ELECTRONIC CASH
“Monetary
value charged and stored on an electronic support, in the form of a smart card
or incorporated into the memory of a computer” (Batalla 2001, p. 81).
The
European Union Directive on Electronic Money 2000/46/EU: Article 1 (3)(b) gives
a definition that is a technologically elite version of the traditional notion
of a legal tender. According to it, electronic cash is:
“Monetary
value as represented by a claim on the issuer which is:
(i)
stored on an electronic device;
(ii)
issued on receipt of funds of an amount not less in value than the monetary
value issued;
(iii)
accepted as a means of payment by undertakings other than the issuer”.
Current Regulations
The Banking Act does provide
the basis of regulating products offered by non-banks. The Central Bank of
Kenya Act gives the Regulator the general authority to formulate, and implement
such “policies as best promote the establishment, regulation and supervision of
efficient and effective payment, clearing and settlement systems”.
The National Payment System
Act, 2011, has
its main objective as to consolidate and extend CBK’s authority over payment
systems of all kinds.
A case study of the Mpesa
launch by Safaricom Limited in March 2007, Central Bank of Kenya’s approval for
the registration was sought. It was clear from the onset to CBK that there was
no legislative framework by which it would purport to license Safaricom to
launch the product. The then acting Governor agreed to issue a "letter of
no objection” indicating that CBK would allow the service to launch provided
that the following conditions were met including; firstly, appropriate measures
were put in place to safeguard the integrity of the system to protect customers
against fraud, loss of money and loss of privacy. Secondly, the system would
provide adequate measures to guard against money laundering. Thirdly, proper
records were kept and availed to the Regulator. Fourthly, Mpesa would observe
all existing laws governing its relationship with its agents and customers.
Draft E-Money
Regulations
In December 2008, the then Minister
of Finance, John Michuki, requested the Central Bank of Kenya to undertake an
audit of Mpesa that was run by Safaricom. Michuki is quoted as saying “I do not
know whether Mpesa will end up well”.
An audit was carried out by the Central Bank of Kenya, which although was
satisfied with the workings of Mpesa, recognized the gap in the regulatory
framework in Kenya regarding mobile payment services. Subsequently, on 27
January 2009, the Central Bank of Kenya issued a statement to the public that
sought to give confidence to the market that Mpesa was operating safely in
Kenya.
The Governor of CBK launched
draft Electronic Retail Transfers Regulations and Electronic Money Issuers
Regulations in February 2011. These Regulations were being proposed as a stop
gap regulatory measure pending the enactment of the National Payments Systems
Bill 2009, which has since been enacted. However, the CBK has never gazetted
the regulations, and neither has the Act been fully operationalized.
According to Prof Njuguna Ndun’gu,
the Governor of Central Bank of Kenya, the Regulator recognized the need to
ensure adequate risk mitigation especially through the formulation and
implementation of regulatory and oversight policies that govern mobile phone
and mobile banking services.
For the Regulations to be effective there was need to prudential guidelines in
policy and oversight activities of relevant payment system operators and
regulators. Central Bank of Kenya issued Regulations for the retail payments
sub-sector of the National Payments System. The main objective of issuing
regulations was to ensure that E-Money issuers and payments service providers
conduct their businesses prudently and in accordance with the provisions of the
Central Bank of Kenya Act.
On 1 September 2010, the
Central Bank of Kenya held a workshop for the main players in the industry and
came up with two sets of Regulations namely; Electronic Retail Transfers and
E-Money Issuers Regulations. The main objectives of these Regulations were to;
firstly, define retail transfers and provide for the delivery of retail
transfers by banks and financial institutions as well as persons who were not
licensed as banks or financial institutions.
The Second objective was to
facilitate the provision of electronic payment services without compromising
the safety and efficiency of National Payment System. The third objective was
to provide minimum standards for consumer protection and risk management to be
adhered to by all providers of retail transfers. The fourth objective was to
provide for the authorization of e-money issuers and the conduct of the
business of e-money issuers and the registration of such agents as well as
rules of engagement. The fifth objective was to provider for the appointment of
agents by e-money issuers and the registration of such agents as well as rules
of engagement. Lastly, to provide for the appropriate measures to protect the
interest of the clients of e-money issuers
The Central Bank of Kenya
developed the National payments System Act, which aims to enhance further the
regulations and supervision of payments systems and payment service providers.
The proposed E-Money Regulations are meant for use by the industry while the
National Payments System Act will reinforce them.
Analysis of the E-Money
Regulations
The draft E-Money Regulations
propose to regulate the relationship between the Central Bank of Kenya (‘the
Regulator”) and the Mobile Money Service Providers (“the issuers”) on one hand,
and the relationship between the Mobile Money Service Providers (“the issuers”)
and the Customers on the other hand.
