Bringing financial inclusion to the Horn of Africa

November 1, 2013: 12:51 PM ET

Zaad mobile wallet powers economic development and job creation in Somaliland.

By Erik Heinrich

131031154223-somaliland-620xaFORTUNE -- Somaliland is an African region balancing on a knife's edge. Separated from Somalia, it's a stronghold for terrorist groups like Al-Shabaab and for high-seas pirates. With so much crime and political instability to contend with, Somaliland is perhaps the last place on earth you would expect to find the bleeding edge of the world's mobile money revolution. But this is exactly where local wireless provider Telesom launched Zaad, an informal banking system that is slicker and easier to use than anything available to the banking public in North America or Europe.

It's an especially remarkable feat considering that 70% of the region's 3.5 million inhabitants are illiterate, and virtually 100% are without a bank account or ATM card.

"Since Somaliland lacks formal financial institutions, bringing financial inclusion and contributing to the economic well-being of our society was the primary aim," says Abdirahman Adan Shire, services manager for Zaad at Telesom's headquarter in Hargeisa, the region's capital situated in the deserts of northwestern Somalia.

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Thanks to Zaad, Somaliland has achieved one of the world's highest rates of digital transactions in roughly two years. At present some 281,000 active subscribers use their mobile phones every day to transfer money, make purchases, pay bills, and buy airtime. That number is expected to increase to 400,000 by the end of 2014, says Adan Shire.

Even small payments to street vendors or the purchase of bus tickets can be made with Zaad by dialing a three-digit number, entering a PIN, the recipient's phone number and the amount of the purchase. Within seconds both parties -- some 11,000 businesses in Somaliland have a Zaad merchant account -- receive a text message confirming the transfer.

The convenience and simplicity of Zaad has turned it into a key driver of development in Somaliland, which has perhaps the least regulated economy in the Horn of Africa. "By enabling poor people to more cheaply and easily transact, markets spring up spontaneously," says Laurence Chandy, a development specialist at the Brookings Institution, a Washington-based think tank. "One of the things that makes mobile money so potential-laden is its ability to support the growth of the  services sector in Africa, which is an important driver of job creation and poverty reduction."

Ironically, it's precisely the lawless nature of Somaliland and the absence of strong government regulations that has allowed Zaad to take off like a rocket -- an accomplishment that would be near impossible in the U.S. or another G7 country where powerful interests are holding back mobile money for fear of losing traditional revenue streams.

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"Mobile money is a disruptive technology which sits somewhere in between telecommunications and the banking sector," adds Chandy. "In weak regulatory environments, deployments are able to take advantage of this ambiguity by avoiding the kind of oversight they would normally be subject to."

That's the primary reason why mobile money has scored its biggest successes in some of the world's poorest nations, including Haiti and Uganda. Of the world's 81.8 million mobile money customers, 56.9 million are in sub-Saharan Africa, according to the GSMA, a London-based trade association representing some 800 wireless carriers.

Kenya's M-Pesa has become the gold standard against which all mobile wallets are measured. Launched by wireless provider Safaricom in 2007, M-Pesa has 15 million subscribers, two-thirds of the country's adult population, conducting more than 2 million daily transactions. The GSMA estimates that more than 60% of Kenya's GDP moves across M-Pesa each year.

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"In very poor markets the mobile network operators are often the only ones trying to fill the banking infrastructure gap," says Kathleen McGowan, senior policy advisor with the Washington-based U.S. Agency for International Development (USAID), which provides financial support to both Somalia and Somaliland.

But for all its benefits, is there a downside to Somaliland's Zaad?

Co-operation between al-Qaeda linked militants in the Horn of Africa, including al-Shabab, and pirate gangs is growing as terrorist groups become increasingly desperate for money to carry out deadly operations. At the same time, the U.S. State Department has identified the UAE and Kenya as financial hubs used by pirate networks operating in the Horn of Africa.

Does Zaad unwittingly help facilitate money laundering and movement of money by outlaws inside Somaliland or between Somaliland and off-shore accounts, including Kenya were M-Pesa allows for international fund transfers?

"Cash transactions are opaque and anonymous," says McGowan with USAID. "Mobile money improves transparency and creates the money trails that can be used to deter and discover illicit transactions."

In the meantime Zaad wants to expand. "The motivating factors are customer retention and creating new revenue streams," says Adan Shire of Zaad, who spends a lot of time on backroads of Somaliland, troubleshooting problems and answering questions.

On the drawing board is dual-currency mobile wallet denominated in both Somaliland shillings and U.S. dollars. And plans to launch Zaad in other regions of the Horn. "We are particularly interested in the Djibouti corridor," says Adan Shire.

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