Microfinance Institution strives to Stimulate Economic Growth in Somalia

For more than two decades, Somalia has suffered from poverty, marginalization, and natural disasters, which have left the East African nation greatly under-developed.
Photo courtesy: KIMS

The country’s political instability and fragile economy have also driven many Somalis to leave in search of better opportunities, thus leading to the steady growth of the Somali diaspora worldwide.

Between 1990 and 2015, the total number of people born in Somalia, but living outside of the country, more than doubled, going from 850,000 to 2 million people, according to United Nations estimates. The biggest population of expat Somalis can be found in the neighboring countries of Kenya, Ethiopia, and Yemen.

According to data from the United Nations Development Program in Somalia, the total remittances the diaspora sends home reach $2 billion annually. One particular enterprise is trying to harness this economic power to promote socio-economic development in Somalia.

Kaah International Microfinance Services (KIMS) is “Somalia’s first and only privately owned, commercially oriented social enterprise, offering responsible and ethical financing for economically active Somalis and small Somali businesses,” according to the organization’s website.

Last year, KIMS won the Ethical Finance Innovation Challenge & Awards, an award that recognized the microfinance institution as the “most dynamic actionable solution that advance [sic] ethics in the world’s financial services,” according to KIMS website. KIMS aims to become “the leading provider of sharia-compliant and micro and small enterprise (MSE) finance services in Somalia.” Sharia-compliant is defined as anything that is governed by the requirements of shariah law and the principles of the Muslim religion.

Justin Sykes is the founder and Managing Director of Innovest Advisory, a boutique advisory firm that strives to promote social enterprise by connecting private investors with investment opportunities that generate financial returns and create measurable social impact in some of the most challenging parts of the world. KIMS is one of the social enterprises that Sykes currently works with.

Sykes first got involved in the Somali finance sector during his time at Silatech, a Qatar-based foundation that focuses on job creation for Arab youth. At Silatech, he worked on the foundation’s enterprise development portfolio and Somalia was one of the foundation’s partner countries. Initially, Silatech struggled to find a suitable social enterprise to partner up with to execute their market entry strategy into the East African country.

The American Refugee Committee then introduced Sykes to Dubai-based Kaah Express, a leading international money transfer company that remits tens of millions of dollars a year from the Somali diaspora worldwide to Somalia, an enterprise that he felt shared a similar strategic direction as Silatech. Having previously worked in the Philippines and Yemen with money remittance companies that turned into full-service microfinance banks, Sykes believed that Kaah Express could do the same.

Sykes pitched Kaah Express the idea of creating a spin-off social enterprise using their existing brand, customers, and staff. He proposed that they establish an Islamic microfinance institution that would serve to fill the huge gap in Somalia’s financial services sector by providing a broader range of financial services, such as enterprise credit, savings, and potentially even insurance. The partnership formed by Silatech, the American Refugee Committee, and Kaah Express eventually led to the creation of KIMS.

Since launching in March 2014, KIMS has provided over $8 million of financial services to over 9,000 clients, and generated an estimated 6,000 jobs. The microfinance institution is headquartered in Hargeisa, Somaliland, and it operates 11 branches in nine different locations throughout Somaliland, Puntland, and the South-Central regions of Somalia. KIMS currently offers its customers two main lines of Islamic financing.

It provides murabaha financing, also known as cost-plus financing, to small income-generating projects, such as home-based businesses and small retailers. In Islamic financing, murabaha is a sales contract in which a financial institution buys a product on behalf of a client and resells it to the same client with a mark-up. KIMS’ microentrepreneurs typically require an average of $1000 in financing in the form of stock or some other small asset, such as equipment or machinery, so they can grow their business.

KIMS also provides a larger financing product to small and medium enterprises (SMEs) that are defined as formal businesses that are able to mobilize some kind of collateral and provide some kind of proven track record of their clients and overall performance. A loan for one of these SME averages around $10,000.

Although KIMS typically works in urban contexts, it is making a concerted effort to slowly move social businesses from urban areas to rural areas. Despite the political and economic instability that Somalia faces, KIMS’ operations continue to grow.  

“KIMS has seen some of the highest levels of demand now coming in the southern part of [Somalia], so, Mogadishu and right down to the Jubaland region…where for many years these were areas of conflict and areas that were under the control of Al Shabab,” Sykes said in an interview with The Responsible Finance podcast.

