Economic growth and financial institutions in somalia

IMPACT OF FINANCIAL INSTITUTIONS ON ECONOMIC GROWTH IN PUNTLAND

IMPACT OF FINANCIAL INSTITUTIONS

ON ECONOMIC GROWTH

IN PUNTLAND

Daud Dahir Hassan

2014

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DEDICATION

I dedicates this thesis to my lovely parent my mother Fatima Yusuf Mohamed and My father Dahir Hassan Musse for their

endless love, support and encouragement.

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About the Author

Daud Dahir is a Senior Accountant and Financial Expert

who works in Amal Express’s Headquarter. His passion

for helping people in all aspects of Banking and

providing more information about central bank of

Somalia through the expert industry coverage he

provides. A graduate of Mogadishu University with a

degree in Finance and Banking. He published a number

of researches in Slide share and search Engines.

Researcher Published many researches and Books including the Central bank of

Somalia published in 2014.

Connections:

Email: [email protected]

Linked in: Daud Dahir Hassan

Facebook: https://www.facebook.com/daauddahir

Twitter: https://twitter.com/dauddhassan

Website: https://dauddahir.wordpress.com

Skype: Daud.d.hassan

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https://dauddahir.wordpress.com/

https://twitter.com/dauddhassan

https://www.facebook.com/daauddahir

mailto:[email protected]


DECLARATION

I hereby declare that this thesis is my own work and effort and that it has

not been submitted anywhere for any award. Where other sources of

information have been used, they have been acknowledged.

Daud

Daud Dahir Hassan

Signature: 31/05/2014

IV


CERTIFICATE OF APPROVAL

We hereby declare that this thesis is from the student’s own work and

effort, and all other sources of information used have been acknowledged.

This thesis has been submitted with my approval

SUPERVISOR: Zamzam Said Mohamed

SIGNATURE………………

DATE: …………………….

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ACKNOWLEDGEMENT

First and foremost praise is to Allah, the Almighty, on whom ultimately we

depend for sustenance and guidance. Foremost, I would like to express

my sincere gratitude to my advisor Prof. Zamzam for her continuous

support of my thesis study and research, for her patience, motivation,

enthusiasm, and immense knowledge. Her guidance helped me in all the

time of research and writing of this thesis. I could not have imagined

having a better advisor and mentor for my study.

I would like to thank my grandfather Ahmed Sha’ur For his innumerable

Support. Special Thanks due to my dear brother Mohamud Dahir with his

continuous financial support and daily encouragement as I would like to

thank whole and rest of my family including my brothers and sisters.

Besides my advisor, I would like to thank and recognize the contributions

of Mr Sino Alaly: Lecturer of Mogadishu University, Mr ahmed Hussien:

Lecturer Mogadishu University.

Extraordinary gratitude to Mogadishu University Administrators, My

teachers and classmates in four years at Mogadishu University I would

like to say thank you. Last but not the least, I would like to thank my dear

friends Abdi Aziz Jama’, Ahmed Mohamed Mohamud and all my friends

for their contribution due to the completion of my thesis

I would like to express my deepest appreciation to the great authors whom

I quoted their articles, thank you

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Abbreviation latter

GE: General Equilibrium

PE: Partial Equilibrium

GDP: gross Domestic Production

MFIs: Micro Finance Institutions

WTO: World Trade Organization

IMF: International Monetary Fund

UNDP: United Nation Development Program

GNI: Gross National Income

SSA: Sub Saharan Africa

GNP: Gross National product

HDI: Human Development Index

ISEW: Index of Sustainable Economic Welfare

GPI: Genuine Progress Indicator

GNH: Gross National Happiness

SNI: sustainable National Income

NFIA: Net Factor Income from Abroad

FI: Financial Institutions

LC: Letter of Credit

LG: Letter of Grantee

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Executive summary

This study was searching the financial institution and its impact on

economic growth. It contains five chapters.

The first chapter is introduction it focuses the bases of the study,

objectives, and research questions.

The second chapter concerns literature review which presented

comprehensive understanding of financial institutions of economic growth

in Puntland Somalia then it also presents the growth of business firms in

economic in Puntland.

The third chapter presented the research methodology including research

design, target population, how data is collected & analyzed and the

limitation faced the researcher during the study process.

The fourth chapter concerned data presentation, analysis and

interpretation. It presented the data collected from the respondents

accompanied with data sourced from society in Bosaso; Business sector,

households, government, education and research centers from the last

two year 2013 - 2015.

At last, chapter five presented the findings, conclusion and

recommendation.

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Table of Contents

Cover page……………………………………………………………………..I

Dedication………………………………………………………………………II

About the Researcher……………………………………………………..…III

Declaration…………………………………….……………………………….IV

Certificate of approval………………………………………………...............V

Acknowledgement ……………………………………………......……..........VI

Abbreviation latter………………………………….……………………..….VII

Executive summary…………………………………………………………..VIII

Table of contents…………………………………………………………........IX

1 Chapter one: introduction

1.1 Background of the study

1.2 Problem of the study

1.3 Purpose statement

1.4 Objectives of the study

1.5 Research question

1.6 The scope of the study

1.6.1 Geographical scope

1.6.2 Theoretical scope

1.6.3 Time scope

1.7 Significance of the study

1.8 Conceptual framework

2 Chapter two: Literature review

2.1 Introduction

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2.2 Financial institutions

2.2.1 Banks

2.2.2 Remittances “Hawala”:

2.2.3 Microfinance institutions

2.3 Economic growth

2.3.1 Gross domestic Production “GDP”

2.3.2 Employment rate

2.3.3 National income

3 Chapter three: methodology

3.1 Introduction

3.2 Research design

3.3 Population and sampling

3.3.1 Study population

3.3.2 Sample of the study

3.3.3 Sampling procedure

3.4 Data Collection

3.4.1 Instrumentations

3.5 Quality control of the study

3.5.1 Validity…………………………………………………………………………..

3.5.2 Reliability

3.6 Data Analysis

3.7 Ethical Considerations

3.7.1 Permission to conduct the research

3.7.2 Informed Consent

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3.7.3 Confidentiality and secrecy

3.8 Research Limitations

4 CHAPTER FOUR PRESENTATION, ANALYSIS AND

INTERPRETATION OF DATA

4.1 Overview

4.2 Characteristics of respondent

4.2.1 GENDERS OF THE RESPONDENTS

4.2.2 AGE OF RESPONDENT

4.2.3 Marital status

4.2.4 Educational Level

4.3 Financial institutions

4.3.1 Central government and internationally recognized bank

4.3.2 Lack of international recognized financial and economic situation

4.3.3 Microfinance poverty reduction mechanism

4.3.4 Insurance companies and risk recovery

4.3.5 Remittance and standard of living of the Households

4.3.6 Legal Financial framework and mutual understanding

4.4 Improvement of economic growth

4.4.1 Financial institutions and employment rate

4.4.2 Financial institutions and domestic productions

4.4.3 Microfinance and small entrepreneurs

4.4.4 Development banks and infrastructures

4.4.5 Hawala and inflation

4.4.6 Factors of production and economic growth

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4.4.7 Exchange rate and foreign direct investment

5 CHAPTER FIVE: FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

5.1 Overview

5.2 Findings

5.3 CONCLUSION

5.4 RECOMMENDATIONS

References

Appendix……………………………………………………………………………..…..70

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1 Chapter one: introduction

1.1 Background of the studyGenerally financial institutions play a vital role for economic growth, so it is one

of most priorities. financial institutions is a term refers for the combination of

banks, remittances “Hawala” and microfinance institutions each of them plays

an important position for the process of economic growth. In the last two

decades the link between financial institution (FI) and Economic growth has

generated a great deal of interest among academics, policy makers and

economists around the world. Financial institutions become much more

effectives and plays vital character for economic growth. In black continent

Africa it’s same as the other parts of the world even if it’s less developed and

there is a lack of valuable financial institution which plays important part for the

economic growth but in Somalia since the central government was collapsed

in 1991 the overall economic of the country was declined although financial

institutions especially the remittances “Hawala” take part in the economic

growth in punt-land and in Somalia generally.

This study of financial institutions and its impact of economic growth in

Puntland have been used to the following variables to analyze how financial

institutions and economic growth are related to each other. Bank, remittance

“Hawala” and microfinance institutions, Gross domestic production,

employment rate and national income are independent and dependent

variables respectively that we have analyzed.

Banks offer different financial service banks are an organization where people

and businesses can invest or borrow money, change it to foreign money, etc.,

or a building where these services are offered (Cambridge advanced learners

dictionary -3rd editions). Bank is a financial institution that accepts deposit and

grants loans and makes available many different financial services as they are

profit seeking institution. Banking, saving and investment, insurance, and debt

and equity financing help private citizens save money, guard against

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uncertainty, and build credit while enabling business to start up, extend,

increase efficiency, and compete in local and international markets. For the

poor, these services reduce vulnerability and enable people to manage the

assets available to them in way to generate income and options (Christopher,

2007)

Remittance “Hawala” can be defined financial institution that acts for sending

amount of money for somebody to do something (Free dictionary). Remittance

is known as a financial institution that collects money from citizens outside the

state and sends to the entire members. Officially recorded remittances

received by developing countries exceeded $93 billion in 2003. The actual

size of remittances, including both officially recorded and unrecorded transfers

through informal channels, is even larger. Remittances are now more than

double the size of net official flows (under $30 billion), and are second only to

foreign direct investment (around $133 billion) as a source of external finance

for developing countries. In 36 out of 153 developing countries, remittances

are larger than all capital flows, public and private.

Remitters use informal channels because these channels are cheaper, better

suited to transferring funds to remote areas where formal channels do not

operate, and offer the advantage of the native language and, on rare

occasions, anonymity. Informal channels, however, can be subject to abuse.

Strengthening the formal remittance infrastructure by offering the advantages

of low cost, expanded reach, and language can shift flows from the informal to

the formal sector. Both sender and recipient countries could support migrants’

access to banking by providing them with identification tools.

