, Kaaba Microfinance Institution (has 5000 clients and is a field partner of Kiva) etc. Loans are offered for a period of up to six months[ii]. According to Kiva, the average loan size in Somalia is US$ 542 and the average loan size per GDP per capita ppp is 90.42 percent. Total loans provided by Kiva amounted to US$ 120 975 in 2014. Microfinance facilities and informal facilitators charge between five percent – 10 percent commission (Amoo).  Alternatively, loans are also secured through family members.

Housing Affordability

In 2015, GDP per capita was recorded at US$ 425 and is anticipated to increase to US$ 445 in 2016; despite this increase, Somalia still remains one of the poorest countries in the world.[10]  The effects of years of conflict and instability, are reflected as multidimensional poverty affects 61 percent of the population in urban households, and 95 percent of the population in rural households.  With a score of 0.47 out of one on the Multidimensional Poverty Index, in 2010, Somalia ranked 94 out of 104 countries on the global Human Development Report.  As at 2012, the Somali Human Development Index was significantly low at 0.285, and it ranked 165 out of 170 countries.

According to Datagrid Somalia, in 2015, the average house price per square meter was US$ 250. The average rental price for a formal unit was US$ 500, the average plot size is 400m², and the price of the cheapest newly built house built by a developer in Somalia is US$ 100 000. The current rental market is booming according to an article by The Somali Investor[iii]. Rent has increased in some places from US$ 300 five years ago to between US$ 2 000 and US$ 3 000. However, these figures are biased toward city and urban areas such as Mogadishu and Hargeisa.

The cheapest newly built house, costing US$ 100 000, is affordable to zero percent of the Somali population.   This house would cost, US$ 769 per month, and US$ 276 809 over the term, at an interest rate of 8.5 percent, zero percent deposit and repaid over a 30 year period.[11]

Cement is expensive in Somalia, costing about US$ 14 per 50kg bag. Using the GNI per capita of US$ 122.90, ± 8.8 bags of cement can be bought – far below the estimated 35-40 bags of cement that would be required to build a basic 40m² house. With 73percent of the population earning less than US$ 60 a month, the affordability for formal housing is extremely limited.  And, for example, an income of US$ 60, one could afford a house priced at US$ 1 951, assuming an interest rate of 8.5 percent and a 30 year repayment period; this would be affordable to 69.2 percent of the Somali population.[12]

Housing Supply

In 2014, the Federal Government of Somalia in collaboration with the United Nations Population Fund, reported that there were approximately 2 076 677 households in Somalia with an average household size of 5.9 people.[13]   The total estimated population in urban areas is 5 216 392, 2 806 787 in rural areas, and the nomadic population is estimated at 3 186 965.

Just under a quarter (24 percent) of the population has access to formal housing (60 percent in urban areas and six percent in rural areas)[vi]. About 24 percent of houses in Somalia are constructed with durable materials and can be classified as permanent structures. Approximately 56 percent have walls or roofs constructed utilising semi-durable materials, the remaining 20 percent are categorised as temporary. In rural areas, 90 percent of households are owner occupied as opposed to 60 percent in urban areas. One in every four houses is rented in urban areas as opposed to one in every 25 in rural areas.  Additionally, one third of those households in urban areas had two or more families living in the same house, with more than half of them sharing a single roomed house.[14] Less than 60 percent of those residing in urban areas own the houses in which they live, versus 90 percent in rural and nomadic areas.

The UN Habitat has been active in Somalia for more than 30 years, their project activities range from targeting immediate local needs, to more strategic attempts to address sustainable urban development through integrated human settlement programmes.  Some of their housing projects include, Shelter Provision, Reintegration, and Improved Livelihoods for Returnees and Internally Displaced Persons in three towns, this project is valued at US$ 3.2 million, and includes the construction of 475 houses.  Another project is Integration of Long-term IDPs into the Host Community in Bossaso, its project value is US$ 2 million, and 524 houses are planned.  And, lastly the Shelter Provision, Reintegration, and Improved Livelihoods for Returnees and IDPs project which is valued at US$ 2.3 million and 335 houses are planned.  These three projects are funded by the Government of Japan, and are intended to provide security of land tenure and permanent housing, social infrastructure, and skills training for 1 334 vulnerable IDP families in Bossaso and Berbera towns[15]

Salaam Properties, a development company, was established in 2014 with the objective of developing well designed, competitively priced houses in Mogadishu.  It is currently developing Darul Salaam City, the first large scale housing project in Somalia which comprises 6 000 housing units, which will be constructed over a three year period, with a total project cost of US$ 20 million.

Jazeera Estate which is being constructed in Mogadishu, 3 km from the airport. This gated development is proposed to have over 1 200 apartments, villas and townhouses as well as commercial and public facilities.  And, according to the Somalia Real Estate Association, the Jazeera and Darul-Salaam developments will add 10 200 housing units to Somalia’s housing stock.[16]

As the country stabilises, there appears to be increased construction activity and higher demand for construction materials.  Somalia’s construction sector is one of the three main drivers to its economic growth.  There are approximately 14 companies across Somalia which supply roofing and construction materials.  And, in 2015 a quarry that had been shut down for more than 30 years, due to security concerns, had just reopened.  The quarry, in Wadajiir district, provides jobs to truck drivers, manual labourers and machine operators.[17]

A key component of formal housing is cement. Cement has largely been imported by the Dahabshill organisation (dealing largely with remittances) indicating that there is a form of investment in infrastructure. Plans have been approved to establish a cement terminal at Berbera port in Somalia[vii]. While the Global Cement Report for Somalia suggests that the short term future seems bleak, various articles indicate that the construction market is booming due to the strengthening political situation.

