## 1somea2021001

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---

### Preface and Executive Summary — context and mission scope
- The Monetary and Capital Markets (MCM) Department provided a series of Technical Assistance (TA) under the Somalia Trust Fund (STF) established in February 2015 to support IMF capacity development to Somalia.
- TA under STF Phase I started in May 2015 and was completed with the final mission in April 2020.
- Phase I TA objective: develop a functional central bank and establish a modern banking supervisory regime, focusing on licensing capacity, on- and offsite supervisory capability, and related regulation and procedures.
- Quarterly missions were undertaken; the final mission was delivered as a virtual mission (April 8–17, 2020) due to COVID-19 precautionary measures.
- Absorption of training and skills development by the Central Bank of Somalia (CBS) has been high; CBS has significantly improved supervision and licensing exercises based on MCM advice.
- Main operational constraints:
  - Inadequate human resources and technological support in the Licensing and Supervision Department (LSD).
  - Unforeseen tasks interrupt LSD primary work leading to shortcuts, incomplete analyses, declines in product quality and timeliness.
  - Inadequate information technology (IT) resources; lack of a central data system and document management system.
  - Security concerns limit LSD ability to execute mandate, postpone stakeholder meetings, and reduce time for onsite examinations.

### Executive Summary — selected key recommendations (from Table 1)
- Licensing Capacity Development
  - Maintain the moratorium on new bank licenses until adequate resources in LSD are available to properly oversee the banking system — Priority: High; Timeframe: Immediate to Medium-term.
  - Update the Regulation on Bank Licensing — Priority: Medium; Timeframe: Medium-term.
  - Revisit and enhance the template used by LSD to guide licensing application reviews — Priority: Medium; Timeframe: Medium-term.
  - Obtain a document management system to facilitate capture of licensing application information — Priority: High; Timeframe: Medium-term.
  - Ensure consistent enforcement of bank licensing regulation and more critical analysis of licenses — Priority: High; Timeframe: Short-term.
  - Reactivate outreach to foreign bank supervisors and to management of Puntland and Somaliland central banks — Priority: Medium; Timeframe: Medium-term.

- On and Offsite Inspection
  - Develop and issue instructions to banks on compilation of prudential returns, including guidance for consolidating financial information — Priority: High; Timeframe: Short-term.
  - Provide guidance regarding determination of financial data integrity and the dates from which data will be considered ‘clean’ — Priority: High; Timeframe: Immediate.
  - Strengthen financial analysis and narrative on banks’ financial data (both per bank and industry summary) — Priority: High; Timeframe: Short-term.
  - Establish and resource a comprehensive information technology and communication framework (records management; system to gather, store, validate, analyze and report; adequate hardware/software for LSD) — Priority: High; Timeframe: Medium-term.
  - Complete streamlining of onsite examination procedures — Priority: High; Timeframe: Short-term.
  - Strengthen AML/CFT onsite and offsite procedures — Priority: High; Timeframe: Short-term.
  - Develop procedures to conduct pre-opening visitation procedures — Priority: High; Timeframe: Immediate.
  - Develop consolidated supervision framework, identify groups and group-related risks and conduct assessments — Priority: High; Timeframe: Short-term.
  - Finalize guidance on agent banking and develop supervisory review processes (to be prepared if agent banking is authorized) — Priority: Medium; Timeframe: Medium-term.

- Other Initiatives
  - Prioritize implementing measures to bridge identified gaps in the Basel Core Principles (BCP) self-assessment — Priority: High; Timeframe: Immediate.
  - Formalize internal approach to the policy making process — Priority: High; Timeframe: Medium-term.
  - Revise existing TA products (workpaper, template) to reflect industry development — Priority: Medium; Timeframe: Medium-term.
  - Formalize CBS’ code of conduct — Priority: High; Timeframe: Medium-term.

- Islamic Banking
  - Include in the Financial Institution Law (FIL) revisions related to Islamic banking activities and Sharīʻah governance — Priority: Medium; Timeframe: Medium-term.
  - Enhance licensing framework to include fit and proper criteria for Sharīʻah Board at Islamic banks — Priority: Medium; Timeframe: Medium-term.
  - Develop regulations and guidelines on Sharīʻah governance and internal control requirements — Priority: High; Timeframe: Short-term.
  - Enhance financial reporting to include information specific to Islamic banking activities — Priority: High; Timeframe: Short-term.
  - Upgrade current risk rating system to include criteria related to Islamic banks — Priority: Medium; Timeframe: Medium-term.
  - Incorporate assessment of Sharīʻah governance systems in supervisory assessments — Priority: Medium; Timeframe: Medium-term.

- Mobile Money
  - Review regulations (including for money transfer businesses (MTB)) to ensure consistency in nonbank activities and relevant requirements — Priority: Medium; Timeframe: Medium-term.
  - Communicate with other relevant authorities including the National Communications Authority (NCA) to ensure mobile money service providers are sufficiently regulated — Priority: High; Timeframe: Short-term.
  - Encourage mobile money service providers to submit transitional implementation plans and implement agreed regulation — Priority: High; Timeframe: Short-term.
  - Develop risk-based methodology to calculate ongoing capital and publish the methodology (with support of the World Bank (WB)) — Priority: Medium; Timeframe: Medium-term.
  - Collaborate with relevant authorities to develop a robust legal framework for trust to ensure customers’ funds are legally separated from mobile network operators (MNOs)’ assets — Priority: High; Timeframe: Medium-term.
  - Complete supervisory manual and operationalize data reporting template for MNOs (with WB support) — Priority: High; Timeframe: Short-term.
  - Develop guidance for commercial banks on safeguarding MNOs customers’ funds and investment mechanisms — Priority: High; Timeframe: Medium-term.

### Banking Sector Overview — key statistics and developments (year-end 2019)
- Eight banks were operational and held:
  - Total deposits of $417.3 million.
  - Total assets of $543.2 million.
- Assets grew by 31 percent in 2019 compared to 2018 (from $414.9 million).
- Capitalization ranged from 9.98 percent to 27 percent among banks (average for the industry was 15 percent); three banks that began operations in 2019 are not included in that capitalization range.
- Some established banks and all newly operational banks are recording losses.
- Nonperforming loan (industry) was 2 percent in 2019.
- Liquid assets to total assets was 40 percent in 2019.

