Somalia Credit Guarantee Scheme (SCGS)
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The intervention targets several development problems in Somalia. The financial sector in Somalia is underdeveloped. Banks practice an exclusive approach towards lending that only occurs to the few that can provide collateral. Financing costs are high and allow only short-term financing. The majority of the population, and especially women and young people, ar...
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- C01 - Project-type interventions
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The intervention targets several development problems in Somalia. The financial sector in Somalia is underdeveloped. Banks practice an exclusive approach towards lending that only occurs to the few that can provide collateral. Financing costs are high and allow only short-term financing. The majority of the population, and especially women and young people, are excluded from the financial sector due to lack of collateral and perceived risk level. This in turn has a major negative impact on micro, small and medium sized businesses, MSMEs and its conditions for employment and creating jobs. This initiative is expected to open up for access to finance for MSMEs, thereby contributing to job creation, especially for women and youth, in Somalia. Several on-going programs, including the World Bank's Somalia Core Economic Institutions and Opportunities Program (SCORE), supported by Sweden among several other donors, work to address issues related to the legal framework and legal review, as well as formalization of the financial sector, but no intervention is targeting the problem of access to finance and cost of credit. The biggest casualties of this are MSME's which are widely recognized as key drivers of new job creation and overall economic growth. Therefore, the objective of this intervention is to reduce poverty in Somalia through enterprise growth and employment creation. MSME, especially with focus on women and young people, will be able to benefit from formal banking system and the Somali financial will be able to benefit from more long-term clients, which in turn will provide much needed growth capital for expansion, employment and contribute to resilience. In the long run, it is expected to contribute to a change in Financial Institutions' lending attitudes to include a broader segment of clients and recognize on their part that this makes good business sense. For MSMEs this is expected to provide resources for sustainable job creation as they benefit from what can become a long-term relationship with the financial institutions. The intervention intends to provide credit guarantees in order to incentivize lending to merit worthy MSME applicants in any sector that lack sufficient collateral. To achieve this, Sida will provide a guarantee to One Earth Future Foundation (OEF), which will be Sida's agreement partner. OEF is an American NGO with projects in Somalia, among other fragile countries. The work in Somalia is handled under a project called Shuraako. Shuraako work to facilitate investments in promising Somali-based businesses. OEF will in turn sign separate agreements with the three (out of currently six) Somali financial institutions: Dahabshil Bank, Premier Bank and International Bank of Somalia, but additional financial institutions may be added during the guarantee period. The three banks are the ones who give loans to the target group by utilizing the risk sharing set-up of the guarantee. The guarantee to OEF means that the banks´ risk is reduced for up to 70% in case the loan is not repaid while the bank takes the remaining 30%. OEF estimates that approximately 260 loans will be guaranteed and over 2000 jobs will be created during the five-year project period. This 5 million USD Guarantee is complemented by a grant to OEF for Technical Assistance (TA) that will be provided to the banks and MSMEs, including OEFs operational costs for managing and following up the guarantee instrument. The grant component is considered essential for achieving the goal of this intervention. The Guarantee instrument and Grant component will be handled in two separate agreements where the Grant Agreement is handled by the Embassy.
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Total aid 24,361,046 SEK distributed on 0 activities
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Result
Summary of Key Findings and Lessons Learned Programme Performance and Impact - The Somali Credit Guarantee Scheme (SCGS) facilitated 156 loans across various sectors, creating 905 new jobs. - Women-led businesses accounted for 14% of loans, while youth-led businesses comprised 32%, exceeding the target for youth but falling short for women. - The guarantee was utilised at 86% ($4.3M of $5M), with a total loan portfolio of $6.15M and only five defaults. Programme Structure and Implementation - Sida partnered with One Earth Future Foundation/Shuraako as the intermediary between Sida and local banks. - The scheme used a 70/30 risk-sharing model and employed Murabaha financing. - The lending window closed in March 2022, followed by a mid-term impact evaluation to assess progress and inform future programme design. Key Lessons and Challenges 1. Mobilising Private Capital & High Demand: The guarantee successfully leveraged local bank financing instead of donor on-lending, demonstrating strong potential for scaling up. Demand for MSME finance far exceeded supply, requiring efforts to improve loan structuring and accessibility. 2. Capacity Gaps & Technical Assistance: Financial institutions required substantial capacity-building to effectively manage the guarantee, while MSMEs particularly women-owned businesses and first-time borrowers faced barriers such as financial literacy gaps and limited formalisation. Targeted support is critical for improving financial inclusion. 3. Data Accuracy & Sectoral Reach: Borrower data inconsistencies, including gender, age, and employment figures, necessitate validation mechanisms like audits. Additionally, loans were concentrated in retail, with limited success in agribusiness, fishing, and manufacturing, highlighting the need for sector-specific interventions and market studies. 4. Banking Behaviour & Sharia Compliance: Changing lending patterns requires sustained engagement, and banks need clearer incentives to extend finance beyond familiar sectors. Ongoing dialogue with Sharia boards remains essential to ensure sustainable, long-term compliance with Islamic financing principles. 5. Impact Measurement & Future Considerations: There has been insufficient tracking of borrower performance, employment generation, and business growth. Strengthening monitoring mechanisms, intermediary support, and linking financial services with market-driven business development services (BDS) will be essential for increasing MSME resilience and programme effectiveness.
The interventions intended outcome is that formal access to credit is increased in Somalia through a Guarantee Instrument and thereby unlock access to finance for SMEs and ultimately contribute to employment creation throughout the country. This is expected to substantially increase access to credit for women, youth and other poor but entrepreneurial segments of the society. The intervention provides incentives for Somali Financial Institutions to expand their lending attitudes and exposes new and viable markets previously avoided. This is in turn expected to reduce poverty in Somalia through enterprise growth and employment. SMEs, particularly women and youth owned SMEs benefit from formal banking and Somali Financial Institutions benefit from more long term clients, which in turn provide much needed growth capital to expand, employ, and contribute to the stability of the country. Finally, in the long run, the intervention is expected to contribute to a systemic and sustainable change in Somali Financial Institution's lending attitudes to include a broader segment of clients and recognize on their part that this makes good business sense.
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