Microfinance institution it refers to a variety of financial services that target

low-income clients, particularly women. Since the clients of microfinance

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institutions (MFIs) have lower incomes and often have limited access to other

financial services, microfinance products tend to be for smaller monetary

amounts than traditional financial services (Merriam Dictionary).

Microfinance has grown to become a much favored intervention amongst

international development agencies. There is scarcely a multi-lateral, bilateral

or private development donor organization not involved in the promotion of a

microfinance program have observed that, the last twenty-five years have

witnessed rapid expansions in the numbers and size of MFIs in many parts of

the world with estimates suggesting that by 2000, MFIs worldwide served

about 12.5 million individuals.

They further argued that the primary clientele of MFIs consists almost of those

who face severe barriers to access financial products from conventional

financial institutions. These barriers comprise mainly high operational costs

and risk factors. To overcome these barriers, MFIs have to be innovative.

Innovative products, services and processes can create additional value and

expand the frontier of finance if they: create access to the formal financial

system by groups previously without access; reduce transaction and risk costs

of the financial services provider or of the clients or both; increase the term of

loans and of savings, and/or provide larger loans to clients by refining

valuation processes.

The challenge in the region is to achieve scale and reach remote areas

without losing control of costs. The good news is that it is possible. As they

grow in size, larger institutions in Africa can be profitable: the top quartile of

African MFIs reporting to the MIX not only were profitable, but boosted their

ROA by one percentage point (from 0.9 in 2005 to 1.9 in 2006). Once MFIs

reach profitability, MFIs were able to expand their operations and achieve

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economies of scale. These positive returns allowed them to reach twice as

many borrowers as their unprofitable peers.

In the last decade, microfinance institutions have experienced a boom in

innovations of lending products, partly fuelled by donors who see microfinance

as the next promise to alleviate poverty. Examples of these new products are

the combination of credit with health or life insurance, business and health

education, savings products, and the adoption of (or conversion to) individual

loan liability. The add-in features generally aim at reducing the vulnerability of

clients while contributing to asset creation, hence improving their repayment

rate and the sustainability of the service. The product innovations typically

result from organizations striving to extend outreach, increase impact, and

promote sustainability.

Recent theoretical studies have tried to establish precise mechanism through

which financial institution influence economic growth. For example,

(Greenwood and Jovanovic, 1990) developed a model in which both financial

institutions and economic growth are endogenously determined. With respect

to the growth effects of financial institutions, they demonstrated that by pooling

idiosyncratic investment risks and eliminating uncertainty about rates of

returns, financial institutions can lead to faster economic growth. In the model

proposed by (Bencivenga and Smith, 1991), it was shown that the

development of banks increases economic growth by channeling savings to

the activity with high productivity but offering risky and illiquid assets, while

allowing individuals to reduce the risk associated with their liquidity needs.

1.2 Problem of the studyThe problem to be directed is around poor of financial institutions and in some

instances improper financial service offered by poor financial institutions in

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Puntland, this normally results to failure of economic growth. Deficiencies in

the financial institutions are the major cause of poor economic growth Ellison

and Orozco (2007). Are the Financial institutions in a position to influence the

economic growth of the state? Lack of existence of important part of financial

institutions including; credit union, insurance companies, mutual fund, pension

fund and many others in a building up market can lead the economy to

decline.

This paper will analyze how effective and successful financial institution will

bring economic growth in punt-land and how it will contribute the improvement

of the economic in the state. One of the most critical obstacles to financial

institutions is informality. The poor often live and work in the informal sector,

lacking legal ownership of land, homes and business. Half of Puntland people

live in informal settlement in urban area alone, meaning that they cannot use

their land as collateral on a loan; often they lack address they could associate

with a bank account or credit application. Entrepreneurs can face high fees,

inefficient and sometimes corrupt procedures, and burdensome regulation that

essentially make it too costly to incorporate legally the result are enforce

contract or declare bankruptcy.

1.3 Purpose statement The purpose of this study is to investigate the impact of financial institutions on

economic growth in puntland, using historical resulting knowing the impact of

financial institutions on economic growth in Puntland, in this study agent of

financial institution will be defined as a banks, remittances “Hawala” and

microfinance institutions in view of this study will determine and describe the

effect of banks, remittances “Hawala” and microfinance institutions will affect

the Gross Domestic Production “GDP”, employment rate and national income.

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1.4 Objectives of the studyThe general objectives of the study were to examine the impact of financial

institutions on economic growth in Puntland the study was tested to realize the

following specific objectives:

To examine the relationship between banks and economic growth in

punt-land.

To establish the effect of remittances “Hawala” on economic growth in

Puntland.

To examine the relationship between the microfinance institutions and

economic growth in Puntland.

1.5 Research question

What is the relationship between the banks and economic growth in

Puntland?

How does the remittance “Hawala” effect the economic growth in

Puntland?

How does a microfinance institution effect the economic growth in

Puntland?

1.6 The scope of the study1.6.1 Geographical scope

This study was conducted to examine the impact of financial institutions on

economic growth in Puntland consists all its territory, which is located in

Puntland state of Somalia.

1.6.2 Theoretical scope

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This study was focusing on financial institutions and its impact on economic

growth, especially why banks are important to economic growth and the how

remittance “Hawala” influence the economic growth of the state and finally the

effect of the microfinance institutions on economic Growth in Puntland.

1.6.3 Time scope

The study on impact of financial institutions on economic growth in punt lad

was conducted for the last two years.

1.7 Significance of the study This study focus on economic growth in Puntland in generally its one of

those studies alert the agent of financial institutions in punt land as

such It is expected to show some important points about economic

growth needed in Puntland and became useful material to reference by

other researchers and anyone who want to obtain more about

economic growth in Puntland,

So that this study would provide a detailed and comprehensive

knowledge of the functions of these financial institutions and would

remarkably help to analyze their implication on the economic growth of

the state.

This study also expected to suggest policy makers through guidance

and suggestion,

The study will provide recommendation and advices on banks,

remittances “Hawala” and microfinance institutions it can be helpful

material by the side of formulation new policy in Puntland and other

states.

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This study should also influence practice of financial institutions at the

state, and it assists to deal economic growth and relates problem of

financial institutions in Puntland.

1.8 Conceptual framework I. V E. V D. V

2 Chapter two: Literature review

2.1 IntroductionThis chapter presents a review of related literature of the financial institutions

and economic growth based other scholars views point, opinions, and findings

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Financial institutionsEconomic growth

Banks

Remittance

Microfinance

Gross Domestic

Production

Employment rate

National income

Government regulations


world over. The first section presents a review of related literature on financial

institutions. This is followed by a review of related literature on economic

growth and the relationship between financial institutions and economic

growth.

2.2 Financial institutionsFinancial institutions are an organization that is a channel between the parties

involved in funds transfer between fund savers and fund borrowers. They are

depository or no depository insurance companies. Depository banks pay

interest on a deposit from the interest on loans. Sometimes financial

institutions can be classified into three major groups:

Depositary Institutions: Deposit-taking institutions that accept and manage

deposits and make loans, including banks, building societies, credit unions,

trust companies, and mortgage loan companies. Contractual Institutions :

Insurance companies and pension funds; and Investment Institutions : Investment Banks, underwriters, brokerage firms (leu, 1998)

2.2.1 Banks

The name bank derives from the Italian word banco "desk/bench", used during

the Renaissance era by Florentine bankers, who used to make their

transactions above a desk covered by a green tablecloth. However, traces of

banking activity can be found even in ancient times (Hauppauge, 1993).

Banks are financial intermediaries that accept deposits and make loans.

Banks offer several advantages in connecting borrows and lenders. By pooling

the funds of thousands of different depositors they are able to make large

loans beyond the means of any individual investor. In addition, because they

deal in such a large volume of loans, their costs to making a loan are smaller

than for a single investor. Banks make a variety of different kinds of loans.

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They lend money to businesses for capital improvement projects, called

commercial and industrial loans. They lend money to consumers for projects

such as auto and college loans, called consumer loans, and also to purchase

a house, called a real estate loan, or a mortgage. Banks make profits by the

spread between the interest rate on the loan that they make and on the

deposits that they take (thiel, 2001).

Historically in recent years the number of commercial banks in Puntland was

massively increasing, this encourages the habit of saving and investing and it

increases the liquidation and mobilization of resources in the market

(Poutziouris, 2013). Banks are not only offer the saving and investing services

also commercial banks deals with business sectors via issuing letter of credit

“LC” and letter of guarantee “LG” as well as commercial banks act as an agent

for collecting bills, paying bills, sale and purchase of securities in financial

markets. Banks are the linkage between servers “who have surplus” and

lenders “who is in need for money”. Banks are profit seeking institutions some

us other business entity (SHAN, 2004). Mostly banks are classified into public

“central” bank and private banks “Commercial” banks based on their

ownership

2.2.1.1 Public “Central” Banks

It is the entity that is responsible for the monetary system of the nation Central

banks has a wide range of responsibilities, from overseeing monetary policy to

implementing specific goals such as currency stability, low inflation and full

employment. Central banks also generally issue currency, function as the

bank of the government, regulate the credit system, oversee commercial

banks, manage exchange reserves and act as a lender of last resort.

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One of the aims of a central bank in an underdeveloped country is to improve

its currency and credit system. More banks and financial institutions are

required to be set up to provide larger credit facilities and to divert voluntary

savings into productive channels. The central bank plays an important role in

bringing about a proper adjustment between demand for and supply of money.

In an underdeveloped country the interest rate structure stands at a very high

level. There are also vast disparities between long-term and short-term

interest rates and between interest rates in different sectors of the economy

(hamsik, 2010). Debt management is one of the important functions of the

central bank in an underdeveloped country. It should aim at proper timing and

issuing of government bonds, stabilizing their prices and minimizing the cost of

servicing public debt, central bank also performs the act of credit control as

well as solving the balancing the payment problems (Germidis, 1986)

Thus the central bank plays an important role in achieving economic growth of

a developing country It should promote economic growth with stability, help in

attaining full employment of resources, in overcoming balance of payments

disequilibrium, and in stabilizing exchange rates.