“As these areas are being liberated and stabilized there’s been very little economic active as a result of the conflict and occupation . . . now you’re seeing huge demand for business startup and business expansion.”  

Despite the challenging economic context, KIMS has been able to maintain a very high quality portfolio, with less than 2% non-performing financing from clients, which Sykes said is in line with international standards of microfinance. “You’d think that in an environment where there are insecurities . . . that it may impact the quality of the portfolio or the payment rates of our clients, but ironically that’s not the case,” he added.

However, even with the most conservative estimates, Sykes believes that more than a quarter of a million businesses in Somalia are unable to access finance that would be creditworthy. The portfolio of this overlooked category of entrepreneurs represents hundreds of millions of dollars in unmet financing demand.

To date, KIMS has been financed by donor funding and the earnings it retains from its revenue-generating activities. However, Sykes believes that the Somali microfinance institution should not rely on donor funding to finance its operations in the long-term.

“[KIMS] requires a very different business model, because donor money, for as much as you can look at it as technically ‘free money’ is never really free, because it comes with a lot of conditionality,” said Sykes. “Certain donors might have certain requirements for the money to be spent in particular geographies or particular thematic areas, such as agriculture or fisheries, or population cohorts, such as refugees or internally displaced peoples, youth, women or ex-combatants and those criteria might not always be aligned with the commercial priorities of the business.”

KIMS is currently looking to move from a startup phase to a growth phase by seeking and engaging strategic Islamic social investors. These investors would be able to take equity positions or become partners in  profit and loss sharing investments in KIMS’ overall portfolio or some of its specific portfolios. KIMS aims to raise $24 million in debt, equity, and grants from its strategic investors over the next four to five years.

The microfinance institution has successfully concluded several agreements with strategic partners in 2018 and is in active discussion with others. However, these agreements represent only a small fraction of the overall investments that KIMS will need in order to expand its operations in the future. Therefore, KIMS will need to continue seeking additional investors.

Kaah Express, KIMS’ parent company, has over 100,000 active clients that remit on a monthly-basis from 40 countries around the world, giving the microfinance institution the opportunity to explore and introduce various unique financial and investment products.

In fact, KIMS is currently exploring the possibility of offering Kaah Express customers a diaspora investment product, which would allow remitters to invest a portion of their monthly remittance in Somalia to stimulate economic growth.

This Somali investment product could benefit different stakeholders in Somalia’s economic ecosystem. On one hand, it could provide KIMS a new way to raise capital for its investment portfolio, as Kaah Express customers would have a vested interest in continuously investing in the growth of Somalia.

On the other hand, the diaspora investment product could allow Kaah Express to attract a broader set of customers, by giving their current, and future clients, an investment option that fills an existing gap in Somalia’s finance sector.

Many members of the Somali diaspora feel socially and religiously obligated to send money to extended family in Somalia. However, many remitters in the diaspora feel that their remittances make their extended family economically dependent on them, according to Sykes.

But new financial offerings, like the prospective diaspora investment product, could offer Kaah Express remitters a financial product that they can encourage their extended family members to use to subsidize their lifestyles, while also stimulating productive and wide-scale economic activity in Somalia. At the moment, this product is still under consideration because it would require a high degree of complexity to design.

In the meantime, KIMS is in the process of designing a number of new financial products, including a solar loan product that would enable low income families to abandon the use of dirty and expensive forms of energy, such as kerosene and diesel, and start to use cheaper and cleaner solar home systems. The microfinance institution is also working on offering financing to farmers, microinsurance for small businesses and farmers and small business loans to support the expansion of artisanal fisheries and other business that support the fishing industry.

KIMS is also working closely with the Central Bank of Somalia to align its internal goals with the country’s overall financial inclusion agenda. “As the leading microfinance institution in Somalia, KIMS can play a significant role in the achievement of financial inclusion in Somalia,” Sykes told Inside Arabia.

By 2021, KIMS hopes to achieve various ambitious social goals, which include the provision of more than 100,000 Somalis with first-time access to financial services, the creation of more than 100,000 new jobs, and much more.

KIMS success over the past several years highlights how responsible finance can be used to create positive change, even in a country like Somalia, that suffers from the negative impacts of conflict and climate change. More homegrown institutions, like KIMS, need to be established in order to develop the creative solutions needed to unlock the full economic and social potential of Somalia.