How the inflation of the Somali Shilling correlate to the develop the telecommunications sector

of Somalia
Table of Contents
1. Introduction

1.1. Literature Review

1.2. Significance

1.3. Research Question

2. Methodology

2.1 Framework

2.2 Initial and alternative hypothesis

3. Results

3.1 Analysis

3.2 Limitations

4. Implications & Conclusion

5. Works Cited
1.0 Introduction

With the breakdown of Somalia’s banking system in 1991 due to the toppling of the Siad

Barre regime, the Somali Shilling significantly inflated, resulting in consumers carrying large

amounts of paper cash to pay for mundane everyday items. According to the International

Financial Statistics Yearbook (1991), “inflation rate skyrocketed by 110% and the shilling

depreciated by 278%”. As a result of the massive devaluation in Somali currency, the

introduction of mobile payment systems emerged, filling the void and becoming a new option

for consumers to employ in their day-to-day transactions and financial operations.

The country's lack of a viable traditional banking system, as well as the people's demand

for functioning financial services, paved the way for mobile currency to gain widespread

prevalence among the Somali population. Furthermore, mobile banking also improves financial

security for persons living in crime-ridden countries such as Somalia, where it is unsafe to keep

or carry cash to make deposits and payments. Mobile banking also reduces transportation

expenses in areas with poor infrastructure or weather. Somalia is characterized by a distinct lack

of railways and other commuting systems—in fact, only around 1,800 miles (2,900 kilometers)

of paved roads are open all year, and most rural villages are inaccessible by car during the rainy

season (Lewis, 2015). The population's primary modes of transportation include buses, trucks,

and mini-buses. Camels, oxen, and donkeys are still employed as personal transportation and

pack animals in rural areas. Due to widespread inaccessibility of reliable means of commuting to

urban regions, many are unable to access conventional banks and transaction systems in an

equitable manner. Mobile banking helps to amend this issue by improving access to banking
services through remote engagement—“transactions associated with banking itself, such as

payment of bills, shopping, and entertainment, can be conducted at remote locations…through

the use of electronic delivery channels” such as those of Internet and mobile banking

(Maunganidze et. al, 2007).

Mobile Payment System (MPS) is a type of electronic payment system that enables

users to conduct financial transactions by simply using their mobile devices. These mobile

payment systems have been developed and improved by Telecommunications Companies, in

specific, Hormuud . The primary benefit of these systems is that it lets unbanked individuals

receive financial services for a much lower cost than conventional banking. How this system

works is that vendors will have their code posted in front of their store.

Figure 1: A ZAAD code in front of a local vendor in Somaliland

The consumer then opens their phone keypad and places the vendor’s code, as well

as the amount to be transferred, then the transaction is completed.

This type of system primarily benefits countries with weaker infrastructures, such as the
subject of this study, Somalia. In order to support these digital mobile payments systems, Somalia

launched its first mobile money service company in 2009. The ZAAD service, which was

established by Somalia-based company Hormuud, was successfully placed in different regions in

the country. Thereafter, a number of smaller companies supported by Hormuud also started to

offer this service in different regions of the country. Such companies include NationLink,

Telesom, Gillis, and Somtel. “Today, about 37.1% of adults in Somalia have a mobile money

account” (Aden-Gas, 2017).

Hormuud, founded in 2002, is the leading telecommunications firm by market share in

Somalia with over 12,000 shareholders. Today, an estimated 155 million mobile transactions

occur each month in Somalia. Furthermore, according to Global System for Mobile

Communications (2013),refers to figures from the World Bank Global Financial Inclusion

DataBase as follows:

“The database 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 Hormuud”.

Overall, the mobile payment system has risen as a result of its use of US Dollars, which

satisfies Somaliland's demand for hard currency in the face of inflation. This allows residents in

Somaliland to transfer and deposit US dollars, offering them a way to deal with a volatile

economy at home that the Somali government appears unable to manage.

1.1 Literature Review

With the introduction of Digital Payment systems due to the collapse of the government and

central bank in 1991, the Somali telecommunications market has generally increased. According

to the Somali Journal of Business and Social Sciences (2015), “Through the anarchy which

continues to disrupt many areas of the country, the telecoms market, dominated by the

competitive mobile sector where seven networks compete for customers, has flourished. Some of

these mobile services operators also offer fixed-line and internet services. There are no

regulations or taxes, and no service obligations. Tariffs are among the lowest in Africa

(Mohamed et. al, 2018 ). This shows how even though the nation is going through an ongoing

conflict, the telecommunications sector has thrived and developed further. In addition, another

study focused on how the people of Somalia quickly adapted to the fledgling mobile digital

payment service: utilizing a questionnaire, researchers demonstrated that Somali users eagerly

accepted mobile banking systems and quickly adapted to this new financial service, finding that

the perceived degree of positive influence and usefulness had significant bearing in this

inclination (Sayid et. al, 2012). In the pre-existing body of literature, the mobile money

mechanism used by Somalia's carriers has been proven to be a sustainable and trustworthy one,

widely utilized and celebrated by the majority of the Somali population. Perhaps the scarcity of

alternative financial products contributes to their success.

