In July 2005, Kenya implemented the Kenya Electronic Payment and Settlement System, its first Real Time Gross Settlement system. The system is operated by the Montran Corporation, and all commercial banks in Kenya participate in the system. The Central Bank of Kenya (CBK) declares in its 2007 Payment Systems Policy Framework Report that, in conducting payment system oversight, it follows the Core Principles for Systemically Important Payment Systems promulgated by the Committee on Payment and Settlement Systems. It will also use standards, principles and recommendations established by the CBK, the East African Monetary Affairs Committee (a committee of the three East Africa Central Bank Governors of Kenya, Tanzania and Uganda), and other international financial organizations. The CBK also states that by the end of 2008, through the National Payment System Project, Kenya shall have put in place a modern payment system that is effective, efficient, secure, compliant with international standards, and compatible with other international payment systems. The CBK also plans to designate and continuously review and evaluate Systemically Important Payment Systems in Kenya to ensure that their design and operations continue to meet, at the very minimum, international best practices, standards and protocols.

General Overview

In its policy framework document on the "Oversight of Payment Systems in Kenya" released in July 2007, the Central Bank of Kenya (CBK) declares that in conducting payment system oversight, it follows the Bank for International Settlements (BIS) Core Principles for Systemically Important Payment Systems (CPSIPS). It will also employ the standards, principles and recommendations established by the CBK, the East African Monetary Affairs Committee (MAC, a committee of the three East Africa Central Bank Governors of Kenya, Tanzania and Uganda), and other international financial organizations.

A 2004 CBK policy report also stated that by the end of 2008, through the National Payment System (NPS) Project, Kenya would have put in place a modern payment system that was effective, efficient and secure and would be compliant with international standards, practices and compatible with other international payment systems. The Systemically Important Payment Systems (SIPS) were also to be designated and continuously reviewed and evaluated to ensure that their design and operations have met and continue to meet, at the very minimum, international best practices, standards, and protocols. The 2005 Annual Report of the CBK announces a significant achievement of the Kenyan NPS Project - the implementation of the Real Time Gross Settlement (RTGS) system that went live on July 29, 2005. According to the Report, all commercial banks in Kenya are participants in the system, named the Kenya Electronic Payment and Settlement System (KEPSS), and operated by the Montran Corporation.

The 2006 Annual Report of the CBK provides statistics on the payment mechanisms in Kenya. According to the Report, currency was the most widely used form of payment in 2006, with Kenyan Shilling (Ksh) 76.3 billion in circulation. Further, with over 80 percent of all transactions and a daily value of Ksh 10 billion, checks dominated noncash payment instruments processed through the clearing house. In the same year, Electronic Funds Transfer (EFT) transactions equaled Ksh 479 million. There has also been consistent growth in the use of credit and debit cards, ATMs, and Point of Sale (POS). The 2006 Annual Report also found that the KEPSS has recorded a steady increase in usage since its inception in July 2005, especially for interbank transfers, and valued at Ksh 839 billion in 2006. The majority of transactions originated as direct payments. Values posted directly into KEPSS by commercial banks accounted for approximately 92 percent of the total transactions flow through KEPSS. However, third party messages processed via the Automated Clearing House showed a rising trend.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

II

There is insufficient information publicly available regarding Kenya's compliance with this Principle. However, the policy framework document on the "Oversight of Payment Systems in Kenya" released by the CBK in July 2007 mentions that Section 4A(D) of the CBK Amendment Act sets out the CBK's role, empowering it to "formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems." The Act lays down the basis of CBK's authority as overseer of payment systems thereby making oversight of payment systems an integral part of the wider responsibilities for monetary and financial stability .

