CEO, Rays Microfinance
Having grown up in eastern Ethiopia’s Somali Region, a group of six men observed potential in the community that raised them. They saw a zeal for trade and an awareness that embraces technological change and other dynamics. In 2014, they would set out to establish Rays Microfinance to tap that potential and turn it into profits. Having been licensed by the National Bank of Ethiopia, Rays was sabotaged by the region’s previous administration and did not make it into the financial sector. With the coming of the new administration, the company launched its services in 2020 and the founders are marching towards their ambitious goal of realizing a totally cashless society in Somali Region and beyond. EBR’s Addisu Deresse sat down with Abdiaziz Hassan, Chief Executive Officer of Rays, to talk about the journey, challenges, and prospects of the institution and the financial sector in general.
Your website says that the idea of establishing a microfinance institution was inspired by what you witnessed growing up in Somali Region. How did your younger years inspire you today?
Though I am the Chief Executive Officer (CEO) of the institution, I am not the only founder. It was six of us led by Engineer Muktar Sheik Omer Adam. Others in the team had international exposure on the matter that they brought on board to help shape the idea into existence. Some in the team have socio-economic backgrounds, whilst others were involved in humanitarian works.
As far as what we witnessed in Ethiopia’s Somali Region, it is the potential of trade and other small businesses which could turn peoples’ lives simply with the supply of finance. You see young men and women with ideas for trade and small businesses.
And you witness how those ideas, in addition to the geographical advantage of the town and the region, can indeed be turned into something that can change many lives. Yet, you witness zero realization as there simply is no finance for these young people.
That is the environment that contributed to the establishment of Rays Microfinance, apart from of course, the efforts, ideas, and backgrounds of the founding members.
Let’s talk about the names. I know they have backing stories. Rays and Sahay. What do they mean?
I meet people confusing them for Amharic and English terms. This is not bad, but does not tell the full exact stories behind the name. Rays is a Somali word meaning that moment after early season’s rain where the ground turns green and the grass begins to sprout out from the underground.
That is the moment we call Rays. So, we hope our presence will bring up trade and business potential out from the underground. Sahay, one of our financial products, is also a Somali word for a kind of food storage which people carry when travelling.
The appropriate Amharic word could be sinq. You can also see this item in our logo. Like sinq, you can carry our mobile payment service and get whichever service wherever you go—that is the idea we are trying to communicate.
Yet, we understand the success of our financial products also requires working on financial literacy and the business climate that accommodates the idea.
How much is your institution worth as it stands right now?
The institution was established with ETB10 million in capital back in 2014. Now, the institution is worth ETB162 million as we expanded our operations both in product varieties as well as the locales in which we operate.
We are still pushing for an even bigger capital base. In fact, ETB700 million in capital has already been positively voted on at the general assembly, and is pending for the central bank’s approval.
What are the financial services which you provide?
Basically, the institution has two broad services. First, are regular microfinance services under which we have deposits and loans. Due to the geographical area in which we are operating in, we have only provisioned interest-free loans thus far.
Secondly, we have different financial services to fit specific sectors. One financial package is the Murabaha, designed for the financing of goods, machinery, equipment, and livestock trade.
There is also Salam to fund farming and manufacturing activities, amongst others. We use Istisna for the financing of agriculture, construction, small industry, machinery, etc. Finally, we use Ijara towards non-consumable assets.
Salam is a forward sale contract wherein our customer undertakes to deliver certain goods on a future date in return for the full price paid in advance. Ijara means leasing and is a transfer of usufruct of usable but non-consumable assets in exchange for rent.
The idea of creating a society that uses less and less cash is an agenda of the current government. Of course, private banks have also been pushing towards this by introducing various financial products. However, progress isn’t as fast as hoped. People in many parts of the country still use cash even when its less convenient than digital means. What is so special about communities in the Somali region that they seem to have embraced the idea of these services faster than other parts of the country?
There are a couple of contributing factors. One is the limited access to other banking services. In many cases, mobile banking in these areas is the only mode of accessible banking.
Second is the exposure they have to neighboring countries like Somalia and Kenya where cashless is well advanced, and digital money in some cases has totally replaced paper money.
So, they get the exposure that mobile money can be a substitute for paper money. There are also studies that show that people in Somalia, Djibouti, and Kenya easily adapt to technologies.
