This article is Part 1 of a 2 Part Series
The importance of informal finance arrangements is a reverberating theme across Africa. Informal doesn’t necessarily mean bad or evil or dirty, it’s just that rather than rely on the heavy hand of the law, some communities prefer to place their trust in reputation and social networks for all trade commerce and financial relationships whether offline or online.
Others, will turn to informal institutions of trade and finance when faced by adversity in an immediate harsh environment such as war, political instability, structural programs or lack of reliable services.
For example, the Igbo traders in Nigeria pulling on social networks to scale resilient informal enterprise in the face of political instability in Nigeria.
The early airtime currency traders of Africa who gave birth to mobile money like Mpesa tapped into the power of networks to fill a money remittance gap using an odd piece of technology.
Today, the peer to peer Bitcoin traders of Kenya are bypassing an embargo by banks to meet demand for bitcoin by leveraging informal bitcoin trading networks based on trust and reputation.
It is all there.
One of the best case studies is of the Somali people, during post black hawk down cold war of Somali in the 90s by Peter D. Little.
Set in the early 2000s post war Somalia, his stories tells of the resilience of trade of livestock across the whole of East Africa despite the collapse of central government and no functional system.
The Ethiopia Somali Kenya cattle trade flourished in spite of the failed state conditions, on the back of trust network built on kinship. Through informal financial instruments and contracts of exchange and trade, they were able to sustain demand in Nairobi, forming a key trading corridor network in the Horn of Africa
In the post digital, post mobile world of 2019, the Somali people of little Mogadishu are under a different kind of threat on their digital financial lives.
Digital financial surveillance is underway in Kenya as part of tax reforms by revenue authorities including mandatory monitoring of electronic transactions and taxes on the digital economy.
Kenya is under pressure to reform after taking on too much debt to fund infrastructure projects that haven’t quit materialized as planned. An economic slow down, high youth unemployment rates and the weight of repayments on sovereign debts are some of the symptoms of the times. Some commentators have likened the impending state of the times to the Structural Adjustment Programs of the late 80s to 90s which shaped much of what is today’s informal economy.
As we shall see, the Somali people are some of the most sensitive to threats of erosion capital. It is in their blood, a natural instinct to respond to invasive threats to wealth such as hawala networks to bypass strict capital controls.
This got me thinking, how will the Somali people weather a period of heavy monitoring, high scrutiny and low trust?
The the answer lies in Eastleigh, a bustling business district in one of East Africa’s capitals, Nairobi. Here, youthful Somali hawadalars are complementing the old informal financial practices with an odd piece of a new digital resilient tool – bitcoin.
While there is no war today, times are similarly tough, the only difference is that is all mostly digital.
This is Part 1 of a 2 Part Series on how the young Somali Hawaladars of little Mogadishu are shaping the future of bitcoin in Africa
How We Used to Trade During Post War Times
From Southern Ethiopia all the way down to Nairobi, there was an 800 km route that was highly lucrative for Ethiopia Somali cattle traders. More than 20 different actors lived off this highly prized market. Everyone from the Somali herders, dilaal’s (brokers), middlemen such as the hawaladar, trekkers, loaders, truckers; all were linked by trader-based networks that spanned vast distances of cross border space.
Many of them worked together in networks bound by religion of Islam, or ethnicity or common kinship such as clans. Some of the singular ethnic groups straddled both sides of the Ethiopia/Somali – Kenya border regions. They were able to draw upon their shared ethnicity in form of language and identities, to reduce the costs of monitoring and enforcement of transactions across the borders of the 3 countries.
During time of conflict and heightened uncertainty, trusted networks assume a crucial role as all the actors favor transactions with those they can trust, know, or share a common language.
As with all commerce, trade and finance requires an acceptable level of confidence that default and deception will not occur.
In the absence of formal contracts and legal protections, social relations serve important market functions. Market transactions costs in cross border trade (CBT) can be reduced significantly, because informal credit and market contracts can be extended with loosened oversight and formal agreements.
In the case of the Somalia border areas, trans-border merchants relied on a range of different informal financial functions. One function being the management of risks associated with carrying large amounts of cash in an unstable environment.
Following a successful trade at the border, Somali border traders could take their earnings to Nairobi, convert them to dollars, and then ‘wire’ them back to money houses in Somalia, where they could be picked up by associates.
In other cases, as documented by Mohmaoud, a researcher on the dynamics of cattle trading in northern Kenya and southern Ethiopia, part of the earnings from such a trade would be converted into trad-able goods, followed by an arrangement with a wholesaler to pick up the goods at the border to avoid the risk of traveling in Northeastern Kenya with excess money.
Trans-border traders who flogged animals in Nairobi would transfer their cash earnings to a border wholesaler. The wholesaler, in turn, would buy goods in Nairobi with the trader supplied money and transport the products back to the Ethiopian border to sell. The sender then ordered a business associate or partner at the border to repay the livestock trader or his/her partner. At this point, the livestock trader may have had a partner at the border who would receive the cash and then re-initiate the process of procuring animals for movement to Nairobi.
These transfer services are mediated through informal money houses and middlemen, who assume special importance in most forms of long-distance trade, including livestock.
This important informal practice allowed both the livestock trader and the wholesaler to conduct business without incurring the risk of transferring large amounts of cash across vast areas of insecure territory. Bandits in northern Kenya are less likely to attack a lorry if it is only transporting goods.
In this region many of the important informal finance businesses that traders used had offices in Nairobi. The enterprises usually charged fees of 3% – 6% to ‘wire’ funds from Kenya to locations in Somalia or Ethiopia.