Recognizing that sound oversight ensures efficiency, reliability, safety, and stability of the payments system, the CBK declares in its 2007 Report that it seeks to establish and encourage consistent legal rules, regulations and procedures that govern the transfer of money, so as to achieve legal certainty and enforceability of settlement and settlement finality. The CBK further believes that the payments system law governing funds transfers should take the form of a statute, which is part of the broad commercial and bankruptcy framework and that the rule of law should override relationships among parties. Further, the oversight function of the CBK should be inscribed in the law clearly describing its purpose and powers in legal statutes, laws or parliamentary Acts. The CBK would also aim that its oversight role include supporting and advising law-making authorities, in developing and strengthening legal provisions pertaining to payments system in Kenya .

With respect to the requirements of this principle, the CBK plan of action, as laid out in its 2007 Policy Report, includes ensuring that the system's rules and procedures, especially relating to contract, payments, securities, banking, debtor/creditor relationships and insolvency are clear and enforceable . The 2004 CBK Report notes that there is no law in Kenya that explicitly and exclusively deals with payment systems, although the Central Bank of Kenya Act, as amended in 1996, gives the Bank powers to oversee and regulate the payments systems . The 2004 World Bank report mentions the Financial and Legal Sector Technical Assistance Credit (FLSTAC), a World Bank funded project that aimed at assisting the CBK in developing a comprehensive legal framework and mechanisms to effectively fulfill its oversight obligations .

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

II

With respect to the requirements of this principle, the CBK states in its 2007 policy report that it will work towards ensuring that the rules and procedures spell out clearly the rights and obligations of all the parties involved, and providing them with up-to-date explanatory material. The CBK will also disclose publicly the key rules to financial risk, seeking to highlight legal risks incurred by the operator or participants of the payment system in Kenya due to a weak legal framework . Nonetheless, there is little information publicly available explicitly addressing Kenya's compliance with this Principle.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

II

There is insufficient information publicly available regarding Kenya's compliance with this Principle. The 2007 Policy Framework Document of the CBK states that the focus of its oversight activities is to identify potential risks posed or introduced to the NPS, and to take necessary steps to control and eliminate them. Further, the oversight will seek to ensure that participants adopt consistent methods to manage their risks and that systems have adequate incentives and safeguards against excessive risk exposures experienced by individual participants. It will also encourage collective action by participants in this area, where the risk profile of each participant is tied to the behavior of others . The 2007 document further spells out that the CBK will work towards ensuring that the rules allocate responsibilities for risk management and containment and set limits on the maximum level of credit exposure that can be taken by each participant especially in netting systems. The CBK also plans to move toward establishing rules on pre-funding collaterizing obligations and implementing real-time settlement processes .

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

II

With respect to this principle, the CBK states in its 2007 Policy Report that it seeks to ensure that appropriate mechanisms (liquidity management, exposure limits, appropriate laws, and real-time processes) exist to facilitate and support intra-day finality and irrevocability of settlement . However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

II

In its 2007 Policy Document, the CBK states its commitment to ensure that the system has strong controls to address potential liquidity and credit risks from failure of the largest single net debtor to the system. It will also earmark provisions for access to liquidity in adverse circumstances . Apart from there above there is scant information as to Kenya's actual compliance with this Principle.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

II

There is insufficient information publicly available regarding Kenya's compliance with this Principle. However, the 2007 Policy Report of the CBK notes the CBK'S intention to ensure that settlement is effected using balances of the participants at the CBK since they lack credit or liquidity risk for the holder. However, it also aims to ensure that settlement in commercial bank claims carry little or no financial risk .

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

II

There is insufficient information publicly available regarding Kenya's compliance with this Principle. Nonetheless, the CBK does state in its 2007 Policy Framework Document that it seeks to ensure that the system has commercially reasonable standards of security and a high degree of operational resilience. It also aims at putting in place reliable technology, adequate hardware, software and network facilities, effective business procedures and well-trained and competent personnel to facilitate the security and resilience of the system .