### Licensing Capacity Development — findings, template issues, and recommendations
- Licensing activity and processing:
  - Nine applications for bank licenses were reviewed during the December 2019 mission.
  - CBS granted 13 licenses for banks to operate in calendar year (CY)2020; four applications were received and processed by LSD after the established deadline.
  - Annual licensing is conducted by CBS at end of each CY for operation in succeeding year; adopted to gather comprehensive information given developing supervisory program and short onsite examination durations.
  - Re-licensing provides LSD with considerable information for deeper analysis due to concerns about integrity of periodic data filed by banks.
- Template and application quality:
  - A revised template was used by the LSD for the 2019 licensing exercise; it added governance and AML/CFT oversight data points but omitted related-party information for Board, senior management and significant shareholders and foreign bank ownership details.
  - STXs recommended LSD revise the template to ensure it provides at a minimum all items required under the current licensing regulation.
  - Quality of submissions remains a concern; incomplete applications with missing management structure, expertise, business plan/feasibility study, critical systems (accounting and IT) should not be considered.
  - CBS is assumed to have issued licenses with conditions requiring documentation that should have been provided as part of the application; recommendation: cease granting licenses with conditions that allow post-licensing provision of required application documentation.
- Licensing fee collection and compliance:
  - An annual license fee is required but collection is inconsistent; in two cases for CY2020, licenses were issued prior to receipt of the annual license fee.
  - Suggested enhancements: make license application fee nonrefundable and payable when the application is submitted; require annual financial information of each significant shareholder; require approval by CBS of the Memorandum and Articles of Association; prohibit re-licensing if banks have not opened in two calendar years of the initial license being granted (one-year time out for the license).
- Cross-border and state-level licensing concerns:
  - Somali banks suspected to have parallel banks in neighboring countries including Djibouti; LSD drafted a letter to establish dialogue with foreign bank supervisors but outreach was not pursued by CBS management.
  - Commercial banks have been established under the authority of central banks in two states (Puntland and Somaliland); some banks operate without a CBS-issued license and quality/scope of supervision over state-licensed banks is unknown.

### Onsite and Offsite Supervision — data, tools, scope, and gaps
- Offsite supervision — data collection and integrity:
  - CBS began collecting financial information from the banking sector as of Q1:2015 on a quarterly basis; initial data limited to balance sheet, statement of income and expenditure, and portfolio distributions.
  - Financial Reporting Instruments drafted in June 2016 expanded scope to include capital adequacy calculation, liquidity calculations, report of related party transactions, nonperforming loans, and countries where bank balances are held abroad.
  - Guidance indicates reporting on a consolidated basis, but no guidance or criteria established for consolidated reporting.
  - Banks submit financial information via paper submissions to emails; LSD manually analyzed data on personal computers due to limited IT support. A drop box was established in early 2019 to promote a single version of figures.
  - A data management system is needed to gather, store, validate submissions and produce reports.
- Offsite analysis templates and capabilities:
  - LSD developed an offsite analysis template (June 2018); LSD proficient in ratio analysis but lacks understanding of linkages and ability to explain changes in banks’ condition — additional TA needed to strengthen narrative and linkages.
- Onsite supervision — tools and execution:
  - A comprehensive set of tools exists: exam manual, standard workpapers, and a report of examination template structured around CAMELS.
  - Inadequate time for onsite exams has resulted in manual’s disuse; onsite assignments sometimes ignored supervisors’ capacity causing inconsistent and incomplete reviews.
  - Under STXs guidance, LSD streamlined onsite procedures for capital review; further streamlining of other exam procedures was not completed due to other assignments.
  - All onsite exams include assessment of AML/CFT risk management. Somalia has not had a FATF mutual evaluation. A National Risk Assessment was begun in 1028, and the central government committed to completing it by early 2021.
  - First onsite exam conducted February 2017; first round of all onsite exams completed March 2018. By Q3:2019, all but one established bank had a second onsite exam.
  - Evidence of effectiveness: ownership structures changed to comply with legal limits; stock certificates issued and stock registry maintained; loss provisions established for problem loans; governance structures and reporting lines improved.
  - LSD was not up-to-date on developments in some new banks (changes in management, advertising opening a branch in a foreign country requiring prior CBS approval).
- Consolidated supervision and agent banking:
  - Consolidated supervision needed as MTBs converted to banks and mobile money service providers present new risks; TA needed to guide development/enhancement of legal and supervisory frameworks covering consolidated supervision.
  - LSD drafted a guideline on agent-banking in April 2019; CBS encouraged to finalize guidance and TA to support supervisory review of agent-banking relationships.
- Workpapers, reports, and corrective action:
  - Standard workpapers and a template report of examination exist; may need revision to reflect regulatory and supervisory framework changes.
  - Manual of Supervisory Intervention provided March 2017; comprehensive but STXs doubtful it has been referenced — recommended future TA use it as basis for training and regulation on sanctions.

### Supervision, reporting, IT, AML/CFT — explicit recommendations
- Develop an accounting standard that is consistent with Islamic banking and prepare criteria and guidance for consolidating financial information.
- Develop and issue instructions to banks on compilation of prudential returns.
- Provide guidance regarding the determination of financial data integrity and the dates from which data will be considered ‘clean’.
- Strengthen the financial analysis and narrative on banks’ financial data (both per bank and industry summary).
- Establish and resource a comprehensive information technology and communication framework: records management; system to gather, store, validate, analyze and report; adequate hardware/software for LSD.
- Complete streamlining of onsite examination procedures.
- Strengthen AML/CFT onsite and offsite procedures.
- Establish closer engagement with new banks and develop procedures to conduct pre-opening visitation procedures.
- Develop consolidated supervision framework—work with LSD staff to identify groups, group-related risks and conduct assessments.
- Issue guidance on agent banking.
- Review the template of the report of examination and workpapers prepared by LSD; identify needed changes and procedures to develop and maintain workpapers.
- Review the Manual of Supervisory Intervention with LSD to determine if it needs upgrading and make necessary changes.

### LSD engagement, staff development, and integrity measures
- LSD engagement history:
  - LSD met with bank representatives in October 2015 and October 2016, but was unsuccessful in holding several planned meetings since then; industry input obtained via letters and surveys by email.
- Staff development and resources:
  - From 2017–2019, a few changes in LSD staff; new staff attended missions. An inventory of training resources was created and a drop-box accessible to all staff established.
- Integrity and conduct:
  - A draft code of conduct was prepared for LSD but CBS senior management viewed a CBS-wide code as necessary before LSD could issue its own internal code.
- Recommended CBS actions (LSD-related):
  - Prioritize implementing measures to bridge identified gaps in the BCP self-assessment.
  - Formalize the internal approach to the policy making process.
  - Finalize issuance of operational risk guidelines.
  - Revise existing TA products (workpaper, template) to reflect industry development.
  - Reinforce procedure for appointment of external auditors by commercial banks (requires CBS approval).
  - Formalize CBS’ code of conduct.

