Somalia's Economic Reset: Why the African Development Bank Is Betting on Private Capital

Somalia’s push to reduce aid dependence is shifting attention toward private investment, stronger development banks and financing for small businesses. With the African Development Bank backing this transition, the critical challenge is whether new financial partnerships can unlock productive investment, generate jobs and build an economy capable of sustaining growth beyond external assistance.

Somalia's ambition to move beyond external aid is placing a difficult economic question at the centre of its development agenda: how can financial institutions turn investment commitments into functioning businesses, productive industries and sustainable employment? The African Development Bank's renewed backing for private sector-led growth signals growing emphasis on the financial structures needed to support such a transition, but the real measure of progress will be whether capital reaches productive economic activities.

At the Somali Development Finance Forum, convened in Mogadishu on 19 September, the African Development Bank Group reaffirmed its commitment to strengthening Somalia's domestic institutions and mobilising long-term development financing. The gathering, organised by the Somali Development and Reconstruction Bank (SDRB), brought together two closely connected priorities: attracting investment into the economy and developing institutions capable of directing that investment toward productive uses.

The approach reflects a broader ambition to move from recovery-focused financing toward an economic model in which domestic enterprises and private investment play a greater role. Yet the distinction between attracting financing and generating lasting economic returns is significant. Development finance can support investment opportunities, but sustained growth requires those resources to translate into stronger production, viable enterprises and employment.

Somalia's economic transition faces a financing architecture problem

At the heart of Somalia's development agenda is an institutional challenge that extends beyond the amount of capital available. Investment depends on the ability to identify suitable projects, organise financing arrangements and establish mechanisms through which institutions and private investors can participate. AfDB's latest engagement places these requirements alongside the country's ambition to reduce reliance on external assistance.

African Development Bank Director General for East Africa Alex Mubiru highlighted this challenge during discussions on strengthening Somalia's development finance architecture. He called for greater discipline in preparing investment opportunities and wider use of financial instruments designed to reduce investment risks. His intervention suggests that improving the quality and financing readiness of projects is an important part of efforts to attract private capital.

The emphasis on risk mitigation is particularly relevant to the proposed financing model. Instruments that reduce or share financial risks can make investment opportunities more accessible to private financiers, potentially widening participation beyond development institutions. However, the forum's discussions did not establish which instruments would be deployed or how they would operate, leaving an important part of the proposed approach dependent on further decisions.

Mubiru also advocated concentrating resources on a limited number of high-potential value chains capable of generating employment and strengthening local production. Rather than distributing development financing across an undefined range of activities, this approach would direct attention toward selected economic opportunities. Its effectiveness would depend on how those opportunities are identified, financed and connected to wider economic activity.

Such concentration presents a difficult allocation question. Prioritising particular value chains may improve the focus of development financing, but it also requires decisions about which activities receive institutional support and which remain outside the initial investment priorities. With no specific value chains identified in the forum announcements, the economic direction of this proposal remains clearer than its eventual implementation.

SDRB's microfinance partnerships put smaller enterprises at the centre of the strategy

Somalia's effort to strengthen development finance is also taking shape through the SDRB, an institution first established in 1968 and re-established in 2014. Its role as the country's national development finance institution places it within efforts to connect development priorities with financing partnerships. The bank's renewed activity illustrates how the transition toward private sector-led growth is being pursued through domestic financial institutions rather than external development support alone.

During the forum, SDRB signed partnership agreements with Asal Microfinance, Maal Microfinance and Himilo Microfinance under its Ramad Microfinance Programme. The arrangements are intended to expand Sharia-compliant financing for micro, small and medium-sized enterprises and productive sectors. Unlike broader institutional commitments, these agreements identify specific financing partners and an intended group of beneficiaries.

The inclusion of smaller enterprises introduces an important dimension to Somalia's investment ambitions. Large-scale development financing and private capital mobilisation address the resources available for investment, while microfinance partnerships concern the mechanisms through which businesses may access financial services. Connecting these levels of financing is central to building a development system that reaches beyond institutional agreements.

Sharia-compliant financing also defines the financial structure through which the programme intends to support enterprises. Its practical contribution will depend on the products offered, the eligibility requirements applied and the ability of participating institutions to extend financing to businesses. The agreements establish a framework for expanding access, although they do not yet demonstrate how many enterprises will benefit or how much financing will become available.

The real measure of Somalia's development strategy will be investment outcomes

AfDB's participation in the forum is consistent with its Country Strategy Paper 2025–2030, which prioritises productive investment, private-sector development, economic resilience and employment. Strengthening institutions such as SDRB forms part of this broader engagement, linking financial-sector capacity with efforts to support sustained economic activity. The strategy thus extends beyond individual financing agreements to the development of a more functional investment system.

Three interconnected requirements emerge from the proposed approach. Somalia needs institutions capable of organising development financing, investment opportunities sufficiently prepared to attract capital, and financing channels that can serve productive enterprises. Weakness in any of these areas could limit the effectiveness of the others, even when development partners remain committed to supporting economic growth.

The relationship between public development finance and private investment will be especially important. Development institutions can support the preparation of investment opportunities and encourage the use of risk-sharing mechanisms, but the intended shift toward private sector-led growth requires businesses and investors to participate in productive economic activity. The effectiveness of that relationship cannot be established through statements of support alone.

For smaller enterprises, the immediate questions concern access to financing and the operational details of the SDRB's new partnerships. For development institutions, attention will focus on whether investment pipelines become more structured, whether suitable risk-mitigation arrangements are introduced and whether resources are concentrated in clearly identified productive activities. Each development would provide a more concrete indication of how Somalia's financing priorities are being implemented.

The longer-term assessment will depend on evidence of productive investment, business activity and employment. Expanding financial arrangements is an institutional objective; generating sustainable economic returns is the outcome against which those arrangements must eventually be judged. The forum has brought these objectives into closer alignment, but it has not established that the transition from external assistance to investment-driven growth has been achieved.