Zaineb Majoka explores the evolving world of mobile money in Somalia.

Somalia is fast becoming a cashless society through innovations in financial services (FinTech) in which people are increasingly using mobile money for everyday transactions such as buying groceries, paying bills, receiving salaries and remittances, and conducting business. This transition happened in response to the absence of a formal banking sector and the dollarisation of the economy as well as the lack of faith in the Somali shilling. According to the IMF’s country head, Samba Thiam, 98 per cent of the current Somali shilling banknotes in circulation are counterfeit, as no banknotes have officially been issued by the central bank since 1991. According to the Somalia’s High Frequency Survey conducted by the World Bank in 2017, currently, 70 per cent of Somali households own a cell phone and 63 per cent have access to a mobile money account.

According to the head of IMF in Somalia, Samba Thiam, 98 per cent of the Somali shilling banknotes currently in circulation are counterfeit  Image Credit: AMISOM Public Information CC0 1.0

In the absence of central bank regulation and supervision, FinTech in Somalia has continuously evolved to cater to individual financial needs. In 1991, the financial and regulatory system ceased to function due to the civil war. It was only in 2009 that the Central Bank of Somalia was reestablished. Somalis have historically relied on the hawala system for money transfer services, particularly for international and domestic remittances. Hawala is based on informal trust systems and traditional networks, including business connections to transfer funds internationally and domestically. Neither the sender nor the recipient requires a bank account.

The first breakthrough was Dahabshiil, a money transfer operator based on the principles of the hawala system, that facilitated the transfer of remittances from abroad to Somalia. Once cash was handed over to an agent, the recipient would receive a text on the mobile phone within a few hours confirming the transfer of money to a local agent from where it could be withdrawn after providing proof of identity.

Every transaction is logged and identities of senders and recipients are recorded using biometric information. Because a majority of Somalis lack official identification, clan networks are used to establish identity. It is then recorded and linked with biometric information for future reference. This system soon became the most reliable option for transferring money into Somalia. Humanitarian organisations such as Oxfam, Care International and World Vision have used this approach to transfer aid money to projects in Somalia. Today, these transactions can be made directly to bank or mobile money accounts.

World Remit also operates in a similar way but is a digital platform. It only accepts funds through its website or mobile phone application and is linked with mobile or bank account of the recipient. The digital platform also serves as a database of both senders and recipients.

These mobile transfer operators have recently linked their payment platforms with mobile money accounts making household level financial transactions more seamless.

What makes Somalia’s mobile money services different

Mobile network operators launched mobile accounts that initially only allowed transfer of airtime. However, they soon transitioned to monetary transactions between different mobile account holders with mobile money services such as Hormuud’s Electronic Voucher Cash (EVC+) and Telesom’s Zaad. According to the Mobile Money household survey conducted by the World Bank, a majority of the households (58 per cent) make one to four transactions per month and prefer using mobile money to cash for purchases between US$2-300. For transactions greater than US$300, a mobile money account requires linking to a bank account. This makes digital money a perfect substitute of cash and facilitates use of mobile money for daily transactions such as bill payments, salary receipts and merchant transactions.

The mobile money environment in Somalia is substantially different from that in neighbouring countries. For example, in contrast to M-Pesa in Kenya, Somalia’s mobile network operators do not charge a transaction fee. Similarly, there is no cash withdrawal fee. In case of Hormuud, which holds the largest market share, the operators do not require agents for transaction exchange to happen. Most people use informal mechanisms such as transferring money to a friend’s mobile account in exchange for cash. However, according to the Mobile Money survey, 63 per cent of households do not cash out mobile money.

However, the current system is not without its own challenges as mobile money is not regulated or supervised by the Central Bank of Somalia. For many Somalis, mobile money can be unreliable and carries significant risks for their cash, as the system does not provide customer guarantees. There is also no interconnectivity between different mobile money service providers. There is also concern of tax evasion, as the government does not collect direct revenues on mobile money transactions. Finally, money laundering and the financing of terrorism is a threat due to the lack of oversight. Currently, the Central Bank of Somalia with support from the World Bank’s SCORE Program is working on developing mobile money regulations. These regulations once adopted will help tackle the central bank’s financial stability concerns. The regulations will also enable greater innovation and promote experimentation and testing of new products linked to mobile money services.

Somalia entrepreneurship and innovation has led to an integration of hawala system, mobile money and bank accounts through mobile phones. The result is the creation of an agile mobile fund transfer system that delivers directly to the households with digital system essentially replacing paper-based currency.

This mobile money system also allowed for a swift response to the drought in 2017 where $10 million were transferred to one million Somalis within one month using mobile accounts. Using electronic cash transfers through mobile money also increased accessibility in those parts of Somalia which were difficult to reach due to insecurity and other logistical challenges. It also served as a cheaper alternative given that the administrative cost of delivering cash to people through agents or vouchers is higher and requires physical access.

Somalia’s Communications Act passed in 2017 mandates that mobile network operators link all mobile accounts with identification information. When this gets implemented, it will make this system more robust while also fulfilling the know your customer, KYC requirement.

Overall, a regulated and supervised digital payment platform with verification links to identification system has a huge potential to facilitate delivery of public goods and services; to make government-to-person (G2P) payments such as salaries and social transfers; to collect taxes and bills; and to increase access to credit as well as livelihood opportunities while safeguarding financial stability and integrity. In particular, the Somali Government can leverage this system for setting up a social protection system where this ledger can also be used to identify beneficiaries and deliver cash directly to them in an effective and efficient manner.

Zaineb Majoka (@ZainebMajoka) is a Social Protection consultant at the World Bank and has experience working on social protection, gender, institutions and social inclusion. Her work focuses on in building evidence base for policy decisions and program implementation.

The views expressed in this post are those of the author and in no way reflect those of the Africa at LSE blog, the Firoz Lalji Centre for Africa or the London School of Economics and Political Science.