The draft E-Money Regulations
have attempted to define and now regulate the relationship between Central Bank
of Kenya (“the Regulator”) and the Service Providers (“the Issuer”) in the
following ways;
Firstly, the Regulator
approves and grants licences to
the issuers. The requirements for a licence include that one has to be a
limited liability company, the Board of Directors has to adequately reflect the
balance of interests of the issuer, a core capital of KShs 60m, financial
stability, experienced persons proposed to control the issuer possess, minimum
controls including proper administrative and accounting procedures and
technology systems, effective audit functions and adequate business recovery
plans. A licencing fee of KShs 50,000 is applicable.
One of the critiques of the
above requirement is that the issuer’s Board of Directors only cater for the
interests of the issuer whilst none will look after the interests of the
customers. Another critique of the is that a core capital of KShs 60m is lower
than the average value of mobile money transfer transactions per month.
Secondly, small e-money
lenders
are to be registered. A small e-money lender refers to a person who issues
e-money on a small scale and whose transactions are limited to a maximum of
KShs 10,000. The requirements for licensing are more lenient than those
applicable to issuers as one has to be a company, and ensure that their liabilities
are less than KShs 100m. In addition, no application fees are payable. This
will assist especially the Saccos that lend money to
their members.
Thirdly, on compliance
requirements applicable to e-money issuers,
limits are imposed on the transaction amounts for each e-money account with one
individual transaction not exceeding KShs 75,000 and a monthly limit of KShs
1m. In addition, the issuers are to ensure that their systems maintain accurate
records of the customers. The issuers and their agents must also comply with
the provisions of the Proceeds of Crime and Anti-money Laundering Act. In
addition, the issuer should enter into a contract with its customers
identifying the issuer providing the service. However the Regulations do not
make it mandatory for the contract to state the specific obligations of the
issuer to the customer.
Issuers, other than banks and
financial institutions are not allowed to engage in lending or investment
activity. Issuers have to obtain the Regulator’s approval prior to making any
changes in the scope or nature of the e-money payment instrument for example by
adding a new functionality of the instrument.
The Regulations provide that
the issuer’s liquid assets,
including the balance held at the bank, must be equal to the amount of
outstanding e-money issued. Issuers are expected to carry out daily
reconciliations of transactions between the liquid assets held by the bank,
monies redeemed during the day by 4pm of every day.
The Issuers and Agents
Relationship[9]
The
Regulations recognise that agents may be appointed by the issuers who must then
put in place mechanisms to regulate them. The issuer must inform the Regulator
of its intention to appoint agents and in particular the procedure for
recruiting the agents, their proposed locations, policies governing the agents
including anti-money laundering controls, security measures to be adopted by
the agents and training of the agents.
A
case study of how Safaricom manages its agents indicates that proper regular
training of the agents is carried out and its managers monitor the retail
agents on a monthly basis with on-site visits. A major challenge being faced is
the availability of the agents’ working capital in ensuring that there is
sufficient capital to meet the customers’ requests for withdrawals.
The
requirements to be appointed as an agent include possessing the proper business
registration, expertise to provide agency services and being financially sound.
Firstly on Disclosure, the
issuer needs to disclose to the customer any information relating to fees
applicable, that e-money may be redeemed at any time at par value, that e-money
does not earn interest and that it is not a savings account or investment instrument, that e-money
is not a deposit and available customer care procedures.
Secondly, the issuer is
obliged to provide written confirmation to the customer of the details of his
balance in his account if so requested within thirty days. This is akin to the
current bank practices.
Thirdly, the issuer is obliged
to establish a customer care system to deal with customer complaints from
customers. Customers may file complaints which must be addressed within sixty
days. At the time of making the complaints the customer has to be advised of
the expected investigations and estimated date of resolving the complaint. The
customers have to be advised of the outcome of any investigations.
However, the issuer may levy
additional charges for handling complains when the investigation requires
retrieval of records which are more than three years old. Any such charges have
to be agreed upon by the customer. This regulation may discourage customers
from reporting any complaints which are more than three years old.
Fourthly, if any customer is
aggrieved by a decision arrived to by an issuer; the customer may appeal to
another person in the issuer’s company. This appeal mechanism, though a step in
resolving customer’s grievances, may not be very effective as the appeal is to
be made to a person in the same issuer’s company.
Fifthly, issuers are obliged
to provide assistance to people with disabilities to ensure that they are able
to assess the complaint handling process and in lodging the complaints. Sixthly,
the issuer is liable to the customers for any acts of the agents which have
been performed within the scope of the agency agreement. This might lead to
less negligence by the issuer’s agents.
