Mobile banking laws should not restrict capital inflow

The money transfer market in Kenya is increasingly vibrant. As the economy grows, new and innovative methods of transferring funds are being modelled and improved upon. The latest of course, is the mobile telephony money transfer system.

The system is now being used to pay worker’s salary, pay school fees, settle utility bills such as electricity and water, withdraw cash and even settle bar tabs and basic food purchases in rural Kenya.

To many, the system is providing a service which the traditional bank account could never provide whilst for others it is replacing the bank account.

It would appear that in Kenya, as long as the money finds its way to its rightful destination in the shortest time and lowest cost possible, anything goes.

The growth of the money transfer markets has brought with it the heated debate about whether the Central Bank of Kenya has powers under existing laws to regulate mobile telephony payment services and if not, whether these services should be brought within regulatory purview.

Banks are pushing for tough regulation of this sector whilst the mobile telephony companies appear not to see that there are any grounds for concern.

The central question that arises is whether the payment of monies to a mobile telephony money transfer operator constitutes taking of “deposits” or conducting “deposit-taking business” within the meaning of these terms under the Banking Act.

The Banking Act restricts the taking of deposits from members of the public in the course of carrying on a deposit taking business.

The Act prohibits any person, other than an institution which holds a valid licence, from inviting or accepting deposits in the course of carrying on a deposit-taking business.

On the face of it, it would appear that mobile services providers are taking deposits in the course of providing mobile-telephony money transfer services.

However, the strict definition of the term “deposit” under the Banking Act is perhaps what has led to the protracted debate about whether the mobile money transfer services should be regulated or not.

Making payment
The term is defined to mean “… a sum of money paid on terms (a) under which it will be repaid, with or without interest or a premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and (b) which are not referable to the provision of property or services or the giving of security.”

The model adopted by mobile companies in offering money transfer services is that the funds are not held by the mobile company themselves or in accounts opened in the names of the mobile companies.

The mobile companies instead establish trusts and appoint trustees to manage the funds.

Bank accounts in the names of the trustees are opened with licensed banks in Kenya and the funds are held in trust for customers of the mobile companies.

The trustees also deduct any fees levied by the mobile companies in connection with the transfer services, remit the fees to the mobile company and pay the balance to the order of the mobile company’s subscriber.

Contrary to popular belief, at no time are the funds held by or to the order of the mobile company. The mobile companies simply act as a conduit and technological facilitator for the funds.

As such, it is debatable whether such funds, which are indeed not held by or to the control and direction of the mobile companies can be said to be deposits collected by the mobile companies.

The likely conclusion therefore is that the Banking Act does not apply to them.

It is noteworthy, however, that although the mobile telephony money transfer services appear to be unregulated and although Kenya does not have an exchange control regime in place, there are, however, certain limitations that apply on the transfer of foreign currency and the remittance of funds from outside Kenya into the country.

However, Kenya has not yet enacted any anti-money laundering laws so the banks in Kenya are adopting procedures consistent with CBK guidelines and their own internal requirements.

Under Revised Foreign Currency Transaction Guidelines to Authorised Banks issued by the Central Bank of Kenya (CBK), commercial banks have been assigned a monitoring role by the CBK.

Each commercial bank is required to submit returns to the CBK on a regular basis. Foreign currency is freely repatriable from Kenya provided there is written evidence of an underlying business transaction and the bank undertaking the repatriation is satisfied as to the genuineness of the transaction.

So far as remittance from Kenya to outside Kenya are concerned, for any amount equivalent to $500,000 or more, the CBK has requested that the relevant bank notifies the CBK as to the amount and purpose of the remittance.

This is stated to be for statistical purposes. For any amount below the equivalent of $10,000, commercial banks are not required to obtain any documentary evidence to support the transaction, although in certain cases banks will nonetheless seek an explanation.

Clamping down
It is also noteworthy that section 33H of the Banking Act which provides that except with the permission of the CBK, every payment made in Kenya, to or for the credit of a person outside Kenya or outside Kenya, to or for the credit of a person in Kenya or in Kenya (other than a payment for a current transaction) between a resident and a non-resident shall be effected through an authorised bank.

It is an offence to contravene this provision.

Unlicensed providers of money transfer services, particularly funds from overseas, should be aware that they risk being in contravention of the law.

Conversely, the CBK does not, it seems, appear to be very diligent in clamping down on such “informal” unlicensed money transfer service providers.

There are obvious risks attendant to “unconventional” or “alternative” money transfer.

For instance, what happens when monies are accidentally transferred to the wrong transferee or when funds “disappear” or financial yet confidential details of customers are divulged for wrongful purposes?

Consideration should also be given to whether the customary duties of bankers such as duty of care, duty of confidentiality and other similar duties should also be extended to the providers of these services.

Service providers
Or is it simply enough to leave these important issues to be dealt with in unnegotiated contracts entered into between customers and the money transfer service providers?

Obviously, the new and unconventional alternative money transfer systems are drawing increasingly large sums of money.

Apart from concerns related to money laundering, it is likely to make the planning of national financial systems more complex.

However, care has to be taken not to throw the baby out with the bath water.

The regulation of the money transfer sector must not unduly restrict or discourage these remittances or stifle the growth of innovative and cheap payment mechanisms.

Ms Kiunuhe is an advocate in Nairobi. ak@africalegalnetwork.com