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By Matina Stevis –Gridneff

Hargeisa, Somaliland—Hyperinflation and economic isolation have pushed this poor, breakaway republic closer to a virtual milestone than most other countries in the world: a cashless economy.

Mobile-money services have taken off over the past decade in Africa; 1 in 10 adults across the continent—about 100 million people—use them. In Kenya, Vodacom Group Ltd.’s VOD -1.46% groundbreaking service M-Pesa, broadly considered the first major and most successful mobile-money technology platform, counts 26 million users, roughly half the population. More than half of the world’s 282 mobile-money platforms are in sub-Saharan Africa, research by McKinsey & Co. shows.

A Somalilander demonstrates the use of Zaad, the dominant mobile-money platform in the country. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

The continent, home to many of the world’s frontier economies, has come closest to skipping, or “leapfrogging” as it’s often called, traditional brick-and-mortar banks and going straight to heavily using phones as wallets.

And nowhere are the benefits of mobile money more apparent than in Somaliland, where the extreme economic and financial conditions have allowed Zaad, a service from the main local telecom, Telesom, to catalyze commerce in one of the most isolated parts of the world.

“I have my salary paid on Zaad, so I only use cash when I can’t use Zaad,” said Qassim Ali, a supermarket salesman here in the country’s capital. “I prefer it. I have less cash on me, so I am less vulnerable if I am robbed.”

Forex agents use wheelbarrows to transfer stacks of devalued currency for customers in the money-exchange district of Hargeisa. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

Somaliland, a self-declared republic of 3.5 million that broke away from Somalia in 1991, isn’t recognized by any foreign nations and, despite being considered more peaceful than Somalia, it is largely cut off from international banking because terror-finance concerns restrict transactions.

The country prints its own currency, the Somaliland shilling, but the exchange rate is around 10,000 or more to the dollar, money traders say. This leads to wide use of the greenback, which arrives through remittances and major aid agencies that operate here and mainly pay in the U.S. currency.

Since its launch in 2009, Zaad, which means “to grow” in Somali, has swelled to 850,000 users—roughly one-quarter of the nation’s population. Locals use the platform on battered old cellphones and, less frequently, on smartphones and a designated app.

Without mobile money, cash has a hard time flowing through the country. No commercial banks really operate here, and hauling physical cash over rough roads is time-consuming. Companies use Zaad for their monthly payrolls, instead of handing wads of cash to their employees.

Hargeisa, Somaliland, serves as the capital of the breakaway republic of 3.5 million. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

Today, each user on average makes 35 Zaad transactions a month, and Somalilanders say they try to use Zaad for most transactions. A rudimentary texting system makes it easy even for the many Somalilanders who are illiterate.

Apart from phone-to-phone transactions, users can top up their mobile wallets by handing cash—shillings or dollars—over to an official agent, who is often a single person in a shack on the side of the road.

“This service has been a driving force for the smooth operation of our economy,” said Abdikarim Eid, Telesom’s chief executive.

Since mobile-money services aren’t regulated by the central bank, they aren’t subject to the restrictions that traditional banks face, including requirements meant to block terror financing.

The reasons for mobile money’s success in Somaliland are on full display on Hargeisa’s busy, bumpy streets, where rows of money changers lounge in front of 3-foot-tall towers of cash, some held together by nets, others in sacks. To get the shillings to a customer’s car, most money exchanges employ assistants armed with wheelbarrows to lug the heavy bags.

Once a week, Abdullahi Abdirahman hauls two bulky, heavy sacks of shillings from his gas station across Hargeisa to the money-exchange area downtown and, several hours later, returns with just a few dollar notes in his back pocket and his Zaad wallet loaded up.

A Somalilander wheels stacks of banknotes through the money-exchange district on a recent day. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

Clients pay Mr. Abdirahman in Somaliland shillings. He needs to pay suppliers in dollars. Using Zaad, he gets half the payments in mobile money, meaning the cumbersome ritual has become more manageable in these times of high inflation.

A money changer loads bundles of cash into a sack in Hargeisa on a recent day. The money inside would convert to about $3,500. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

Stories like these have driven an average 10% growth in Zaad over the last year alone. Other services have also sprung up, creating more competition. Dahabshiil, a Somali-owned money-transfer service that operates in 126 countries and is popular across the Muslim world, is another player in mobile services in Somaliland.

Dahabshiil has paired with Somtel, another telecom company here, to launch eDahab. The platform has become popular with Somalilanders abroad, who use it to remit money home over mobile—one major source of dollars here.

The Somaliland shilling is valued around 10,000 or more to the dollar. PHOTO: TOMMY TRENCHARD FOR THE WALL STREET JOURNAL

“The idea of a cashless economy has attracted growth as a result of the lack of conventional banks and also due to security concerns that continue to be an issue,” Dahabshiil CEO Abdirashid Duale said.

Zaad and the newer mobile-money platforms are so critical to the running of Somaliland’s economy, and the spirit of patriotism here is so strong, that these executives have been offering the services free. Similar services elsewhere in Africa tend to be expensive, with charges as high as 10% for transactions as small as $1.

But Mr. Dil, the Telesom boss, says the free lunch may be over here, too. He is considering introducing ultralow charges for Zaad transactions later this year.

He thinks Somalilanders and the economy are ready.

“People don’t like to pay and it will be tough,” he said, “but we have to…persuade them it’s to their benefit and to our benefit to pay a little for something so important.”

Write to Matina Stevis-Gridneff at matina.stevis@wsj.com

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