2.2.1.2 Private “Commercial” banks

This is a financial institution providing services for businesses, organizations

and individuals. Services include offering current, deposit and saving accounts

as well as giving out loans to businesses. Commercial banks are defined as a

bank whose main business is deposit-taking and making loans.

Commercial banks make their profits by taking small, short-term, relatively

liquid deposits and transforming these into larger, longer maturity loans. This

process of asset transformation generates net income for the commercial

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bank. Note that many commercial banks do investment banking business

although the latter is not considered the main business area (dalton, 1989).

Commercial banks perform many functions. They satisfy the financial needs of

the sectors such as agriculture, industry, trade, communication, so they play

very significant role in a process of economic social needs.

The functions performed by banks, since recently, are becoming customer-

centered and are widening their functions. Generally, the functions of

commercial banks are divided into two categories: primary functions and the

secondary functions.

2.2.1.2.1 Commercial banks perform various functions for economic growth:

Commercial banks accept various types of deposits from public especially

from its clients, including saving account deposits, recurring account deposits,

and fixed deposits. These deposits are payable after a certain time period

Commercial banks provide loans and advances of various forms, including an

overdraft facility, cash credit, bill discounting, money at call etc. They also give

demand and demand and term loans to all types of clients against proper

security. Credit creation is most significant function of commercial banks.

While sanctioning a loan to a customer, they do not provide cash to the

borrower. Instead, they open a deposit account from which the borrower can

withdraw. In other words, while sanctioning a loan, they automatically create

deposits, known as a credit creation from commercial banks.

Along with primary functions, commercial banks perform several secondary

functions, including many agency functions or general utility functions. The

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secondary functions of commercial banks can be divided into agency functions

and utility functions (Henry luis, 2007).

2.2.1.2.2 Agency functions of commercial banks include:

To collect and clear checks, dividends and interest warrant.

To make payments of rent, insurance premium, etc.

To deal in foreign exchange transactions.

To purchase and sell securities.

To act as trustee, attorney, correspondent and executor.

To accept tax proceeds and tax returns.

2.2.1.2.3 Utility functions of commercial include:

To provide safety locker facility to customers.

To provide money transfer facility.

To issue traveler’s cheque.

To act as referees.

To accept various bills for payment: phone bills, gas bills, water bills,

To provide merchant banking facility.

To provide various cards: credit cards, debit cards, smart cards, etc.

2.2.2 Remittances “Hawala”:

The alternative remittance system or Hawala operates outside of, or parallel to

conventional banking or financial institutions. It was developed in India, before

the introduction of Western banking practices, and is now a major remittance

system used around the world (sandhu, 2001). This system of remittance is no

longer referred to as an "underground banking", as it is now operating with full

legitimacy and it is openly advertised in a variety of media, such as ethnic

newspapers and Internet websites.

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The major distinctive feature of this informal banking system that differentiates

it from other forms of remittance systems is trust and the extensive use of

connections such as family or clan relationships in the processes of money

transactions. Trust is therefore a very important component in Hawala banking

system. It is now well established that Hawala firms are honest and

trustworthy in their dealings with their customers. Breaches of trust are

extremely uncommon and rare. Hawala are informal money transfer

companies that Transfer funds both domestically and internationally.

This type of system was originally developed to facilitate trade between

secluded regions where conventional banking institutions were either absent,

weak or unsafe. They operate parallel to –and usually independently from –

regular banks. Transactions are fast, safe and cost- effective, and are often

used by Diaspora abroad to remit money home to relatives (Gorodnichenko,

2000).

Since the collapse of the Somali state and economy in the 1990s, Somalia has

become even more dependent on remittances from family members working

abroad. Today, remittances are by far the largest single source of hard

currency entering the country, and are vital to the country’s limited ability to

feed and sustain itself. One study estimates that remittances to Somaliland

alone (which is home to about 1/6 of the total population in Somalia, which is

estimated at about fifteen million people) reach as much as US $500 million

per year – four times the value of livestock exports in a normal year (Ahmed,

2000). Another study calculates that remittances constitute nearly 40% of the

income of urban households in the northern towns of Hargeisa, Burao, and

Bosasso. Remittances to southern Somalia are less well-documented.

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Mogadishu is unquestionably the largest recipient of remittances; it probably

accrues a similar level of remittances as does Somaliland. In the town of

Beled Weyn, with a population of about 50,000, an estimated US $200,000

per month is received in remittances, for a monthly average of US $4 per town

dweller. Our best estimates are that remittances nationally probably total

somewhere between 500 million to one billion US dollars per year. Even the

low end of this estimate dwarfs the amount of money the country earns in

livestock exports or receives in foreign aid (Medani, 2003). Hawala has since

then played a very crucial role in the survival and economic growth of the

people in Somalia generally and puntland particularly and it is considered to

be an important factor in linking the Somalis in the Diaspora with their country

of origin.

Remittances from the Somali Diaspora in abroad are primarily intended for

supporting the needs of the households in Somalia and those families and

relatives who are still in refugee camps in Africa and in other parts of the

world. A survey conducted by UNDP estimates that more than 25-32% of

families in Somalia receive Remittances from abroad (UNDP, 2003). The

money received is used for basic necessities such as food, clothing,

education, health and for simple investment purposes such as the purchase of

house or land, or set up a small business. The Somali Hawala remittance firms

need to take all measures necessary to work against the negative image that

has been leveled against their operations.

Though the firms in western countries and in other parts of the world have

made notable progress in meeting international standards for accountability

and transparency, it appears, however, that these firms are still tackled with

certain impediments that can lead to the creation of a climate of suspicion and

15


uncertainty The western banks are still reluctant to allow the Somali Hawala

remittance firms to hold accounts with them (Kosse, 2007).

This being the case, the Hawala remittance firms must embark on a serious

dialogue with the formal financial institutions and the regulators to ensure the

continued operation of the remittance sector in western countries. The

absence of a centralized government in Somalia is precluding the possibility of

the establishment of the formal financial institutions and the laws and

regulations that govern them.

September 11 tragedy has prompted the United States of America and other

countries that host Hawala remittance firms to focus on money laundering and

its role in the financing of terrorism. The USA Patriot Act (Uniting and

Strengthening America by Providing Appropriate Tools Required to Intercept

and Obstruct Terrorism) passed in the United States requires all the Hawala

remittance firms to comply with the Anti-Money Laundering Compliance

Program (Ahmed, 2000).

The knowledge available on the impact of remittances on the livelihood and on

the economy of the people is relatively scanty. The sustainability of the

Hawala remittance sector in general needs further research. Second

generation Somali Canadians will have very little to do with their country of

origin; and this will have an impact on the flow of remittances from Canada. In

light of this, the Hawala firms will have to formulate long-term strategies to

counteract any negative effects that may eventually arise as result of the

change of the attitudes of the second generation migrants. Western countries

may consider contraction immigration for Somalis still stranded in refugee

camps. The new immigration policies will certainly have some impact on the

flow of remittances from the Diaspora (Gorodnichenko, 2008). There is little

16


doubt that Hawala remittances could be good means and mechanisms to fund

terrorism, civil wars, and other illegal activities. Initially, the Somalis in the

Diaspora used the Hawala remittance to supply arms to the guerillas who

overthrew the dictatorial regime of Siad Barre in 1991. It has occurred in other

failed states where remittances were used not only for family survival and

household consumption but to finance conflicts and support military

operations. Nevertheless, the importance of remittances and their social

insurance roles in the failed states and in other poor countries has been widely

acknowledged.

Remittances in failed and poor states have provided many times what the aid

agencies have been providing to alleviate the suffering of the devastated

populations. In other words, given the scarcity of the international funding for

these war-torn societies, the people have been able to bear the brunt of the

reduced international commitment and do things for themselves (Dow, 2009).

On the positive side, remittances are believed to reduce poverty, as it is the

poor who migrate and send back remittances. But this view has its critics. It is

sometimes argued that remittances may increase inequality, because it is the

rich who can migrate and send back remittances, making recipients even

richer. These questions should be studied at the macro level using cross-

country data, and at the micro level using household surveys. The impact of

remittances depends on their use, especially on schooling of children.

A recent study from El Salvador shows that the school drop-out rate is lower

and the enrollment ratio higher in households that receive remittances. It's

important to consider how remittances may offset the negative effects on

economic growth and fiscal revenue of the remittance-receiving country when

skilled workers emigrate. The brain drain issue, along with the issue of job

17


competition from in-migration in labor-receiving countries, may well hold the

keys to the success of the global migration agenda (larson, 2008).

2.2.3 Microfinance institutions

Microfinance is the provision of savings accounts, loans, insurance, money

transfers and other banking services to customers that lack access to

traditional financial services, usually because of poverty (Tony Sheldon,

1998).

Lesser-developed economies do not have access to financial technologies

because perspective borrowers lack collateral; institutions do not want to pay

high monitoring, screening, and enforcement costs; and because risks are

very high in populations that suffer from severe illness, malnutrition, and low

levels of education. Microfinance is a wide variety of economic interventions

that aim to improve poor people’s access to financial technologies.

The model of the Grameen (Village) Bank of Bangladesh is the most well-

known and discussed model in the literature. Muhammad Yunus, a

Bangladeshi economist who founded the Grameen Bank in 1976, won the

2006 Nobel Peace Prize. As of 2007, the bank has 7.3 million members in

over 74,000 villages. Total assets are nearing $1 billion, the recovery rate is

98.4%, and profits are at $20 million. The distinguishing features of the

Grameen model are joint liability, forced savings, and ‘non-financial products’

that aim to change the social and economic infrastructure of Bangladesh and

other poor countries (Levine, 2012). Achieving balanced and inclusive

economic growth is a key challenge faced by policymakers in countries around

the world.

