By Liban Obsiye
Today Micro-finance and Crowd funding are the talk of the development finance community. In a challenged world of increasing conflict, displacement, poverty and limited resources to confront all of these, new financing models are being sought like never before. Entrepreneurs, Small Medium Enterprises, communities, social projects and even students are relying on Micro-financing and crowd funding to fund their operations and future. Despite the new academic and policy focus, in Somalia, and most of the developing nations, Micro-financing and crowd funding have been the norm for centuries.
Hagbad is the term that best describes the prevalent community based micro-financing in Somalia. The term Hagbad simply means saving in Somali. Hagbad started in port towns all over Somalia such as Mogadishu, Saylac and Berbera. It even stretched all the way up to what is now modern-day Djibouti which was then part of the Somali territories.
Hagbad is popular in Somalia because it complements the Islamic based culture of community, sharing and charity and was easily accepted and quickly grew in stature among the Somali people after its introduction. A widespread practice before the arrival of Hagbad was for farmers to contribute crops, livestock and milk to communal funds made up of willing savers and each turn was given to a different person to sell and profit from. The Hagbad is and was used in the past as a saving scheme by both the rich and the poor who had no formal banking systems and tended to save to purchase land, clothes, food and cattle which were the safe investment commodities of the time. Today, Hagbad funds all major investments both within Somalia and the Diaspora and is much more popular and accessible than a bank loan for ordinary Somalis.
Hagbad relies on the strength of numbers. The more that saves together, the more money each saver gets in the end. This method is preferred to traditional banking because the latter is new and often the amounts people save are small. However, both are built on trust, and require security and insurance to be successful. Accordingly, those that know each other save together for different things and individual accountability and responsibility is paramount. Often, there is Hagbad administrator who collects all the money and distributes it and this person is respected, trustworthy and agreed on by all savers.
Critics of the Hagbad system have long argued for the inherent risk associated with its informal management which simply rests on trust and reputational risk to be better managed. Somali banks, still in their infancy, have constructed a high wall of requirements and asset backed guarantees against borrowing and customers in Somalia who jointly share assets with relatives, friends or have none, still prefer Hagbad for its convenience and accessibility.
The argument that trust on its own is not enough is to misunderstand Somali culture. Trust is everything to the Somali people and as their saying goes, “One’s face is their passport.” Once one loses this passport, not only are they shamed but they are excluded from business partnerships and their losses or deception is recovered from their immediate and wider clan family. If all these do not work, they are then also imprisoned and forever stigmatised. Often this is worse than been declared bankrupt or insolvent like in most of the developed world.
Hagbad, given how important it is to the financing of the Somali economy, needs to be better understood, researched and partnered sensibly with the formal financing facilities and development projects. If groups and communities can save together for a road to connect their locality or businesses to a market or customer base, then they ought to be supported with government or donor match funding. If an entrepreneur with an innovative idea is in a Hagbad, the banks can lend them against their eventual payout to start their business sooner. This will strengthen the relationship between the savers and bankers which is in both of their interests. Closer engagement earlier on will also limit the risk posed to both by national and international Anti-Money Laundering Laws.
Many of Somalia’s banks offer Micro-financing opportunities but again, these are lent formally backed by assets which many Hagbad participants do not have. Instead of lowering the assets threshold, what banks can do is provide a Hagbad management service to create a financial track record for savers so that they can also borrow later and assist them in complying with Anti-Money laundering laws. Many banks are now also offering business advice and this is a golden opportunity to spot, nurture and finance the future business leaders of Somalia.
Personal banking is relatively new in Somalia as during the period it truly took off in Africa, Somalia was still in midst of its disastrous civil war. With failed public and private institutions still fresh in the people’s memories, Hagbad still seems a more reliable and safer system for most Somalis. However, Banks need both the customer and Hagbad money to operate successfully and convince global partners and regulators that they can manage their affairs prudently and are profitable enough to qualify for correspondent banking which is not yet available to most Somali banks. The best thing for Somali banks to do is educate and provide innovative solutions for the unbanked. This is the clearest route to a profitable partnership.
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