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.
The 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.
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 east African 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.
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.