People in Somali Region also like things to be very simple. It is in their genes, I suppose. They like simplicity. There is also this element of trust. They easily trust new products compared to when you come to the center of the country.
When you introduce new products elsewhere, people usually tend to test the products from a distance. It’s after a while that they start to use them. From personal experience, I don’t need to carry cash whenever I go to Jigjiga. From the taxi that picks me up from the airport, there is a way to pay via my mobile phone. Somali people are quite different.
There are other reasons related to methods used to promote our new financial products. We do not launch them or promote them just because they are being used elsewhere. We put in a great deal of work on customizing them.
We plan ahead on how we can advertise our products. Such things must be adjusted based on the target community’s living ecosystem. Of course, these services are also in line with contemporary initiatives being taken by the government, which has been helpful.
I know many other financial institutions are introducing several of these digital services. Some are progressing well in some of these financial products while others are struggling. What is more important, from our experience, is the way in which we design and promote these services and products.
The services must be customized and well harmonized in the context of the target community. What works in Somali Region may not work elsewhere. So, we cannot just promote it in such a way that dictates a community must use it just because other communities have done so. Or just because it is somehow a modern way of transaction.
So, we know that Rays was first established in 2014, but went fully operational only in 2020. What were the challenges in the period in between.
That’s a very important question. We got the license in June 2014 from the National Bank of Ethiopia (NBE) and launched with two branches—in Jigjiga and Gode—in February 2015. We invested in our offices and all the necessary resources to get it all started.
But the regional administration then was not the kind to entertain such ideas, to say the least. Having fulfilled all the necessary requirements, our offices were closed and all our resources confiscated. The administration did not like people and businesses operating beyond their control. So, we stopped the process and waited until the new administration was put in place.
How many people use your services and how many daily transactions do you handle?
Last time I checked, we had 616,907 active customers with mobile money. On a daily basis, we handle 65,000 transactions amounting to about ETB100 million—this is only mobile money. In the last couple of weeks, we have been doing a lot of promotion, and I am sure a lot has changed in the numbers. During the month of October, we have handled total transactions of about ETB2.4 Billion, which is our average business volume.
We have also come to learn that you are planning to disperse loans via mobile phones. Given this country’s little-to-none experience on easy access to loans, how do you expect it to play out?
That’s a service that we are now finalizing and it has not launched yet. But we’re very much enthusiastic and really looking forward to its implementation. You know we have services that allows customers to make deposits using their mobile phones.
They can also transfer money. But, the lending element has been missing. So, we thought we can also integrate that into our services. We have visited a couple of countries like Kenya that have advanced in the mobile money business and have learned from them. We have taken their experience on credit scoring and other necessary elements of the system.
We first bought the systems, then the source code after which we set up a team of engineers to develop these new systems for us. So, we have deployed the system in-house. We are now testing, after which the services will be launched.
The community we have served thus far is predominantly Muslim—requiring interest-free services. At least to my knowledge, these interest-free digital lending systems do not exist, even in advanced countries like Kenya which only provide conventional loans through digital systems.
So, it took more time to navigate the digital path of lending in accommodation of all Shariah principles. This must be done to ensure that compliance with the interests of the majority of our target communities. Once it goes operational, though, it is going to be the first of its kind in East Africa.
How do you navigate around both compliance with Shariah law as well as local financial regulations?
Yes, making it workable with regulatory institutions is also one of our challenges and we are working on this. We still have not started issuing loans in the digital way yet. When we start the service, there are some loopholes that need to be fixed.
Thus far, we have tried to accommodate all the required standards of the regulatory body. One of the key backbones of digital loans is a Credit Reference Bureau (CRB). In Ethiopia, we have one recently established at NBE, though not fully functional yet.
Currently, we entertain loans for customers that have been within our system for the last six months, at least. Then based on that, we enable the customer to be eligible for a certain amount of loan.
So today, if you are a new customer to the system and we don’t know you, it’s difficult for us to lend to you. But, if the CRB is developed similar to Kenya’s, we would have used that to help us get to know new customers. The credit history of each citizen from all financial institutions is collected and databased at the bureau and accessible to lenders. That will make it easier to provide loans for new customers.
