Faster, cheaper cross-border transactions for EAC

Taking the logical step
EAPS marks the boldest step to be taken by the regional central banks in promoting and advancing regional integration. Dr Stephen Karingi, the director of infrastructure, regional integration and trade at UNECA, explains why: “The central banks are crucial in the regional integration process right from the basics. This is because at the end of the day, it is the central banks that have the capacity of overseeing the evolution of the payment system through which all these (the movement of people, goods and payments) can take place seamlessly.”

He adds:  “It does not make sense that if you are in Nigeria and you get an order from Malawi, the payments between the two countries have to go through a correspondent bank somewhere in the US! That increases not only the time but the cost margins for both traders. So the African central banks have a role in setting up a payment system that makes it possible for traders from different countries and currencies in the continent to be able to trade without additional costs.”

The EAPS system first went live in November 2013 and by mid May 2014 when it was unveiled in Nairobi, it had been used to process $23m through 1,106 transactions. The Kenyan, Uganda and Tanzanian shillings are the main currencies using this format and so far the Kenyan shilling dominates the transaction, accounting for some $18m.

Professor Njuguna Ndung’u, the Kenyan central bank governor, has already termed EAPS as a “quick win for the EAC” and expects more people to use commercial banks in settling cross-border payments.

The establishment of EAPS is expected to boost regional banking as it is viewed as a critical step in the establishment of a regional currency which the trading bloc hopes to achieve in a decade.

“In CEMAC, the cost of trading is actually very small because they have the same platform and same currency,” Karingi says. “But you don’t necessarily need a common currency; central banks have what we call currency convertibility and then a platform for payments where this convertible currencies can be used for trade.”

The key aim of EAPS is to boost intra-regional trade and integration as well as competition among businesses, access to an extended market and increase the attractiveness of the region as an FDI hub.

EAPS’s platform is also expected to enhance the region’s financial sector integration and boost the combined capital markets’ liquidity. It comes at a time when the EAC is seeking to establish a single market in financial services, which will be geared towards supporting increased and deepened financial markets infrastructure.

The realisation of EAPS was long expected owing to the major changes which have taken place in the region’s financial sector. Kenyan banks still dominate the region with their cross-border presence. These include KCB, Equity, Diamond Trust Bank and Cooperative Bank. Multinational banks, such as Standard Chartered, Barclays and Ecobank and Tanzania’s CRDB Bank are also keen to benefit from EAPS.

In 2011, Kenya set up an $8m system to speed up the clearing of cheques in the region. Before that, it took three to 10 days to clear a cheque in Kenya: this was reduced to a maximum of three days through the cheque truncation system.

Karingi says that “in countries where you don’t have regional payment systems, you have expensive and uncompetitive additional costs and this undermines integration and even national economic goals”.

He argues that central banks need to be involved in the regional integration process right from the beginning because “there is no point in reducing the tariffs to zero and then you find that companies and people have to pay another 10 or 12% of the value of the transaction. This comes about because of using corresponding banks or round tripping of the money between two countries that are in the same free trade area”.

In March this year, the AfDB advanced some $23m for the project’s implementation.

According to a study undertaken by AfDB, by next year inter-bank transfers in Burundi, Kenya, Rwanda, Tanzania, and Uganda will  rise to $340bn up from $240bn in 2010, thanks in large measure to EAPS.

By 2016 it is estimated to reach $420bn. AfDB projects that an increase in cross-border trade is to be expected as previous bottlenecks and bureaucracy have now been removed.