Managing Banks amid Information and Computer Technology: paradigms in Kenya

Dr. Richard Nyangosi Sr. Lecturer School of Postgraduate Studies and Research Kampala International University, Dar es Salaam-Tanzania [email protected] Dr. S amuel N. Nyangau Lecturer and Head Department of Social Sciences Kampala International University, Dar es Salaam-Tanzania [email protected] Hellen G. Magusa Ganipati Business School Kurushetra University,India [email protected] ABS TRACT The recent robust of Information System and Computer Technologies (ISCTs) has changed the face of Banking worldwide. Bank managers are re-looking for the better strategic options to manage their institutions amid mixed reactions from clients, regulators, governments, competitors and even crises. The winner party in the coming unpredictable and dynamic financial market is that which positions itself at the centre stage to enable the stretching of the financial tentacles to reach the un-banked on a leveraged technology. This paper is an attempt to analyse the strategic options utilized by Kenyan banks to cope with the dynamic environment. It will also try to e xamine the development and the effect of technology adoption on human resource and management of earning. Data for this study was collected from Central Bank of Kenya, Government survey reports and other periodicals. Statistical tools like CGR, T-value, Charts, tables and graphs were utilized for analysis and presentation of the result through SPPS and Spread sheet. The result reveals that Kenyan banks are transforming their business from traditional mode of service delivery to technology-based delivery systems. This arouses strategic management in banks systems to cope with the changing banking paradigms. The study recommends that strong supervisory and regulatory mechanisms will help bank management to solve any problems which may be caused by the mixed reactions. Keywords: Banks' ATM, Internet Banking, Technology, Paradigms

1. Introduction E-commerce and online transactions are complementary phenomenon. First is incomplete without the later and second is of no use without the first (Shabbu, 2010). Kalakota and Winston (2009) arguably indicated that e-payment systems are becoming central to online business process innovation, as companies look for ways to serve customers faster and at lower cost. In line with this, Chhabra (2009) suggested that electronic payment systems are proliferating in air ticketing, insurance, banking, retail, health care, online markets and even governments- in fact everywhere money needs to change hands. There are many evident advantages of an electronic mode of transfer compared to the conventional clearing house, because banks are increasingly turning to technology for managing their payments (Kumar 2009). Some of the value attributes include secure payments, cost cutting, payment on due date and easier cash management compared to conventional systems. The payment industry in Kenya has over few years has been transformed with the new wave of IT advancements. Currently the use of cash has been replaced by digital cash and digital wallets. It can be rightly said that this is the fourth stage of evolution after Barter, Currency, Paper money (Cheques) and now digital cash (Fig1). From the reports of Central Bank of Kenya (CBK), Kenyan banks have exponentially embraced the use of information and communication technologies in the provision of banking service which has enhanced the application of e-payments.

Fig1: Evolution of payment systems

Barter systems

E-payment S ystems

National Currency S ystem

Paper system e.g Cheques

They have invested huge amounts of money, in implementing the self-banking services with the objective of improving the quality of customer service. Some of the ICT-based products and services include the introduction of SM S banking, ATM s, Anywhere banking softwares. The development of e-banking services is expected to decongest banking halls and reduce the incidences of long queues in banking halls. ICT based financial services have made a significant contribution in reducing the cost of offering financial services (CBK 2009). The banking industry has also over years continued to introduce a wide range of new products, prompted by increased competition, embracing ICT and enhanced customer needs. As a marketing strategy, the new products offered in this segment of market, continue to assume local development brand names to suit the domestic environment targeting the larger local customer base. Among the products, Islamic banking was introduced in 2005, tailored in line with Shariah principles. Currently Barclays Bank of Kenya, Kenya commercial Bank, K-Rep Bank, and Dubai Bank has so

far introduced Islamic banking products in the market (CBK 2006). It is clearly indicated that Kenyas banking Industry has great developments like any other banking market in the world.
Table 1 E-banking de velopment in Kenya

S .No 1. 2. 3. 4. 5. 6.

