Centralized government has broken down, and the Union of Islamic Courts competes with local warlords to administer any taxation.
The transitional national government has not been able to effectively collect taxes and has no noteworthy finances. As such, there is no audit institution in the country.
Somalia has three major banks, the Central Bank of Somalia, the Commercial and Savings Bank of Somalia, and the Somali Development Bank, but much of the national banking system collapsed as a result of the civil war. The Universal Bank of Somalia (Ubsom) declared its intent to open operations in 2002 as the first commercial bank in Somalia since 1991, over the objections of the governor of the Central Bank. Its ownership is 51 percent Somali and its headquarters is located in Brussels. Plans for Ubsom were stalled indefinitely after the representative of investors in the bank was kidnapped during a visit to the Mogadishu office. Attempts to found another bank, the Global Bank, also proved abortive.
The Central Bank of Somalia is unable to regulate the banking system and enjoys little autonomy. The transitional government sacked its governor in 2005 for disobeying orders, and the governor protested that its action was illegal and unconstitutional. The central bank cannot control the money supply. From 1992 to 1995, Somalia’s weighted average annual rate of inflation was 331.2 percent. No subsequent data are available, but it is estimated that inflation remains in the 300 percent range annually.
The US crackdown in October 2001 on Somalia’s Al-Barakaat wire services, alleged to be associated with the Qaeda network, dealt the informal economy a blow. Remittances from Somalis living abroad may amount to a half billion dollars annually. In the wake of al-Barakaat’s collapse, numerous wire services rose to fill the gap, but commissions on their financial services increased from 3 percent to 7 percent. Wire services, or hawaalat, fill the role of financial institutions in Somalia, since no functional banks exist. The largest ones include Dahab Shiil, based in Hargeisa, which transmits $5 million monthly, and Dalsan, which handles $2 million in monthly transactions.
During the conflict, observers note, business profits increased and the power of militants slowly eroded. Hence, the strengthened position of businessmen may be paving the way for national reconciliation discussions.
The physical inventory and turnover rate of currency are the only factors to mark the country’s monetary value. As a result, a series of informal financial markets have emerged to infuse a degree of financial stability in the country. Exchange rates vary according to region. Furthermore, traders also borrow hard currency from Somali workers in the Middle East in order to exchange it in Somalia.