18


The gains of economic growth are accessible to a greater extent by the

relatively advantaged, who find it easier to participate in the growth process.

Poorer people, who are separated by distance from the urban areas where

economic activity is concentrated, have to wait much longer to reap the

benefits of economic growth. Engaging these sections of society in the

economic mainstream is essential to achieve balanced growth, which is critical

for the long-term sustainability of social development and economic prosperity

(della, 2009).

Access to financial services is a key element of the process of socio-economic

empowerment. Only by delivering financial services to people in rural areas

and lower income strata can they be brought within the ambit of economic

activity. Only then can the full potential of the country’s physical and human

resources be realized. The rural economy represents a large latent demand

for credit, savings and risk mitigation products like insurance.

Governments and regulators the world over have articulated the expansion of

financial service delivery to this segment of the population as a priority

objective (Ustarz, 20013). Between 1997 and 2006, access to microfinance

grew 29% a year, i.e., at a scale large enough to consider its macroeconomic

impact. The Microcredit Summit Campaign, 2010, reports 3,552 institutions

serving 155 million borrowers, which including borrowers and their households

affect 533 million people, roughly the size of Latin America.

For various countries, microfinance loans now represent a significant fraction

of their GDP. Despite the growth and prevalence of microfinance and its

importance in academic and policy circles, quantitative analyses of these

programmes are almost exclusively limited to micro evaluations. The

macroeconomic effects of economy-wide microfinance have been largely

19


unexplored. Since the wealthy already have access to financing beyond the

microfinance limit, only the poor have their choice set expanded by

microfinance, and the marginal entrepreneurs - who would have chosen not to

run their own business in the absence of microcredit - are affected in the most

direct and significant way (Verlag, 2001).

The paper finds that the typical microfinance program, when made widely

available, can have significant aggregate and distributional impacts, and that

the general equilibrium (GE) effects through wages and interest rates are

quantitatively important. In partial equilibrium (PE), microfinance induces a

high rate of entry among marginally-productive entrepreneurs, increasing the

capital/labor demand and output, but lowering the aggregate TFP. In GE,

however, the increase in wage that results from marginal entrepreneurs

selecting out of the labour supply - and demanding labor instead - has

strikingly different impacts on output, capital and TFP. In redistributing income

away from individuals with high saving rates (high-ability entrepreneurs) to

those with low saving rates (marginal entrepreneurs and workers ),

microfinance leads to lower aggregate saving and capital accumulation .

Higher wages and interest rates also lead low-productivity entrepreneurs to

exit, and TFP actually increases with microfinance in contrast to the PE result.

In net, the lower capital accumulation and higher TFP lead to positive overall

impacts on consumption and output, but the magnitudes are substantially

smaller than in PE. In Ghana, more than three-fourth of the population lives

under two dollars a day.

According to the fourth round of Ghana Living Standard Survey (GLSS 4),

access to capital credit is one of the most important factors that hinder

progress of most businesses in Ghana. The report further indicated that about

20


60 per cent of non-farm enterprises have no access to capital or credit. The

regions with the highest incidence of poverty are Upper East, Upper West and

Northern regions. Since majority of the people in Ghana and particularly the

northern regions lives in poverty, micro finance is probably the most

appropriate way to provide financial services to a majority of Ghana’s poor

population. It is therefore, not surprising that the present government

perceives microfinance to be central to achieving the greater goal of poverty

alleviation.

Through microfinance the government aims to provide poor entrepreneurs,

especially those in the informal sector, with greater access to customized

financial services (Haruna, 2008). While microfinance is widely celebrated as a

possible solution to the financing problems of smaller firms and micro

businesses, there is remarkably little examination of the connection between

microfinance and product innovation as observed by. Studies in Ghana have

also largely concentrated on the role of MFIs in poverty reduction.

In terms of profitability, African MFIs do not fare well compared to their

counterparts in the rest of the world. African MFIs return on assets averages (-

2%), compared to 2.5% for the Latin America and Caribbean region, 3% for

MENA, 1% for Asia and 1.5% Eastern Europe African institutions faced

tremendous hurdles in reaching sustainability: low population density with a

predominantly rural population, weak communication infrastructure and high

labor costs (“compensation to employ and retain skilled personnel averaged

12 times GNI per capita, over twice as much as any other region in the world”,

MIX). In terms of women empowerment and gender equity, African

microfinance plays an important role. Women account for around 70% of the

world’s microfinance clients. The vast majority of them have excellent

repayment records, in spite of the daily hardships they face (Congo, 2003)

21


Although microfinance does not address all the barriers to women’s

empowerment, when properly designed, they can make an important

contribution to women’s empowerment. Some of the most valued benefits

include expanded business and social networks, improved self-esteem,

increased household decision-making power, and increased respect and

prestige from both male and female relatives and community members.

Because women contribute decisively to the well-being of their families,

investing in women brings about a multiplier effect.

There are many testimonies from African women on the positive impacts

generated by their access to finance. Overall, MFIs in Africa are growing and

are dynamic. Clearly, there are some positives on the performance of African

MFIs to date. The sector is expanding. African MFIs are among the most

productive globally, as measured by the number of borrowers and savers per

staff member. MFIs in Africa also demonstrate high levels of portfolio quality

(lourents, 2012).

However, African MFIs face many challenges. Expenses are high, and on

average, revenues remain lower than in other global regions. Efficiency in

terms of cost per borrower is low. More importantly, available data suggests

that Africa has a long way to go before it bridges the gap between demand by

poor households for financial services and supply thereof. It is estimated that

the coverage rate for financial services to the poor in Africa is only 6.9%, the

lowest for the developing world. There are an average 2.5 branches for

100,000 persons in Sub Saharan Africa (SSA), compared to 15 in the rest of

the world; and an average 6 branches per 1,000 square kilometres compared

to 34 (IMF).

22


In 2004, savings in banks represented only 19% of the GNP in SSA, against

38% on average in other regions; and private sector loans represented only

13%. On average, only 11% of households had access to savings accounts,

compared to 25% in other low- and middle income countries and 90% in

industrial countries. Chad and the Central African Republic have the lowest

access levels, with savings accounts held by less than 1% of the adult

population. By contrast, the figure is close to half in Botswana and South

Africa1.

2.3 Economic growthEconomic growth is an increase in the production and consumption of goods

and services. It entails increasing population and/or per capita consumption. It

is indicated by increasing gross domestic product (GDP). Economic growth

literally refers to an economy that is getting bigger, not necessarily one that is

getting better (Dalton, 1997). Economic growth has an indicator this includes

the: GDP “Gross Domestic Production”, employment rate and national income

of the state. There are many factor that leads economic for growth and

expansion this includes the availability of fund required by the business firm

from financial institutions, utilization of natural resources, usage technology

and many other factors (Yuenger, 1973).

Economic growth can be achieved when the aggregate demand and

aggregate supply increase thus economic growth means increase in real GDP

“Gross Domestic Production”. Whether or not our individual slice grows

depends on whether we are able to share in the growing economy. Even if we

do not benefit directly, we should still be able to see some advantages to the

growing economy. This is because the extra economic growth should produce

1 Source: MIX 2006 Peer Group Medians

23


higher tax revenues, which can then be spent on public services that should

benefit everyone.

An increase in an economy's ability to produce goods and services, therefore

increasing economic output, is possible under two conditions:

More resources are used in the economy, and

Existing resources are used more efficiently.

Barriers to economic growth

We have seen earlier that the ability to grow an economy depends on using

more resources (land and labor, for example), or on more efficient use of

these resources. The correct term for the resources used is: factors of

production. There are four factors of production: land, labor, capital and

enterprise. Economic growth depends on the quality and availability of these

factors. If any of the factors of production suffers from a lack of quality or

availability, then economic growth will not be as great as its potential.

Other barriers exist that can hamper countries' ability to grow their economies.

They may be unable to gain access to export markets, due to the trade

policies of other countries. In order to protect their own domestic producers,

many countries block the imports of goods or services from other parts of the

world. The World Trade Organization (WTO) is a place where member

governments go to sort out the trade problems they have with each other

(mosses, 2009).

2.3.1 Gross domestic Production “GDP”

The monetary value of all the finished goods and services produced within a

country's borders in a specific time period, though GDP is usually calculated

24


on an annual basis. It includes all of private and public consumption,

government outlays, investments and exports less imports that occur within a

defined territory.

GDP estimates are commonly used to measure the economic performance of

a whole country or region, but can also measure the relative contribution of an

industry sector. This is possible because GDP is a measure of value added

rather than sales; it adds each firm's value added (the value of its output

minus the value of goods that are used up in producing it). For example, a firm

buys steel and adds value to it by producing a car; double counting would

occur if GDP added together the value of the steel and the value of the car.

Because it is based on value added, GDP also increases when an enterprise

reduces its use of materials or other resources (intermediate consumption) to

produce the same output.

A significant change in GDP, whether up or down, usually has a significant

effect on the stock market and financial institutions. It's not hard to understand

why: a bad economy usually means lower profits for companies, which in turn

means lower stock prices. Investors really worry about negative GDP growth,

which is one of the factors economists use to determine whether an economy

is in a recession. The use of GDP to measure economic growth is not without

its critics. Whilst it can be useful in seeing how different economies are moving

over time, GDP is criticized as a measure of how well-off people are.

In other words, GDP is not regarded as a good way of indicating the standard

of living of individuals and households in an economy. The current measure of

GDP is not good at reflecting the damage to the environment caused by much

economic activity. Many observers complain that this means that all economic

activity is seen as a positive event, even though it may harm the environment.

25


In response to this, some countries are planning increased emphasis on

environmental national accounting, where the effects of activity on natural

resources are shown and the environmental impact of growth is highlighted.