So, there has been a long-standing belief among state officials that opening up the financial sector to foreign investment would only be a disadvantage to local financial companies for the fear of the big financial muscle that could push local ones out of the way. Also considering the obstacles around regulation, what is your view?
Personally, I agree with the government’s policy on that aspect whilst at the same time disagreeing with some of the elements in place. I believe in the thought that local financial institutions should first be strengthened to an extent that they can compete with external foreign companies.
The workings of international banks and our financial institutions are totally different. So, it’s good that the government assures that, first, local institutions have the power and strength to match with the potential competition.
But the other aspect is that local financial institutions should be given the environment to grow and flourish as that is the only way to reach their full potential of being able to compete with the eventual foreign investors. Our working environment, as it is right now, is defined by high fear of risk, very much controlling and protective. Such an environment is not the ideal environment for innovation and creativity, which are required to grow stronger and be able to compete against big foreign banks.
So personally, I believe that innovation is not typical to operations in the financial sector. Though the argument is right that you should grow before others are allowed in, the environment should be one that allows innovation.
The telecom sector, on the other hand, is opening up. We already have one telecom company ready to commence operations in the Ethiopian market while another agreement seems to be in the making. What are the implications of this liberalization on your services?
Personally, I believe the market is enough for many players. We have a population of close to 120 million, of which most are unbanked. To us in particular, it will be helpful. You know SMS is vital for our services. But, sometimes in remote areas where we operate, even this basic service is challenging.
As we only have one operator, we have to deal with them and push to get it fixed as soon as possible. With alternative telecom services, however, it is advantageous for both the state operator and our institution. On one hand, we will have an alternative service provider whenever one is down.
On the other hand, the sense of competition will force the state operator to provide better services. So yes, more and more companies in the telecom sector will have a positive implication on the service we provide.
What are the current major challenges in your line of business?
As I said earlier, at the start we had a challenge from the Somali Region administration. Since 2020, thanks to the new government, we are enjoying a relatively stable and open market.
Yet we still have a couple of challenges. The first being community awareness, as we are operating in areas of low financial literacy. We should put more time and effort into educating the people themselves. As stated, telecommunication services are also a challenge.
There are some areas where we operate where there is no telecom access at all, even in areas with significant populations Internet outages also occur. And for a company like ours, which relies on the service, a minute of shutdown or destruction might cause a loss of hundreds of thousands of birr as well as customer trust and convenience. We also have challenges with ID cards.
Regulations don’t permit banking services for those who do not carry IDs. We are mainly dealing with pastoralist communities and they don’t carry IDs. But now we are working with NBE on ways we can use fingerprints as IDs. I believe a recent amendment has been made for this biometric issue. Regulations need to be inclusive enough.
Decisions at financial institutions are commonly based on economic theory. How does Shariah law play into this?
I know many people may misunderstand that. There was also a misunderstanding that we don’t provide our services to Christians, which is not true. Shariah law is involved as far as the issue of making cash profits by lending cash. We don’t make profits where we have not put in the work that made the profit. But there are so many other services.
We lend money for a business and share in the profit. These services are administered based on economic theory and national regulations. The other aspect is that of sharing the loss. If we lend you money for a business and you lost it to a natural disaster, we share the loss. So, Shariah law is involved to that extent.
Induced by security concerns, NBE has been issuing regulations limiting access to loans, among other affected services. How has that impacted you, if at all?
The government has been announcing some directives which I understand from the security perspective. Even though we do not operate in the north of the country, we have been impacted by the policies starting from daily withdrawal limits. We were working towards the direction of creating a cashless society. But, the limitations also affect transactions on digital wallets and not only regular services. It has been a constraint, and not been very helpful. But we should work within the legal framework.
With all the reforms and changes arriving with the new government followed by growing security challenges, what do you feel when you see into the future?
We see the potential. We see big potential ahead of us. As a microfinance firm, we can say that we are a product of the change. Before the change came, we couldn’t move one step forward. It was only after the change that we were really born and were able to initiate our businesses.
There is a new opening. As a new company, the economy is going in the direction we like. Even with all the challenges we have up in the north, the economy is growing and the perception of people is also growing. The government is encouraging digital economy and financial inclusion. There are more and more promising things ahead. EBR
10th Year • Dec 2021 • No. 102