Post by Anna Diofasi, Humanitas Global
Consistently ranked as the most ‘failed state’ in the world, Somalia had been a country without an effective government for over two decades, from the central government’s collapse in 1991 until the establishment of a new federal government in late 2012. After the fall of the Barre regime, the country descended into civil war and state institutions ceased to function. As a result, Somalia now counts as one of the least developed countries in the world, with 43% of the population living in extreme poverty.
Yet, despite low incomes and lack of formal institutions, a lively private sector has emerged, led by remittance companies, which process over $2 billion worth of remittances flowing into the country each year. Even more surprisingly, Somali remittance companies have some of the largest networks and fastest processing times in the world. A remittance payment made in the U.S. or Australia can reach a remote Somali village in less than 24 hours.
Dahabshiil, one of the country’s leading money transfer service providers, has over 24,000 agents and 144 branches worldwide, and has recently expanded its services to include mobile banking through the acquisition of Somtel, a local telecommunications company. There are over 20 remittance companies operating in Somalia, forming a sophisticated network of branches across the country and throughout the world in locations with a prominent presence of Somali diaspora.
At the same time, mobile banking is emerging as another Somali success story, providing enabling people to engage in cashless transactions in a conflict zone where the added security from not having to carry cash or other valuables is highly valued. A recent World Bank report found that Somaliland (a Northern, semi-autonomous region of Somalia) ranks 1st and 3rd globally in the percentage of adults using mobile phones to pay bills and to send or receive money.
Telesom’s ZAAD mobile money service, launched in Somaliland in 2009, has been a resounding success, counting over 250,000 active subscribes by the first half of 2013. Many in Somaliland receive their entire salaries in the form of mobile money and pay for daily necessities, electricity bills, and even university tuition using their handsets. Increasingly, international organizations and NGOs are taking advantage of mobile financial services to deliver cash to intended beneficiaries. Oxfam used mobile banking to launch its ‘e-cash’ unconditional cash transfer program to improving the livelihoods of skilled urban residents.
Defying all expectations, Somalia boasts one of the most developed and efficient financial institutions on the African continent. The country’s experience illustrates that opportunities for the private sector can exist even in situations where poverty is pervasive and where conventional contract enforcement mechanisms are non-existent. In fact, innovations that reduce risks and the costs of doing business, such as mobile banking, are thriving amidst a volatile security situation.
This is not to say that zero state intervention is an ideal outcome. States have an important role to play in the financial sector, from improving access to services for the most vulnerable to regulating financial service providers. Nevertheless, non-conventional financial institutions, such as of mobile banking or agent-based money transfer services, hold great promise for fragile states. Access to fast, reliable, and safe economic transactions in conflict-affected areas creates much-needed opportunities for trade, entrepreneurship, and higher incomes.