CHAPTER 1

1.0 INTRODUCTION

Somalia is a country located in the Horn of Africa. It is bordered by Ethiopia

to the west, Djibouti to the northwest, the Gulf of Aden to the north, the Indian Ocean
to the east, and Kenya to the southwest. Somalia has the longest coastline on the
continent, and its topography consists mainly of plateaus, plains and highlands. Hot
conditions succeed year-round, along with periodic monsoon winds and irregular
rainfall (Robert, 2009). Somalia has a population of around 12 million. About 97% of
local residents are ethnic Somalis, who have historically inhabited the northern part of
the country. Ethnic minority groups make up the remainder of the nation's population,
and are largely concentrated in the southern regions. Somali and Arabic are the
official languages of Somalia, both of which belong to the Afro-Asiatic family. The
people of Somali are entirely Muslims and the majority of people in the territory are
Sunni.

The Federal Government of Somalia officially announced later the Federal

Republic of Somalia following the longtime of end of the interim mandate of the
Transitional Federal Government of Somalia. Therefore the government of Somalia
officially contains the executive branch of government, with the parliament serving as
the legislative branch, and it is headed by the President of Somalia, to whom the

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cabinet reports through the Prime Minister of Federal Somalia. According to Robert,
the Federal Member States known local state governments have a degree of autonomy
over regional affairs and maintain their own police and security forces. However, they
are constitutionally subject to the authority of the government of the Federal Republic
of Somalia. As Northern Somalia consist of two states whom are Somaliland and
Khatumo State are the local governments that already officially recognized since their
establishment in 1992 and 2002 respectively. Also the national parliament is tasked
with selecting the ultimate number and boundaries of the Federal Member States
within the Federal Republic of Somalia.

In ancient times, Somalia was an important center for commerce with the rest
of the ancient world, especially Khatumo State had played a major role for connecting
Northern and Southern parts of the country, and it also plays a vital role for
worldwide supplier of frankincense and myrrh to the ancient Egyptians, Arabs and to
the Europe. Thus, this is study mainly focuses M-Money (ZAAD Service) in the
northern Part of Somalia particularly Khatumo State of Somalia

Khatumo State of Somalia is semi-autonomous region in north Somalia

centred on Las-Anod in the Sool province; A third of Somalia's population lives in the
territory, which contains about a third of the nation's geographical area. Khatumo is
Unique for its strategic position in which it connects south and north of Somalia. In
addition the stability of the political and economic allows the companies to form a
business to compete the market, the strategic position of the State permits competition
between companies and new business to grow day after day. Local companies plays a
vital role for the economic development in general Somalia and specifically in
Khatumo, because it created a lot of opportunities to the companies and also it
produces a job opportunities for the people as it also allowed to grow the income of
the population (Robert, 2009)

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 According to (Robert, 2009) The Economy of Khatumo State is flourishing
consistently , as the strategic location helps Local companies to develop their business
operations, the state facilitates to export Somali domestic productions to the world as
they export their local products such manufactured fish, livestock’s and the materials
of fragrance to the neighboring countries such as Kenya, Ethiopia, Djibouti, Yemen
and so on, also its strategic location helps to became a business hub in The Greater
Somalia.

The adoption of mobile phones has occurred at perhaps the fastest rate and to
the deepest level of any consumer-level technology in history.” The fixed line
telephone—the predecessor to mobile phones—took 100 years to reach only 80
percent of the population, even in developed countries. Meanwhile, mobile phones
have been adopted “more than five times as fast” worldwide, and have significantly
decreased communication costs in many parts of the developing world. According to
(Abdusalam, 2012), One of successful histories in Somalia is the telecommunication
sector that was developed by private companies. These private companies provide
affordable fixed-line, mobile phone and internet services in every major city in
Somalia with a lowest international calling rates and high quality, which are not
available in many parts in the continent.

Due to having access and rapid growing of telecommunication, Somalian

telecommunication companies such as Hormuud Telecom in South Somalia, Golis
Telecom in Puntland State and Telesom in North Somalia have introduced a mobile
money (M-money) service in the first time in 2008, which is known as Zaad or Sahal
financial Service allowing customers using their mobile phone to transfer money, to
pay bills and to purchase goods and services.

