Money: Whose Money? Part II.
Whence It Came, Where It Went?
Hi, everyone, it’s me again. I guess you’ve noticed that things are getting complicated in the global scene and aggravating the local (Somalia’s forever war) issues more than we can cope with. Travel during July delayed this post, my apologies. I’ve been super busy as of late working on finalizing multiple projects that I’ve been working on for months. In this post you will read part II of the brief(est) history of money from local Somali perspective. The literature covers ‘money’ extensively and while writing this piece I came across a particularly insightful book that significantly enhanced my understanding of the monetary phenomenon. I recommend this book to readers who are intrigued by the study of money and its socio-economic implications1.
Introduction - The Fundamentals of Money
The use of paper money is believed to have originated in China in the 11th Century, and over time, has become globally ubiquitous for the settlement of transactions. Between the 1870s and 1970s, currency notes were fixed to gold through the international gold standard, with monetary authorities standing ready to convert gold to and from currency at a fixed price. Today, fiat money is issued by decree as legal tender by governments and is not backed by any commodity.
I have covered in earlier posts what criteria any currency must satisfy in order to enable its widespread use. In Somalia, this is not necessary the case, since the private sector entities manage the monetary system which literally makes the universal or academic views of ‘money’ redundant.
Mobile Money (MM) without any government regulations is Somalia’s de facto and some would inaccurately claim to be the de jure money as well. Under the current arrangement, MM is a digital currency issued by private vendors on a one-to-one basis for cash deposits, and available for transmission across the vendor’s network (or an integrated set of vendor networks), with the ability to be redeemed into US dollar notes, possibly into Shilling in the Northern part of the country. MM is not a new phenomenon; it has been around for some time. The GSMA, World Bank and the IMF, among others cover its development comprehensively, but data from Somalia is not easy to find (see chart below). Certainly, a growing industry.
Somali MM networks are centralized, privately-operated digital currency systems, where the operator controls the settlement of transactions by increasing or decreasing individual ledger balances upon the execution of a transaction. These networks are typically deployed by mobile network operators (MNOs) who also provide the MM platforms.
Issued MM is stored electronically on a mobile wallet (or mobile account), typically accessible through a mobile device. The mobile wallet is a ledger of the individual’s transactions, uniquely identified, linked and secured to the person’s mobile phone. Any person with access to a mobile phone can open a MM account upon registration through a simple and free process. In Somalia MM functions are accessible through a text based USSD interface on basic mobile future phones, or lately as my research has found out through a MM application using smartphones.
MM Challenges
MM service providers collect a large quantity of personal data, including telephone numbers, personal identity information, transactional history (including amounts spent, vendors of goods and services, and types of items purchased), debt history and location data in some cases. In addition, MM agents, who typically operate as third parties, collect data on behalf of MM service providers, and also have access to personal data. The large volumes of private information collected raise data privacy concerns due to the risk of data misuse. Risks arise from the large number of stakeholders with access to personal data, as well as at every point in the data lifecycle, from data creation to processing, storage, transfer, analysis, archiving and destruction. The most significant risks within MM platforms are related to data security, where fraud or system hacking can result in financial losses. In addition, unauthorized data sharing can compromise individual privacy and may also carry reputational risks or perpetuate fraud.
A system of effective data governance, which establishes principles to enable data sharing to improve living standards while at the same time recognizing and protecting the rights of data originators and users, is essential to safeguard data privacy within MM platforms. The development of an effective framework requires careful scrutiny of the attendant economic, legal and institutional concerns, as well as the establishment of proper standards for the exchange and protection of data.
Regulatory authorities in some countries have established guidelines to promote data security amongst payment service providers. For example, the Central Bank of Kenya has published minimum requirements that necessitate high- level management engagement and support to underpin information security. This includes the role of a Chief Information Security Officer, who is responsible for developing and implementing an information security program, as well as clear procedures to identify and respond to data security breaches.
MM ecosystems tend to be dominated by a few players, and each provider has an incentive to maximize traffic within its own network. This creates a major disincentive for network integration and interoperability, and dominant networks in particular have little incentive to integrate with new and smaller networks. In turn, this means that MM networks can collude and marginalize new competitors in the sector. This is the case in Somalia at the moment where barrier to entry for both the telecom and MM sector is very high, almost impossible for new business to participate.
While consumer protection is afforded by legislation, we have not seen an escrow accounts with the central bank or any other government entity which provides consumer funds provision of deposit insurance. This is a very high-risk scenarios and Somali MM clients trust but never verify the status of their deposited funds. The current system does not provide full coverage of funds in the case of bank default. There is therefore a strong need to ensure that better protection is accorded to Somali MM users against systemic risks within the system.
On second thought
Earlier I wrote in another forum the following’ .. that #Somali shilling notes printed in 1990 are still in use in Mogadishu, Somalia... however, the real money in use is dollarised mobile money which is not entirely regulated by the government, but by the private sector... how can that be a legal tender?..’ More on my thoughts on frictionless payment and even fast tracking the journey towards a cashless society in Somalia, please see this personal view https://www.linkedin.com/posts/mi2000_somali-somalia-mobile-activity-7088692963987378176-lv95?utm_source=share&utm_medium=member_desktop and different view, see this https://www.linkedin.com/posts/mi2000_m-pesa-good-but-far-from-great-activity-7087170488602406912-TXfW?utm_source=share&utm_medium=member_desktop and more on this see the possible risk here… https://www.linkedin.com/posts/mi2000_why-kenyans-are-scanning-their-eyeballs-for-activity-7091146980202070016-vfqF/?utm_source=share&utm_medium=member_desktop
The way ahead- suggested solutions
I have tried to illuminate a pressing need for the Somali government to give serious consideration to the implementation of electronic Shilling (eShilling) and, potentially, Central Bank Digital Currencies (CBDCs). along with the transformation of the last mile of money transfers, payments and banking services, which will certainly help close the financial inclusion gap... an area I have been researching over the last few years. More on this please see, https://www.linkedin.com/posts/mi2000_cbdc-banks-melbourne-activity-7087582316880953344-lE32?utm_source=share&utm_medium=member_desktop
This will not only enhance efficiency and security in the financial ecosystem but also significantly reduce transaction costs and delays, fostering an inclusive financial environment. It will also provide an invaluable conduit for bridging the financial inclusion gap, thereby promoting equitable access to essential financial resources, fostering economic development, and advancing social welfare and widespread financial participation, particularly among marginalized communities, i.e., the underbanked, unbanked and unbankable.
I hope this represents a crucial step in understanding the implications of MM platform technologies for financial inclusion, and as such, I invite fellow scholars and policymakers to further explore this area of inquiry.
And finally … here is part of a talk I gave in the Hague which briefly touches this topic, https://vm.tiktok.com/ZGJb17PQb/… Thanks #xogaha5 at Xogta5 (@xogaha5) | TikTok for this. And also, someone who know more about money commenting on the future of Cash, see https://www.linkedin.com/posts/christinelagarde_futurebanknotes-activity-7084098340442787841-iHbj?utm_source=share&utm_medium=member_desktop