Another regular complaint about GDP used as a measure of economic well-

being is that it ignores unpaid, voluntary work. It also fails to value domestic

work such as caring and child-rearing. Some economists have pointed to the

benefits that would flow if unpaid or voluntary work was included in measures

of economic activity. How has an economy developed? Which industries does

it depend on? How sustainable are the routes that a country has chosen to

follow towards the goal of growth? Why can't the progress of a country be

measured in ways other than just the amount of goods and services it

produces? How can we measure human happiness? These are all areas of

controversy in any analysis of economic growth.

The United Nations Development Program (UNDP) publishes its Human

Development Reports annually. A quote from their Web site illustrates well the

reason for focusing on the human aspects of economic activity “Human

development is about much more than the rise or fall of national incomes. It is

about creating an environment in which people can develop their full potential

and lead productive, creative lives in accord with their needs and interests.

People are the real wealth of nations (Hopkins, 2010). Development is thus

about expanding the choices people have to lead lives that they value.

And it is thus about much more than economic growth, which is only a means

- if a very important one - of enlarging people's choices”. Features of economic

growth are the role played by the international financial institutions:

International Monetary Fund (IMF), World Bank and WTO in the global

economy. Less developed economies are often structured in such a way that

agriculture forms a large part of their overall economy. Small scale or

26


subsistence farming tends to produce low incomes for the people who work in

these countries. This leads to low effective demand for goods and services

other than those that are central to life. These economies are often

characterized by having low levels of private investment. This tends to be

because people are unable to save much of their already low incomes.

High fertility rates are often seen in less developed economies. Children often

form part of a family's wealth, as their labor is often seen as essential to the

family's survival.

2.3.1.1 Limitations to the usefulness of GDP as a measure of welfare:

Measures of GDP typically exclude unpaid economic activity, most importantly

domestic work such as childcare. This leads to distortions; for example, a paid

nanny's income contributes to GDP, but an unpaid parent's time spent caring

for children will not, even though they are both carrying out the same

economic activity. GDP takes no account of the inputs used to produce the

output. For example, if everyone worked for twice the number of hours, then

GDP might roughly double, but this does not necessarily mean that workers

are better off as they would have less leisure time. Similarly, the impact of

economic activity on the environment is not measured in calculating GDP.

Comparison of GDP from one country to another may be distorted by

movements in exchange rates. Measuring national income at purchasing

power parity may overcome this problem at the risk of overvaluing basic goods

and services, for example subsistence farming. GDP does not measure

factors that affect quality of life, such as the quality of the environment (as

distinct from the input value) and security from crime. This leads to distortions

- for example, spending on cleaning up an oil spill is included in GDP, but the

27


negative impact of the spill on well-being (e.g. loss of clean beaches) is not

measured.

GDP is the mean (average) wealth rather than median (middle-point) wealth.

Countries with a skewed income distribution may have a relatively high per-

capita GDP while the majority of its citizens have a relatively low level of

income, due to concentration of wealth in the hands of a small fraction of the

population. See Gini coefficient. Because of this, other measures of welfare

such as the Human Development Index (HDI), Index of Sustainable Economic

Welfare (ISEW), Genuine Progress Indicator (GPI), gross national happiness

(GNH), and sustainable national income (SNI) are used.

2.3.2 Employment rate

Employment can be expressed in number of people working or in total working

hours. A mixed measure is the number of hours divided by standard working

hours to give a full-time equivalence to jobs.

In a macroeconomic perspective, levels of employment depend on levels of

economic activity (broadly measured by GDP) and on intensity of labor per

unit of product (productivity). An important role is played by institutional

arrangements (as laws, contracts and collective negotiations) on how to react

to slow-downs in GDP. Employment in a certain activity may be sealed up by

the number of employable skilled people and by timing, contents, and

effectiveness of vocational training.

Job openings signal to external population that a job place is available, either

because of a previous co-worker's foreign / retiring / moving along or away the

career ladder or because of the addition of a new job place (for higher

production or a new production). General population dynamics is a very broad

28


framework for employment and should not be used as a proxy for its

dynamics, since demographic variables are extremely slow in changes,

whereas employment reacts to economic climate.

The relationship with wages is twofold: higher wages may reduce the incentive

for firms to employ but, conversely, high employment may give more power to

employees in wage negotiations, thus increasing their remuneration.

Employment creation happens both in the private and the public sector, while

policies and rules on the labor market and the general economy exert an

impact on both. Politicians promising job creation may mean to foster public

expenditure for goods and services produced in the private sector, thus

increasing the number of jobs there. The employment rate is the most

excellent indicator of how well the economy is doing relative to its productive

potential

2.3.2.1 Okun's Law - the Basics

In its most basic form, Okun's law investigates the statistical relationship

between a country's unemployment rate and the growth rate of its economy.

The economics research arm of the Federal Reserve Bank of St. Louis

explains that Okun's law "is intended to tell us how much of a country's gross

domestic product (GDP) may be lost when the unemployment rate is above its

natural rate. It goes on to explain that "the logic behind Okun's law is simple.

Output depends on the amount of labor used in the production process, so

there is a positive relationship between output and employment. Total

employment equals the labor force minus the unemployed, so there is a

negative relationship between output and unemployment (conditional on the

labor force)."

29


That rule of thumb describes the observed relationship between changes in

the unemployment rate and the growth rate of real gross domestic product

(GDP). Okun noted that, because of ongoing increases in the size of the labor

force and in the level of productivity, real GDP growth close to the rate of

growth of its potential is normally required, just to hold the unemployment rate

steady. To reduce the unemployment rate, therefore, the economy must grow

at a pace above its potential.

More specifically, according to currently accepted versions of Okun's law, to

achieve a 1 percentage point decline in the unemployment rate in the course

of a year, real GDP must grow approximately 2 percentage points faster than

the rate of growth of potential GDP over that period. So, for illustration, if the

potential rate of GDP growth is 2%, Okun's law says that GDP must grow at

about a 4% rate for one year to achieve a 1 percentage point reduction in the

rate of unemployment.

2.3.3 National income

The sum total of all the goods and services produced in a country, in a

particular period of time. Normally this period consists of one year duration, as

a year is neither too short nor long a period. National product is usually used

synonymous with National income (Fisher, 1998). GDP per capita (per person)

is often used as a measure of a person's welfare. Countries with higher GDP

may be more likely to also score high on other measures of welfare, such as

life expectancy. The concept of national income is linked to the society as a

whole. It differs fundamentally from the concept of private income.

Conceptually, national income refers to the money value of the entire final

goods and services resulting from all economic activities of the country. This is

not true of private income. Also from the calculation point of view, there are

30


certain receipts of money or of services and goods that are not ordinarily

included in private incomes but are included in the national incomes, and vice

versa. National income includes, for example, employer's contribution to the

social security and welfare funds for the benefit of employees, profits of public

enterprises, and services of owner occupied houses. But it excludes the

interest on war-loans, social security benefits and pensions (deltur, 1998).

There items are, however, included in the private incomes. The national

income is, therefore, not merely an aggregation of the private incomes. One

can however obtain an estimate of national income by summing up the private

incomes after making necessary adjustments for the items excluded from the

national income.

The trend in national income determines the trends in aggregate demand, i.e.,

the demand for the goods and services, and also the business prospects.

Therefore, business decision makers need to keep in mind these aspects of

the national income, especially those having long-run implications. National

income or a relevant component of it is an indispensable variable considered

in demand forecasting. Conceptually, national income is the money value of

the end result of all economic activities of the nation. Economic activities

generate a large number of goods and services, and make net addition to the

national stock of capital (pareto, 2001). These together constitute the national

income of a ‘closed economy’—an economy which has no economic

transactions with the rest of the world. In an ‘open economy’, national income

includes also the net results of its transactions with the rest of the world ( i.e.,

exports less imports).

2.3.3.1 Methods of measuring National Income

2.3.3.1.1 Output

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The output approach focuses on finding the total output of a nation by directly

finding the total value of all goods and services a nation produces. Because of

the complication of the multiple stages in the production of a good or service,

only the final value of a good or service is included in the total output. This

avoids an issue often called 'double counting', wherein the total value of a

good is included several times in national output, by counting it repeatedly in

several stages of production. In the example of meat production, the value of

the good from the farm may be $10, then $30 from the butchers, and then $60

from the supermarket (Petty, 2009). The value that should be included in final

national output should be $60, not the sum of all those numbers, $90. The

values added at each stage of production over the previous stage are

respectively $10, $20, and $30. Their sum gives an alternative way of

calculating the value of final output.

Formulae: GDP(gross domestic product) at market price = value of output in

an economy in the particular year - intermediate consumption at factor cost =

GDP at market price - depreciation + NFIA (net factor income from abroad) -

net indirect taxes

NDP at factor cost = Compensation of employees + Net interest + Rental &

royalty income + Profit of incorporated and unincorporated NDP at factor cost.

2.3.3.1.2 Expenditure

The expenditure approach is basically an output accounting method. It

focuses on finding the total output of a nation by finding the total amount of

money spent. This is acceptable, because like income, the total value of all

goods is equal to the total amount of money spent on goods. The basic

32


formula for domestic output takes all the different areas in which money is

spent within the region, and then combines them to find the total output

Y=C+ I+G+ ( x−m )

c=household consumptionI=InvestmentG=Gov ExpeditureX=ExportM=Import

Note: (X - M) is often written as XN or less commonly as NX, both stands for

"net exports".

2.3.3.1.3 Income Method:

Under this method, national income is measured as a flow of factor incomes.

There are generally four factors of production labor, capital, land and

entrepreneurship. Labor gets wages and salaries, capital gets interest, land

gets rent and entrepreneurship gets profit as their remuneration. Besides,

there are some self-employed persons who employ their own labor and capital

such as doctors, advocates, CAs, etc. Their income is called mixed income.

The sum-total of all these factor incomes is called NDP at factor costs

(wagner, 1997).

