How Ethiopia Rewrote the Rules
When Financial Inclusion Meets Security: Ethiopia's Balancing Act in East Africa's New Reality
The Challenge at Hand
Picture this: A small trader in Addis Ababa wants to open a bank account to receive payments from customers, but lacks formal identification. Meanwhile, across the border in Somalia, Al-Shabaab operatives are exploiting similar gaps in the financial system to move millions of dollars. This is the daily reality facing Ethiopia and East Africa—how do you bring more people into the formal financial system while keeping the bad actors out?
The Financial Action Task Force's latest report delivers a stark message: Sub-Saharan Africa has become the global epicentre of terrorism. But here's the twist—the same report suggests that excluding people from financial services might actually be making the problem worse.
Al-Shabaab: The Elephant in the Room
Let's be frank about the threat Ethiopia faces. Al-Shabaab isn't just a Somali problem—it's an East African problem with a sophisticated financial machine that would make some legitimate businesses envious.
The terrorist group has essentially built a parallel taxation system. They're collecting what amounts to customs duties on truck drivers, licensing fees from businesses, and even "registration" charges for vehicles. In some areas, they're more efficient at tax collection than legitimate governments. And here's the kicker: they're doing it all in US dollars, showing just how professional their operation has become.
The Mobile Money Challenge
Remember when mobile money was going to revolutionize financial inclusion in Africa? It has, but Al-Shabaab got the memo too. The FATF report reveals that the group's finance officers maintain mobile money accounts with limits of up to USD 100,000. They're using fake identities, frequently changing phone numbers, and exploiting weak SIM card registration systems.
For Ethiopia, this creates a dilemma. Mobile money could be transformative for financial inclusion—just look at M-Pesa's success in Kenya. But how do you capture those benefits while preventing exploitation by groups like Al-Shabaab?
Ethiopia's Unique Vulnerabilities: Geography Meets Economics
Borders That Exist More on Maps Than Reality
Anyone who's traveled in the Horn of Africa knows that borders can be... flexible. Ethiopia shares extensive frontiers with Somalia, Sudan, and South Sudan—areas where central government control is often limited. The FATF found that 30% of countries identified porous borders as a major terrorist financing risk factor.
But here's what makes this personal for Ethiopians: these aren't just security statistics. These are the routes that connect communities, enable trade, and support livelihoods. Donkey caravans, foot traffic, and informal truck routes that have operated for generations are now potential channels for terrorist financing. The challenge isn't just stopping bad actors—it's doing so without destroying legitimate economic activity.
The Informal Economy: Ethiopia's Double-Edged Sword
Walk through any Ethiopian market and you'll see the informal economy in action. Cash transactions, handshake agreements, community trust networks—this is how much of Ethiopia's economy functions. But it's also exactly the environment that terrorists exploit to hide their activities.
The FATF notes that terrorists are particularly drawn to:
Small grocery stores and markets
Second-hand car dealerships
Transport companies
Any cash-intensive business where transactions don't leave digital trails
The traditional response might be to crack down on these sectors. But the FATF's new guidance suggests a different approach: instead of pushing these activities further underground, bring them into the formal system with smart, risk-based rules.
The Game-Changer: Financial Inclusion as a Security Tool
Here's where things get interesting. The FATF has fundamentally shifted its thinking about financial inclusion and security. Instead of seeing them as competing priorities, the new guidance recognizes something important: when you exclude people from the formal financial system, you're not making the system safer—you're making it more dangerous.
Think about it this way: if a legitimate small trader can't open a bank account because the requirements are too burdensome, where do they turn? The same informal networks that terrorists use. By pushing legitimate users into the shadows, traditional "tough" compliance approaches actually reduce visibility into financial flows.
The Smart Compliance Revolution
The FATF's 2025 guidance introduces what you might call "smart compliance"—using technology and risk-based thinking to include more people while maintaining security. Here's what this looks like in practice:
Graduated Access: Start Small, Grow Smart
Instead of requiring full documentation upfront, financial institutions can offer:
Basic accounts with phone number verification and low transaction limits
Upgrade paths where customers provide additional verification as their needs grow
Community vouching systems where trusted local leaders can verify identity
Think of it like a learner's permit for banking—you start with basic privileges and earn more as you prove yourself.
Alternative ID Solutions
Not everyone has a government-issued photo ID, but that doesn't make them a terrorist. The new approach accepts:
Birth certificates or expired IDs for low-risk accounts
Community leader endorsements
Digital identity verification through existing systems
For Ethiopia, this could mean leveraging existing community structures—the same social networks that help people find jobs, arrange marriages, and resolve disputes could help verify identity for financial services.
Following the Money: How Terrorists Actually Move Funds
Understanding how terrorist financing works in practice helps explain why the traditional "tough compliance" approach often misses the mark.
Cash is Still King
Despite all the talk about cryptocurrency and high-tech financing, the FATF report confirms that cash remains terrorists' preferred method. Al-Shabaab's truck driver "taxation" system? All conducted in US dollars. Their payments to operatives? Cash couriers moving money across those porous borders we discussed.