Recommendations for
Inclusion in the Draft E-Money Regulations
Firstly,
the Regulations do not limit the costs to the customers to transfer of money
between different service providers. This means that the issuers can, at their
own discretion levy any charges as they deem fit for the use of this service.
This leaves the customers at the mercy of the issuers.
Secondly,
the Regulations have not provided for harmonization between the issuers
networks. Currently, one cannot send money directly from Safaricom Mpesa
to Airtel’s Zap from one’s phone without going through an agent. Also, such a
transfer of funds is subject to hefty charges. Service providers are now
proposing that Central Bank of Kenya should establish a clearing house that
will process all the transactions from all four mobile money transfer platforms
namely M-pesa, Zap, Yucash or orange money and send it directly to the
recipient’s cellphone.
Although, this move has been strongly opposed as it is seen as a plan by other
service providers to take advantage of the already existing Safaricom network
of Mpesa.
Thirdly,
even though the Regulations expressly provide that the mobile money transfers
are not a savings or investment product which do not earn any interest, the
common practice is that most ordinary citizens, especially the unbanked
customers are storing money in their e-money accounts. This means that the
service providers can play a role in mobilizing community savings. However,
this can only be done through strategic partnerships with banks and other
financial institutions.
Fourthly,
in the event that the issuers were to go into liquidation, the customers would
lose the money which is in their mobile e-money accounts. The Investor
Compensation Fund does not recognise these customers and would not be able to
compensate them. The Regulations are also silent on this.
Fifthly,
in the event of the demise of an e-mobile customer, what happens to the monies
in his transaction account? Whilst, the Unclaimed Financial Assets Act, does
not define monies in the e-mobiles as part of unclaimed assets, the Minister of
Finance
is authorized to prescribe other classes of assets for inclusion which in time
could include e-money is one’s mobile. My proposal is that the Regulations
should provide for the means by which the money can be transmitted to the
customer’s next of kin.
Non implementation
Despite the regulations being agreed upon by stakeholders, they have
never been gazette by CBK, leaving a lacuna in law. The fear may have been CBK
Act did not give express authority to regulate mobile cash. However, the
National Payment Systems Act now gives such authority. CBK should publish the
regulations under this Act.
CHEQUE TRUNCATION
Cheque truncation is a new system of cheque clearing and settlement
between banks based on images and associated electronic payment data, without
the physical exchange of the cheques. The clearing and settlement system that
makes use of images and electronic payment data. It does not rely on the
exchange of physical cheques. Cheques will no longer be taken to the automated
clearing house by courier. Telecommunication links will be used by banks and
their branches to send cheque data for settlement.
How does Cheque Truncation
work?
The customer will draw a cheque and present it to the bank. The bank
where this cheque is deposited is known as the collecting bank.
The collecting bank will take the image of the cheque leaf that has
been presented and also read the information line with the magnetic ink
character recognition (MICR) code on the cheque.
They then send the captured images and data to the central clearing
house. The Clearing House processes the data and arrives at the settlement
figure for the participating banks and send the required data to payee/drawee
banks for processing at their end. They also send the net settlement figures of
each participating bank to the Central Bank of Kenya, also a member of the
Clearing House, for debiting or crediting the participant's account.
NB:
- It is the
responsibility of the drawee bank Capture System to process the inward
data and images and generate the return file for unpaid instruments.
- The law requires that
the physical instruments be stored for a statutory period. Therefore, it
is obligatory for the presenting bank to warehouse the physical
instruments for that statutory period. However, in case a customer desires
to get a paper instrument back, the instrument can be sourced from the
presenting bank through the drawee bank.
- Only members of the
clearing House can participate in the Cheque Truncation System.
The new cheque truncation system is relevant for Kenya shillings and
domestic foreign currency cheques drawn on Kenyan banks. This includes United
States, Euro and Sterling Pound cheques.
Why are banks implementing the
Cheque Truncation System?
The Central Bank of Kenya together with the Kenya Bankers Association
developed a National Payments Strategy paper in which the modernization of the
financial sector is a key deliverable. The implementation of Cheque Truncation
was the next logical step in this modernization, following the automation of
the Clearing House in 1997. Due to the state of telecommunications at that
time, the implementation cost was prohibitive. With the recent improvements in
infrastructure and reduction of the high cost of data transmission, time is
ripe to implement this phase of the process.
The leveraging of the communication infrastructure removes the need to
physically move cheques to the Clearing House, and reduces the time taken to
process the cheques as well as courier costs.
