“An in-depth analysis of the risks associated with Zaad Service, such as; tax evasion, money laundering, instability of the exchange rate, and disturbance of the money supply”
By: Abdirisak Ismail
Recently, the management of Somaliland’s central bank launched a media campaign to stem the tide of the increasing Dollarization phenomenon in the country by encouraging citizens to store and use Somaliland Shillings as a means of payment.
Really, the central bank’s campaign will bear no fruit until Telesom’s mobile money (Zaad Service) is working.
My intention of this article is not to offend Telesom Company but only to present evidence and make others aware of the negative issues associated with Telesom’s Zaad Service, such as; economic effects, legality, security and deposit protection.
Background
In June 2009, Somaliland’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, al-most 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.
The advent of mobile money service in the country has transformed systems of cash transfer not only within the country but outside as well.
In the good old days we used to receive/send money through diverse Hawalas (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, VOILA! 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. Dahabshil later introduced its own less popular e-dahab.
Zaad Service
ZAAD Services is a modern mobile payment service. It will add more value to our existing Telesom services. ZAAD facilitates all kinds of money payment transactions, including transfer, purchases, fee payment, salary/wages payment and 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.
How Zaad 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. For further information, please visit www.zaad.net.
While the above clearly show the advantages of e-cash system which has been hailed as a savior by many several negative issues demand mention and attention namely;
• Deposit protection
• Legality
• Economic effects
• Security
• Problems of Digital cash
• Consequences
The following discourse is relevant to ZAAD service owing to the fact that other similar services are minute thus of no relevance or impact.
Deposit protection
It is a given fact that every time you and I make electronic cash exchange we pay cash, read dollars, in exchange for an SMS text message from Telesom, the Zaad service operator informing you that you have this amount of dollars in your Zaad account. No receipt
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.
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 that is the Guurti & house of representative were involved thus depositors are naked. To this effect the mobile money system in Somaliland is illegal and the government should act accordingly.
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 Somaliland, a Mr. Juma’ale who collects the millions on a daily in hard cash from Somalilanders 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 Somalilanders 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.
Security
Somalilanders require not only bodily security but that of other areas like deposits et al as well, thus sleep comfortably in the knowledge that their children will eat school and thrive sustainably.
It is a fact that ZAAD service transactions have been utilized for criminal and terrorism purposes;
The 17 February 2011 UN Security Council Resolution 1844 calls for an asset freeze and travel ban on the real owner of the e-cash business in Somaliland and Somalia, Ali Ahmed Nur Jim’ale, who the UN says has used ZAAD service to send money to the Islamist group.
Click here to download the 17 February 2011 UN Security Council Resolution 1844
Consequences
What are the consequences of Digital cash (Zaad service)? The main benefit of Digital cash (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.
First, Digital cash (Zaad service) will make transactions less expensive, because the cost of transferring Digital cash (Zaad service) 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 own. These overhead costs increase the fees of money transfers or credit card payments through banks. But because Digital cash (Zaad service) uses the existing user’s mobile phones, the cost of Digital cash (Zaad service) transfer is much lower; probably nearly zero. This nearly zero cost enables micropayments (e.g., payments of 10 or 50 cents).
Third, Digital cash (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 (Zaad service) are fourfold: taxation and money laundering, instability of the exchange rate, and disturbance of the money supply.
Because Digital cash (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 (Zaad service) in place in Somaliland.
To make matters more difficult, the transfer of Digital cash (Zaad service) does not leave any record like a bank accounting record that the tax authority can trace, because Digital cash (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 (Zaad service). Money laundering will be an easy task because if you send money as Digital cash (Zaad service), 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, we should decide whether Digital cash (Zaad service) is a proxy of real currency or a privately issued new currency.
I believe/assume that Digital cash (Zaad service) is issued as a proxy for currency in Somaliland, at least for a while. In other words, Digital cash (Zaad service) will be issued on the same terms as existing hard currency (digital dollars, digital sl shs, etc.) and can be exchanged to that hard currency at any time. Some people assume that Digital cash (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.
Instability of exchange rates
Digital cash (Zaad service) has increased the instability of exchange rates. Exchange rate has been depreciating in Somaliland since the introduction of Telesom’s Zaad service in 2009.
Zaad service’s contribution to the inflation of the Somaliland Shilling, brought about a widespread “dollarization” of the economy as people learned to switch shillings into dollars as a hedge against inflation. 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 Somaliland 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 Somaliland. 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.
Now will somebody tell Somalilanders what will happen if?
• The ZAAD data bank or server is damaged or interfered with the resultant disappearance of transaction records leaving depositors with nil balances.
• If prevalent and unreliable rate of exchange fluctuations persist
• If Juma’ale disappears with the deposits
• If the current Telesom vs Dahabshil dominance war escalates thus bring the system down
• If the government taxes digital cash service.
Will the government initiate necessary legislation for submission to parliament?
When will Telesom throw out the foreign Juma’ale as a precursor of putting a stop to the huge capital flight emanating from Zaad service ownership?