### Islamic Finance — structure, framework gaps, and recommendations
- Usage and structure:
  - As at end-March 2020, customers’ deposits (predominantly current accounts based on Qarḍ and Muḍārabah investment accounts) constituted 80 percent of funding sources.
  - Banks predominantly use Murābahah (including commodity Murābahah); other contracts (Istiṣnāʻ, Muḍārabah, Mushārakah) are slowly being used.
- Legal and prudential framework findings:
  - Current laws do not include specific requirements for Islamic financial services activities; CBS Act 2012 and FIL do not provide institutional arrangements related to Sharīʻah governance.
  - No specific licensing requirements applicable to Sharīʻah compliant products and services, corporate and Sharīʻah governance structure, or internal controls tailored to Islamic banks.
  - No regulatory frameworks on Sharīʻah governance; current approach is self-regulated and voluntary.
  - Absence of internal Sharīʻah review requirements risks noncompliance as product complexity increases.
  - Prudential reporting includes types of Sharīʻah contracts but CBS staff’s understanding of inherent risks is limited.
  - Banks vary in accounting standards used; one bank used Accounting and Auditing Organization for Islamic Financial Institutions standards while others followed International Financial Reporting Standards.
  - CBS lacks adequate capacity to undertake risk assessments of Islamic banking activities; supervisors have not conducted Sharīʻah reviews.
  - CBS’s bank risk rating system requires additional Islamic banking-related criteria.
  - Onsite inspection procedures are transitioning from compliance-oriented to risk-based; additional risks related to Sharīʻah noncompliance, rate of return risks, and treatment of IAHs need inclusion.
- Recommendations for CBS on Islamic banking:
  - Revise the FIL related to Islamic banking activities and Sharīʻah governance.
  - Enhance the licensing framework to include fit and proper criteria for Sharīʻah board members at Islamic banks.
  - Develop regulations and guidelines on Sharīʻah governance framework and internal control requirements.
  - Enhance financial reporting and clarify accounting standards to include information specific to Islamic banking activities.
  - Upgrade the current risk rating system to include criteria related to Islamic banks.
  - Enhance capacity to undertake risk assessments of Islamic banking activities.

### Mobile Money — usage, regulatory context, issues, and recommendations
- Usage and regulatory context:
  - Mobile money penetration rate is 73 percent.
  - Six operating mobile money service providers recognized by the CBS.
  - Mobile money regulation (2019) defines mobile money broadly as monetary value stored on any electronic device; MTB regulations define mobile money narrowly as records stored on a mobile phone or related central computer system.
  - Discrepancies in definitions may create regulatory inconsistencies and enable regulatory arbitrage.
  - Mobile money regulation requires MNOs to obtain a valid license issued by the NCA before being licensed as a mobile money service provider; no MNOs have been licensed by the NCA because of the NCA’s lack of capacity.
- Implementation and supervision gaps:
  - Regulation was issued in 2019 with WB technical support but has not been completely implemented; phased-in implementation agreed to prioritize customer funds protection.
  - Currently only two mobile money service providers have applied for a license; CBS processing these applications.
  - Mobile money service providers required to have initial capital of $2 million at the time of license application and meet ongoing capital specified by official bulletin; CBS plans to develop a risk-based methodology to calculate ongoing capital.
  - Regulation requires mobile money service providers to keep at least the amount of issued mobile money in a commercial bank account and, if above a threshold, in at least two commercial bank accounts for diversification.
  - Lack of trust law in Somalia creates uncertainty if customers’ funds kept in commercial bank accounts are legally separated from assets of failed MNOs; CBS should consider explicitly requiring trust accounts.
  - LSD completed a first draft of a supervisory manual for mobile money service providers (WB support) and developed a data template; required data has not been submitted by MNOs.
  - CBS secured three employees responsible for mobile money regulations and supervision by internal staff relocation and plans staff training by other country authorities.
  - Due to small supervisory capacity, CBS and WB plan to reinforce supervision on MNOs through supervision of commercial banks which safeguard MNOs’ customers’ funds; but current regulatory scheme is unclear on division of responsibility between commercial banks and MNOs.
- Recommendations for CBS on mobile money:
  - Review relevant regulations including that for MTB to ensure consistency over regulated activities and their requirements.
  - Communicate with other relevant authorities including the NCA to ensure mobile money service providers are sufficiently regulated.
  - Continue to encourage all mobile money service providers to submit their transitional implementation plans and implement the regulation as agreed.
  - Develop the risk-based methodology to calculate ongoing capital and publish the methodology (with support of the WB).
  - Collaborate with relevant authorities to develop a robust legal framework for trust to ensure customers’ funds are legally separated from MNOs’ assets.
  - Complete the supervisory manual and operationalize data reporting template for MNOs (with support of the WB).
  - Develop guidance for commercial banks on safeguarding MNOs customers’ funds and investment mechanisms.

*Source: Preface and selected sections of the IMF technical assistance report (STF Phase I).*

### Preface ................................................................................................................

### 1somea2021001 - Preface ................................................................................................

### Preface
- The Monetary and Capital Markets (MCM) Department provided a series of Technical Assistance (TA) under the Somalia Trust Fund (STF) established in February 2015 to support IMF capacity development to Somalia.
- TA under STF Phase I started in May 2015 and was completed with the final mission in April 2020.
- Phase I TA focused on operationalizing banking license capacity, development of on- and offsite supervisory capability, and related regulation and procedures to establish a functional central bank and a modern banking supervisory regime.
- Quarterly missions were undertaken to build capacity in banking regulation and supervision.
- The final mission was delivered as a virtual mission (April 8–17, 2020) due to COVID-19 precautionary measures; an originally scheduled mission in Nairobi (March 9–20, 2020) was postponed.

### Executive Summary — Key findings and context
- Purpose of Phase I missions: develop a functional central bank and establish a modern banking supervisory regime, focusing on licensing capacity, on- and offsite supervisory capability, and other relevant areas.
- Absorption of training and skills development by the Central Bank of Somalia (CBS) has been high; CBS has significantly improved supervision and licensing exercises based on MCM advice.
- Bank-sector adjustments achieved:
  - Bank ownership restructured to comply with law.
  - Banks filed external audit reports.
  - Governance structures realigned to promote internal auditor independence.
- Main constraints and operational challenges:
  - Inadequate human resources and technological support in the Licensing and Supervision Department (LSD).
  - Unforeseen tasks interrupt LSD primary work; sometimes shortcuts on procedures, incomplete analyses, and declines in product quality and timeliness.
  - Inadequate information technology (IT) resources hamper implementation of TA recommendations and supervisory practices.
  - Lack of a central data system; current workaround keeps same-date data in different LSD officials’ laptops but does not fully address need for a document management system.
  - Security concerns limit LSD ability to execute mandate, postpone stakeholder meetings, and reduce time for onsite examinations, hampering comprehensive reviews.
- The final mission (April 2020) reviewed Phase I progress and proposed recommendations for Phase II (FY2021–FY2024, October 1, 2020–October 30, 2024).