2.3.3.2 Uses of national income statistics:

The major and for most reason caused for the measurement of national

income is to be used and analyzed for the following points:

Measure economic growth and changes in the standard of living in a

country.

To help government to assess the state of the economic and plan future

policy.

33


Compare economic performance and standard of living in different

countries.

Identifies the countries that are not in need for aid.

Calculates the contribution which countries should make to international

organizations: World Bank and IMF.

2.3.3.3 Problems of measuring national income:

If national income figures are not to be used for measuring and comparing the

economic performances and activity then they need to be accurate however

there a number of reasons why the national income statistics is not may not

inaccurate some of them are listed below:

Errors and omissions occur when collecting and calculating the statistics.

People deliberate hide what they earn or what they produce in order to avoid

tax or claim benefit –“Black or shadow economic”.

Over recording of output where double accounting occur

Over recording of income when transfer of income are included

2.3.3.4 Difficulties when using national income for making comparison over time or between countries:

National income figures are used to compare changes in standard of living but

there are difficulties:

Method of calculating national income may differ over time or between

countries.

Statistics have to be adjusted for inflation –accuracy depends on inflation

figures.

34


Standard of living is measured by income per person “per capita” so

population changes must also be measured.

Statistics do not show difference in ranges design and quality of goods and

services.

Statistics do not show difference in working conditions, hours and leisure

time.

Social costs are not taken into account.

2.3.3.5 Importance of National Income Computation in Modern Economic Analysis

The computation of national income is one of the very important statistics for a

country. IT has several important uses and therefore there is a great need for

their regular preparation (huizer, 2000). The following are some of the

important uses of national income statistics.

2.3.3.5.1 Level of Economic Welfare

The national income estimate reveals the overall performance of the country

during a given financial year. With the help of this statistics the per capita

income i.e. the income earned by every individual is calculated. It is obtained

35


by dividing the total national income by the total population. With this we come

to the level of economic welfare in terms of its standard of living.

2.3.3.5.2 Rate of Economic Growth

With the help of national income statistics we can know whether the economy

is growing or declining. In simple words it helps us to know the conditions of a

country economy. If the national income is growing over a period of year it

means that the economy is growing and if the national income has reduced as

compares to the previous it reveals that the economy is detraining. Similarly

the growing per capita income shows an increasing standard of living of the

people which are a positive sign of a nation’s growth and vice versa.

2.3.3.5.3 Distribution of Wealth

One of the most important objectives that is achieved after calculating national

income is to check its distribution among different categories of income such

as wages, profits, rents and interest. It helps to understand that how well the

income is distributed among the various factors of the economy and their

distribution among the people as well.

2.3.3.5.4 Ease in Planning

Since the national income estimates also contain the figures of saving,

consumption and investment in the economy so it proves to be a valuable

guide to economic policy relating to planning and active government

intervention in the economy. The estimates are used as a data for future

planning also.

2.3.3.5.5 Formation of Budget

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Budget is an effective tool for planning and control. It is prepared in the light of

the information regarding consumption, saving, and investment which is all

provided by the national income estimates. Further we can assess and

evaluate the achievements or otherwise of the development targets laid down

in the plans from the changes in national income and its various components.

3 Chapter three: methodology

3.1 IntroductionThis chapter provides a detail description of selected methodology which

includes: study design, population and sampling, data collection method and

data analysis techniques.

3.2 Research design In general, research design is the general plan and structure for the shape of

the research used to achieve the aim of the study. In the point that this

research will view is financial institution and economic growth in punt land.

Research design provides a framework for the collection and analysis of data.

So, the study will use descriptive design to get a deeper information and high

analytical approach to develop solutions.

3.3 Population and sampling

The target area for this research is business centre of punt land

(Bosaso). And the target population for this study is also totaled to sixty

individuals with different qualifications from different institutions. While

the sample size will be 30 individuals coming from different sections of

the selected study population.

37


3.3.1 Study population

The researcher has limited the sample frame for the study in the pursuance of

this research, it shall focus on, how fluctuations of Somali shilling, exchange

rates and economic stability in Puntland.

The researcher specified the number of the target population for the study.

The number study population will reach 60 people who mainly from different

economic sectors such as, households, business sector and government

institutions.

Table 3.3.1

Stockholder Male female Total

Government sectors 8 4 12

business sector 12 6 18

Households sector 6 9 15

Education and

research center

7 8 15

Total 33 27 60

This table indicates that the target population of the study; consists of four

parties with in the target population. Government sector contains both male

and female gender. Similarly households, business sectors and education and

research centers are also include the target population of study.

3.3.2 Sample of the study

Sampling is a process of selecting study subject; it will employ probability

theory to draw a sample from a hole of the study population .due to the

resource, cost, feasibility and other reasons the population may be

38


unreachable or too large to conduct the study. So, the researcher may wish to

consider more feasible and accessible groups for the population. The study

sample will be selected from the above mentioned population by proportional

form.

Table 3.3.2

Stockholder/gender Male Female Total

Government sectors 3 2 5

Financial institutions

Business sectors and

households

5 7 12

Education and research centers 5 3 8

Total 13 12 25The above table shows the sample size of the study; it consists of five

members from government sector, twelve members from business sector and

households and another eight members form education and research centers.

All sections contain male and female gender.

3.3.3 Sampling procedure

The research used both purposive and simple random sampling. This is where

the researcher selects typical and cause the population is too large to examine

as a whole. The researcher selected only some respondents that has same

characteristics, in which researcher anticipated to get full information which

useful for conducting this research.

Purposive sampling was used on 5 respondents including the finance officers.

And the remaining 20 sample were selected from different parts of society

including education and research centers, business firm’s households and

government agencies. In applying of purposive sampling the researcher

39


decided who was included in the sample, it is used to collect focused

information, normally and useful cases are preferred.

3.4 Data Collection3.4.1 Instrumentations

The researcher used interview and questionnaire research instruments which

are structured set of questions designed to generate the information required

for specific purpose which is suitable in large population with short time. The

information of the questionnaire is described in writing while the information of

the interview is described in oral explanation while the researcher is asking

question and taking key notes.

3.5 Quality control of the study3.5.1 Validity

Validity postulated by tuck man 1978 is concerning with measurement it deals

with accuracy and effectiveness of the measuring what it tends to measure,

the validity of a test extent to which test measures what is supposed to

measure, the researcher make use of sampling according to NWABUEZE

1986 sampling is a method of sample it is a process in which every individual

in the population has equal chance of being selected in to the sample of the

study.

3.5.2 Reliability

Reliability of a test instrument according to Ogbomosho 2006 is consistency of

the test in measuring whatever intends to measure, it involves the accuracy of

both the process and result of the measurement where that a measuring

instrument is reliable if it provide the same data when administrator twice or

40


more under the similar condition, the question and interview are reliable

because it has given the researcher the desired result.

Reliability refers to the consistency that an instrument demonstrates when

applied repeatedly under similar conditions (Erlanger, 1983). The reliability of

the research instruments were by established by the researcher before

analysis and consequent presentation.

3.6 Data AnalysisAnalysis of data is a process of inspecting, cleaning, transforming, and

modeling data with the goal of highlighting useful information, suggesting

conclusions, and supporting decision making. Data analysis has multiple

facets and approaches, encompassing diverse techniques under a variety of

names, in different business, science, and social science domains.

The researcher demonstrated analytical discussion of research findings based

on evidence compiled with logical and analytical arguments. Data was

analyzed both quantitatively and qualitatively. Descriptive methods were

employed and data presented in the form of frequent distribution tables,

graphs and charts that facilitated description and explanation of the study

findings.

3.7 Ethical ConsiderationsEthical consideration is conducting research in a academic or professional

setting you need to be aware of ethics behind your research activity, Here are

some specific points to consider: Bearing in mind the ethical issues, the

researcher provided the respondents with the necessary information as

regards the main purpose of the research, expected duration and procedures

to be followed, and be in position to keep privacy and not disclose the

confidentiality of respondents and researchers responsibility.

41


3.7.1 Permission to conduct the research

"In order to conduct research at an institution, approval for conducting the

research should be obtained before data is collected" (Mc Milan &Schumacher

1993). In this study, the researcher first required permission Mogadishu

University before collecting data.

3.7.2 Informed Consent

"Participants were given enough information pertaining to the study before

data collection" (Schulze 2002). In this study, the participants were given

adequate information on the aims of the study, the procedures that would be

followed, and the possible advantages for the participants, the credibility of the

research and the way in which the results would be used. This enabled

participants to make an informed decision on whether they wanted to

participate in the research or not. No form of dishonesty was used to ensure

the participation of the participants.

3.7.3 Confidentiality and secrecy

"A researcher has to be responsible at all times and be vigilant, mindful and

sensitive to human dignity" (Gray, 1996). This is supported by Mc Milan and

Schumacher (1997) who stress that information on participants should be

regarded as confidential unless otherwise agreed on through informed

consent.

3.8 Research LimitationsThe researcher faced the following problems during data collection

1).The respondents were suspicious of possible investigations by competing

firms but the researcher assured them of the academic purpose of the

findings.

42


2).The researcher had problems dealing with respondents who could not

respond in English, the researcher solved it by translating into Somalia and

Arabic to facilitate easy answering of the questionnaire.

4 CHAPTER FOUR PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.1 Overview This chapter presents, and analyses the study findings on financial institutions

and its impact on economic growth in Puntland Somalia. The data was

collected using instruments like questionnaire, and interview, which was

highlighted under the researcher’s methodology the data, is presented using

cross tabulations tables and charts, to establish the extent to which financial

institutions. The first section presents the response rate. This is followed by

background information about the respondents and a presentation and

analysis of the study findings in relation to the specific objectives.

4.2 Characteristics of respondentThe researcher distributed 25 questionnaires to Bosaso business, and

institutional workers. All the questionnaires were completed and returned

back. This means that questionnaires which have been completed

represented a good response rate which was considered more enough for the

objectives of the study. This section gives the characteristics of the

respondents in cross tabulations and graphs in relation to job title, highest

level of education, gender and age of the respondents with the business firm

based on the information provided by the respondents themselves using the

study questionnaire.