Furthermore, the introduction of the Hormuud mobile digital payment service has had a

factor in socio-economic development in Somalia. According to Daffodil International

University (2019), in terms of socioeconomic impact, mobile money had a favorable impact on

economic growth. Because mobile money is a source of income that households get from

relatives as a remittance—which has an impact on the basic welfare of the family and society as

a whole—the majority of respondents, 57 percent, strongly agree that mobile money helps to

alleviate poverty (Mohamad, 2019). Because mobile money enhances the likelihood that

households would get income through remittances from relatives or earnings from employment,

families are able to meet their basic needs and thus escape extreme poverty. In addition, the

survey discovered that they firmly felt that mobile money creates job chances for society, hence

eliminating unemployment. This further highlights how the introduction of mobile payment

systems has helped develop the country socially and economically.

In addition to helping the country grow financially and socially, the introduction of

mobile digital payment has also aided in increasing the safety of commerce. According to the

International Journal of Contemporary Applied Researches (2015), “Transaction costs are

reduced with mobile money." For example, before mobile money, if someone in Galkayo wanted

to buy something in Bossaso, he or she would have to travel with a sack of cash from Galkayo to

Bossaso, spend a day traveling, risk losing money to robbery, pay for a hotel while in Bossaso,

and go through the trouble of counting bundles of dirty banknotes. You may now transmit money

over the phone in seconds, saving money and time that you can put towards increasing your

company's productivity. As a result, the entire economy will benefit. This exposition further

demonstrates the safety and economic benefits of using Digital payment systems rather than

simply carrying large amounts of cash long distances to pay for regular items and necessities.

Other researchers engaging in the professional conversation discuss the fiscal benefits of using
mobile banking in Somalia. According to Wardheer News (2015) a Somali news source, a bright

spot in Somalia's financial markets is the phenomenal rise of mobile money, which has filled the

void left by conventional banking by providing more comprehensive, effective, and simple

financial services. The major telecommunication firms provide mobile money: Hormuud has

introduced access to financial services to hundreds of thousands of financially excluded Somalis

and changed the way financial transactions take place in Somalia. Everyone now uses mobile

money instead of cash; even nomadic tribes and street vendors have mobile banking accounts. A

poll done by the Gates Foundation, the World Bank, and Gallup concluded that Somalia was one

of the most active mobile money markets: Mobile phones are used by 26% of the population.

This source highlights and talks about the benefits of using the mobile money

system in Somalia and how it is one of the highest users in terms of % of the population of

mobile money systems in the world.

The body of literature on the subject of mobile payment systems in Somalia sheds light

ont the socioeconomic benefits of the introduction of the mobile payment system, as well as the

reception of the mobile payments system by the Somali population. In light of these elucidated

benefits, the goal of the study is to address how the mobile payment system has helped foster

the growth of the telecommunications sector in Somalia as a whole.

1.2 Significance

This research holds significance as it could present new insights regarding the potential

relationship between the strength of the currency and the development of the

telecommunications sector and in specific, Hormuud Telecommunications Company.

Furthermore, if there is a connection, future marketing targets could also be discovered and

effectively integrated into the Somali economy.

1.3 Research Question

After the analysis of the literature review, the developed research question is; How does

the currency inflation of the Somali Shilling correlate to the development of Hormuud

Telecommunications company?

2.0 Methodology

In order to discover relationships between currency strength and the development of Hormuud

Telecommuncations Company, the research queries and analyzes data for four variables;

currency strength, number of ZAAD merchant dealers, number of cellphone sales and the

number of subscribers who have subscribed to Hormuud. Specially from existing research

journals such as The Somali Journal of Business and Social Sciences. Next, the researcher

synthesizes the data into multiple linear regression charts and Pearson correlation values linking

each variable to the next. To find the relationships if any, between the variables. This method is

most appropriate for answering the research question as it provides various evidences if there is a

relationship between Currency strength and the development of Hormuud Telecommuncations

Company.

2.1 Framework
In this project, these will be the four variables and three different correlations being tested to see if

there is a link between Currency strength and Hormuud Subscriber count. First the Pearson

correlation between the Currency Strength and the number of ZAAD merchant dealers will be

determined and concluded whether there is a relationship between the two. Then the Pearson

coefficient will be found for Number of ZAAD merchant dealers and the cellphone sales in

Somalia. The last Pearson coefficient will be found for Cellphone sales and Hormuud subscriber

count.