### Executive Summary — Selected key recommendations (from Table 1)
- Licensing Capacity Development
  - Maintain the moratorium on new bank licenses until adequate resources in LSD are available to properly oversee the banking system — Priority: High; Timeframe: Immediate to Medium-term.
  - Update the Regulation on Bank Licensing — Priority: Medium; Timeframe: Medium-term.
  - Revisit and enhance the template used by LSD to guide licensing application reviews — Priority: Medium; Timeframe: Medium-term.
  - Obtain a document management system to facilitate capture of licensing application information — Priority: High; Timeframe: Medium-term.
  - Ensure consistent enforcement of bank licensing regulation and more critical analysis of licenses — Priority: High; Timeframe: Short-term.
  - Reactivate outreach to foreign bank supervisors and to management of Puntland and Somaliland central banks — Priority: Medium; Timeframe: Medium-term.

- On and Offsite Inspection
  - Develop and issue instructions to banks on compilation of prudential returns, including guidance for consolidating financial information — Priority: High; Timeframe: Short-term.
  - Provide guidance regarding determination of financial data integrity and the dates from which data will be considered ‘clean’ — Priority: High; Timeframe: Immediate.
  - Strengthen financial analysis and narrative on banks’ financial data (both per bank and industry summary) — Priority: High; Timeframe: Short-term.
  - Establish and resource a comprehensive information technology and communication framework (records management; system to gather, store, validate, analyze and report; adequate hardware/software for LSD) — Priority: High; Timeframe: Medium-term.
  - Complete streamlining of onsite examination procedures — Priority: High; Timeframe: Short-term.
  - Strengthen AML/CFT onsite and offsite procedures — Priority: High; Timeframe: Short-term.
  - Develop procedures to conduct pre-opening visitation procedures — Priority: High; Timeframe: Immediate.
  - Develop consolidated supervision framework, identify groups and group-related risks and conduct assessments — Priority: High; Timeframe: Short-term.
  - Finalize guidance on agent banking and develop supervisory review processes (to be prepared if agent banking is authorized) — Priority: Medium; Timeframe: Medium-term.

- Other Initiatives
  - Prioritize implementing measures to bridge identified gaps in the Basel Core Principles (BCP) self-assessment — Priority: High; Timeframe: Immediate.
  - Formalize internal approach to the policy making process — Priority: High; Timeframe: Medium-term.
  - Revise existing TA products (workpaper, template) to reflect industry development — Priority: Medium; Timeframe: Medium-term.
  - Formalize CBS’ code of conduct — Priority: High; Timeframe: Medium-term.

- Islamic Banking
  - Include in the Financial Institution Law (FIL) revisions related to Islamic banking activities and Sharīʻah governance — Priority: Medium; Timeframe: Medium-term.
  - Enhance licensing framework to include fit and proper criteria for Sharīʻah Board at Islamic banks — Priority: Medium; Timeframe: Medium-term.
  - Develop regulations and guidelines on Sharīʻah governance and internal control requirements — Priority: High; Timeframe: Short-term.
  - Enhance financial reporting to include information specific to Islamic banking activities — Priority: High; Timeframe: Short-term.
  - Upgrade current risk rating system to include criteria related to Islamic banks — Priority: Medium; Timeframe: Medium-term.
  - Incorporate assessment of Sharīʻah governance systems in supervisory assessments — Priority: Medium; Timeframe: Medium-term.

- Mobile Money
  - Review regulations (including for money transfer businesses (MTB)) to ensure consistency in nonbank activities and relevant requirements — Priority: Medium; Timeframe: Medium-term.
  - Communicate with other relevant authorities including the National Communications Authority (NCA) to ensure mobile money service providers are sufficiently regulated — Priority: High; Timeframe: Short-term.
  - Encourage mobile money service providers to submit transitional implementation plans and implement agreed regulation — Priority: High; Timeframe: Short-term.
  - Develop risk-based methodology to calculate ongoing capital and publish the methodology (with support of the World Bank (WB)) — Priority: Medium; Timeframe: Medium-term.
  - Collaborate with relevant authorities to develop a robust legal framework for trust to ensure customers’ funds are legally separated from mobile network operators (MNOs)’ assets — Priority: High; Timeframe: Medium-term.
  - Complete supervisory manual and operationalize data reporting template for MNOs (with WB support) — Priority: High; Timeframe: Short-term.
  - Develop guidance for commercial banks on safeguarding MNOs customers’ funds and investment mechanisms — Priority: High; Timeframe: Medium-term.

### I. Introduction — situational summary
- CBS has made great progress in developing and strengthening banking regulation and supervision, but supervisory quality needs further strengthening, including enhanced organizational structure and governance.
- LSD has been able to conduct supervision of banks and is set to continue improving capacity.
- Since 2014, MCM assisted LSD to draft supervisory procedures, regulations, guidelines, streamline offsite and onsite manuals, and develop reporting templates (see Table 2 for a list of Regulations and Guidelines developed).
- The CBS governance framework remains a work in progress (separate STF workstream).
- LSD documented its governance for examination, working papers and corrective actions, including a template for corrective action letters.
- LSD faces capacity challenges: restructuring reduced number of staff actively engaged in supervision; with 13 banks soon to be operating in Somalia, additional qualified LSD staff are critically needed.

### II. Banking Sector Overview — key statistics and developments
- Financial sector composition and changes:
  - Initially composed of six banks and 14 MTBs, all operating prior to establishment of licensing requirements.
  - All financial institutions claimed to operate based on Sharīʻah but are not explicitly recognized as such in Somalia’s legal and supervisory frameworks.
- Growth and scale (year-end 2019 figures):
  - Eight banks were operational and held total deposits of $417.3 million, and total assets of $543.2 million.
  - Assets grew by 31 percent in 2019 compared to 2018 (from $414.9 million).
  - Capitalization ranged from 9.98 percent to 27 percent among banks (average for the industry was 15 percent); three banks that began operations in 2019 are not included in that capitalization range.
  - Some established banks and all newly operational banks are recording losses.
  - Nonperforming loan (industry) was 2 percent in 2019.
  - Liquid assets to total assets was 40 percent in 2019.

### III. Licensing Capacity Development — Main findings
- Licensing activity and processing:
  - Nine applications for bank licenses were reviewed during the December 2019 mission.
  - CBS granted 13 licenses for banks to operate in calendar year (CY)2020; four applications were received and processed by LSD after the established deadline.
  - Prior to the mission, LSD staff reviewed and analyzed applications and presented preliminary findings to STXs; STXs challenged findings and performed quality assurance checks.
  - Due to insufficient information and extensive deficiencies, all applicants were required to submit additional documentation; business plans showed significant shortcomings.
- Annual licensing practice:
  - Annual licensing is conducted by CBS at end of each CY for operation in succeeding year; CBS adopted annual licenses to comprehensively gather information on banks given the developing supervisory program and short onsite examination durations.
  - Re-licensing provides LSD with considerable information for deeper analysis due to concerns about integrity of periodic data filed by banks.
- Suggested enhancements to Bank Licensing Regulation (areas identified for change):
  - Make license application fee nonrefundable and payable when the application is submitted.
  - Require annual financial information of each significant shareholder.
  - Require approval by CBS of the Memorandum and Articles of Association (currently only part of the application).
  - Prohibit re-licensing if banks have not opened in two calendar years of the initial license being granted (one-year time out for the license).
- Licensing fee collection and compliance:
  - An annual license fee is required but collection is inconsistent; the fee should be a separate payment payable before license issuance.
  - In two cases for CY2020, licenses were issued prior to receipt of the annual license fee.
- Licensing numbers and status:
  - During CY2019, eight banks were licensed; five were operational the whole year, and three opened in the second half of CY2019.
  - For CY2020, 13 domestically-controlled banks were granted licenses: 9 operational and 4 in formation.
  - As of April 8, 2020, one foreign bank license application was pending and an exemption from the moratorium was granted by the CBS Board of Directors; if granted, the foreign bank would be subject to higher capital requirements and have limited authorized activities.