4.2.1 GENDERS OF THE RESPONDENTS

43


Table 4.2.1 gender of respondents

Gender of Respondent Frequency Percentage

Male 13 52.0

Female 12 48.0

Total 25 100.0

Source: Primary data

It is observed from table 4.2.1 and figure 4.2.1 that the 52% of the

respondents were males since there was 48% female of the respondent.

While number of male respondents were 13 out of 25 participants as well as

female respondent number was 12.

52%

48%malefemale

Figure 4.2.1

4.2.2 AGE OF RESPONDENT

TABLE 4.2.2 AGE OF RESPONDENTS

Class Intervals Frequency Percent18-25 10 40.0

26-35 10 40.0

44


36-45 3 12.0

above 45 2 8.0

Total 25 100.0


It is observed from table 4.2.2 and figure 4.4.2 shows that the 40% of the

respondent were between 18 up to 25 years old, which means 10 of total

respondents, where another 40% of the respondents were between in age 26

to 35 years old and where 12% of the respondent were between in age 36 up

to 45 which means 3 and other remaining participants were 8% was above 45

which means 2 persons of the respondents were above 45.

18-25 26-35 36-45 above 45

40%40%

12%

8%

Figure 4.2.3

4.2.3 Marital status

Table 4.2.3 marital status of respondents

Marital Status Frequency Percent

Single 10 40%

45


Married 12 48%

Divorced 2 8%

Widowed 1 4%

Total 25 100%

Source Primary Data

It is observed from table 4.2.3 and figure 4.2.3 shows that the 40% of the

respondent were single which means 10 of total respondents, where 48% of

the respondents were married which means 12 of total respondent and where

8% of the respondent were Divorced which means 2 and other remaining

participants were 4% was widowed which means 1 persons of the

respondents.

40%

48%

8%

4%

Marital Statussingle married divorced widowed

Figure 4.2.3

4.2.4 Educational Level

Table 4.2.4 educational level of respondent

Educational Level Frequency Percent

46


Secondary 2 8%

Diploma 4 16%

bachelor degree 10 40%

master degree 9 36%

Source: primary data

From the table 4.2.4 and figure 4.2.4 demonstrate us that the majority of the

respondents are Bachelor level, 40% of the participants were Bachelor degree

level. While 36% of them were master level, and the 16% of were diploma and

remaining 8% were secondary level students.

secondary diploma bachelor degree master degree

8%

16%

40%

36%

Educational level

Figure 4.2.4

4.3 Financial institutions4.3.1 Central government and internationally recognized bank

47


Table 4.3.1 CENTRAL GOVERNMENT and INTERNATIONAL RECOGNIZED

BANK

SINCE THE COLLAPSE OF CENTRAL GOVERNMENT THE STATE DOES NOT HAVE A LEGALLY AND INTERNATIONAL RECOGNIZED BANK

Respondents alternatives Frequency Percent

Strongly agree 15 60.0

Agree 3 12.0

Disagree 2 8.0

Strongly disagree 4 16.0

No idea 1 4.0

Total 25 100.0


Figure 4.3.1

It is detected from table 4.3.1 and figure 4.3.1 shows that the 60% of the

respondent were strongly agreed that lack of government is the main reason

for the absence of international recognized bank, which means 15 of total

respondents, where 12% of the respondents which means 3 person of total

48


respondents were agree that there is a relationship between absence of

central government and international Recognized bank where 8% of the

respondent were which means 3 and other remaining participants were 8%

which means 2 persons out of total 25 respondents was disagree that the

collapse of central government is the result of lack international recognized

bank for the state as well as there is 16% of the respondents which is strongly

disagree and they argue that absolutely there is no relationship between them

and finally 4% of the respondent which means one persons do not knows

anything between them.

4.3.2 Lack of international recognized financial and economic situation

Table 4.3.2 Lack of international recognized financial institutions will lead the

economic to fall dawn

Options for respondent Frequency Percent

strongly agree 5 20.0

Agree 14 56.0

Disagree 2 8.0

strongly disagree 3 12.0

no idea 1 4.0

Total 25 100.0

Primary sources

49


Figure 4.3.2

In the above table and figure explains that 20% of respondents are strongly

agree that lack of international recognized bank leads economy to fall dawn

also agree 56% of the respondent that lack of international recognized bank

leads economy to fall dawn. In contrast 8% of respondents are disagree that

lack of international recognized bank leads economy to fall dawn as well as

12% of respondents are strongly disagree lack of international recognized

bank leads economy to fall dawn and finally 4% of respondents don’t have any

information about two factors.

4.3.3 Microfinance poverty reduction mechanism

Options for respondent Frequency Percent


Agree 8 32.0

Disagree 1 4.0


no idea 1 4.0

Total 25 100.0

Table 4.3.3 Sources primary data

50


Figure 4.3.3

From above table and figure clarifies that 52% of respondents are strongly

agree that microfinance plays key role for poverty reduction also agree 32% of

the respondent that microfinance plays key role for poverty reduction. In

contrast 4% of respondents are disagree that microfinance plays key role for

poverty reduction as well as 8% of respondents are strongly disagree

microfinance plays key role for poverty reduction and lately 4% of respondents

don’t know that microfinance is poverty reduction mechanism or not.

4.3.4 Insurance companies and risk recovery

Table 4.3.4 Absence of insurance companies reduces risk recovery

Frequency Percent

strongly agree 7 28.0Agree 4 16.0Disagree 7 28.0


no idea 1 4.0Total 25 100.0

Sources primary data

51


Figure 4.3.4

It is obtained from table 4.3.4 and figure 4.3.4 that the 28% of the respondent

were strongly agreed that absence of insurance companies reduces risk

recovery where 16% of the respondents agreed that absence of insurance

companies reduces risk recovery where 28% of the respondent are disagreed

that absence of insurance companies reduces risk recovery as well as there is

24% of the respondents which is strongly disagreed that absence of insurance

companies reduces risk recovery and ultimately 4% of the respondent which

means one persons do not knows risk recovery of insurance companies.

4.3.5 Remittance and standard of living of the Households

Table 4.2.5 Remittance from abroad takes a great role standard of living of the

households

Frequency Percent


Agree 8 32.0

Disagree 3 12.0


no idea 2 8.0

Total 25 100.0


52


Figure 4.2.5

since above table and figure simplifies that 44% of respondents are strongly

agree that Remittance from abroad takes a great role standard of living of the

households also 32% of the respondent agreed that Remittance from abroad

takes a great role standard of living of the households. In contrast 12% of

respondents are disagree that Remittance from abroad takes a great role

standard of living of the households as well as 4% of respondents are strongly

disagree that Remittance from abroad takes a great role standard of living of

the households and finally 8% of respondents don’t know any idea.

4.3.6 Legal Financial framework and mutual understanding

Table 4.3.6 Lack of financial legal framework lowers mutual understanding

between parties

Options for respondent Frequency Percentstrongly agree 3 12.0

53


Agree 5 20.0

Disagree 6 24.0


no idea 10 40.0

Total 25 100.0

Source Primary data

Figure 4.2.6

It is observed from table 4.3.6 and figure 4.3.6 that the 12% of the respondent

were strongly agreed that Lack of financial legal framework lowers mutual

understanding between parties however 20% of the respondents agreed that

Lack of financial legal framework lowers mutual understanding between

parties anywhere 24% of the respondent are disagreed that Lack of financial

legal framework lowers mutual understanding between parties as well as there

is 4% of the respondents which is strongly disagreed that Lack of financial

legal framework lowers mutual understanding between parties and ultimately

40% of the respondent which means one persons do not knows legal financial

framework and mutual understanding.

4.4 Improvement of economic growth4.4.1 Financial institutions and employment rate

54


Table 4.4.1 investment of financial institutions leads to employment

opportunities

Options for respondents Frequency Percent


Agree 7 28.0

Disagree 1 4.0


no idea 1 4.0

Total 25 100.0

Source: Primary Data

Figure 4.4.1

It is obtained from table 4.4.1 and figure 4.4.1 that the 60% of the respondent

were strongly agreed that investment of financial institutions leads to

employment opportunities where 28% of the respondents agreed that

investment of financial institutions leads to employment opportunities where

4% of the respondent are disagreed that investment of financial institutions

leads to employment opportunities as well as there is 4% of the respondents

which is strongly disagreed that investment of financial institutions leads to

employment opportunities and ultimately 4% of the respondent which means

55


one persons do not knows how financial institutions effect employment

opportunities.

4.4.2 Financial institutions and domestic productions

Table 4.4.2 financial institutions encourages domestic production

Frequency Percent


Agree 11 44.0

Disagree 2 8.0


no idea 1 4.0

Total 25 100.0

Source Primary data

Figure 4.4.2

while above table and figure simplifies that 40% of respondents are strongly

agree that financial institutions encourages domestic production also 44% of

the respondent agreed that financial institutions encourages domestic

production. In compare 8% of respondents are disagree that financial

institutions encourages domestic production as well as 4% of respondents are

56


strongly disagree that financial institutions encourages domestic production

and lastly 4% of respondents don’t have any idea.

4.4.3 Microfinance and small entrepreneurs

Table 4.4.3 Microfinance institutions provides credit for small entrepreneurs

Frequency Percent


Agree 12 48.0

Disagree 2 8.0


no idea 1 4.0

Total 25 100.0

Source primary Data

Figure 4.4.3

It is viewed from table 4.4.3 and figure 4.4.3 that the 20% of the respondent

are strongly agreed that Microfinance institutions provides credit for small

entrepreneurs 48% of the respondents agreed that Microfinance institutions

provides credit for small entrepreneurs anywhere 8% of the respondent are

disagreed that Microfinance institutions provides credit for small entrepreneurs

57


as well as there is 20% of the respondents which is strongly disagreed that

Microfinance institutions provides credit for small entrepreneurs and ultimately

4% of the respondent do not knows either Microfinance institutions provides

credit for small entrepreneurs or not.

