Businesses in the region are asking governments to consider lowering money transfer charges, which they say are adding to costs in the absence of stable exchange rates.
Private sector players are particularly troubled by rising fees on mobile money transfers and the cost of remittances and payments.
Remittances, non-commercial transfer of money by foreign workers for household use, are especially important for low-income countries and account for nearly four percent of their GDP, compared with about 1.5 percent of GDP for middle-income countries.
“I urge EAC partner state governments to pursue initiatives to reduce currency exchange fees during transaction as an interim solution in the absence of a single currency,” said John Bosco Kalisa, chief executive of the East Africa Business Council.
Speaking in Dar es Salaam last week at a webinar to discuss the harmonisation of payment systems, Kalisa called for full interoperability of mobile money networks and cross-border transaction/payments at the EAC level.
At the meeting, which brought together central banks from the seven EAC partner states, participants asked ministries of finance to harmonise legal procedures to facilitate remittances.
“In the absence of a monetary union, regional currencies should be freely convertible to enable transactions without having to convert national currencies into dollars to enhance regional trade and lower transaction costs,” said Kalisa.
In East Africa, the average fee for sending $200 — the benchmark used by authorities to evaluate cost — is $14. But both senders and receivers will be charged an equivalent of 29.7 percent of the amount sent. Besides, the amount received depends on the exchange rate.
The calls for full interoperability of mobile money networks follow a report by Africa RISE, a technical assistance facility funded by the European Union, which reveals that the East African Payment and Settlement System (EAPS) is currently operational in only four of seven EAC states. EAPS was established in 2014 to facilitate cross border interbank funds transfer for payments and settlements within EAC.
The report titled ‘Harmonisation of Payment Systems in EAC’ and dated September 15, 2022, reveals that EAPS is currently operational between Kenya, Tanzania, Uganda and Rwanda, linking their central banks’ Real Time Gross Settlement System (RTGS).
The report is concerned that not all EAC states are using the payment system, making it difficult for their citizens to send money within the region.
“The payment system of South Sudan is under development, with support from the AfDB under the EAC Payment and Settlement Systems Integration Project (EAC PSSIP) project," noted Paul Baker, who presented the report from Africa RISE.
“The National Payment System in DR Congo is under development, with support from the World Bank.”
While the EAPS allows processing and settlement of transactions in local currencies, there is low uptake due to low volumes of intra-regional trade and stiff competition from banks with established correspondent bank relationships.
According to the World Bank’s Remittance Price Worldwide Q4/2020, it costs an average of 6.5 percent to send $200 globally, 4.88 percent to South Asia, 6.58 percent to the Middle East and North Africa, and 8.19 percent to sub-Saharan Africa.
“The integrated payment systems are crucial for the realisation of the EAC Monetary Union as they facilitate the payments for goods and services, the cross border flows of capital as well as remittances within the region,” said Baker.
“Digital payments are one of the core elements for the single online market layer to enable East Africa to pay for domestic and international services.”
The report notes that transactions on EAPS are carried out in the local currencies and settlement is through reciprocal bilateral accounts with each central bank. Transactions on the system are charged at the same rate as local transactions in respective partner states RTGS and exchange rate risks are borne by the customer and commercial banks.
However, EAPS processes only payments through formal financial institutions and does not cover electronic payments or mobile payments.
“Uganda is in the process of deploying a national switch and the EAC bloc should come up with a similar initiative to support mobile transactions at regional and international level,” said James Bukulu, deputy director National Payment Systems Bank of Uganda.
The Africa Rise report also identified challenges to harmonisation of cross-border payments, which include regulatory and infrastructure gaps such as payment settlement workarounds, high compliance costs, as well as low trade of certain currencies.
There are also requirements for pre-funding accounts, bloated payment value chain and taxation.
Africa Rise identified digital payments as one of the core elements for the single online market layer to enable East Africa to pay for domestic and international services.
The report recommends that all EAC partner states establish digital payments platforms to facilitate seamless, low cost cross border digital payments
“The EAC should establish full interoperability between mobile money networks (domestically and regionally) and cross border transactions," the report reads.
"The EAC should also pursue initiatives to reduce currency exchange fees as an interim solution, in the absence of a single currency union and harmonise laws and regulations that affect the availability and ability to use electronic payment platforms."
The calls for harmonisation of payment systems in the EAC comes at a time when Tanzania has announced abolition of recently introduced levies on electronic transactions following a public outcry. The levies had been imposed from August 15.