By Tom Collins
Saturday April 9, 2022
Innovations from Somalia range from the early adoption of the Hawala system to global money transfer companies of Somali origin including World Remit and Dahabshill.
Somalia’s money transfer market is one of the most developed
in the world, characterized by a large diaspora sending billions of dollars
home in remittances each year and a local population that prefers mobile money
to cash.
Latest data from the World Bank in 2017 suggests that 73% of
the population above the age of 16 use mobile money services—making Somalia one
of the most dynamic markets in Africa and worldwide.
Despite only being introduced 10 years ago, over two thirds
of all payments in Somalia now rely on mobile money platforms.
Although Hormuud, Somalia’s leading mobile money provider,
only received GSMA Mobile Money Certification in March, a global standard of
telecoms excellence, the country has changed the face of money transfers
worldwide for decades.
newsinisdeThe major factors behind the country’s innovation in money
transfers are a tough operating environment, a weak banking system, lack of
policy implementation, and deep distrust of government and the local currency.
“It’s the culture in our community, we are risk takers. Due
to the challenges, we have had to explore new ideas.”
Innovations range from the early adoption of the Hawala
system to the global rise of money transfer companies of Somali origin
including World Remit and Dahabshill.
“Anyone who has a mobile has mobile money services,” says
Abdullahi Rage, a Mogadishu-based research analyst at the African Center for
Strategic Progress, a US think tank.
“The problem in Somalia is that we have a lack of data—it’s
hard to get an exact number. But I would say more than nine out of 10 people
use mobile money in Somalia.”
Somalia’s challenging
market sets stage for innovation
Somalia has long been a challenging market with deep divides
in government that often spill over into armed conflict and parts of the
country under the control of terrorist group al-Shabaab. But these problems
have created the perfect hotbed for innovative solutions, especially with
regards to financial technology.
“It’s the culture in our community, we are risk takers. Due
to the challenges, we have had to explore new ideas,” says Ahmed Mohamed
Yuusuf, CEO and chairman of Hormuud, one of Somalia’s biggest telcos with 4.5
million subscribers.
The first innovation was the early adoption of the hawala
money transfer system, which originated in 8th century India and spread to the
Horn of Africa and the Middle East. The service allows users to send and
receive money in different countries through an informal network of brokers,
without any funds crossing borders.
This method of money transfer was popular in Somalia before
mobile money and continues to this day, with most brokers moving into the
formal telecoms industry. Yuusuf says that up to 45% of the hawala agents in
Somalia, who mostly process payments from the US and UK, use Hormuud’s EVC Plus
mobile money to do business.
The chairman of the group says it was the high costs,
inefficiencies, and structural barriers associated with Somalia’s legacy
banking system that previously drove people to the hawala network and the same
is true of mobile money.
A market like nowhere
else
Somalia has an extremely competitive mobile money market
with lots of small-sized players rather than a few large companies like other
markets in Africa. In comparison to neighboring markets like Kenya, which is
home to Safaricom’s M-Pesa, one of Africa’s most well-known mobile money
services, cash is transferred in dollars and most telecoms companies do not
charge a fee for transfers.
When Hormuud launched EVC Plus in 2011, Yusuuf says they
made it a free service to encourage Somalis to adopt the financial technology.
Instead of using EVC Plus to generate revenue, it is used to onboard clients to
other services such as data and voice.
The remittance version of EVC Plus, however, is a charged
service. Yusuuf says that it is often used by humanitarian organizations to
help deliver aid to Somalia. More than $200 million has been sent to Somalia in
the last few months on the platform as the country suffers its worst drought in
decades, where more than 4 million people are at risk of starvation.
Indeed, Somali has a dynamic remittances sector with more
than 2 million citizens living outside the eastAfrican country. The UN
Development Programme estimates that $1.6 billion is sent back to Somalia each
year – almost a third of the country’s GDP which was $5.42 billion in 2021.
One of the most well-known companies to emerge from Somalia
is World Remit, a money transfer company that was founded in 2009 by a
Somaliland entrepreneur who was frustrated by the lack of remittance options
when he arrived in the UK as a refugee.
“We don’t have a national ID in place and therefore
identifying customers was a bit of a challenge.”
Somalis also transfer money between mobile accounts in
dollars as the Somali shilling is very unstable and the IMF says that around
98% of the local currency in circulation is fake. The lack of faith in physical
money is another key reason why mobile money has been so successful in Somalia,
leading to a situation where it has almost completely replaced the Somali
shilling in some parts of the country.
Research shows that Somalia processes some 155 million
transactions a month in a population of only around 17 million people. Most people
keep their money in a digital wallet as opposed to a physical bank.
Lack of oversight a
concern
One of the main problems in the domestic market, however, is
the lack of regulation for mobile money. Fragile institutions and ongoing
political risk have delayed robust legislation that can regulate the mobile
money industry to ensure it benefits consumers and the country.
This has sparked concerns that mobile money is being used
for illicit finance and to support al-Shabaab.
“It’s a challenge to control the flow of money in and out of
the country,” says analyst Rage. “But private companies are doing their best to
at least have checks and balances”.
A good example is Hormuud which received Somalia’s first
GSMA Mobile Money certification in March. The certification from the world’s
leading industry organization is a milestone for Somalia’s telecoms sector and
puts Hormuud among the top mobile money providers in Africa for safety and
security.
The CEO tells Quartz that the company had to meet 350
different criteria and that know your customer (KYC) requirements were the
hardest to meet.
“We don’t have a national ID in place and therefore
identifying customers was a bit of a challenge,” he says. “But then there are
other mechanisms in place, for example records provided by local authorities”.
One of the key challenges was making sure that the rigorous
standards required by GSMA did not discourage financial inclusion for Somalis
that do not have access to formal identification. The solution was to lower the
maximum amount unidentified users could hold on a digital wallet to $300, which
reduced the likelihood that it would be used for illicit finance.
Despite the lack of a strong regulatory body, Yuusuf says
that there have been some recent improvements. Somalia’s central bank awarded
Hormuud with Somalia’s first mobile money license in 2017—a sign to investors
that the local market is maturing. It also introduced a central payments system
in August which allows digital payments to be made between Somalia’s banks,
making payments easier for people across the country.
Moving to digital in
Somalia
The biggest challenge for Somalia’s telecoms industry is the
transition away from analog phones to smartphones. The World Bank found that
49% of the population owned a mobile phone in 2019 but most of the phones were
feature phones that use USSD technology to access mobile money.
“It’s not digital, it’s not internet based,” says Rage.
“Mobile penetration in the country is high compared to low internet
penetration”.
This poses a challenge for telecoms companies that are keen
to introduce data as an income generating stream. The CEO of Hormuud says that
it is currently investing heavily in fiber optics to ensure that “every family
has access to the internet”.
“Voice is dying out. Things like WhatsApp and other apps are
coming in, so our focus at the moment is on extending and monetizing data
services,” he says.
Tom Collins is a financial journalist, editor and consultant covering markets and
businesses in Africa.