*Source: Preface and selected sections of the IMF technical assistance report (STF Phase I).*

### 13. A revised template to guide the review of the licensing applications was used by the

### 1somea2021001 - 13. A revised template to guide the review of the licensing applications was used by the

### Licensing template, application quality, and related-party information
- A revised template was used by the LSD for the 2019 licensing exercise; it:
  - Provides additional data points not on the original template (useful expansions include provision regarding the bank’s governance, as well as oversight of AML/CFT risks).
  - Omitted important items—concern over omission of information regarding related parties of the Board of Directors, senior management and significant shareholders and any information capturing foreign bank ownership.
  - STXs recommended that the LSD revise the template to ensure it provides at a minimum all items required under the current licensing regulation.
- Quality of submissions remains a concern; LSD is advised not to consider incomplete applications.
  - The regulation clearly details required documents; the December 2019 mission highlighted egregious deficiencies that should have led to rejection.
  - Examples of missing information: management structure and names of individuals to hold the management positions; expertise, systems and policies to manage specific risks; expertise in a target market; business plan or feasibility study; critical systems such as accounting and information technology and statements that they would be acquired after the license was granted.
- A more critical analysis by the LSD is needed as application volumes have increased and the Somali banking sector is getting crowded while the economy remains fragile.
  - Some applicants included provisions in Memorandum and Articles of Association that were inconsistent with the CBS bank license (examples: an article limited corporate life of a bank to 60 years; another article addressed governance inconsistent with the FIL).
- The FIL and the Regulation on Bank Licensing permit conditions to be attached to a bank license.
  - It is assumed CBS has issued licenses with conditions requiring documentation that should have been provided as part of the application.
  - Recommendation: CBS should cease granting licenses with conditions that allow post-licensing provision of required application documentation.
- Cross-border and state-level licensing concerns:
  - Somali banks are suspected to have parallel banks in neighboring countries including Djibouti; LSD drafted a letter to establish dialogue with foreign bank supervisors but outreach was not pursued by CBS management—establishing dialogue is essential.
  - Commercial banks have been established under the authority of central banks in two states (Puntland and Somaliland). Some banks operate without a CBS-issued license; quality and scope of supervision over state-licensed banks is unknown. LSD initiated dialogue while conducting onsite exams.

### Recommendations on licensing (explicit)
- Update the regulation on Bank Licensing;
- Maintain the moratorium on new bank licenses until adequate resources in LSD are available to properly oversee the banking system;
- Revisit the template used by LSD to guide the review of the licensing applications to ensure it is comprehensive and revised appropriately;
- Establish formal communication with other regulatory authorities;
- Obtain a document management system that would facilitate the capture of licensing application information;
- Ensure more consistent enforcement of the regulation on bank licensing and more critical analysis of the licenses;
- Reactivate an outreach to the foreign bank supervisors and to the management of the Puntland and Somaliland central banks;

### Onsite and offsite supervision: data collection, tools, and gaps
- Offsite supervision—data collection and integrity:
  - CBS began collecting financial information from the banking sector as of Q1:2015 on a quarterly basis. Initial data limited to balance sheet, a statement of income and expenditure, and portfolio distributions of financing assets and deposit accounts.
  - Scope of information has grown, but lingering questions on data integrity due to lack of guidance and other constraints.
  - LSD compared banks’ audit reports for years 2015–2018 to their submissions and is working with banks to clear differences; Governor instructed LSD to finalize review and correction of data.
  - Banks submit financial information via methods ranging from paper submissions to emails; LSD manually analyzed data on personal computers due to limited IT support.
  - In early 2019 LSD established a drop box for financial data to promote a single version of figures; strain in LSD resources will grow as number of operating banks has grown.
  - A data management system is needed to gather, store, and validate submissions and produce reports.
- Financial Reporting Instruments and consolidation:
  - Financial Reporting Instruments drafted in June 2016 expanded scope to include capital adequacy calculation, liquidity calculations, report of related party transactions, nonperforming loans, and countries where bank balances are held abroad.
  - Guidance indicates reporting on a consolidated basis, but no guidance or criteria established for consolidated reporting.
- Offsite analysis templates and capabilities:
  - LSD developed a template to guide offsite analysis at the June 2018 mission; quarterly reviews contain financial analysis and LSD’s narrative.
  - LSD proficient in ratio analysis but lacks understanding of linkages and ability to explain changes in banks’ condition—additional TA needed to strengthen narrative and linkages.
  - A comprehensive quarterly summary of the banking sector was prepared in June 2018; current status of presentation to CBS executive is not known—future TA should review and recommend enhancements.
- Onsite supervision—tools, execution, and scope:
  - A comprehensive set of tools exists: exam manual, standard workpapers, and a template for the report of examination structured around CAMELS.
  - Inadequate time for onsite exams has resulted in manual’s disuse; onsite assignments sometimes ignored supervisors’ capacity, causing inconsistent and incomplete reviews.
  - Under STXs guidance, LSD streamlined onsite procedures for capital review; further streamlining of other exam procedures (homework August–December 2019) was not completed due to other assignments.
  - All onsite exams include assessment of AML/CFT risk management. Somalia has not had a FATF mutual evaluation. CBS began issuing AML/CFT regulations in 2014. A National Risk Assessment was begun in 1028, and the central government committed to completing it by early 2021. Additional TA recommended to strengthen LSD’s AML/CFT supervision.
  - First onsite exam conducted February 2017; first round of all onsite exams completed March 2018. Scopes have been broad but not sufficiently deep due to short exam durations—deeper dives necessary.
  - By Q3:2019, all but one established bank had a second onsite exam. Evidence of effectiveness: ownership structures changed to comply with legal limits; stock certificates issued and stock registry maintained; loss provisions established for problem loans; governance structures and reporting lines improved (especially for internal auditor).
  - LSD was not up-to-date on developments in some new banks (changes in management, advertising opening a branch in a foreign country requiring prior CBS approval)—closer engagement needed.
  - Between missions (June–October 2018) LSD developed guidance for new banks; recommendation to conduct pre-opening visit/exam to determine readiness to open for operations and provide TA to complete procedures.
- Consolidated supervision and agent banking:
  - Consolidated supervision needed: MTBs converted to banks; some banks have affiliates/sister organizations not necessarily financial groups; advent of mobile money service providers may present new risks; nonbank financial institutions such as mobile money service providers required to cooperate with banks in safeguarding customers’ funds.
  - TA needed to guide development/enhancement of legal and supervisory frameworks covering consolidated supervision across the financial sector.
  - Some banks established agent-banking relationships and were directed by CBS to halt such relationships; LSD drafted a guideline on agent-banking in April 2019. CBS encouraged to finalize guidance and TA to support supervisory review of agent-banking relationships.
- Workpapers, reports of examination, and operating procedures:
  - Standard workpapers developed and revised to reflect changing needs; recommended to expand/revise workpapers with regulatory and supervisory framework changes.
  - LSD developed an internal operating procedure to address workpapers generated during onsite exams (October 2018); pilot agreed—future TA should review practices and revise as needed.
  - Standard template for report of examination is an exception report addressing CAMELS, violations of law, AML/CFT, risk assessments, governance, noncompliance, financial information and schedules; may need revision to reflect regulatory and supervisory framework changes.
  - Internal operating procedure developed to promote timely, consistent, high-quality reports of examination; pilot agreed—future TA should review and adjust.
- Corrective action guidance:
  - Manual of Supervisory Intervention provided to LSD as of March 2017; comprehensive with legal references, criteria, time frames, range of supervisory responses and specific actions.
  - STXs doubtful manual has been referenced; recommended that future TA on dealing with problem banks use the manual as basis for training and a regulation on sanctions.