Property Markets

Land, including its access and its utilisation, is already a problem in Mogadishu, as internally displaced persons (IDPs) and refugees seek housing. In many cases land is unregistered and ownership is difficult to prove without clan support. Protection of individual and collective ownership of land and other property depends entirely on clan support and/or the military might of related factions. For the first time in Somalia, title deeds have been handed over to 500 displaced households in Baidoa. This pilot project identified secure land tenure to protect people from evictions from IDP camps.  Still, there are cases of fraud and land being sold to multiple people.

Officially, land registration in Somaliland takes approximately 30 days and costs about US$ 30, half the average monthly income.[iv] It is only the mayor’s office which registers property and the procedure is cumbersome, given the collapse of the government and the loss of land document archives. However the procedure of new plot demarcation does not take long. It is the process of transferring old plots, where old plot documentations has to go through several verification processes, that increases the time involved.  The process of acquiring land generally amounts to about one percent of the property value, however this amount keeps varying[v].

Housing Policy and Regulations

In 2013, the Somali government launched Vision 2016.  Its three objectives are constitutional review and implementation, completion of the federal system, and democratisation.[18]

The   Somalia Compact, is based on the Busan New Deal principles, and was initiated in December 2012.  The Compact has framed Somalia’s priorities for the period 2014 – 2016.  It is a living document that reflects the ongoing process of transition, and its priorities are framed by the five Peacebuilding and State building Goals (PSG).  These PSGs include inclusive politics, security, justice, economic foundations and revenue and services.[19]

The Somalia Development and Reconstruction Facility was launched in October 2013, and is the mechanism for the Somalia government to oversee and guide the implementation of the Somali Compact.  It consists of three governance structures, namely The High Level Partnership Forum, co-chaired by the President of the Federal Republic of Somalia and the United Nations Special representative of the Secretary General, and is the main platform for dialogue and policy discussion on Somali Compact implementation.  The SDRF Steering Committee, chaired by the Prime Minister and co-chaired by a New Deal lead donor on a rotating basis, provides oversight and guidance for the implementation of the Somali Compact, including commitments on financing and aid delivery.  Lastly PSG Working Groups, which are responsible for sectoral planning and programmatic co-ordination at a technical level, and discussion of international assistance coordination.[20]

In June 2015, the ministry of Planning and International Co-operation began developing a National Development Plan, which is intended to be Somalia’s post-2016 planning framework.  It will further define the country’s development priorities and outline internal and external financing needs, highlight major sources of funding, and guide the allocation of resources and prioritisation of government actions and international development support.  This document will also serve as the interim poverty Reduction Strategy Paper (IPRSP) until a full-fledged official document is developed.[21]

Customary land ownership laws are still in use, and there is an urgent need to develop tenure security to attract further investment.  The legal framework for Somalia’s land tenure system is a mix of secular, sharia, and customary xeer law. In some parts of Somalia, the registration office has the authority to register ownership of land, land taxation, rehabilitating authorisation documents, building permits and inheritance certificates.  However these registrations are not widely practiced, as they are not compulsory.[22]

There are currently no housing laws and regulations in Somalia, however a housing-related law is in the process of being formulated. There are no building standards or township development plans in place to regulate the development of housing. Auspiciously, the restructuring of the various government ministries has availed the opportunity for partnership with organisations like SREA. And, in this specific partnership, they are drawing up a housing legislature, creating building codes and norms, and town plans.[23]

The Somalia Real Estate Association (SREA) was established in 2014, and its objectives are to provide professional assistance to the Somali real estate sector and to assist the government in establishing a proper regulatory framework.  The organisation aims to streamline the real estate sector, and draw together all those involved in the Somali real estate business, from land owners to developers.

Housing Sector Opportunities

The country continues to hone and support the growth of its best performing economic sectors. Including livestock which contributes 40 percent to the country’s GDP, most notably, in 2014 it exported five million livestock to the Gulf of Arabia.  The agriculture sector is the country’s major employer, and contributes 65 percent to the national GDP.  And, in 2014, the construction and building sector contributed to a third of the Somali GDP and 25 – 30 percent to the labour force. In 2014 alone, exports of goods and services were US$819.00 million, while imports of goods and services were US$ 3.50 billion and remittances were US$ 1.133 billion.

There has been notable activity in Somalia, namely the Aden Abdule International Airport which was recently reopened and has seen 10 – 15 daily flights, and the Albayrak ocean port which has experienced increased volumes of trade in the last six months. Turkish investment in Somalia has now reached over US$ 100 million, this investment spreads across various sectors such as trade, education, infrastructure development and humanitarian assistance.

The commitment to establish formal finance institutions and to operationalize the Central Bank will assist in creating a favourable investment environment. And, will further assist with the lack of formal credit facilities, and perhaps even the provision of mortgage loans and allow the private sector to add to the housing stock in Somalia. The thriving informal financial sector, as well as the strong presence of microfinance institutions, also creates a unique opportunity to support housing development.

In an effort to attract increased investment to the country, the Federal Government of Somalia has targeted a few strategic areas, including easing flow of imports and exports, creating more financial stability, and legitimacy in the country, facilitating the continued flow of remittances, and lastly rebuilding and developing basic infrastructure.[24]

In February 2015, the IMF launched a multi-donor trust fund to improve capacity development.  Its main activities include improving macroeconomic institutions, policies, and data systems.  Through this programme, the IMF will provide technical assistance and training, to the value of US$ 9 million over a three year period.

The CBS intends to propose an institutional framework for data compilation, reporting and dissemination to parliament.  And, in this regard it is developing statistical collection infrastructure.  In an effort to raise revenue, the CSB is implementing measures and improvements in tax and customs administrations, this is expected to yield US$ 11.7 million, and increase overall tax revenue to US$ 94.1 million, up from US$ 82.4 million in 2015.[25]