Despite decades of conflict and being one of the world’s toughest business environments, Somalia has managed to maintain a growing private sector that generates an estimated more than 90% of the country’s GDP.
In many cases, the private sector has filled roles typically held by public institutions, such as the provision of financial services, security and education. Swedfund, a Swedish government-supported organisation that invests in businesses and projects in developing countries, recently announced its plan to back SMEs in Somalia. Swedfund has committed US$5 million to the Nordic Horn of Africa Opportunities Fund, an investment vehicle targeting Somali SMEs, managed by fund manager Shuraako.
The fund is among the first commercial investment funds in Somalia, with US$25 million in capital under management. This Somali fund seeks to provide loans to businesses with revenues of around or less than US$1 million.
According to Swedfund, SMEs in Somalia experience a high demand for capital but face challenges in accessing affordable financing.
Local financial institutions require substantial collateral due to the risks associated with the informal market and a fragile financial system.
Compounding the issue, there is no national ID register, and land ownership is poorly regulated.
Investors in Somalia confront various obstacles, such as a weak legal and regulatory framework, political uncertainty, insufficient infrastructure, and underdeveloped formal banking and foreign exchange systems.
The financial sector is still nascent, with limited capacity to control money supply, as the economy heavily relies on the US dollar and grapples with counterfeit currency issues.
Nevertheless, despite the hurdles, the Somali market also presents significant opportunities. Rapid urbanisation, increasing adoption of digital technologies, and planned investments in sectors like energy, ports, education and health have the potential to drive economic growth.