Interview with Ahmed Osman Ali, Governor, Central Bank of Djibouti

Nov 2024 Interview with Ahmed Osman Ali, Governor, Central Bank of Djibouti

What kind of growth has Dibouti’s banking industry seen in the last few decades?

Djibouti’s 13 commercial banks play a key role in financing the economy, which has seen an impressive 7% growth rate over the past 10 to 15 years. Notably, the number of banks has increased significantly. Around twenty years ago, there were only two banks. This growth is due to extensive reforms to modernize banking laws and operating conditions and replace outdated colonial-era regulations that previously hindered the establishment and functioning of banks in modern conditions. A prominent aspect of this growth is our consistent year-on-year progression. Financial aggregates have grown at rates of about 20% to as high as 40% annually. For example, our money supply has increased by about 511% since 2006. Deposits collected by banks have also grown steadily, rising from 90 billion Djiboutian francs to 488 billion — a 5.5-fold increase over 18 years. Credit expansion has mirrored the rapid growth of the banking sector, with loans increasing by 1,500%. Most notably, bank account access among the population has risen from 5% to 36%. Over the last 20 years, the local financial services sector has evolved at a remarkable pace and now forms the foundation of our country’s economic growth.

Can you give our readers an overview of the Central Bank of Djibouti’s role and responsibilities in 2024?

The mission and mandate of the Central Bank of Djibouti align with central banks globally. We hold the privilege of currency issuance, which enables us to manage our monetary system and control currency in response to economic developments. We operate a currency board system that maintains a fixed link between the Djiboutian franc and the US dollar, a choice made nearly 75 years ago during the Bretton Woods era when the dollar was backed by gold. Initially pegged to gold, we transitioned to the dollar and maintained this peg even after the US left the gold standard in the 1970s. Today, the US dollar remains the dominant transaction currency, accounting for around 70-80% of global trade transactions depending on the region.

Beyond currency issuance, we focus on combating inflation and ensuring price stability. Our system has been effective in keeping inflation at residual rates, averaging 1.5-2% annually, with an overall rate of less than 3%. Another of our crucial roles is regulating, supervising and monitoring local banks. We also have technical missions to facilitate transactions between clients and banks. We have developed tools that strengthen bank-client relationships, including a risk centralization mechanism that allows us to track major commitments from large operators. This data is compiled and shared with banks to aid in client assessments. We also manage payment methods for local commercial banks and their interactions with foreign banks and facilitate Djibouti’s trade financing by ensuring the free and independent availability of foreign currency. The Djiboutian franc is fully convertible, with the Central Bank guaranteeing 100% convertibility. We provide this as a service to commercial banks.

What efforts is the Central Bank of Djibouti making to incorporate digital technologies into the country’s financial services industry?

Digitalization is a global trend, and Djibouti is making strides in this area. The World Bank’s funding initiated a project to transform our bank clearing process from a daily physical system to an electronic one. This included establishing an ATS+ clearing center to connect banks via secure lines. The project’s second phase, funded by the French Development Agency, involves building a national switch to integrate all current payment instruments into the clearing process. Supported by both the World Bank and the French Development Agency, this initiative aims to achieve fully digitalized, paperless interactions between clients and commercial banks.

What is the central bank doing to overcome security challenges posed by new digital technologies such as artificial intelligence (AI)?

We face multiple challenges in aligning our operating tools with Djibouti’s current infrastructure, capabilities and economic needs. To enhance financial security, we recently created a cybersecurity department to support banks in securing transactions and protect the central bank’s operations from cyber risks. While AI is still in its early stages in Djibouti, we remain informed through institutions such as the World Bank and monitor advancements to potentially adopt AI as it becomes more secure and viable. This approach considers our human resource capacities and aims to integrate AI technologies as they mature.

What major milestones did the Islamic Financial Services Board (IFSB) pass under your tenure as chairman?

The IFSB is made up of around 180 members, including central banks from the Middle East, Islamic countries and major institutions like the World Bank and International Monetary Fund. It focuses on standardizing regulations in Islamic finance, much like the Basel Committee on Banking Supervision. IFSB also promotes the stability of Sharia-compliant institutions and organizes forums to address current trends and technical aspects in the field. Djibouti was honored to host the annual assemblies in 2024 in July and December. These events included forums and discussions on Islamic finance and meetings to review IFSB’s activities, budgets and statutes. Under my chairmanship, we facilitated easier membership access for smaller institutions and leveraged AI to help members stay informed on regulations and payment tools.

What is the central bank doing to support entrepreneurship and small and medium-sized enterprises (SMEs) in Djibouti?

This is a very important question. SMEs are essential drivers of production and economic growth. However, most SMEs in Djibouti operate informally, which limits their access to banking, a quality we share with many other developing nations. Our strategy has been to connect SMEs with banks — initially through microfinancing — and allow them to transition gradually into the formal banking sector. We have seen positive results, with a notable increase in credit extended to SMEs. To further support them, we are collaborating with organizations like the Djibouti Chamber of Commerce to help SMEs maintain audited financial records. This enables banks to assess their histories and better understand their own needs.

To improve bank-SME relations, we reformed the commercial code to streamline collateral seizure processes and reduce delays in addressing problematic loans. We have also introduced collateral-backed loan instruments and enhanced our risk management center for better data tracking. Moreover, we established a guarantee fund to share lending risks, especially for young entrepreneurs lacking collateral, which makes it easier for banks to support new projects. These measures have improved the relationship between banks and businesses, and while there is still room for growth, banks have ample capacity to extend additional credit.

What kind of support is the Central Bank of Djibouti giving to the nation’s major infrastructure projects?

We provide support in two primary areas: financing port infrastructure and assisting companies in the free-trade zone. Djibouti has expanded its port facilities significantly, with our numbers increasing to five or six ports including deepwater ports. This growth capitalizes on Djibouti’s strategic location at the Bab-el-Mandeb Strait, on the Red Sea and near the Suez Canal. We aim to promote trade and industrial activity around our ports. Additionally, an industrial free zone has been created to complement our growing port infrastructure. Two main challenges remain: high energy and telecommunications costs. While our telecom capacity is sufficient, we are working to ensure a stable energy supply for the free zone. To reduce energy costs, we need further reforms — especially regarding distribution — to make Djibouti’s production costs more competitive and enhance project profitability and business viability. Companies in the free zone benefit from the support measures we offer to businesses across Djibouti.

What is the central bank doing to promote sustainable finance in Djibouti?

In 2023, Djibouti began a study with the United Nations Development Program on introducing green bonds, including outlining initial steps and creating an action plan for sustainable finance. A key takeaway was the need for a national green taxonomy, which requires reviewing policies, regulations and current conditions to create an attractive framework for stakeholders, organizations and the government. This framework will provide clear definitions to support sustainable finance as a growth sector in Djibouti. We also plan to focus on training and education in sustainable finance and draw from the experiences of countries like Singapore, Indonesia and Morocco, which have all made strides in this area.

Why does Djibouti stand out as a destination for businesses and investment?

Despite regional challenges, Djibouti offers considerable investment opportunities with robust infrastructure and a stable currency; it is a country of the future with vast potential. It is also a unique tourist destination with extraordinary sites, such as Lake Assal, the lowest point in Africa at 157 meters below sea level, the stunning Lake Abbe with its flamingos, and the seasonal arrival of whale sharks in November.