National Payments System
A payments System refers to a system or arrangement that enables payments to be effected between a payer and a beneficiary, or facilitates the circulation of money, and includes any instruments and procedures that relate to the system. According to the Bank of International Settlements (BIS), a payment system “consists of a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money.” They are a major channel by which shocks can be transmitted across domestic and international financial systems and markets.
Therefore, National Payments System are the conduits through which buyers and sellers of financial products and services make transactions and are an important component of a country’s financial system. In Kenya participants comprise of the Central Bank of Kenya, the Government, Commercial Banks, Financial Institutions and Payment System Providers. National Payments Systems in Kenya are classified into two categories; Large Value (Wholesale) and Low Value (Retail) Payment Systems. The classification is based on the throughput in terms of values and volumes processed.
See our directory of authorized Payment Service Providers (PSPs) here
The Kenya Electronic Payment and Settlement System (KEPSS) is a Real Time Gross Settlement (RTGS) system, meaning that transactions are cleared and settled on a continuous basis. The real time transfers settled through KEPSS are debited and credited in the commercial banks’ accounts held at the Central Bank, where the banks hold the required cash reserves. [link: Monetary Policy – Reserve Requirements] Throughout the day, the commercial banks transfer funds between their accounts dependent upon their customers’ RTGS payment instructions.
Kenya Electronic Payment and Settlement System (KEPSS)
KEPSS implementation facilitated the mitigation of risks associated with the previous paper-based inter-bank settlement system, transformed the management of liquidity in the banking industry, reduced the systemic importance of the Automated Clearing House (ACH) and enhanced financial stability while providing an efficient mechanism for monetary policy transmission. KEPSS has continued to register remarkable growth in both volume and value of transactions.
Benefits of an RTGS system:
• Real time funds transfer
• Finality of funds settlement
• Risk control mechanism
• Simple payments process
• Optimisation of liquidity
• Efficient funds management
• Allows large value transfers between banks
• Enables fund movement between cities
• Permits on-line real time query of the funds position
The need to enhance efficiency in payment systems within the East African Community (EAC) and Common Market for East and South Africa (COMESA) regions – and therefore promote regional trade and economic integration – resulted in the development of two regional payment systems. The East African Payment System (EAPS) and the Regional Payment and Settlement System (REPSS) objectives are to facilitate cross border payment and settlement within the EAC and COMESA regions, respectively. Both are integrated in KEPSS.
East African Payment System (EAPS)
Regional Payment and Settlement System (REPSS)
Efficient retail payment systems, including payments cards and mobile money transfers, facilitate e-commerce and robust commercial activities within an economy. Recent developments in retail payment systems, as well as technological developments, have provided customers with a wide array of choices, allowing them to demand greater levels of efficiency and safety in their transactions. Further, final settlement of transactions from many of these retail systems are channelled through the RTGS, thus enhancing safety and efficiency.
Nairobi Automated Clearing House
Payments Card Industry
Mobile Phone Money Transfer Services
Payment Service Providers are defined as:
(i) a person, company or organisation acting as provider in relation to sending, receiving, storing or processing of payments or the provision of other services in relation to payment services through any electronic system;
(ii) a person, company or organisation which owns, possesses, operates, manages or controls a public switched network for the provision of payment services; or
(iii) any other person, company or organisation that processes or stores data on behalf of such payment service providers or users of such payment services.
The mobile financial services industry has grown significantly over the past years since inception in 2007. The growth and viability of these services relies heavily on the existence of a payment platform that is convenient, easy to use, traceable and secure. The emergence of innovative mobile phone money transfers has put Kenya on the world’s payment system map. It is notable that the mobile-based money financial services have greatly enhanced access to financial services, which is one of the key objectives of the Government towards meeting vision 2030 objectives.
In particular, mobile phone money transfer platforms have moved from the traditional role of transferring money to provision of banking services to both banked and unbanked. Commercial banks have partnered with mobile network operators to enable customers to access their bank accounts through mobile phones. Mobile phones can be used for opening and operating virtual bank accounts and access of traditional banking services like depositing, withdrawing and credit facilities without physical representation to the bank.
Role of Central Bank of Kenya in National Payments System
In this regard, the Central Bank seeks to ensure that payment systems
(i) Do not generate high level of risks to participants and users of financial services;
(ii) Continue to operate without major disruptions;
(iii) Offer efficient, reliable and safe payment services to customers.
(iv) Have the necessary and regulatory legal framework.
The Central Bank participates in the payment system as a:
• User of payment systems: To effect its own transactions.
• Facilitator of settlement: By providing settlement accounts at the Central Bank to enable Commercial banks exchange obligations.
• Provider of payment systems: It operates and owns the KEPSS system which is used to facilitate real time transactions.
• Supervisor: Supervises the operations of the Nairobi Automated Clearing House on behalf of Kenya Bankers Association in order to maintain integrity and confidence.
• Provider of liquidity: The bank provides liquidity to the system so as to facilitate efficient operation of the settlement system.
• Overseer of the payment system: So as to promote efficiency and soundness in the payment system.
• Catalyst/collaborator; as a catalyst the Bank spurs change in the payment landscape through policy guidelines and as a collaborator provides a platform for open dialogue with all stakeholders geared towards improvement of the national payment system.
Oversight of National Payments System and Instruments
The National Payment System Act 2011 was enacted providing a new legal framework for NPS in Kenya. This act makes provision for the regulation and supervision of payment systems and payment service providers, and for connected purposes. Further to this, the National Payment System Regulations 2014 was enacted to operationalise the NPS Act 2011 and provides for the authorisation and oversight of payment service providers, designation of payment systems, designation of payment instruments and Anti-Money Laundering measures. The oversight responsibilities of the Bank are carried out within these legislations and also the Central Bank of Kenya Act 2004, Chapter 491 Section 4(A) (2) in subsection (1) (d), which provides the Bank the mandate to exercise the oversight powers of promoting financial stability through cohesion in financial market infrastructure.
Objectives of Oversight
In performing its duties, the Bank aspires to: –
• Promote Safety and Efficiency of Kenya’s Payments System to ensure the soundness of the National Payment System and hence financial system stability.
• Prevent Market abuse by ensuring anti-trust tendencies are minimised.
• Ensure conditions of fairness, equity and transparency in payment systems – the rights and obligations of parties to funds transfers are allocated in an equitable manner to ensure level field for all payment system participants.
• Promote extension of payment services nationally, regionally and internationally.
• Protect payment systems from criminal abuse such as money laundering and fraud.
• Address risks that could jeopardise the soundness of the payment system by promoting risk reduction measures.
• Reduce and contain the systemic risks inherent in the national payment system.
• Keep abreast with international development in payment system oversight and payment systems in general.
• Monitor the exposures in the National Payment Systems.
In Kenya, the Large Value Payment System is characterised by Real Time Gross Settlement (RTGS) mechanism whereby payment instructions from customers to beneficiaries in commercial banks are settled instantaneously. Retail Payment systems however process mainly consumer payments of large volume but relatively low value through infrastructure such as cheques, credit transfers, direct debits, ATM, mobile money transfers and EFTs (Electronic Funds Transfers).