Telesom is a privately held company, founded in 2001. Being the number one
telecom company in North Somalia, Telesom takes pride in having the competence
and the ability to combine the quality standard of the telecom industry. Telesom is the

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first African fully owned company in the world to announce Mobile money. Zaad is a
mobile money service, allowing customers to use their money for transfers,
purchases, payment of bills, and airtime recharge. Within a very short period, this
product becomes more popular in the Somalis community from all over the country
due to its reducing risk of carrying cash around and eliminating the need to use
money transfer companies to transfer

However, Islamist Group of Al-Shabab rejected Zaad or Sahal financial

service arguing that this will lead the economy to fall in hands of international
corporations and bankers, elimination of local currency (So.Sh) in circulation, the
hawaleh system to be destroyed. Therefore, the Zaad or Sahal financial service was
suspended in South Somalia, in the area where Hormuud Telecom is operating, while
Zaad and Sahal financial service is operating effectively in Puntland, Somaliland and
Khatumo states because those three states are not under the control of Al-Shabab
which banned Zaad and Sahal services money within the country.

Even though, Zaad or Sahal financial service is partially banned, but it

remains to be one of the interesting innovations in both the telecom and hawaleh
industries in Somalia. It may increase competitiveness between these two industries
especially in a country like Somalia, where it could be a difficult to introduce the
ATM (Automatic Teller Machine) in the public place due to security issues.
The main point of this study is to:
1) Focus on the development of ZAAD services in Khatumo State of Somalia.
2) Examine the challenged and risk associated with ZAAD Service
3) Study the role of Central Bank of Somalia (CBS) and the impact of ZAAD
service on existing Remittance Companies (Hawala) in Khatumo State of
Somalia.

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 CHAPTER 2

2.0 BACKGROUND OF THE STUDY

At the most basic level, M-money is the provision of financial services

through a mobile device. This broad definition encompasses a range of services,
including payments, finance, and banking. In practice, a variety of means can be used
such as sending text messages to transfer value or accessing bank account details via
the mobile internet. Special “contactless” technologies are available that allow phones
to transfer money to contactless cash registers (Donovan, 2012).

M-money is an emerging facet of electronic banking that, unlike traditional

financial services, which offer very limited functions, is a potential platform for
automated banking and other financial services. It is a wireless service delivery
channel that offers additional value for customers by providing “anytime, anywhere”
access to financial services (Lee and Chung, 2009).

Several studies have examined the attitude and/or intention to adopt M-money
services in different countries. Daud, et al. (2011) examined the critical success
factors influencing the adoption of M-money in Malaysia using technology
acceptance model (TAM). The authors found that perceived usefulness, perceived
credibility and awareness have significant effect on user’s attitude and subsequently
influence the intention toward using M-money.

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 A similar study was conducted by Cheah et al. (2011), and found that factors
such as perceived usefulness, perceived ease of use, relative advantages and personal
innovativeness were positively related to the intention to adopt M-money. In the same
context Riquelme and Rios (2010) found that usefulness, social norms and social risk,
are the factors that influence the intention to adopt M-money in Singapore.

Similarly, Bankole et al. (2011) investigated M-money adoption in Nigeria.

The authors used both questionnaires and interviews for data collection. Their results
showed that culture is the most important factor influencing M-money adoption
behavior in Nigeria.

In another context, Suoranta (2003) examined M-money adoption in Finland

and found that relative advantage, compatibility, communication and trialability are
the most important factors in explaining consumers’ behavior. Similarly, Wessels and
Drennan (2010) studied M-money adoption in the Australian context, they found that
perceived usefulness, perceived risk, cost and compatibility are affecting consumer
acceptance of M-money.

Lee et al. (2007) examined the factors that influence adoption of M-money in
South Korea using TAM. The authors found that the financial-performance risk
dimension is the most salient concern for this sample and its context. Similarly, Gu et
al. (2009) explored the adoption of M-money in South Korea, based on TAM model.
The study found that self-efficiency was the strongest antecedent of perceived ease-
of-use, which directly and indirectly affected behavioral intention through perceived
usefulness in M-money.

A similar study was also conducted by Lee et al. (2012), and found that
connectivity influences perceived ease of use directly. In addition, perceived
monetary value has a significant effect on perceived usefulness, inferring MFS is not
only useful for a firm, but also is useful from a time and monetary value standpoint.

