The Horn Of Africa States: The Challenges To Cross-Border And Joint Financing – OpEd

Banks in the Horn of Africa States region (Somalia, Ethiopia, Eritrea, and Djibouti – the SEED countries) face deep-rooted challenges in engaging in cross-border financing beyond the ability to establish foreign subsidiaries. These include structural, regulatory, financial, and institutional constraints that limit both individual cross-border lending and joint financing of large projects through syndicates. Some Somalia and Ethiopian banks have, indeed, subsidiary companies and/or branches in Djibouti.

A major feature of the banking and financial sector of the region includes absence of a syndication culture, where banks come together to finance either cross-border projects or within one of the countries. They appear to have no experience with syndicated, structured, and standardized documentation, common legal frameworks, and established mechanisms for interbank trust and collaboration. Risk-sharing arrangements across borders are weak, making banks reluctant to pool capital for large projects. This implies that large and regional projects are typically beyond the balance sheet capacity of individual banks. Syndications as tool of co-financing even for smaller projects remains absent. 

Commercial co-financing among local banks in the region, being absent, however, does not negate the existence of co-financing major projects, mostly cross-border, in the region. There are major cross-border projects in transport, energy and trade corridors and they are primarily financed by multilateral development institutions such as the African Development Bank and the World Bank. They include the Horn of Africa Initiative (HOAI), where multiple Horn of Africa states participate as beneficiaries and financing is pooled at the multilateral level, not through syndicated lending by domestic commercial banks. Local banks typically play supporting or domestic roles (e.g., payment handling, government securities, limited on-lending), rather than acting as co-lenders across borders. 

Cross-border financing in the region is constrained by divergent banking laws, prudential regulations, and varying capital adequacy and large-exposure limits, as well as differing foreign-exchange and capital-control frameworks. Limited coordination among supervisory authorities further adds to compliance costs and regulatory uncertainty, discouraging banks from cross-border lending or joint financing. Strengthening regional payment systems and settlement infrastructure, currently domestic and non-interoperable, will be essential. At present, cross-border transactions rely on correspondent banks, with settlements often routed through third-country intermediaries and hard currencies.

This increases transaction costs, settlement risks, and delays in fund availability. Here one must note that Horn African currencies are typically thinly traded, volatile, and difficult to hedge. Somalia does not even print its own currency yet, after the collapse of the state in 1991, and the economy is dollarized. Banks face high foreign exchange (FX) risks on cross-border loans, limited access to hedging instruments and exposure to sudden foreign exchange controls or shortages. These discourage long-term or large-scale cross-border lending.

Many of the local banks of the region are marked by small capital bases, limited access to long-term lending and heavy reliance on short-term deposits. The region is also exposed to “de-risking” by international banks due to AML/CFT concerns, governance and geopolitical risk perceptions, which limits the region’s access to foreign liquidity, efficient international settlements and ability to support cross-border trade and finance.

The region does not enjoy deep bond/sukuk markets, active secondary loan markets and regional investor participation, without which banks cannot easily distribute or transfer risk. This makes syndicated lending even more difficult in the region or almost impossible. The region does not also enjoy credit bureaus, cross-border data sharing or a regional risk-assessment infrastructure, which increases uncertainty and pricing risk.

Banks in the region continually face political instability and conflict risks, weak contract enforcement and cross-border insolvency frameworks. This makes recovery across borders uncertain, which hence raises credit risk. The region has not mastered all aspects of local financial engineering let alone regional financing. Cross-border financing is currently and overwhelmingly financed by multilateral development institutions, with domestic banks playing limited roles.

These issues highlight deeper structural challenges. Without deliberate efforts toward regional financial integration, harmonized regulatory frameworks, and capacity-building in areas such as syndication and project finance, cross-border banking cooperation among local banks in the region is likely to remain aspirational rather than achievable.