Cheque truncation also reduces the possibilities of cheque
substitution, further reducing the avenues for fraud.
Advantages for Bank cheque truncation system in Kenya
- Cheque truncation
will reduce the time it takes to transmit data between banks.
- The time saved will
reduce the clearing time
- There will be accurate
reconciliation of accounts
- Paperwork will be
minimal.
- Fraud avenues
emanating from cheque substitution will be reduced because of the
elimination of physical movement of cheques. Any changes on the cheque
leaf can be detected.
- The liquidity of the
economy will be generally improved because of the reduction of the
clearing cycle. The time taken to clear funds will be faster ensuring
funds circulate in the economy at faster rates.
Legal basis
It is a payment system, under regulation of CBK under the National
Payment Systems Act 2011.
DIGITAL/ELECTRONIC SIGNATURES
Kenya Information and Communication Act (KICA) defines electronic
signatures thus;
“electronic
signature” means data in electronic form affixed to or logically associated
with other electronic data which may be used to identify the signatory in
relation to the data message and to indicate the signatory’s approval of the
information contained in the data message;
The Act grants legal recognition of electronic signatures in Kenya in
section 83P thus;
83P. Where
any law provides that information or any other matter shall be authenticated by
affixing a signature or that any document shall be signed or bear the signature
of any person, then, notwithstanding anything contained in that law, such requirement
shall be deemed to have been satisfied if such information is authenticated by
means of an advanced electronic signature affixed in such manner as may be
prescribed by the Minister.
As per section 83(O)(3), The electronic signature is only valid if;
(a) it is
generated through a signature-creation device;
(b) the
signature creation data are, within the context in which they are used, linked
to the signatory and to no other person;
(c) the
signature creation data were, at the time of signing, under the control of the
signatory and of no other person;
(d) any
alteration to the electronic signature made after the time of signing is
detectable; and
(e) where the
purpose of the legal requirement for a signature is to provide assurance as to
the integrity of the information to which it relates, any alteration made to
that information after the time of signing, is detectable.
However, as per section 83B(1)
electronic signatures are not allowed for;
(a) the
creation or execution of a will;
(b) negotiable
instruments;
(c) documents
of title.
As per 83B(2) The Minister may by order modify the provisions of
sub-section (1) by adding or removing any class of transactions or matters.
The Communications Commission of Kenya (CCK) is in this law empowered
to facilitate and regulate electronic certification services by issuing
licenses to prospective certification service providers (defined as an entity
or a legal or a natural person who issues certificates or provides other
services related to electronic signatures).
The law creates an opportunity for local entrepreneurs (and foreign
service providers) to go into provision of digital signatures and
certification. This will bring such services closer to Kenyan corporates and
consumers who have previously had to services from European and North American
providers amidst legal and logistical hardship.
ELECTRONIC BANKING
ATM’s
An automated teller machine or automatic teller machine (ATM) is a
cash machine; a computerised telecommunications device that provides the
clients of a financial institution with access to financial transactions in a
public space without the need for a cashier, human clerk or bank teller. With
ATM’s ustomers can access their bank accounts in order to make cash
withdrawals, cash and cheque deposits, credit card cash advances, and check
their account balances
In Kenya, ATM machines are available 24 hrs at all major banks.
Recently, in September 2011, Barclays Bank of Kenya has launched a new
interface on its ATMs to deliver video. The new capabilities will see the bank
deliver relevant promotions through its ATM network. If you visit any Barclays
ATM now, you will see the dancing ATM which is just one such promotion. All the
230 plus ATM machines in the Barclays network have been upgraded to this
capability.
To reduce queues in banking halls, some banks like Equity and Family
banks have even established ATM branches, especially now that ATMs can deposit
cash and cheques as well as withdrawals.
Telephone banking
Telephone banking is a service provided by a financial institution,
which allows its customers to perform transactions over the telephone.
Most telephone banking services use an automated phone answering
system with phone keypad response or voice recognition capability. To guarantee
security, the customer must first authenticate through a numeric or verbal
password or through security questions asked by a live representative (see
below). With the obvious exception of cash withdrawals and deposits, it offers
virtually all the features of an automated teller machine: account balance
information and list of latest transactions, electronic bill payments, funds
transfers between a customer's accounts, etc.
Usually, customers can also speak to a live representative located in
a call centre or a branch, although this feature is not always guaranteed to be
offered 24/7.
Major banks in Kenya offer this service through the landline telephone
system but through call centres. These services are mainly open to corporate
and business club customers.
Internet Banking
Internet banking is a facility that allows you to do your banking from
the comfort of your home, office or when on holiday, through the internet. Some
of the services you can perform on your own include but are not limited to:
- You can transfer cash
or funds from one of your accounts to another of your account, for
example, from current account to savings account.