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Personal innovativeness significantly influences perceived ease-of-use, so innovative
users can take advantage of MFS more frequently. Absorptive capacity also directly
affects usage intention. Finally, perceived task technology, versus a task characteristic
view, significantly influences perceived usefulness.

Furthermore, Brown et al. (2003) investigated the predictors of M-money

adoption in South Africa. Factors identified included relative advantage, trialability,
and consumer banking needs, with perceived risk having a major negative influence.
On the other hand, Cruz et al. (2010) examined the adoption of M-money in Brazil.
Perception of cost, risk, low perceived relative advantage and complexity were
revealed to be the main reasons behind the use of the service. A similar study was
conducted by Puschel et al. (2010).

In another context, Koenig-Lewis et al. (2010) investigated the factors that

influence M-money adoption in Germany using TAM. The results of the study
indicated that compatibility, perceived usefulness, and risk are significant indicators
for the adoption of M-money services in Germany.

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 CHAPTER 3

3.0 DEVELOPMENT OF ZAAD SERVICE IN KHATUMO STATE OF

SOMALIA

In June 2009, Northern Somalia’s leading mobile network operator (MNO)

Telesom launched Telesom ZAAD, the country’s first mobile money service. Since
then, the service has gained significant traction: in June 2012, almost 40% of Telesom
GSM subscribers were active users of Telesom ZAAD. What is most striking about
the service is the level of activity on the mobile money platform.

Active Telesom ZAAD users perform over 30 transactions per month on

average, far above the global average of 8.5 per month. Telesom ZAAD is one of the
14 GSMA mobile money Sprinters and is recognized as one of the most successful
mobile money services in the world.

3.1 ZAAD Service

ZAAD Service is a modern mobile payment service. It adds more value to

Telesom’s existing services. ZAAD facilitates all kinds of money payment
transactions, including transfer, purchases, fee payment, salary/wages payment and

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cash storage. It enables Telesom subscribers to send money to their friends and
relatives. ZAAD is highly secure having different security layers. Users can access
their accounts with security pin number and they can send money to anywhere,
anytime, People can pay their bills or buy things from shops and other business
outlets. Early 2009 Telesom succeeded to be the 5th Telecommunication Company in
the world that provides MMT (mobile money transfer) technology to its customers.

3.1.1 How It Works

The customers can deposit their money an authorized Telesom agents (stores).
The cash in process credits the subscriber account into the Mobile cash platform and
debits the stores’ accounts, while the customer hands cash to the retailer. Customers,
using any of the given interfaces, can then use their electronic money to pay for goods
or send part of their money to other ZAAD Customer or non-ZAAD Customer, who
in turn may choose to use it to pay for goods, convert it to air-time, or just convert it
to cash at retailer´s stores.

3.1.2 ZAAD International Money Transfer:

ZAAD international money transfer service enables customers to transfer and

receive money internationally. What makes this service possible is the collaboration
between ZAAD and Tawakal Express Remittance Company. Worth to mention , with
ZAAD international money transfer service it takes only one minute to receive money
that have been sent from any destination around the globe directly to your mobile
before you move from your place.

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3.1.3 ZAAD IVR

Telesom in order to reach to different segments of the society with its ZAAD
service have introduced ZAAD IVR for the disabled customers who are blind and can
read not the instructions to use ZAAD service by listening to ZAAD interactive voice
response.

3.1.4 KAAFI

KAAFI service is about connecting ZAAD account with Salaam account

which makes it possible for customers to transfer money from their ZAAD account to
Salaam account, this service makes enables customers to withdraw and deposit money
from & to their Salaam bank without having to go to the bank by themselves but
simply by sending their money from their ZAAD account to their salaam account and
the so on.

3.2 ZAAD Web Service

ZAAD internet is easy to use service that enables you to do the following:
 Payroll payment
 Payment and predium and disbursement
 Project fund management and reporting
 Activity and documentation

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3.3 Dealers Menu

Dealers are the main entity of ZAAD Hierarchy, they provide to shops ability to gain
benefits. The main contents of dealer menu are:

 Knowing your account and store balances.

 Moving money among the stores.
 Managing your stores by enabling or disabling from them to do activities.
 Managing your accounts by changing languages, security PIN etc.

3.4 Stores Menu

The main advantages of store menu are:

 Knowing your account balance.

 Making customer deposits.
 Ensuring customer withdrawals.
 Initiating and pay transfers.
 Registering customers and;
 Managing your accounts by changing languages, security PIN etc.

