Bank boosts EAC payments link plan with Sh1.9bn grant

The African Development Bank (AfDB) has made a Sh1.9 billion grant to speed up the installation of infrastructure needed to link East African banks.

This is part of efforts to increase the speed and volume of transactions and boost trade. The lender Monday granted the East African Community (EAC) Sh1.9 billion under the EAC -Payment and Settlement Systems Integration Project (PSSIP).

The grant will be used to finance a real-time settlement system, banking platforms, central depository systems, drafting uniform payment and money transfer and protection laws applicable in all five member-states.

“The project is expected to put in place well-functioning and integrated Real Time Gross Settlement (RTGS) systems in the region,” said AfDB regional director (East Africa Resource Centre) Gabriel Negatu in a statement.

“It will also support the development of central securities depositories and core banking platforms in some of the EAC partner States.”

Under the RTGS system, cross-border transactions would be cleared by respective central banks unlike the present situation that requires routing of money for clearance to cities as far as New York.

(Read: Cross-border bank link to boost trade in EAC countries)

The project appraisal form says that creation of a regional payment and settlement system should halve the time it takes to clear cheques drawn between parties in Kenya, Uganda, Rwanda, Tanzania and Burundi.

The target is to have a T+5 days clearing cycle for cheques by 2014 from the current T+10 days. By 2016 the cycle is expected to reduce to T+3 days.

The project appraisal form adds that by 2016 the volume of transfers within the region will have hit $420 billion (Sh36.75 trillion), from 2014’s $340 billion (Sh29.7 trillion) and 2010’s $279 billion (Sh24.4 trillion).

Central banks in the region, with the exception of Burundi, have been testing the RTGS system on a pilot basis targeting to go live within one year. The grant also forms part of the plan to have a common market and monetary union.

“In addition, this project is aligned to the Fourth EAC Development Strategy, and the EAC Common Market Protocol, which emphasise trade facilitation, establishment of a single market in financial services, establishment of the EAC Monetary Union and integration of ICT into regional development initiatives, amongst others,” said Mr Negatu.

The EAC Monetary Union is expected to come into place in November.

Kenya Association of Manufacturers chairman Jaswinder Bedi had said that regional trade would be catalysed by reducing how fast money changed hands between buyer and seller.

One of the hurdles RTGS is expected to address is the snaking trailer traffic that is caused by traders having to first confirm that money is in their bank accounts before they release goods.