### Recommendations on supervision, reporting, IT, AML/CFT, and frameworks
- Develop an accounting standard that is consistent with Islamic banking and prepare criteria and guidance for consolidating financial information;
- Develop and issue instructions to banks on compilation of prudential returns;
- Provide guidance regarding the determination of financial data integrity and the dates from which data will be considered ‘clean’;
- Strengthen the financial analysis and narrative on banks’ financial data (both per bank and industry summary);
- Establish and resource a comprehensive information technology and communication framework that would provide a records management system; a system to gather, store, validate, analyze and provide reports thereon; and provide adequate hardware and software to the LSD;
- Complete streamlining of onsite examination procedures;
- Strengthen AML/CFT onsite and offsite procedures;
- Establish a closer engagement with new banks and develop procedures to conduct pre-opening visitation procedures;
- Develop consolidated supervision framework—work with LSD staff to identify groups, risks arising from group relationships and to conduct assessments of risk;
- Issue the guidance on agent banking;
- Review the template of the report of examination and workpapers prepared by LSD, identify any needed changes to the templates and the procedures to develop and maintain the workpapers;
- Review with the LSD the Manual of Supervisory Intervention to determine if it needs upgrading and make the necessary changes.

### Other initiatives undertaken by LSD and capacity-building efforts
- BCP self-assessment:
  - Since the December 2019 mission, LSD staff started a self-assessment of the BCP to identify priorities for future TA.
  - STXs presented the BCBS methodology and provided an Excel template to document review, to be discussed in March 2020; template documents weaknesses, recommended action, priority rating, timeframes, and follow up tracking.
- Policy-development process and operational risk:
  - LSD is committed to gradually developing internal policy-making approaches based on best practices; consultation process is underdeveloped and intermittent and currently carried out only with the banks.
  - At LSD’s request, the April 2020 mission discussed a guideline on the policy-development process for LSD’s consideration to be subsequently formalized by the CBS’s board.
  - Operational risk guideline discussed March 2019 and updated December 2019; subsequent review and revision pushed start date of reporting to May 2020.
- Revisions to TA products and liquidity regulation:
  - LSD recognized need to revise reporting template and guidance to reflect unsophisticated banking activities in Somalia (including definition of high-quality liquid assets, cash inflows and outflows, while bearing in mind best international practices).
  - Revisions to be drafted by LSD with STXs input and are yet to be finalized; changes will be reflected in the Regulation on Liquidity Risk Management 2015 where liquidity coverage ratio is introduced, together with reporting requirements.
- Engagement with external auditors:
  - From mid-2017, need to engage external auditors due to high level of noncompliance in external audits.
  - LSD prepared letters of invitation, presentations, talking points and a template for meetings with external auditors; several meetings postponed mainly due to security issues; LSD held tri-lateral meetings with banks and external auditors.
  - Improvement in submission of late audit reports was noted; expectation that banks would engage with LSD on seeking approval before external auditors’ appointments are made, as per the FIL / best international practices.

*Source: IMF mission report content (extracted unit).*

### 46. While the LSD met with bank representatives in October 2015 and October 2016, it

### 1somea2021001 - 46. While the LSD met with bank representatives in October 2015 and October 2016, it

### LSD engagement, staff development, and integrity measures
- 46. While the LSD met with bank representatives in October 2015 and October 2016, it was unsuccessful in holding several planned meetings since then. The LSD consulted with the industry via letters and surveys via email. Input from the industry was obtained on new regulations and guidance.
- 47. From 2017–2019, there have been a few changes in the LSD staff, and the new staff have attended the missions. Recognizing that a considerable amount of reference material has been provided and generated, the LSD developed a program to promote its usefulness. An inventory of training resources (manuals, PowerPoint presentations, quizzes, and case studies) was made and a drop-box accessible to all staff was established.
- 48. Recognizing the importance that staff have credibility based on their professionalism and integrity, at one mission, the team drafted a code of conduct for the LSD. In the preparation stage, the STXs reviewed codes of conduct of other supervisory agencies and central banks. Candid discussions regarding pressure brought to bear on supervisors, questionable and unacceptable behavior, along with raising awareness of professional integrity, were held. The LSD prepared a comprehensive document and presented it to the senior management of the CBS. The view was that the CBS needed a code of conduct for the staff of the institution as a whole, and until that time, the LSD could not issue the code internally.

### Recommendations for CBS (LSD-related)
- 49. It is recommended that CBS:
  - Prioritize implementing measures to bridge the identified gaps in the BCP self-assessment;
  - Formalize the internal approach of the policy making process;
  - Finalize the issuance of operational risk guidelines;
  - Revise the existing TA products (workpaper, template) to reflect the development of the industry;
  - Reinforce the procedure for appointment of external auditors by commercial banks, which requires the approval of CBS;
  - Formalize the CBS’ code of conduct.

### Islamic Finance — structure and product usage
- 50. The structure of the banks’ balance sheets reflects a limited diversification of banking services. As at end-March 2020, customers’ deposits, predominantly in the form of current accounts (based on Qarḍ) and Muḍārabah investment accounts, constituted 80 percent of funding sources. Deposits and placements are primarily with foreign banks and other financial institutions. Customer assets are essentially short-term financing, followed by cash on hand and investments in property and joint ventures. While Murābahah contracts, including commodity Murābahah, are predominantly used in the financing transactions, other contracts such as Istiṣnāʻ, Muḍārabah, and Mushārakah are slowly being used by the banks.