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3.5 Merchants Menu

The main advantages of merchant menu are:

 Knowing your account balance.

 Canceling customer transaction in the case of wrong amount.
 Enabling withdrawing cash from your account.
 Managing your cashiers' balances and activities.
 Recharging your E-voucher agents.
 Managing your accounts by changing languages, security PIN etc.

3.6 Learning from M-PESA Kenya

Prior to the launching of Telesom ZAAD Services, a team of senior Telesom

officers travelled to Kenya and Tanzania to study Safaricom’s and Vodacom’s M-
PESA services. They learned a lot about the model, but identified some aspects of the
services that would not translate to Somalia. Telesom decided to adapt the M-PESA
model to its country context in three distinct ways

3.6.1 Making the Service Free

Telesom decided to offer the service for free. The M-PESA business model
was not applicable in the context of Somalia where people are not familiar with
mobile money.” Telesom ZAAD aimed to achieve an active rate of 40% of their GSM
customer base before revisiting that policy.

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3.6.2 Using in-house Agents

Telesom decided to utilize its own distribution network and not to recruit
external agents. This meant relying on the stores it already owned and operated with
salaried employees. This decision was driven in part by the fact that there was no
formal banking infrastructure or suitable chain of retail stores/businesses in Khatumo
State equipped to deliver the service or to provide an adequate distribution solution
for Telesom ZAAD. Since mobile money was a completely new concept in Khatumo
State, Telesom management also realized that it would be challenging to convince
external agents to offer the service. For both these reasons, Telesom decided to use its
own outlet network as mobile money agents

3.6.3 Including merchants from the start

While Telesom has offered money transfer as a core product from the start,
management saw an opportunity for goods and services payments to spur growth and
to help the company keep up with its growing numbers of customers. As a result,
merchant acquisition took the place of agent acquisition in the Kenyan model.

3.6.4 Investment and returns

From the very start, Telesom’s commitment to the service was matched by
strong investment they decided early on to invest heavily in the service. They knew
customer education would be difficult as the level of financial literacy in Somalia was
far different in either Kenya or Tanzania.

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 An open book approach to budgeting was taken in the first year to get the
service off the ground. One quarter of the initial investment of US$ 1 million was put
into developing the in-house platform using Telesom’s own coding and development
expertise. Since Telesom ZAAD has always been treated as a separate business from
Telesom’s core GSM business, it has had its own dedicated business unit from the
start. Another half of the initial investment was used to build and equip the Telesom
ZAAD head office where the team now works. The investment strategy takes on a
new light when the business model was discussed: Telesom ZAAD has been a free to
use service from the start.

Although this is both a financial and strategic decision, it is driven by a

commitment to financial inclusion and the recognition that customer education would
pose a major challenge to the success of the service. From a financial perspective,
although Telesom decided to offer its mobile money service for free, the company
was able to quickly recoup its initial investments from indirect revenues: challenge to
the success of the service. Savings on airtime distribution have been significant, with
almost 70% of Telesom airtime sold over Telesom ZAAD in April 2013 rather than
through scratch cards. These savings amounted to US$ 2 million in 2012, $1.8 million
in 2011, and $865,000 in 2010.

Telesom also measure increased airtime sales due to Telesom ZAAD. This
represents the difference between projected sales growth and actual growth. In 2010
soon after the launch of the service, Telesom registered a 33% increase in airtime
sales, 22% in 2011 and 17% in 2012. Finally, Telesom managed to reduce customer
churn from 5% before the launch of Telesom ZAAD to 2% in 2013. Given the fierce
competition over price for voice and SMS, indirect revenues have become essential
and Telesom ZAAD is giving Telesom an important competitive distinction.

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 The World Bank’s Global Financial Inclusion Database (Findex) recently
revealed that Somalia was one of the most active mobile money markets: 26% of the
population reported using mobiles to pay bills, which is the highest rate in the world,
and 32% to send and receive money. Most of this mobile money activity has been
driven by Telesom ZAAD.

To transform its vision of financial inclusion into a reality, Telesom’s strategy

has been to develop the mobile money ecosystem around Telesom ZAAD. This
ecosystem is focused on solving two issues faced by mobile money services around
the world: getting money into the system and then keeping it there. Most mobile
money services are still functioning as a money transfer service, with customers
withdrawing all their funds from the system as soon as they receive them. However,
Telesom ZAAD has succeeded in convincing users to keep money in their e-wallets
by building an ecosystem of salary payers and merchants.