- You can transfer
funds to someone else with an account in the same bank
- You can set up
periodic transfers or payments for loans
- You can get you
statements and view your transactions
Also all the major banks provide this service where one can log on to
his/her account through an internet connection that is secured by series of
authorizations and passwords.
AGENCY BANKING
Agency banking in Kenya is the new way that banking in Kenya is using
to take banking services to the unbanked and under banked at a cheaper rate.
The banks are training agents who will engage in banking services on behalf of
the banks.
Agency banking is not new in the world. It has been used very well in
Latin America and Asia. There are few African countries that have taken up
agency banking. The agency banking in Kenya guidelines were enacted in 2010.
Banks must first apply to central bank of Kenya to get approval to conduct
agency banking business. The board of directors of each banking institution
interested in agency banking must make policies guidelines and procedures to be
followed to ensure that:
-
the agents are credible,
-
risk identification and mitigation measures are
in place and
-
Agents are audited on an ongoing basis to ensure
that the Agents follow the guidelines from central Bank, their contracts and
the banking policy.
Agency banking in Kenya requirements
Agents must also through the banks that sponsor them apply to run
agency banking in Kenya business. The agency banking network approval requires
the following conditions to be met, together with completing the Agency Banking
Network application form.
-
The proposed or expected number of agents in
each province for the next three years
-
The banks must produce a report of the due
diligence policy and procedures for their agencies
-
The service that the agency would provide on
behalf of the bank
-
The draft generic agency contract
-
The policies, procedures and the technology the
bank will apply and use at the agency outlet
-
Risk management and mitigation policies in place
-
Internal controls and audits performed prior to
agents engaging in agency banking
-
Policies on anti-money laundering
Additionally the bank provides their channel, growth and business
strategy for agency banking and how it fits in with the overall global strategy
of the bank.
The application form for Agency banking is accompanied by a
non-refundable fee of Kenya shillings 5,000. Where an application has been
rejected, central bank responds to the applicant within thirty days of having
received the application form the bank. After the conditions have been met, the
bank can resubmit their application to central bank.
Agency banking in Kenya application
An agent application form is also sent to central bank for approval
before the agent can start transacting on behalf of the bank. A fee of Kenya
shillings of 1,000 per agent is required. An application is renewable annually
and the fees are payable yearly. Details included in the forms include:
-
Agent Name
-
Location, postal addresses and telephone
contacts
-
The business the agent carried out for the last
eighteen months
-
The banking services that the agent will handle
on behalf of the bank.
-
Confirmation or declaration from a senior member
of the prospective agency stating the minimum qualifications required have been
met.
Agency banking in Kenya approved activities.
Activities that the agency can engage are determined by the bank after
assessment of the agency. The agency
does not have to perform all the activities. These include but are not limited
to:
-
Cash withdrawal and deposits
-
Repayments of loans
-
Bills payment
-
Salary payments
-
Funds transfer
-
Balance enquiry
-
Document collection for debit and credit cards,
loan applications and account opening forms
-
Cheque book requests and collection
-
Collection of bank correspondence and mail
-
Mobile banking services
Agency banking transactions are denominated in Kenya shillings.
Activities prohibited for agency banking in Kenya
Some activities are prohibited and are listed below. When an agency
continues to perform prohibited activities, their contract may be terminated.
The list below is not exhaustive.
-
Perform and carry out transactions when the
networks and communication failure is experienced.
-
The transaction must have acknowledgement or
receipt.
-
Charge customers any fees
-
Carrying out agency banking business when agent
is no longer a going concern
-
Offer its own banking services apart from the
sponsoring bank
-
Anti-money laundering services
-
Foreign exchange transactions
-
En-cashing and depositing of cheques
-
Provision of cash advances and loans
-
Subcontracting to any business to run its agency
banking
Agency banking in Kenya termination of services
A bank or central bank may terminate an agency contract. The bank that
had registered the agent must inform the general public by posting the most
appropriate notice around the premises or vicinity of the agent. A contract for
agency banking may be terminated when the agent:
-
When the agent is no longer a going concern
-
The agent suffers damage or financial loss that
is not remedied after three months
-
is involved in criminal activities, fraud and
financial mismanagement
-
is declared bankrupt by the courts and is being
wound up
-
death of a sole proprietor or mentally
incapacitated owner
-
has expired business licences
-
violates the provisions of the agency banking
guidelines or the terms of the contract with the bank
Many Banks have started Agency Banking in Kenya and have trained the
agents so as not to affect the service they offer to their customers.
