Walls Start to Fall As EAC Rolls Out Cross Border Payment System
By ADAM IHUCHA--
The multi-billion-dollars intra-regional-trade has received
a major boost, thanks to the rollout of cross
border payment system in the East African region.
A configuration is anticipated to enable traders to either make
or receive cross-border payments seamlessly in real time and in a respective
local currency.
It will work just the same way as the banks’ real time
gross settlement (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.
This means that the system will save the huge proportion of cost usually incurred to facilitate cross-border
payment for EAC’s $5.5 billion intra-regional trade as of 2012.
The system, for instance, is credited to have saved $600
million cost of cross border payment for
COMESA’s intra-regional trade of $17.4 billion in 2010 alone.
An ambitious cross-border-payment system is a key
component of the major EAC Payment and Settlement Systems Integration Project (EAC-PSSIP).
“The system will benefit exporters and importers in
the region as it allows a faster, safe and secure transfer of funds” says the
EAC Deputy Secretary General, Dr. Enos Bukuku.
Indeed, the system, whose main players are five
central banks, will empower member states to transfer funds within EAC in ten
minutes and at a lower cost.
The system also paves the way for trading on open
account, the predominant method of payment within the European Union and other
parts of the world.
The deal is the second major attempt for EAC to integrate
the region’s financial services after commercials banks in Kenya, Uganda and
Tanzania linked their RTGS systems last year,
reducing cheque clearance time from 22 days to just a day.
Dr. Bukuku said financial sector integration is the
anchor that will make the EAC region a more viable destination for both foreign
and domestic investment by bolstering the liquidity of the region’s capital
markets and creating financing avenues for investors and issuers.
EAC-PSSIP
The EAC-PSSIP project being financed
by the African Development Bank (AfDB) at the tune of $23 million, aims to support the integration
of payment and settlement systems in the region.
AfDB head of Mission, Jacob Mukete says by
developing efficient and harmonized payment and settlement system across the
EAC trading bloc, the project will facilitate the transition to a single
integrated financial system.
And once this is achieved it will enable the
processing and settlement of payment obligations in a timely manner, enhance
accountability and minimize errors.
“The system will also facilitate the development of
innovative financial products while better managing risks” Mr Mukete explained.
Specifically, the project is expected to put in
place well-functioning and integrated Real Time Gross Settlement (RTGS) systems
in the region.
In additional, the scheme will also support the
development of central securities depositories and core banking platforms in
EAC partner states, he said.
“The project will also provide supporting
infrastructure to the payment systems, including business continuity and
disaster recovery platforms” Mr Mukete noted.
The Governor of the Central Bank of Kenya, Prof
Njuguna Ndung’u stated that the launching of EAC-PSSIP is a milestone in light
of the proposed EAC Monetary Union.
“This will also help investment across
the border because it is easier for any potential investors to make decision on
how to transfer cash in real time at the lowest rate” Prof. Ndung’u said.
Intra-EAC-trade
Daniel Mghwira, a business consultant with Miradi
Associates in Tanzania said the cross border payment system would go a long way
to boost the EAC intra-trade, which for years had been grappling with
exorbitant costs associated with cross border payment and delays.
He said that multiplicity of currencies and cumbersome
exchange rate arrangements that exist in EAC usually add to the cost of doing
intra-EAC- trade.
Indeed, some of currencies in the EAC are not
convertible and as a result, payment obligations have to be settled in dollars,
euros or other preferred international currencies.
“Given the very limited correspondent banking
relationships amongst EAC banks, intra-regional- trade payments had been posing
enormous challenges to traders”. Mr Mghwira explained.
The absence of correspondent banking relationships
means successive transfer of funds and high intermediation costs, crippling the
intra-regional-trade.
“With the system in place and ongoing elimination of
non-tariffs-barriers, I have no doubt that the intra-EAC-trade will strive” he
noted.
The––intra-EAC trade––withered a myriad of
non-tariff-barriers to grow by 22 per cent in 2012, new data show.
The data from the EAC secretariat shows that the volume of
intra-EAC trade grew to $5.5 billion in 2012, up from $4.5 billion recorded in
2011 even as the five countries––Kenya, Uganda, Rwanda, Tanzania and
Burundi––dithered in the elimination of NTBs.
These figures do not include informal cross border trade,
which has been estimated to be as much as 40 per cent of formal trade.
The EAC statistics indicate that the development was driven
by the increase of both imports and exports that went up by 20.7 percent and 23
per cent, respectively.
This intra regional trade is made up mainly of manufactured
products and services.
For example, the fast moving goods or products behind this
growth comprised oil cake and other solid residues of sunflower seeds.
Others were maize, oranges, Portland cement, Carboys,
bottles, flasks, jars, pots, phials and ampoules, thermometers/pyrometrs, black
tea fermented, flavoured or not, Mosquito nets, Liquefied Natural gas, groats
and maize meal (corn) Potatoes seed, maize seed and Salt.
In the list there were unbleached kraft liner, Petroleum
jelly, mineral or chemical fertilizers, sacks and bags, Petroleum gases and
other gaseous hydrocarbons, cane or beet sugar, unbleached sack kraft paper.
Others were solid residues of coconut, crocheted rubberized
textile fabrics, seamless iron, or steel casing used in oil/gas drilling.
Tanzania and Rwanda recorded increases in their shares to
total intra EAC trade while that of Kenya, Uganda, and Burundi declined.
Despite the decline of the share, Kenya continued to
dominate, accounting for nearly 36 percent of total intra-EAC trade.
In real value, Kenya’s sales to EAC members amounted to $1.3
billion in 2012.
Central Bank of Kenya (CBK) data shows that Kenya’s main
destination of exports in the region was Uganda and Tanzania, where it exported
goods worth $675 million to Uganda and to Tanzania $472 million.
“Kenya’s exports in EAC were mainly to Uganda 12.9 per cent
and Tanzania 8.9 per cent,” the CBK said in its latest Monthly Economic Review.
The EAC’s total intra-regional trade increased from a total
of $4.6 billion in 2011 to $5.8 billion in 2012, an increase of 26 percent,
while the total intra-regional exports increased from $2.6 billion to $3.2
billion during the same period, an increase of 23 per cent.
Kenya and Uganda accounted for an average of 37 and 24 per
cent of the total intra-regional trade during 2011 and 2012.
During the same period, Tanzania, Rwanda, and Burundi
accounted for an average of 20, 12, and 8 percent, respectively.
For instance, data shows that the total exports from
Tanzania in 2011 and 2012 amounted to $411 and $614 million respectively, while
the total imports from the region for the same period hit to $376 and $678
million respectively.
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