3.7 Effective distribution strategy and creating the mobile money ecosystem

Understanding the socio-economic characteristics status of Northern Somalia

was an important starting point in the development of Telesom ZAAD’s distribution
strategy. In order to realize their vision of delivering financially inclusive services,
Telesom chose to use a wallet-based mobile money service with a focus on keeping
cash in the system. To do this, they focused on developing a strong mobile money
ecosystem around the service, which has informed its approach to both products and
distribution.

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3.8 Commitment to merchant payments and salary payments

Telesom ZAAD was launched with a focus on salary payments and merchant
payments. The idea was to create a mobile money system that did not require service
users to repeatedly cash-in and cash-out. Instead, Telesom ZAAD users would
regularly receive money in their wallet (their salary, for example), maintain a small
balance, and use it for daily transactions, such as paying for goods and services. In
order to promote both products successfully, Telesom concentrated its efforts on two
target groups: merchants and employers.

In the beginning, the team spent a lot of time educating merchants about the
service. Telesom also offered free handsets to new merchants as an incentive to
accept payments via Telesom ZAAD, but they quickly halted this program as
merchants started to come to Telesom ZAAD even without the incentive. When
Telesom ZAAD was launched in June 2009, 170 merchants had already agreed to
accept payments via mobile money. Merchants were encouraged to use the e-money
in their account to buy Telesom products instead of cashing out, which has helped to
keep money in the system. Many mobile money services struggle to get customers to
maintain balance but Telesom have been very successful.

Today, two members of the Telesom ZAAD team are dedicated to merchant
supervision and monitor their activities on a daily basis. They also identify merchants
with limited activity and visit them to understand why. The Telesom ZAAD team
knew that convincing employers to pay salaries through mobile money would be
particularly challenging since mobile money was so new to Somalia.

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 Telesom decided to lead the way, and two months before the commercial launch
of Telesom ZAAD, it started to pay its 1,430 employees exclusively with mobile
money. This was a bold decision – most mobile money providers that want to push
salary payments start by paying only a small percentage (usually between 5% and
10%) of their employees’ salaries using mobile money. This helped to convince other
companies to start paying their employees using Telesom ZAAD.

Telesom also wanted their employees to become brand ambassadors and to start
using Telesom ZAAD to pay their rent, buy goods and services, and transfer money.
As relatively high net-worth customers to their local businesses, Telesom employees
promoted the service very effectively. To encourage uptake by word-of-mouth,
Telesom trained all its employees on Telesom ZAAD so that they were fluent in using
and promoting the new service.

3.9 Mobile money distribution

Telesom ZAAD has taken a unique approach to mobile money distribution by

not relying on external agents. Telesom decided to use its own retail stores
exclusively to register new customers and offer cash-in and cash-out services. As
mentioned earlier, this approach has been possible due to the unique market
conditions in North Somalia and Telesom’s strong presence and brand recognition.
Telesom operates 178 of its own retail outlets distributed around North Somalia,
which has been sufficient to reach its subscriber base. The 20 largest stores, which
Telesom calls “dealers”, are responsible for managing the liquidity of the smaller
stores.

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 In the Telesom ZAAD model, people who work for stores that facilitate cash-
ins and cash-outs, as well as dealers who supervise smaller stores are all Telesom
employees. As such, they receive a monthly salary from Telesom. Offering a high-
quality mobile money service is one of their objectives and their bonus depends on
whether or not they are able to reach their mobile money targets.

Interestingly, dealers are also responsible for recruiting and supervising

merchants. This reflects the importance of merchants in Telesom ZAAD’s business
structure. For Telesom, agents and merchants are the two ways customers can directly
interact with the company, and both groups are seen as equally important. All
Telesom ZAAD staff is trained to use the service when they are hired and then given
refresher training each following year.

This training has ensured that staff knowledge and customer service levels are
kept very high. Weak links in the value chain are also discovered and identified
quickly which, in addition to the in-house distribution system, preserves trust in the
Telesom ZAAD brand.

3.10 The wider ecosystem

Focusing on the ecosystem has meant that Telesom ZAAD has had to connect
with other key financial service stakeholders, including money changers (also called
currency exchangers) and neighboring mobile money services. Because the Telesom
ZAAD platform uses only US dollars, money changers are an important part of the
extended mobile money ecosystem.

