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Finally, real time money transfers for EAC

Saturday June 22 2013
eaps

Going live later this year, the East African Cross-Border Payment System will work just the same way as the banks’ real time gross settlement system. TEA|FILE

Anyone who has tried to send money across countries and currencies in East Africa is familiar with the painfully slow or non-existent systems, exorbitant commissions, unbankable security and frayed nerves.

But all that should change when a proposed regional payment system goes live later this year.

The system, known as the East African Cross-Border Payment System (EAPS), is part of a larger plan by the EAC economies to integrate their money and capital markets.

It will work just the same way as the banks’ real time gross settlement system (RTGS), which allows for the movement of cash between different banks and branches and is increasingly being used in the region in place of cheques.

The only difference is that it will support all currencies and have cross-border functionality, simplifying transactions and reducing the cash that is currently lost by senders in the form of commissions and other charges during cross-border money transfers.

A project of the region’s central banks, the integrated system is expected to not only smoothen the flow of money around the region, but also to set the stage for an eventual single currency for the region, besides the linking up of the five capital markets.

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The Bank of Uganda (BoU) in its annual report for the period ended June last year disclosed that partner states were upgrading their RTGS systems so as to support all currencies. Uganda’s banking regulator said that as of May last year, its system could process transactions denominated in regional currencies other than the Uganda shilling.

The National Bank of Rwanda early this year made disclosures about the regional payment system that will link up the RTGSs of the five member states; at the beginning of this month, the matter came up again in Tanzania’s parliament, underlining the urgency with which regional governments are treating the issue.

In his budget estimates speech for the 2013/14 fiscal year, Tanzania’s Finance Minister, William Mgimwa, said all the requirements to link up the Tanzanian, Ugandan and Kenyan RTGS systems could be met by the end of next month, paving the way for the payment system to go live in the three countries.

“East Africa’s central banks agreed to establish a payment system that will make it easy to effect payments using the currency of the country concerned,” said Dr Mgimwa, who added that once the system goes live in the three countries Rwanda and Burundi can join up later.

Small and medium-sized businesses, investors who make high value payments across the borders and consumers who have been using informal methods to make smaller payments including school and medical fees for relatives across national borders, are expected to be the biggest beneficiaries when the system takes off.

Currently, some banks with a regional presence allow their customers to access their funds in parts of East Africa in either their home currency or in a currency of choice. Customers are however required to pay a fee for the conversion of the currencies through wide spreads that the banks offer.

Kenyan banks have led the way. KCB Group operates in Uganda, Tanzania, Rwanda, Burundi and South Sudan, and Equity Bank which operates subsidiaries in Uganda, Tanzania, Rwanda and South Sudan. Diamond Trust Bank operates subsidiaries in Tanzania, Uganda and Burundi, NIC Bank has operations in Tanzania and Uganda and Fina Bank has operations in Rwanda and Uganda.

Multinational banks such as Ecobank, Bank of Africa, Standard Chartered Bank and Barclays also operate in different countries in the region.

CRDB Bank, whose headquarters is in Tanzania, started operations in Burundi at the end of last year, becoming the first to break the trend of banks domiciled in Kenya opening up in other EAC member states. But even with an increasing regional presence, not all the banks allow customers to access money from another country and when they do, the process can be cumbersome.

While small and medium-sized businesses are able to use platforms being offered by some of these banks, retail consumers largely use informal systems offered by couriers such as transport companies.

Retail consumers also use mobile money platforms offered by the telecommunication companies to send money from where they are. But even this is limited as mobile money platforms are limited to home countries.

Joanes Nyang’ai, a Kenyan living in Tanzania, said the process of sending money around the region is difficult even when it involves just sending school fees for his children in Kenya. “In the past, I have been using international platforms, but they are cumbersome and expensive,” he said.

Jonathan Ciano, group chief executive officer, Uchumi Supermarkets, said the retailer uses the regional banks, “but, for us, this is rare because our subsidiaries operate independently. It happens when the parent company wants to support a subsidiary.”

Bank of Tanzania payment system oversight and policy department manager Generose Tabaro said that when the system goes live, customers will be able to go to any bank in the region that is connected to the system with instructions and the money will be sent at a minimal cost to the receiving bank account.

The system, which is partly funded by the African Development Bank (AfDB), is expected to send the instructions real-time, making it convenient to use, safer for bank customers and easier for central banks in the region to trace the source and movement of funds.

Despite the huge gains the region has made in intra-regional trade and increased movement of workers and families among member states, especially since the establishment of the East African Community Customs Union in 2005, the lack of a convenient and safe way to make and receive payments has remained an impediment.

Testing the system

“Central bank governors in the region had agreed that the system should be up and running in the course of this year. We are testing the system and it is expect to take off by September,” said Ms Tabaro.

An AfDB project appraisal report done in October last year envisions that when investors and consumers are able to freely transfer funds across borders, the region could see inter-bank high-value fund transfers grow from $279 billion in 2010 to $340 billion next year and $420 billion in 2016.

The Bank also says that as a result of the incorporation of a regional cheque truncation system in the payment system, the longest clearing and settlement cycle for local and upcountry cheques within the region is expected to drop from around 11 days in 2011 to six days next year and eventually four days in 2016.

Luke Kinoti, Fusion Capital’s chief executive officer, said that the establishment of the EAPS will help resolve the problems investors have been having when they make payments across borders while a comprehensive legislative framework is developed.

He said that the new system would help reduce costs in terms of transaction levies and the efficiency created would be beneficial to businesses and even to banks because it will encourage increase in cross-border trade, growing their deposit base.

Additional reporting by Rosemary Mirondo

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