This informal practice known is known hawala and is enabled by transfer agents known as hawaladars.
Where there are Somalis there is Hawala
When illegal Somali migrants from East Africa move to seek fortunes in Southern Africa, they will map their travel routes according to the presence of Somali communities along the way because, as one returnee from South Africa pointed out, “where there are Somalis there is hawala.”
Hawala can be traced as far back as the 11th century when it was used as an informal system of transferring money across borders and long distances through networks of hawala agents.
The distinctive feature of hawala is its operation outside the scope of government enforcement using self enforcing exchange mechanisms without recourse to formal legal agreements.
Hawaladars, abide by a a code of honor, that espouses confidentiality as a professional virtue. Breach of trust in these reputation networks often leads to punishment in the form of ostracization from the larger network. This is bad for business and keeps everyone’s interests aligned under conditions of contract uncertainty.
While Hawala is often pigeon holed as a money transfer system, it is much closer to an alternative financial system that is invisible to outsiders.
Hawaladars manage their liquidity across assets, and hard currencies as short term deposits, acting like banks and investment banks with a suite of financial services.
For example, hawala companies allow the opening of deposit accounts so that branches of the same company may be used as ATMs by travelling Somalis crossing borders, withdrawing little amounts at each branch along the route on the journey to Nairobi.
This enables people to travel light, carrying a limited amount of money, and avoid the risk of being robbed.
In volatile periods or instability, hawala transactions are an attractive option because they protect against a different type of robbery, currency controls and bureaucratic red tape. Hawala channels have been used to purchase USD to store value against falling currencies in weak economies, or shield against government scrutiny.
Over time, hawala networks have grown resilient throughout the medieval and colonial era till today, withstanding the emergence of online banking. With the advent of the telegraph, the phone, the fax machine, the cellular phone, and eventually the internet, technology is blending with this informal culture and practice.
How We Trade Today
When Gianluca researcher and author of Contingency Routes: Somali Financial Flows and Transnational Spaces between Kenya and Uganda visited Eastleigh, in 2013, he described it as “a crossroads of flows, from China to the States, from Dubai to the different diasporas of refugees and merchants, and a paradise for the informal economy”
After the central government of Somalia collapsed in 1991, thousands of Somalis poured into Kenya. Eastleigh became a Somali Hub, a magnet for the ones who still had access to financial assets and could rely on social relations. Transnational networks converged on little mMogadishu, attracting capital from the Somali diaspora, and bringing goods—especially clothes and electronics—from Dubai, China and elsewhere that were much in demand in East Africa.
While the informal financial practices had remained, some things had drastically changed since 2005.
A larger Somali community had blossomed beyond Nairobi spilling over into neighboring Uganda, key border towns such as Busia and Namanga and and key towns in Kenya such as Eldoret.
Somali’s had become a key part of the merchant community in Kenya and East Africa for fashion and electronics. They continued to leverage their networks to distribute goods across Kenya and East Africa
Kenya’s Somali merchant community supported much of the trading in Nairobi’s hubs like River road and Luthuli, which ultimately linked to towns across the country such as Eldoret, Busia and Mombasa and cross border towns.
Over and on top of gold, US dollars and cash, Eastleigh’s exchange market of Hawadalars had incorporated digital tool such Mpesa and messenger apps to complement their hawala business including tools such as whatsapp for texts and communication.
With increased trade, Eastleigh was awash with capital and money. Little Mogadishu had come under attention for all the wrong reasons. A construction and real estate boom in Eastleigh had drawn the the scrutiny prying eyes of journalists and political interests.
Islamic financial institutions and Islamic finance had become part and parcel of Kenya’s formal financial industry adopted in the Capital Markets regulatory framework and Central Bank framework.
12 major Kenyan and international banks had opened up branches in Eastleigh, spanning from Kenya Commercial Bank (KCB) to Barclays and Gulf African Bank. They offer shariah compliant financial products for Somali Kenyans and refugees who can produce either a UNHCR or an alien registration card
The age of the merchant was younger, the proteges and apprentices of the 2005 era.
The average Somali trader had access to access to mobile phones and smartphone width an array of digital tools such as p2 p messaging tools and p2p value transfer tools like Mpesa.
There was also advanced global peer to peer cryptocurrency markets and tools like Bitcoin and localbitcoin markets.
A New Digital Threat
In 2019, the Somali people of Little Mogadishu face a new type of threat – intrusive digital surveillance by the Kenya tax state agency.
The Kenya Revenue Authority is under pressure from the state to beef up revenues, to cover the heavy burden of interest payments on sovereign loans that have been piling up. Already, the man on the street is crying woe over harsh economic times.
A slew of tax reforms that can only be said to amount to digital financial surveillance of transactions have been rolled oout underpinned by a data analytics strategy. KRA is recruiting moles to flesh out tax cheats in exchange for bounties. Perhaps the most brazen is a proposal to monitor Mpesa, bank accounts and digital platforms.
How will the Somali people of 2019 react this threat of heavy digital surveillance in a tough business environment like the one in Kenya?
Check out Part 2 next week and find out!
Digital financial surveillance exhibits
Much thanks to the amazing work of the following researchers, whose papers was more than enough material for this blog post
Unofficial Cross-Border Trade in Eastern Africa by Peter D. Little
The dynamics of cattle trading in northern Kenya and southern Ethiopia: The role of trust and social relations in market networks by Mahmoud, H. 2003.
Remittances and Reputations in Hawala Money- Transfer Systems: Self-Enforcing Exchange on an International Scale by Emily C. Schaeffer, 2008