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 Telesom ZAAD customers often need to change Somali shillings into dollars
before they can perform a cash-in into their Telesom ZAAD account. Telesom ZAAD
users can either go to a Telesom store to do this, or they can go to one of Somali
money changers. When they go to a money changer, Telesom ZAAD users simply
have to bring Somali shillings and ask for the equivalent amount in US dollars to be
deposited into their account.

This is performed as a traditional P2P transfer since money changers also have
standard customer accounts. Every time they put dollar value into a Telesom ZAAD
wallet, money changers are helping to facilitate and expand mobile money
transactions.

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 CHAPTER 4

4.0 CHALLENGES AND RISKS ASSOCIATED WITH ZAAD SERVICE

Mobile money has its bad side which include; for instance, the cash in or cash
out is difficult because of regulatory issues this will lead to interoperability. There is
also different model with m-banking, the users can easily switch, or change SIM
cards. From a cultural stand point, m-banking provides amplification effects, that is,
people do more of what they are already doing and change effects for example;
women can control savings more.

There is also the issue of spending too much time in front of a phone which
has more possibilities to spend too much. Also acceptance of infrastructure can be
problematic that is money flows from the educated to the low-educated. M-banking
may strain our inclinations to talk face-to-face. There could be family strains. M-
banking may encourage families to live separately because it is easier to transfer
money. In the earlier history of banking, central bank evolved because one could only
redeem currency at the issuing bank and that caused rigidities

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4.1 Deposit protection

It is a given fact that every time ZAAD Service users make electronic cash
exchange they pay cash, read dollars, in exchange for an SMS text message from
Telesom, the ZAAD service operator informing the user that you have this amount of
dollars in your ZAAD account. No receipt existing

On the other hand the government has no law governing e-cash business; such
a law would have entailed the ZAAD service operator deposit a certain amount with
the central bank as what is normally called Deposit protection fund, thus depositors
rest assured that their bank deposits are protected by the government in-case of any
mishaps occurring within a bank. This type of protection is non-existent for ZAAD
users, literally translated to the fact that any ZAAD deposit you make, you make it at
your own peril & risk. No protection at all, that is, legal protection.

At the same time what will happen if the ZAAD data bank or server is
damaged, all records of deposits will disappear leaving depositors with nil balances.
This scenario is possible considering that recent reports indicate that the CIA servers
were hacked into by and by amateurs for what it is worth.

4.2 Legality

When all is said and done the e-cash business was introduced in the country
without any legislation being enacted. Neither house of parliament nor house of
representative were involved thus depositors are unprotected. To this effect the

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mobile money system in Northern Somalia is illegal and the government should act
accordingly.

4.3 Economic effects

Millions of dollars for diverse purposes are transacted electronically on a daily

basis in the country; the irony is that these millions are fleeced out of the country by
the real owner of the e-cash business in North Somalia, who collects the millions on a
daily in hard cash from the country and issues SMS text messages in return. On the
flight of this millions continues to damage the fragile national economy, despite
numerous efforts by diaspora who inject millions in investments. It is a fact that the
ZAAD deposits are made in hard cash while the depositors dispense the same through
the air. Air cash never seen, never touched but used anyway

4.4 Instability of exchange rates

Digital cash or ZAAD service has increased the instability of exchange rates.
Exchange rate has been depreciating in Somalia since the introduction of Telesom’s
ZAAD service in 2009. ZAAD service’s contribution to the inflation of the Somali
Shilling, brought about a widespread “dollarization” of the economy as people
learned to switch shillings into dollars as a hedge against inflation.

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 Since the introduction of ZAAD service in 2009, the “dollarization”
phenomenon increased to such an extent that the dollar is now used not only as a store
of value but also as the most preferred means of payment.

At the end of 2008 (the year before ZAAD launched), one US dollar would
get you 7,500 Somali Shillings, but the exchange rate in the country has seen a huge
downtrend for the last three years from a high of 6,700 sl shs a dollar to a low of
5,000 to the same dollar. The fluctuation prevails whereby you can exchange a dollar
at 6,800 in the morning and 6,000 in the afternoon of the same day.

Disturbance of money supply is another of the problems identified above.