### Islamic Finance — legal and prudential framework findings
- 51. Current laws in Somalia do not include any specific requirements for Islamic financial services activities. The Central Bank of Somalia Act 2012 (CBS Act) and FIL do not provide any institutional framework and arrangements related to Sharīʻah governance framework. FIL mandates the CBS to oversee domestic financial institutions, have exclusively responsibility for licensing, regulation and supervision of the business entities taking deposits from the public (mainly banks and MTB), as well as taking administrative measures and applying sanctions. The WB is providing TA on the enhancement of the CBS Act and FIL and the mission commented on the proposed revised draft. In the case of insurance/takaful, despite lacking the legal framework, all insurance companies/takaful operators are required to register with the CBS.
- 52. Several elements of an appropriate licensing process require adjustments to accommodate the nature of banks offering Islamic banking services. At present, there are no specific licensing requirements applicable to Sharīʻah compliant products and services, a corporate and Sharīʻah governance structure, and internal controls tailored to banks. There is a need to develop and implement fit and proper requirements to Sharīʻah board members, Sharīʻah firm or Sharīʻah advisor within banks.
- 53. There are no regulatory frameworks on Sharīʻah governance. At present, there is no legal basis supporting the regulations on Sharīʻah compliance in Somalia. The currently applied Sharīʻah governance is based on a self-regulated approach and with no guidance from the CBS. In other words, the notion of having the Sharīʻah governance system within institutions that offer Islamic banking services is rather a voluntary initiative to foster credibility in offering Islamic products. Banks have been adopting two types of Sharīʻah institutional arrangements in Somalia: permanent Sharīʻah board/committee and Sharīʻah advisor, with some banks only engaging a part-time Sharīʻah advisor for fatāwā (rulings). The mission prepared a draft survey questionnaire as part of the preparation to develop Sharīʻah governance framework, which is scheduled to be issued this year.
- 54. The absence of appropriate internal control requirements specifically on ex-post internal Sharīʻah reviews could potentially lead to noncompliance in banks’ operations. At this stage, noncompliance risk may be minimal since banks in Somalia predominantly use Murābahah or Commodity Murābahah contracts on the asset side and Qarḍ contract to source the funds. However, the mission learned that other contracts such as Istiṣnāʻ, Mushārakah are increasingly being used by banks. As the Islamic banking industry gets more competitive with product differentiations, potential reputational risk will emerge as banks may fail to comply with certain aspects of the Sharīʻah requirements. If investment account holders (IAH) were to face losses or forego profits, banks’ management could confront charges of misconduct and negligence.
- 55. Current prudential reporting includes information on the types of Sharīʻah contracts, but the CBS staff’s understanding of inherent risks and financial stability implications is limited. The banks are exposed to specific risks not faced by conventional banks due to the various constraints enforced by Sharīʻah. The complexities of profit and loss sharing contracts (Muḍārabah and Mushārakah) and their associated risks should be taken into account for banks to establish more effective risk management. Moral hazard issues may occur as a result of the relationship between the banks and the IAH. Withdrawal risk may persuade banks to deviate from traditional Sharīʻah principles. This occurs if banks pay competitive market returns to the IAH regardless of the banks’ actual performance.
- 56. Clarity on CBS’s usage of accounting standards for Islamic banking activities is critical in ensuring consistency and comparability of banks’ statements. A review of banks’ audited financial statements showed one bank used Accounting and Auditing Organization for Islamic Financial Institutions standards, while others followed International Financial Reporting Standards. There is no specific requirement for reporting Sharīʻah compliant products and services. It is important to develop and enforce a set of financial reporting templates that facilitates compliance with the law, official accounting standards and Sharīʻah requirements. In turn, disclosures should facilitate the assessment of the banks’ financial position, risk exposures, and performance. Failure to disclose certain aspects of financing and investment activities and associated risk analyses could expose the banks to fiduciary risk vis-à-vis their IAH on the use of their funds, smoothing of the profits, and any potential tainted income in the future. A set of additional information related to Islamic banking activities is being developed, of which the revision of the financial reporting will be issued at the end of 2020.
- 57. CBS does not have adequate capacity to undertake risk assessments of Islamic banking activities. Supervisors appear to have not conducted Sharīʻah reviews. In addition, CBS onsite supervisors and banks did not discuss Sharīʻah noncompliance issues. A key first step would be to enhance existing templates on banks’ balance sheet information for banks by utilizing templates as set out by the Islamic Financial Services Board. The information should also be supplemented with information on income and losses from Islamic banking activities, the description of IAH and risk breakdowns by Islamic contract type, credit risk distribution for Islamic financing, and some key financial stability indicators.
- 58. The CBS has adopted a bank risk rating system, but additional criteria pertaining to Islamic banking-related components needs to be developed. Owing to the nature of Islamic banks that compliance with Sharīʻah is mandatory, a critical examination of the resources available to Islamic banks for Sharīʻah compliances and structured procedures need to be in place. Islamic banks do not have the same level of commitment to Sharīʻah. In this respect, it is logical that Islamic banks will not have the same level of responses to the dynamic Sharīʻah compliance process, so their level of compliance will also differ. Islamic banks that are not complying with Sharīʻah will be exposed to the risk of their income cannot be considered as bank’s income, which has to be donated to charity.
- 59. Onsite inspection proceedings are currently compliance-oriented but are transitioning towards risk-based. An onsite inspection procedures manual exists, and some risks associated with specificities to Islamic banking products and services are highlighted. Additional risks related to Sharīʻah noncompliance, rate of return risks, and treatment of the IAHs are yet to be included.

### Recommendations for CBS on Islamic banking
- 60. It is recommended that CBS upgrades the legal, regulatory and supervisory framework to contain specificities of Islamic banking activities, including:
  - Revising the FIL related to Islamic banking activities and Sharīʻah governance;
  - Enhancing the licensing framework to include fit and proper criteria for Sharīʻah board members at Islamic bank;
  - Developing regulations and guidelines on Sharīʻah governance framework and internal control requirements;
  - Enhancing financial reporting and clarify on accounting standards to include information specific to Islamic banking activities;
  - Upgrading the current risk rating system to include criteria related to Islamic banks; and
  - Enhance the capacity to undertake risk assessments of Islamic banking activities.

