A critique of Kenya’s banking laws: The case of under-regulated mobile banking

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David Odhiambo and Herman Omiti
The emergence, development and invention of sophisticated technology in the 21st century has brought with it unprecedented practice in the banking industry. Banks are no longer the traditional institutions they have been known to be. Mobile technology has been absorbed and integrated into mobile-based banking services. Almost all banks have come up with products and services that rely on mobile technology to execute monetary and other financial transactions. Paperless banking now has had its roots deep into banking.
This piece delves into this technological development that has taken the banking industry by storm over the past decade and given the big players a run for their money. Its primary focus is on the regulatory framework of the industry with a view to offering strategic insights into the current state of mobile money transfer services, as well as reviewing the relationship between telecommunication companies and financial service providers. Likewise, it critiques existing laws, meant to regulate mobile telephony but which have not done much to solidify consumer confidence.
Legal framework
The two major pieces of legislation that regulate banking industry in Kenya are the Central Bank of Kenya Act (Cap 491) and Banking Act (Cap 488), which stipulate strict guidelines for commercial banks and financial institutions. However, with the technological advancement that continues to be witnessed, banks have entered into a laissez faire arena where mobile banking services are being offered outside the ambit of the available laws and regulations. It is not clear whether mobile money transfer services should be regulated by communication or banking laws.
Over the last decade, all banks in Kenya have adopted different forms of mobile money transfer and mobile payment services. The practice has continued with no clear guidelines as to its legality. The transfer and payments services are currently being integrated into the available forms of financial transactions, from commercial banking, micro insurance provision, money transfer, locally and internationally, and bill payments. Even though the services are meant to ease commerce and lower operational costs, it is not clear whether the current banking laws and regulations are sufficient to cover the emerging practice of mobile money transfer services offered by commercial banks and other financial institutions. At the time the practice of mobile money transfer was taking root, commercial banks criticised Central Bank of Kenya (CBK) for granting a licence to Safaricom, a non-bank, to offer financial services without subjecting the telco to the stringent rules of Central Bank of Act and Banking Act.
A danger to consumers
When Safaricom was given the “no objection letter” to launch and operate M-Pesa, the Kenyan banking community was outraged, and expressed concern that no institution could operate a large payment system network without proper legislation. The worry was that M-Pesa did not meet the risk management requirements. The telecommunication companies have been left to offer banking services when they have not been subjected to the stringent controls of the banking laws as are commercial banks. In other words, there is no level playing ground and the telecommunication companies have been left to operate on loose grounds.
The fears that the telecommunication companies may go down with their products and services is real – this would lead to big losses being incurred by the subscribers given that the telecommunication companies do not contribute to the Deposit Protection Fund Board as established under Section 20 of the Kenya Deposit Insurance Act (Cap 487C). CBK did not conduct sufficient due diligence and the resultant “no objection letter” should not have been issued. Even though banks have embraced the idea of mobile money transfer and payment services, the same has not been backed by any law or legislation, but by trust and self-regulation of the banks and telecommunication companies.
From the foregoing, it is clear that mobile phone companies, unlike commercial banks, are offering mobile banking services without a clear legal and regulatory framework within which they can be held accountable in case they go under. For example, before the launch of M-Pesa in 2007, the Central Bank of Kenya considered all aspects of the service to understand its nature as well as associated risks.
There were worries about the possible implications of allowing an un-regulated money transfer service, with commercial banks contending that M-Pesa did not meet the risk management requirements involved in large payment system network, and that it was not advisable for any institution to operate on that scale outside legislation.  The situation has since escalated so quickly that industry players have been unable to come up with an umbrella legislation to clear the havoc. Commercial banks argue that CBK applied double standards in licensing M-Pesa.
Is this popularity contest an advantage to the consumer?
Studies have shown that M-Pesa’s popularity has been boosted by its speed, safety, reliability, extensiveness of its network of outlets and its price relative to the alternatives (“Morawezynski, Olga, ‘Exploring the usage and impact of transformational mobile financial services: The Case of M-PESA in Kenya,’ in Journal of Eastern African Studies”, 3(3): 509-525).  At the inception of M-PESA, commercial banks urged government to regulate it and other mobile money platforms under the commercial banking regulations.  The opposition by the banks failed and they have since decided to partner with banks to offer better services and, in some cases, even become M-Pesa agents (Njiraini, J. and Ayanzwa, J. “Unmasking the storm behind M-Pesa”, in East Africa Standard, 5th December 2008).
Njaramba Gichuki has briefly touched on this subject of mobile money transfer and mobile money payment systems and suggested that a thorough research needs to be done as it involves some banking aspects of information and technology. He says that mobile money transfer services are convenient but so far they do not fall under any ambit of law. Apart from the due diligence steps carried by CBK, there has not been a substantive law to regulate M-Pesa, and Safaricom has been self-regulating. This has given CBK the comfort that it is operating safely and meeting the needs of its increasing customer base (Morawezynski, Olga).
In realisation of the threat posed by electronic banking and mobile banking to commercial banks, lawyer Kethi Kilonzo has commented thus: “The future of banking lies in click and mortars. Paper based systems are slow, labour-intensive and correspondingly expensive to maintain, hence the growth of electronic funds transfer system” (Kethi Kilonzo, “An Analysis of the Legal Challenges Posed By Electronic Banking” in Kenya Law Review (2007) Vol 1: 323).  She argues that the simplicity of the emphasis of banking at the click of the mouse, mobile banking belies the intricacies, dexterity and network of relationships involved in the banking relations between banks themselves, banks with corporate as well as national responsibilities, banks and national governments and banks in an international environment.
Deep-rooted challenges
Mercy Buku and Michael Meredith discuss some of the future challenges facing M-Pesa, including the role that M-Pesa and Safaricom might play in international anti-money laundering and counter-terrorist financing efforts. They argue that the development and implementation of a new mobile payment system is generally faced with a number of financial, cultural and logistical challenges, not least of which is attracting users to the service and ensuring that they will trust their money to a previously unknown and untested commercial entity (Buku, M., and Meredith, M., “Safaricom and M-Pesa in Kenya: Financial Inclusion and Financial Integrity” in Washington Journal of Law; Technology & Arts 375 (2013)).
On the regional front, in Rwanda it is noted that mobile network operators are required to take out insurance for their aggregate deposits held by them. Even though the mobile money deposits are already operationally ring fenced from the accounts of the mobile network operators, there is still no legal framework to protect the mobile companies from bankruptcy.
Elsewhere, Rasheda Sultana, et al have reviewed and examined the mobile banking regulations  in South Asian countries and the countries where mobile banking payment system are already in practice or a successful, where they scrutinise the financial regulators and the policy measures taken and discussed in international forums [Rasheda Sultana, “Mobile banking: Overview of regulatory framework in emerging markets” (2009)].
Conclusion
The success of M-Pesa has been attributed to loose regulatory framework and a credible self-regulation model that has enabled it to meet the needs of the Kenyan market. Legislation has been slow in clipping the wings of mobile phone companies offering banking services.
Technology relating to mobile money transfer and payment has been so fast as to slip through the loopholes in our banking laws. One wonders whether self-regulation is enough in the absence of a substantive legislation. What will happen to the subscribers if the mobile companies go under without a Deposit Protection Fund to fall back on?
It is expected that at some point, there will be some air in the vacuum that exists in our laws and regulation. As at now, mobile phone companies have taken advantage of the lacuna in our laws to expand their business. The popularity contest in the banking industry may be an advantage to the consumer but the absence of proper regulation makes it a ticking time bomb.^

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