Digital cash has affected the money supply in Northern Somalia. Customer deposits
with the ZAAD service run to the millions of dollars daily, and the money is not
visible, that is it is transferred living the market hungry thus empty pockets and
commodity prices that increase on an hourly basis.

4.5 Consequences

What are the consequences of digital cash or ZAAD service? The main benefit
of digital cash or ZAAD service is that it makes transactions more efficient, which
will in turn enlarge business opportunities and eventually pass more benefits on to the
users. Digital cash or ZAAD service will make transactions less expensive, because
the cost of transferring Digital cash through mobile phones is cheaper than through
the conventional banking system.

To transfer money, the conventional banking system maintains many

branches, clerks, automatic teller machines, and electronic transaction systems of its

23
own. These overhead costs increase the fees of money transfers or credit card
payments through banks. But because digital cash or ZAAD service uses the existing
user's mobile phones, the cost of digital cash or ZAAD service transfer is much lower;
probably nearly zero. This nearly zero cost enables micropayments (e.g., payments of
10 or 50 cents).

Digital cash or ZAAD service payments can be used by everybody. Although

credit card payments are limited to authorized stores, ZAAD service payments are
possible for person-to-person payments. Thus, even very small businesses or
individuals can use these payments. The problems of digital cash or ZAAD service
are fourfold: taxation and money laundering, instability of the exchange rate, and
disturbance of the money supply. Because digital cash or ZAAD service enables
seamless transactions across national borders, taxation and money laundering become
potential problems.

ZAAD service transactions evade taxation, because there are no taxation rules
on digital cash or ZAAD service in place in northern Somalia. To make matters more
difficult, the transfer of digital cash does not leave any record like a bank accounting
record that the tax authority can trace, because digital cash or ZAAD service is
exactly like cash, not like a transfer through the conventional banking system.

Owing to this untraceability, taxation will not be an easy task, even if the
national or international taxation rule is adjusted. This untraceability will enable
criminal usage of digital cash or ZAAD service. Money laundering will be an easy
task because if you send money as digital cash, you can send it any person in the
country without any evidence.

The other three problems associated with ZAAD service are concerned with
the effects of digital cash on macroeconomic stability. Before analyzing these effects,

24
we should decide whether digital cash or ZAAD service is a proxy of real currency or
a privately issued new currency. Besides, digital cash or ZAAD service is issued as a
proxy for currency in Somalia, at least for a while.

In other words, digital cash or ZAAD service will be issued on the same terms
as existing hard currency (digital dollars, digital so shs, etc.) and can be exchanged to
that hard currency at any time. Some people assume that digital cash or ZAAD
service will be issued by private firms: "MS-cash" is issued by the Microsoft
Corporation just as dollar bills are issued by the U.S. Federal Reserve.

If so, ZAAD service should have relevant legislations imposed. But this
development is not likely, at the moment due to the weight of the provider and the
lack of a central bank as well as the constraints imposed by the current parliament.

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 CHAPTER 5

5.0 ROLE OF CENTRAL BANK AND THE IMPACT OF ZAAD SERVICE

ON REMITTANCE COMPANIES (HAWALA) IN KHATUMO STATE OF
SOMALIA

The Central Bank of Somalia (CBS) is the monetary authority of Somalia.

Among other duties, it is in charge of ensuring financial stability, maintaining the
internal and external value of the local currency, and promoting credit and exchange
conditions that enable the balanced growth of the national economy. Although the
role of the Central Bank of Somalia is limited to reserve and control the monetary
policy of Somalia and to keep the cash flow and preserve the hard currency of the
country, it is the official monetary authority of Somalia. In terms of financial
management, it is in the process of assuming the task of both formulating and
implementing monetary policy system in Somalia. .

As the reconstituted Central Bank of Somalia fully assumes its monetary

policy responsibilities, the existing money transfer companies are required to seek
licenses as well as new comers need to register and seek license to develop into full-
fledged commercial banks. This will serve to expand the national payments system to
include formal cheque which in turn is expected to reinforce the effectiveness of the
use of monetary policy system in domestic market in Somalia.