### Mobile money — usage and regulatory context
- 61. The TA mission in April 2020 took stock of regulatory developments on mobile money services, which are widely accepted in Somalia. A large portion of the population is unbanked, and mobile money has a quite high penetration rate of 73 percent for a variety of purposes from daily payment transactions to saving money.
- 62. Mobile money has been one of the key areas of the regulatory development in the CBS’s recent strategic plans to help support financial stability. Since September 2019, the IMF has provided the fourth Staff-Monitored Program (SMP IV) to support Somalia authorities and set some Structural Benchmarks on regulatory development for mobile money service. Based on the agreed division of labor between the WB and the IMF, the WB has actively provided practical support to the CBS on regulation and supervision of nonbanking sectors, including mobile money, under the Somalia Capacity Advancement, Livelihoods and Entrepreneurship, through Digital Uplift Project—SCALED-UP.
- 63. There are six operating mobile money service providers recognized by the CBS in Somalia. In the regulatory framework of Somalia, mobile money regulation defines mobile money as a monetary value which is stored on any electronic device and it does not explicitly limit electronic devices to mobile phones. However, the regulation intends to regulate only MNOs by requiring MNOs to obtain a valid license issued by the NCA before being licensed as a mobile money service provider.
- 64. The regulatory framework for mobile money service provider needs to be developed in better coordination with regulations on the other types of financial institutions to ensure consistency and precise cross-reference. The definition of mobile money in the mobile money regulation is not consistent with that in the regulations for MTB. While the mobile money regulation broadly defines mobile money as a monetary value stored on any electronic device which is not limited to mobile phones, the regulations related to MTB define mobile money in a narrow way as one type of e-money products where the record of funds is stored only on a mobile phone or a related central computer system and can be drawn down through specific payment instructions issued from the bearers’ mobile phone.
- 65. This difference in the definitions while using the same term “mobile money” may create regulatory inconsistencies. For example, in some cases, under different regulatory requirements for MNOs and MTBs, money transfer transactions performed by MNOs are unintendedly considered equal to the same activities delivered by MTBs. Considering that requirements under the MTB regulations are looser than those under the mobile money regulation, this discrepancy may enable regulatory arbitrage where a telecom company gets registered or licensed as MTB with fewer requirements in order to provide the same money transfer activities using the “narrow” mobile money definition.
- 66. While the mobile money regulation stipulates that a mobile money service provider “may issue mobile money”, it is unclear if mobile money issuance is an integral nature of mobile money service providers. The mobile money regulation can also be read as if a company can be regulated as a mobile money service provider as long as it performs some stipulated activities (e.g., money transfer) while it does not issue mobile money. To clarify the regulatory coverage of each regulation, both regulations need to be adjusted. In addition, the mobile money regulation should be revised to be more risk-based with some different levels of requirements based on the activities each MNO performs.
- 67. Coordination with nonfinancial authority should be ensured. Despite the requirement for MNOs to be licensed by the NCA before operating as a mobile money service provider, no mobile money service providers have been licensed by the NCA because of the lack of capacity of the newly established organization. As these MNOs are in operation already and licensing processes have started, the CBS should start communicating with the NCA to ensure that all MNOs are well regulated in the other functions they perform.
- 68. The regulation and supervision for mobile money service providers is still at a nascent stage. Although the CBS issued the new regulation on mobile money in 2019 with technical support by the WB, the regulation has not been completely implemented and no mobile money service provider is sufficiently covered by regulation and supervision. This is due to the lack of capacity of the CBS and difficulties to promptly secure full regulatory compliance by all the mobile money service providers. In addition, a phased-in implementation of the regulations was agreed in order to prioritize key elements to protect customers’ funds. The CBS has made efforts to encourage MNOs to steadily comply with the regulation. Currently, only two mobile money service providers have made applications for a license and the CBS is now processing these. The CBS also provided a comprehensive training on regulatory requirements and case studies for the MNOs, but it is not clear when the other mobile money service providers will apply to be licensed, especially under the COVID-19 pandemic.
- 69. The current mobile money regulation in Somalia covers main regulatory factors that are common in the other jurisdictions. Mobile money service providers in Somalia are required to have initial capital of $2 million at the time of license application and all the time meet ongoing capital that is separately specified by official bulletin accordingly issued by the CBS. The CBS plans to develop a risk-based methodology to calculate ongoing capital approach.
- 70. There are some measures in the regulations that intend to ensure that mobile money service providers safeguard customers’ funds against their failure. The regulation requires mobile money service providers to take adequate measures to protect customers’ fund from loss, including separating consumers’ funds from MNO’s funds. The regulation requires MNOs to keep at least the amount of issued mobile money in a commercial bank account, and if the amount grows beyond a threshold, the funds need be kept in at least two commercial bank accounts for diversification. This requirement to use commercial bank accounts is to ensure one-on-one relationship to maintain liquidity to meet obligations to all their customers.
- 71. Due to the lack of trust law in Somalia, in case of failure of a mobile money service provider, it is unclear if customers’ funds kept at commercial bank accounts are legally separated from assets of the failed MNOs. The CBS should consider enhancing the safeguarding requirements including explicitly requiring mobile money service providers to keep consumers’ funds in a trust account to legally segregate customers’ funds as beneficiaries’ assets.
- 72. In addition to operationalizing the mobile money regulation, the CBS has some additional tasks to develop a better supervisory framework. With technical support from the WB, the LSD has completed the first draft of a supervisory manual for mobile money service providers which will soon be finalized. The mobile money regulation also requires mobile money service providers to submit monthly reporting of specific data on mobile money. The CBS developed the data template with the WB experts’ advice, but the required data has not been submitted by MNOs. The CBS has made efforts in capacity development for mobile money regulation with WB’s guidance, which includes securing three employees responsible for mobile money regulations and supervisions by internal staff relocation in the CBS, and planning staff training by other country authorities (Turkey and Malawi) to acquire practical supervision on mobile money.
- 73. Due to the small supervisory capacity of the LSD, the CBS and the WB plan to reinforce supervision on MNOs through supervision of commercial banks which safeguard MNO’s customers’ funds. However, the current regulatory scheme is not clear on the division of responsibility in management of customers’ funds between commercial banks and MNOs. The LSD needs to develop guidelines for banks on their risk management and investment mechanism to ensure the safeguards work.

### Recommendations for CBS on mobile money
- 74. Based on the main findings discussed above, it is recommended that the CBS should:
  - Review the relevant regulations including that for MTB to ensure consistency over regulated activities and their requirements;
  - Communicate with other relevant authorities including the NCA to ensure mobile money service providers are sufficiently regulated;
  - Continue to encourage all mobile money service providers to submit their transitional implementation plans and implement the regulation as agreed;
  - Develop the risk-based methodology to calculate ongoing capital and publish the methodology (with support of the WB);
  - Collaborate with the relevant authorities to develop a robust legal framework for trust to ensure customers’ funds are legally separated from MNOs’ assets;
  - Complete the supervisory manual and operationalize data reporting template for MNOs (with support of the WB); and
  - Develop guidance for commercial banks on safeguarding MNOs customers’ funds and investment mechanisms.

*IMF mission findings and recommendations as presented in the source content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1somea2021001.pdf_