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

II

In its 2007 Policy Document, the CBK spells out its intention to ensure that the system is cost effective and compatible to the requirements and demands of Kenya's geography, population distribution and telecommunications, transportation, and banking infrastructure, and that its technical, business and governance arrangements are flexible enough to respond to changing demands . Moreover, the 2004 CBK Report states that the envisaged vision for the NPS is to put in place "a developed and modern payment system that is effective, efficient, secure, accessible, reliable, robust, viable and demand-driven ." However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

II

As its 2007 Policy Framework Document states, the CBK has the twin objectives of making the system accessible to encourage competition, and at the same time to protect the system and participants from exposure to excessive legal, financial, and operational risks. It seeks to lay down objective and publicly disclosed system rules that clearly specify criteria and procedures for orderly entry and withdrawal of participants from the system . The CBK declares that it will aim at making the system fair and equitable, encouraging its geographic extension to both rural and urban areas, as well as sectoral expansion to both formal and informal financial sectors. However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

X. The system's governance arrangements should be effective, accountable and transparent.

II

The 2007 Policy Report of the CBK notes the central bank's intent to provide incentives to the management of participants in the system to pursue objectives that are in the interest of the participants and their customers. The CBK also aims to provide all interested parties with access to information about how decisions affecting the systems are made . However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

II

There is insufficient information publicly available regarding Kenya's compliance with this Principle. However, in its 2007 Policy Report, the CBK does envisage defining and publicly disclosing its oversight role, as well as major policies affecting payment system operations and users through appropriate instruments . With regard to its role, the CBK further states that it will not monitor day-to-day operational aspects of payment systems or seek to resolve day-to-day operational problems except where it is itself operationally involved. It lays the responsibility for the reliable functioning of payment systems with system operators and members, and will continuously monitor to see that operators have taken reasonable steps to ensure the robustness of their systems. Further, the CBK spells out its aim to work collectively with market participants towards improving the Kenyan payment and settlement infrastructure for the benefit of members and end-users. To facilitate this, it will support market-led development but may, where necessary, take a more active operational role, as was the case in its proactive role in the automation of the Clearing House and the introduction of KEPSS .

B. The central bank should ensure that the systems it operates comply with the Core Principles.

ID

As spelled out in its 2007 Policy Document, the CBK will ensure that systems that it operates comply with the Core Principles relating to risk management; asset settlement, preferably as a claim on the CBK; and governance arrangements . The systems operated by the CBK include both high value (wholesale) and low value (retail) payment systems in Kenya, including the Bank's own internal systems, the ACH, KEPSS, Securities Clearance and Settlement Systems and other payment systems to be designated from time to time. The CBK notes that it aims to comply with the provisions of the CPSS CPSIPS together with the responsibilities of the Central Bank; Europay, Mastercard, and Visa (EMV) standards and guidelines for card businesses; and the International Organization of Securities Commission's (IOSCO) recommendations for the securities clearance and settlement system. The CBK also encourages Kenya's payment systems to achieve full compliance with the Core Principles .

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

II

There is insufficient information publicly available directly addressing Kenya's compliance with this Principle. However, the 2007 Policy Framework Document by the CBK states that the CBK's oversight activities should cover systems in Kenya that have systemic importance and affect financial stability but are not regulated by the Central Bank of Kenya Act. The document recommends the enactment of an appropriate legal and institutional framework to extend the scope of the CBK .

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

II

There is insufficient information publicly available directly addressing Kenya's compliance with this Principle. In its 2007 Policy Report, however, the CBK iterates its intention to cooperate with legislative authorities, Ministry of Finance, and other oversight agencies and stakeholders through the regular exchange of views and information within a mutually agreed framework in order to promote the overall stability of the payment system . The report further mentions exchanges of information between the National Payment System Division of the CBK, the Capital Markets Authority (CMA), the Nairobi Stock Exchange (NSE) and utility service providers including telecommunications and electricity firms .

As regards international cooperation, the 2007 CBK Report advocates cooperation between the three East African Central Banks (of Kenya, Tanzania, and Uganda) that oversee their National Payment Systems independently, so as to promote information sharing and the development of uniform oversight procedures . The 2006 Annual Report of the CBK states that it plans to continue to work towards improving payment, clearing, and settlement systems within the East African and the Common Market for Eastern and Southern Africa regions .