26
 Most of the Somali companies and Business practice remittance firms which
is called Hawala by transferring money and reserving their money, and by sometimes
doing commercial business for all over Somalia and across the globe, because all
these remittance companies are very reliable and very fast when sending money to the
local and overseas compare to the Central Bank of Somalia,

Also remittance companies helps to the Business and Somali companies to

reserve their saving money. These remittance firms (Hawala) have become a large
industry in Somalia with an estimated $1.6 billion USD annually remitted to the
region by Somalis in the diaspora via money transfer companies. Most are members
of the Somali Money Transfer Association (SOMTA), an umbrella organization that
regulates the community's money transfer sector, or its predecessor, the Somali
Financial Services Association (SFSA). The largest of the Somali MTOs is
DAHABSHIIL, a Somali-owned remittance firm employing more than 20000 people
in Somalia and across 150 countries with head branches in London and Dubai.

The US dollar is widely accepted as a medium of exchange alongside the

Somali shilling. Dollarization notwithstanding, the large issuance of the Somali
shilling has increasingly powered price climbs, especially for low value transactions.
According to the central bank of Somalia stated that this inflationary environment,
however, is expected to come to an end as soon as the Central Bank undertakes full
control of monetary policy and replaces the presently mixing currency introduced by
the private sector companies in Somalia. (Central Bank of Somalia, 2010)

Monetary authority is a general term in finance and economics for the entity
which controls the money supply of a given currency. Therefore the subsequent re-
establishment of the Central Bank of Somalia, the nation's payment system is fairly
advanced primarily due to the widespread existence of private money transfer
operators (MTO) that have acted as informal banking network. Generally a monetary

27
authority is a central bank, however often the executive branch of a government has
de facto control over monetary policy by controlling the central bank. there are other
arrangements, for example democratic governance of monetary policy, a central bank
for several nations, a currency board which restricts currency issuance to the amount
of another currency, free banking where a broad range of entities can issue notes or
coin. (Central Bank of Somalia, 2010)

The role of the Hawala system is not ended with transferring money from
overseas to back home, but it plays important role in trade and local investment
financing since there is no investment and commercial banks in Somalia. Moreover,
the Hawala system acts as a saving bank by accepting the public deposits in its
current and saving accounts (Abdusalam, 2012).

However the development and acceptance of ZAAD service among

Somalian’s has brought significant challenges to the existing banks and remittance
companies (Hawala) in northern Somalia. The advent of mobile money service in the
country has transformed systems of cash transfer not only within the country but
outside as well.

Prior to this people used to receive/send money through diverse Hawala

(money transfer companies), this operation usually took up to three to five days with
the recipient visiting or calling the relevant Hawala on an hourly basis to verify
deposit arrival. This hourly receive/send was negated when, Telesom introduced its
ZAAD service and electronic banking system. The arrival of ZAAD service made it
possible to send/receive money instantly that is within minutes if not seconds.

28
 CHAPTER 6

6.0 CONCLUSION AND RECOMMENDATIONS

ZAAD is new system of making payments by mobile phones which has been
launched in the northern Somalia. Telesom's ZAAD service means that people can
send money to friends and relatives or pay bills just using their phones. Users can
have access to their accounts with a Pin number and they can send money to
anywhere, anytime. People can pay their bills or buy things from shops

Telesom has learned from the experiences of successful mobile money

services in neighboring countries and applied these lessons to Somalis unique cultural
and socio-economic context. Apart from the no-fee business model and internal
distribution network, the major difference in Telesom’s approach is its commitment to
salary payments and merchant payments. The results have been extremely
encouraging; Telesom has created a new model for mobile money whereby customers
are encouraged to keep money in the system rather than cashing it out.

Thus, Telesom ZAAD will soon be facing some major challenges, however.
First, Telesom ZAAD’s active customer base recently reached 40%, and its initial
plan was to revise the free-to-use business model once customer usage reached this
level So, Should Telesom start charging customers to use the service? And what could
Telesom do to mitigate possible customer drop-off once charges are introduced?

29
 Second, although the number of Telesom ZAAD customers and customer
usage continue to increase, the pace has started to slow. Telesom ZAAD now must
answer the same questions that many other mobile money services are asking: How
can mobile money usage are increased among existing customers? And what new
services would attract new customers? How can new segments of the GSM subscriber
base be reached?

Besides that it is very important that the local government to establish deposit
protection act or fund to assure the users of ZAAD service that their deposit and
money are protected and secured.

Last but not least, ZAAD Service was introduced in the country without any
legislation being enacted. Neither house of parliament nor house of representative
were involved thus depositors are unprotected. To this effect the mobile money
system in Northern Somalia is illegal and the government should act accordingly.

30
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