4.4.4 Development banks and infrastructures

Table 4.4.4 Development bank contribute for infrastructural development

Frequency Percent


Agree 10 40.0

Disagree 3 12.0


no idea 3 12.0

Total 25 100.0


Figure 4.4.4

It is observed from table 4.4.4 and figure 4.4.4 that the 32% of the

respondents strongly agreed that Development bank contribute for

infrastructural development however 40% of the respondent agreed that

58


Development bank contribute for infrastructural development. Although 12% of

respondents disagreed that Development bank contribute for infrastructural

development as well as 4% of respondent strongly disagreed that

Development bank contribute for infrastructural development while 12% of

respondents haven’t any idea.

4.4.5 Hawala and inflation

Table 4.4.5 Hawala institutions leads to inflation

Options for participant Frequency Percent


Agree 4 16.0

Disagree 5 20.0


no idea 3 12.0

Total 25 100.0

Source Primary Data

From the table 4.4.5 and figure 4.4.5 demonstrate us that 16% of the

participants strongly agreed that Hawala institutions lead to inflation. Even as

16 % of respondents agreed that Hawala institutions lead to inflation in

59


difference 20% of participants disagree that Hawala institution lead to inflation

as well as 36% strongly disagree that Hawala institutions lead to inflation and

there is 12% with no idea.

4.4.6 Factors of production and economic growth

Table 4.4.6 availability of factor of production leads to economic growth

Frequency Percent


Agree 9 36.0

Disagree 2 8.0


no idea 2 8.0

Total 25 100.0

Source Primary Data

Figure 4.4.6

From the table 4.4.6 and figure 4.4.6 shows that the 44% of the participants

strongly agreed that availability of factors of production lead to economic

growth. As well as 36% of respondents agreed that availability of factors of

60


production lead to economic growth but in different 8% of respondents

disagreed that availability of factors of production lead to economic growth

whereby 4% of them strongly disagreed that availability of factors of

production lead to economic growth though 8% of respondents haven’t any

idea.

4.4.7 Exchange rate and foreign direct investment

Table 4.4.7 Stability of foreign exchange rate leads to an increase for foreign

direct investment

Respondents Frequency Percentstrongly agree 11 44.0Agree 9 36.0Disagree 2 8.0strongly disagree 1 4.0no idea 2 8.0Total 25 100.0

Source Primary Data

Figure 4.4.7

61


Since the table 4.4.5 and figure 4.4.5 express that 44% of the participants

strongly agreed that Factors of production lead to economic growth. Even as

36 % of respondents agreed that Factors of production lead to economic

growth in difference 8% of participants disagreed that Factors of production

lead to economic growth as well as 4% strongly disagree that Factors of

production lead to economic growth and there is nearby 8% with no idea.

62


5 CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Overview This chapter presents the summary of findings, conclusion and

recommendations of the results from chapter four as related to the views of

scholars in the literature review and the background of the study. The

summary and discussion given in this chapter, aim at answering the research

questions. The conclusion reached is based on the discussion of the findings.

The recommendations are made from the conclusion.

5.2 FindingsThe major findings of the study was interpreted and presented in relation to

the objectives of the study. During the analysis of data presented in chapter

four,

the researcher found out that the majority of respondents strongly

agreed that since the central government collapsed the state doesn’t

have legally and properly working central banking so thus the economic

situation and supply of money in the market was not good as well as

the state doesn’t have legally and internationally recognized bank so

that it resulted for economic decline however absence of development it

plays an effective role for economic reject.

The researcher locates that the most and majority of participants

strongly agreed that there is a strong relationship between remittances

and economic growth knowing that for the last three decades

remittances was play an important role for economic growth via sending

the money from abroad to families and business entities furthermore

remittances help households to get money from their relatives in abroad

63


to cover daily life business firms send, receive and collect money using

though the remittances.

Researcher discovers that the most of respondents agreed that there is

a little few number of microfinance institutions though they are new but

they lead to economic growth as they creates employment for society

as well as they enables microenterprises for sustaining and growth

thought microcredit.

5.3 CONCLUSIONIn this paper, the researcher has explained the impact of financial institutions

on economic growth in Puntland Financial institutions perform an important

role in the development process, particularly through their role in allocating

resources to their most productive uses. More efficient financial markets help

economic agents hedge, trade, pool risk, raising investment and economic

growth. Financial institutions provide consumers and commercial clients with a

wide range of services and different types of banking products.

Banks act as delegated monitors and ensure that firms use the resources

allocated to them effectively. They also play an important role in sharing risk in

the economy by diversifying and smoothing fluctuations over time.

Remittances plays effective role for economic growth as chapter four of the

study shows. Microfinance sector remains at a nascent stage of development

and requires further improvements in both quality and quantity in order to be a

successful tool of economic development.

An increase in the financial institutions, leads to an increase of produced

goods and services, economic growth can be measured in nominal terms,

which include inflation, or in real terms, which are adjusted for inflation. For

comparing one country's economic growth to another, GDP or GNP per capita

should be used as these take into account population differences between

64


countries. Numerous evidences suggest that financial institutions are

important for growth at early stages of economic developments. As regards

industrial economies, the evidence is less conclusive at the aggregate level.

Tentatively, the evidence for stock markets is stronger than for variables on

banking activity. Studies at the firm level yield relatively strong support for the

growth-enhancing effect of finance.

Effective and suitably working financial institutions will pilot to economic

growth of the state as shown from chapter four most of respondents strongly

agreed that financial institutions can affect the economic in two ways either for

improvement of for economic decline therefore useful financial institutions will

lead economic growth.

5.4 RECOMMENDATIONSAfter the completion of the study on financial institutions and economic growth

in Puntland , some recommendation were formulated on the basis of the

findings obtained, so as to help the financial institutions that are existing in

Puntland state and other regions of Somalia.

The researcher will recommend following advices after the evidence from

respondents of the study on financial institutions on economic growth in

punt-land; in Somalia and especially in Puntland there is no legal financial

framework so that researcher will recommend to develop and implement

legal financial framework, as well as punt-land government have to

develop strategies to attract the international and multinational financial

institutions including banking sectors, and other non-banking financial

institutions.

However Puntland government have to collaborate financial institutions to

motivate and mobilize society to build and increase the habit of society in

65


banking and financial institutions as well as to remove the wrong ideology

and inhabit of society while dealing financial institutions, absence of most

and effective financial institutions such as Mutual fund, credit unions,

insurance companies and many others business society have to come up

with new projects to invest, create and build the remaining financial

institutions.

However remittances plays important role for surviving and helping society

for the last three decades thus this doesn’t means that they are don’t have

criticisms, Somali remittances in most countries do not have license to

operate and send money but they have an account from other banks to

send money in Somalia so that the study will recommend them to take

license in order to transfer money In a legal way.

Nevertheless the international financial organizations such as World Bank,

IMF, IDB and others will be recommended to help the state in order to

improve, increase the existing microfinance institutions and craft new

institutions to improve and help under bank people and microenterprises.

The researcher would also like to recommend Banks, microfinance

institutions, remittances and government to collaborate for the aim to

change the manner of society in financial institutions. On the other hand

the researcher gives advice to existing banks and microfinance institutions

to reduce terms and conditions of loan and investment to aspire the

customer which guides more investment via loans and investment from the

banks which leads economic growth.

66


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Appendix I

QUESTIONNAIRESIntroduction

Dear respondent,

I am a Researcher pursuing on impact of financial institutions on economic growth. This is to request you to complete the attached questionnaire

diligently and honestly as your views will be used for purposes of achieving

the academic objectives of this study.

Instructions

Please kindly respond to all items in these questionnaires

Put a (a tick) alongside the option that is most applicable to you or fill in

the spaces provided.

Do not need to write your name in this questionnaire.

Section A: Background information about the respondents:

1) Age

21-30yrs [ ] 31-40yrs [ ] 41-50yrs [ ] 51-60yrs [ ]

2) Sex

Male [ ] Female [ ]

3) Marital status

Single [ ] Married [ ] Divorced [ ] Widowed [ ]

4) Highest level of education Secondary [ ] Diploma [ ] Bachelor

Degree [ ] Master Degree [ ]

70


FINANCIAL INSTITUTIONS QUESTIONNAIRE

Instructions

Indicate the extent to which you agree with the following observations on

financial institutions

Financial institutions 1 2 3 4 5

Since the collapse of central government of Somalia

the state doesn’t have a legally and internationally

recognized bank

Lack of international recognized financial institutions

will lead the economy to fall down

Micro-finance institutions play a key role of poverty

reduction

Absence of insurance companies reduces risk

recovery

Remittance from abroad takes a great role on

standard of living of the household.

Lack of financial legal framework lowers mutual

understanding between parties

Please use the key to answer the following questions by indicating: (1) for

strongly agree, (2) for agree (3) for disagree (4) for strongly disagree (5) for no

idea

71


QUESTIONNAIRE OF THE ECONOMIC GROWTH

Instructions

Indicate the extent to which you agree with the following observations on

remittance in your house hold.

Economic growth 1 2 3 4 5Investment of financial institutions leads to

employment opportunities

Financial institutions encourage domestic

production

Micro-finance institutions provide credit for

small entrepreneurs

Development banks contribute for

infrastructural development

Hawala institutions lead to inflation

Availability of factor of production leads to

economic growth

Stability of foreign exchange rate leads to

an increase for foreign direct investment

Please use the key to answer the following questions by indicating: (1) for

strongly agree, (2) for agree (3) for disagree (4) for strongly disagree (5) no

idea

Thanks

Daud Dahir Hassan

72

Economic growth and financial institutions in somalia

Business

Transcript of Economic growth and financial institutions in somalia