But here's the insight: this heavy reliance on cash creates opportunities. When legitimate users are forced to rely on cash because they can't access formal services, it becomes much harder to distinguish normal economic activity from terrorist financing. Bring legitimate users into the formal system, and suspicious cash flows become more obvious.
The Hawala Reality
Traditional value transfer systems like hawala aren't going anywhere—they serve real economic needs for legitimate users who need to send money across borders quickly and affordably. The FATF acknowledges this reality and notes that these systems are even going digital, with smartphone apps that work like "digital hawala."
For Ethiopia, the policy challenge isn't eliminating these systems—it's regulating them effectively and providing competitive formal alternatives.
Mobile Money: Promise and Peril
The mobile money story in East Africa is one of remarkable success and emerging challenges. Kenya's M-Pesa has revolutionized financial inclusion, but the FATF report shows how groups like Al-Shabaab have adapted to exploit these same systems.
The solution isn't to abandon mobile money—it's to implement it smartly. This means stronger SIM card registration, better transaction monitoring, and designing products that limit risk through their structure rather than their exclusivity.
What Ethiopia Can Do: A Practical Roadmap
Start With What You Know
Ethiopia doesn't need to reinvent the wheel. The country can learn from both regional successes and failures:
From Kenya's M-Pesa: How phone-based verification can enable mass financial inclusion while maintaining oversight. The key insight is that the product design itself can limit risk—basic accounts with transaction limits and restricted functionality for unverified users.
From Bangladesh's bKash: How to implement effective tiered verification. Users start with basic functionality and earn additional privileges by providing more verification over time.
From Al-Shabaab's exploitation: How not to implement mobile money. Weak SIM card registration and inadequate transaction monitoring create obvious vulnerabilities.
Policy Priorities That Make Sense
Map Before You Regulate: Understand your informal economy before trying to formalize it. Where are the hawala operators? How do cross-border traders actually move money? What alternative ID sources exist in different communities?
Start Small, Think Big: Pilot simplified account programs with specific communities (university students, agricultural cooperatives, market trader associations) before rolling out nationally.
Use Technology Wisely: Ethiopia's growing digital infrastructure can support innovative verification methods, but the technology should solve real problems, not create new ones.
Train Everyone: Banks, mobile money providers, and supervisors all need to understand how risk-based compliance can enable inclusion rather than prevent it.
Building Cross-Border Cooperation
The terrorist financing threat in East Africa is regional, so the response needs to be regional too. This means:
Sharing information about suspicious transactions and networks
Harmonizing mobile money regulations to prevent regulatory arbitrage
Coordinating border controls without destroying legitimate trade
Learning from each other's successes and failures
The Path Forward: Making Security and Inclusion Work Together
The conversation about financial inclusion and security often gets framed as a trade-off—more of one means less of the other. But the FATF's new approach suggests this is a false choice. Done right, financial inclusion can actually enhance security by creating better visibility into financial flows and reducing reliance on unregulated channels.
For Ethiopia, this means rethinking some basic assumptions:
Old thinking: "We need strict rules to keep bad actors out" New thinking: "We need smart rules that keep bad actors visible while letting good actors in"
Old thinking: "Informal finance is inherently risky" New thinking: "Unregulated informal finance is risky; regulated informal finance can be an asset"
Old thinking: "Compliance is about saying no" New thinking: "Compliance is about saying yes safely"
Success Stories to Build On
Ethiopia already has building blocks for success. The country's growing mobile penetration, increasing digital literacy, and strong community networks all provide foundations for smart financial inclusion. Companies like Anqa Compliance are working with financial institutions across the region to implement these new approaches while maintaining robust security standards.
The key is starting with pilot programs that demonstrate success, then scaling up gradually. This might mean:
Partnering with agricultural cooperatives to provide simplified accounts for smallholder farmers
Working with universities to offer student accounts with tiered verification
Collaborating with women's associations to design products that work for informal traders
Measuring What Matters
Success shouldn't just be measured by how many suspicious activity reports banks file or how many account applications they reject. The new approach requires tracking:
How many previously excluded people gain access to formal financial services
Whether suspicious activity detection actually improves (more inclusion should mean better visibility)
How effectively the system serves legitimate economic activity while blocking illicit use
Looking Ahead: The Long View
The terrorist financing threat in East Africa isn't going away anytime soon. Al-Shabaab and other groups have proven adaptable and resourceful. But neither is the demand for financial inclusion going to disappear. Ethiopia's young, increasingly connected population needs and deserves access to safe, affordable financial services.
The FATF's evolved approach provides a roadmap for achieving both objectives. It recognizes that security and inclusion aren't opposing forces—they're complementary aspects of a healthy financial system.
The choice facing Ethiopia isn't whether to prioritize security or inclusion—it's whether to pursue both objectives intelligently or to accept the false trade-offs of outdated thinking.
For a country with Ethiopia's potential, the smart money is on taking the integrated approach. The question isn't whether this new model will work—it's how quickly Ethiopia can implement it effectively.
This analysis draws from the FATF's July 2025 "Comprehensive Update on Terrorist Financing Risks" and related guidance on financial inclusion. For implementation support, financial institutions should engage with compliance specialists who understand both international standards and regional realities.
