Kenya too goes for real-time payment

Monday September 21 2009

The Central Bank of Kenya. The CBK’s cardinal goal is to have more than 80 per cent of all the high value transactions covered by the new system. Photo/FILE

The Central Bank of Kenya. The CBK’s cardinal goal is to have more than 80 per cent of all the high value transactions covered by the new system. Photo/FILE 

By MARK KAPCHANGA

In the spirit of converging their economies Kenya has moved a step farther towards joining its East African Community counterparts in modernising its payments system.

Beginning October 1, the banking industry in Kenya will join Tanzania and Uganda in using the real time gross settlement (RTGS) system, also known as the Kenya Electronic Payments and Settlement System (Kepss).

The new system will put a stop to the processing of high value payments using cheques, electronic funds transfers of Ksh1 million and above through the Nairobi automated clearing house.

The radical shift will also apply to domestic foreign currency cheques and EFTs whose value is or exceeds $35,000, sterling pounds 15,000, and euros 30,000.

The new payment system, which has been undergoing testing in the past four years, will enable the public to pay as well as receive large value and time-critical payments on a real-time basis.

Those wishing to make large value payments will no longer need to draw cheques or exchange large amounts of cash to conclude a transaction.

“The implementation of the RTGS aims at addressing deficiencies in the current payment methods that have been heavily dependent on traditional payment methods, which include cash and cheques. These methods are not only prone to risks of theft, cheque substitution and cheque bouncing, but are also subject to delays in the clearing process,” Central Bank of Kenya Governor Prof Njuguna Ndung’u said.

According to Prof Ndung’u, the policy change is aimed at enhancing safety and efficiency of the payment process and instruments.

“It will also increase economic activity by speeding up payment and settlement processes,” he said.

The modernisation of Kenya’s payments system began with the automation of the Nairobi clearing house in 1998.

According to the CBK, the aim was to enhance the clearing of cheques between banks using magnetic ink character recognition technology and EFT payments.

“The result of this policy change was the reduction of clearing time from a high of 14 days to three days currently. The second and third milestones in this modernisation process were the successful launches of the Kenya National Payments System Framework and Strategy document in 2004 and Kepss in July 2005,” said Stephen Mwaura the head of CBK-based National Payments Systems.

Although the automation of the Nairobi clearing house had been projected to increase the stability of the payment systems, critics argue that there has been no significant change in the volumes and values of payment instruments going through it.

The bank’s regulator says Kepss will utilise the internationally recognised Swift messaging network for safe and secure delivery of payment and settlement messages to the Central Bank for settlement and subsequent payments by receiving banks.

“All the commercial banks will use the system to exchange payment instructions among themselves and with Central Bank. We hope the new system will drastically reduce inter-bank settlement risks, provide safe and secure inter-bank transfers and enable banks to manage their liquidity efficiently,” Kenya Bankers Association chief executive officer John Wanyela said.

The system, which the Central Bank says is well tested and fraud-proof, has been designed in a way that its operations will not be limited to transactions valued at over Ksh1 million alone. Mr Wanyela says it will also execute small transactions from as little at Ksh1.

According to Prof Ndung’u, the Bank’s cardinal goal is to have more than 80 per cent of all the high value transactions covered by RTGS.

“We are much lower than the target but this new payment system will radically move us towards our goal,” he said.

CBK’s Monthly Economic Review report shows that Kepss moved a volume of 21,977 transaction messages worth Ksh1,032 billion in June 2009 compared with a volume of 24,024 transaction messages valued at Ksh1,064 billion moved in May 2009, representing 3.1 per cent decrease in value and 8.5 per cent decrease in volume.

However, the flows are expected to rise with the implementation of value capping.

“During the 12 month period to June 30, 2009, the value moved averaged Ksh55.67 million per transaction while the average value moved per day was approximately Ksh62.14 billion. Direct settlements through Kepss in June 2009 averaged 92.2 per cent of the total settlements, while indirect payments averaged 7.8 per cent,” Prof Ndung’u said.

This is not the first time the bank’s regulator is engaging in modernising its payments structure.

In 2008, CBK in conjunction with KBA initiated ambitious modernisation programmes “which are ongoing and are expected to be realised this year.”

They include cheque truncation that is projected to come into effect from mid next year, failure to settle mechanism, and the GPay project.

Mr Mwaura says all of these projects are aimed at mitigating various risks and enhance the efficiency and effectiveness of the country’s payments system. All of these, he says, will be in harmony with EAC payment systems principles.

“ACH therefore still remains a systemically important payment system as opposed to being a low risk retail payment system. It is in this context that it has been seen necessary to introduce value capping in order to reduce risk of settlement,” Mr Mwaura said.

This system will be used stopping the processing of high value payments using cheques and electronic funds transfers (EFTs) of Kenya shillings one million and above through the Nairobi automated clearing house.