Regulation of Somalia’s mobile money market can spur innovation in financial sector development

Somalia’s economy is projected to grow at an annual rate of 3-4 percent, according to the third Somalia Economic Update (SEU), Rapid Growth in Mobile Money: Stability or Vulnerability?, published by the World Bank. The report assesses Somalia’s vibrant mobile money market, and provides concrete recommendations on introducing mobile money regulation that can boost a secure system for widespread financial inclusion.

The SEU aims to provide a comprehensive analysis of economic data, trends and outlook, and sets out a series of recommendations to stimulate reform, growth and improved fiscal performance. The report highlights several improvements in 2017, including the implementation of fiscal policy by the federal government.

As recommended in the previous SEU, domestic revenue mobilization increased, budgets became more realistic, and execution of the budget improved.

“These developments should allow Somalia to build the fiscal buffers that allow the government to start providing meaningful service delivery to citizens,” said John Randa, World Bank Senior Economist for the Macroeconomic, Trade and Investment Global Practice, and lead author of the SEU.

This report comes after the country faced its worst drought in decades. Somalia’s economy grew by an estimated 2.3 percent in 2017, down from 4.4 percent in 2016, reflecting the impact of enormous losses seen in livestock and crop production and exports. The volume of live animal exports – Somalia’s largest export, accounting for more than 70 percent of export earnings – declined by 75 percent, from 5.3 million animals in 2015 to 1.3 million in 2017.

Somalia’s economy has grown modestly in recent years, and it remains vulnerable to recurrent shocks. Between 2013 and 2017, real annual GDP growth averaged 2.5 percent. Nonetheless, growth has not been sufficient to translate into poverty reduction.

“To achieve higher growth, Somalia requires an acceleration of structural reforms,” said Randa. “Somalia needs to continue to build the fiscal buffers to allow greater public investment in basic services. Recent efforts to broaden the tax base, enhance compliance, and reduce wasteful expenditures are starting to pay off.”

The GDP estimate was revised upward in 2017, based on new information and data harmonization with the International Monetary Fund (IMF). The new estimate puts GDP at $6.8 billion in 2016 and $7 billion in 2017. GDP is dominated by private household consumption expenditure, which represents 132 percent of national income, followed by imports (62 percent), exports (15 percent), and gross capital formation (9 percent).

Special Focus: Mobile Money

The special focus of the report is on mobile money. Despite its fragility and underdeveloped financial institutions, Somalia has one of the most active mobile money markets in the world, outpacing most other countries in Africa. Approximately 155 million transactions, worth $2.7 billion, are recorded per month. Mobile money has superseded the use of cash in Somalia, with over 70 percent of adult Somalis using mobile money services regularly. This presents exciting opportunities for the country.

“Private sector actors have given Somalia a unique opportunity to leapfrog towards widespread financial inclusion. We will continue to support the partnership between the Central Bank of Somalia, the National Communications Authority and the key private sector actors as they deliberate on an appropriate regulatory framework for the sector.” said Tim Kelly, Lead ICT policy specialist at the World Bank.

Nevertheless, the mobile money sector lacks robust consumer protection, and know-your-customer requirements. The mass adoption of services – while impressive – presents opportunities for promoting financial broadening and deepening that will lead to more competition and contestability in the financial services market.

The challenge for policymakers and regulators is to how to mitigate system vulnerabilities and avoid macroeconomic effects in the event of service disruptions. “The challenge for policymakers and regulators is to introduce regulations on a mobile money market that has operated without regulatory oversight,” Randa said. Recommendations include:

• Create safeguards for consumers’ funds and ensure the safety and reliability of services.

• Adopt the regulatory sandbox approach to encourage innovation, improve compliance and risk management, and reduce opportunities for agent fraud and other harmful conduct and hold providers liable for agents.

• Protect data and consumer information and ensure that consumers have access to effective redress and complaint-handling mechanisms.

• Strengthen regulatory reporting and public disclosures, minimizing disruption of mobile money services at each stage of implementation.

“Reducing costs and promoting greater stability is a top priority for the overall development agenda for the financial sector, ensuring that regulation does not stifle innovation by leveling the playing field is a very close second,” said Thilasoni Benjamin Musuku, Senior Financial Sector Specialist at the World Bank Finance, Competitiveness and Innovation Global Practice and co-Lead Author of the SEU.

“There is a need to improve the balance between cooperation and competition between banks, MNOs and other non-bank financial institutions and ensure better integration of mobile money within the broader financial system. This is key to deepening and broadening the financial services market in Somalia for inclusive growth.”

The SEU was prepared in close partnership with Somali stakeholders and aims to contribute to government policy-making and the regulatory environment in Somalia. This is the third in the SEU series for Somalia. The SEU series is financed by the World Bank’s Multi-Partner Fund (MPF).