2.2 Initial Hypothesis

𝐻0=  0.0

𝐻𝑎≠ 0.0

The null and alternative hypotheses are two claims about a population that are mutually

exclusive. A hypothesis test examines sample data to determine if the null hypothesis should be

rejected. The null hypothesis in this experiment will be the Pearson R-values equaling 0, which

means that there is no association or relationship between the variables. On the other hand, my

alternative hypothesis will be that the Pearson R-value will not equal 0 and there will be a

relationship between the variables.

3.0 Results

After an examination of the first dataset, it revealed that the first correlation between the

currency strength and the number of ZAAD Merchant vendors offering the mobile payment

system as a payment option is relatively moderate with a Pearson correlation Coefficient of r =

0.696. With a Probability value of 0.003, which is lower than the required significance value of

α=  0.05 .
 Figure 2: The Linear regression chart between the Somali Shilling and the Number of ZAAD

merchant deals.

The second dataset which consists of the correlation between the number of ZAAD

merchant deals and the cellphone sales yields a Pearson correlation r value of 0.964 and a P

value of 0.036.

Figure 3: The Linear regression chart between the Number of ZAAD merchant deals and yearly

Cellphone Sales in Somalia between 2009-13.

 The third dataset which consists of the correlation between the cellphone sales in Somalia

between 2009-13 and the Hormuud subscriber count yields a Pearson correlation r value of 0.892

and a P value of 0.010.

Figure 4: The Linear regression chart between the yearly Cellphone Sales in Somalia 2009-13 and

the Hormuud subscriber count 2009-13.

 3.1 Analysis

As shown in Figure 2, there is a moderate positive correlation between the

Strength of the Somali Shilling and the number of ZAAD merchant vendors (r = 0.696 ) This

suggests that the weaker the currency became, more store owners started to implement the ZAAD

mobile payment service as a payment option for their goods. Therefore, we can determine that

there is a positive relationship between the currency strength and the greater use of the mobile

payment system by vendors and merchants.

In Figure 3, there is a very strong positive correlation between the number of merchant dealers

who use the ZAAD mobile payment system and the number of cellphone sales in Somalia

between 2009-13 (r = 0.964 ). This is a great indicator and shows that the more store merchants

that used the ZAAD mobile payment system, the number of Somali people who bought cell

phones as a result increased with it.

In figure 4, there is a strong positive correlation between the number of cellphone sales in

Somalia from 2009-13 and the subscriber counts of Hormuud from 2009-13. ( r= 0.892 ). This

shows that because more people are buying phones, the more people chose Hormuud as their

telecommunications company to subscribe to because of this service. Furthermore, the

Probability value of figure 4 is (p =  0.010 ), which is less than the significance value of α= 0.05

, therefore, this correlation is significant. Because the probability of this correlation to be as

strong as is 0.010 or 1%.

 3.2 Limitations

There were a few limitations while collecting and analyzing the data in this project. The first

limitation is that the only company’s mobile digital payment system I was able to find credible

data from is Hormuud Telecommuncations Company. Secondly, the methodology used by

multiple papers on the subject in the Somali Journal of Business and Social Sciences (mentioned

in the literature review) were simply unable for me to use. Because these research papers

primarily used qualitative research and survey data to get the input of the Somali people

themselves on the digital payment system. I was not able to do this because I simply don’t have

access to the Somali people and the country of Somalia itself to be able to ask survey questions to

get the input of the Somali people and follow the methodology the journal used. Third, when

talking about the exchange rate of the Somali Shilling to the United States Dollar, I used the local

exchange rates in the actual city markets inside Somalia rather than western exchange rates. This

is because when talking about the Somali shilling I wanted to focus about what people in Somalia

actually took for a dollar rather than an estimation by a western source. Lastly, for all the data

sets, the data is from the years ranging from 2009 to 2013 this is because those five years are the

only years that I was able to have all four of my variables.

4.0 Conclusion & Implications

The findings from all the datasets shows that the weaker the Somali Shilling became, the

necessity of the mobile payment system increased, due to this more store vendors offered the
Mobile payment system; which led to more Somali people buying cellphones as a result of the

payment option being more prevalent, which resulted to more people choosing Hormuud

Telecommuncations Company as a result. Knowing this the positive relationship between the

currency strength of the Somali Shilling and the Growth of Hormuud Telecommuncations

Company, Hormuud should focus on supporting store vendors and merchants rather than just

focusing on remittance support. According to Hormuud Telecom, “The Somali Diaspora is one of

the most crucial human resources in our country; they inject Somalia's largest income through

remittances estimated at $1.6bn annually” (Hormuud). Hormuud and the Somali government

primarily uses this mobile digital payment system to support remittances from Somali Diaspora.

However, from the results from this experiment, we can see that there is also a positive

relationship between the number of merchants who use the ZAAD payment system and people

buying phones and subscribing to hormuud. Therefore, hormuud should also focus more on the

support of vendors and merchants inside the country rather than primarily focusing on the support

of remittances from Somali Diaspora as this is also a huge factor in the growth of Hormuud

Telecommuncations company and the Telecommuncations sector in Somalia as a whole.

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