7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Achievement Automated clearing house (M ICR adoption) Two session Clearing 3 day Clearing period country wide Shared ATM / POS consortium firmed 2 day High Value Clearing Amendment of the Bills of Exchange Act to allow electronic Evidence in and also allow electronic clearing (Legal notice No. 9 of 2000) Introduction of EFT M echanism Pilot on Electronic Clearing Ken Switch goes live (4 Banks) Electronic transmission of clamed data Commencement of CDs Act for listed securities Direct debit implementation KEPSS implementation Frame work and strategy document NIC Bank started SM S Banking NPS and EFT Bill forwarded Execution of the Vertical master repurchase A greement and Intra-day liquidate facilities agreements

Year M ay 1998 M arch 15, 1999 M arch 15, 1999 M ay 1999 June 02, 2000 Dec 2000

August 2000 July 01, 2001 Dec 30, 2002 June 01, 2003 June 01, 2003 June, 2003 July 2004 September 2004 July 2004 2004 June 2007

As the banking fraternity continues to make forays into the retail segment of the market, it is becoming more paramount that customers must be given value for their hardearned deposits (M arket intelligence, 2005). The Kenyan banking industry has been embracing the new technology in order to fulfill the dreams of their customers and to create health competition. The new banking environment is about differentiating banking products, increased choices, security and accessibility. The ability of financial Institution to deliver products and services in the most efficient and effective manner, will therefore be the key to performance and relevance. In Kenya, majority of banks have introduced e-

payment facilities, Internet banking and mobile banking to enhance delivery channels to their customers. The major indicators of e-payment trends and progress which include above mentioned are discussed. Table 1 shows the major milestones in e-payment development in Kenya. Kumar (2009) argues that there are many evident advantages of an electronic mode of transfer compared to the conventional clearing house, because of which banks are increasingly turning to technology for managing their payments. These include but not limited to Secured payments, 2. Research Methodology and Objectives of the study The major objectives of the study was to examine the trends of progress in Kenya payments system, to discuss the various challenges facing the adoption e-payment systems in Kenya and to explore the recent reforms on legal and regulatory framework for payment systems to fit the conduct of e-payments system in Kenya. The study selected few indicators of e-payment system which included EFTs, ECS and KEPSS The source of data for this paper was secondary in nature as publication of Central Bank of Kenya and other periodical with relevant information were scanned. Followed by analysis, statistical tools like CGR, T-test for statistical significance and diagrams were used through a statistical package for social science software.

3. Result and Discussion

The progress of e-payments in Kenya has been rapid over the last few years. M any banks have adjusted their expenses and more is spent in IT systems to pave a clear way for e-banking. From the intensive survey of literature (CBK reports 2000 to 2009, FSDK 2007, NPSK report 2003, and EAC 2005), it was revealed that in Kenya payments

through ATM machines,

EFTs, Electronic Clearing Services (credit and debit) and

through cell phones are on the rise and have dominated the payments industry. 3.1Retail Electronic Funds Transfer System Electronic funds transfer Point of Sale system (POS) has gained popularity in Kenya due to increased arrangement between merchants and financial institution. EFTPOS is one of e-banking system in which a customer approaches a merchant establishment for purchases without carrying cash. The customer is believed to have ecash or digital wallet from where money is deducted. It may be done by use of credit card, debit card, smart card or change cards. After purchases are made the merchant avails the knowledge about the financial strength of the customer through Financial Data Capture (FDC) machine provides by the financial institution and then deducts the cost of goods purchased. Table 2: Transactions of Electronic Funds transfer system Year Volume of EFT Transactions (000s) 311 2318 2630 3524 3607 3774 49.6 2.53 % Growth rate/ previous year 645.3 13.5 34.0 2.4 4.6

Value of EFT Transactions (Ksh. Million) 1500 1600 1700 8,308 11306 14275 13995 11876 46.4 4.86

% Growth rate/ previous year 6.7 6.3 388.7 36.1 26.3 -1.97 -16.3

2000 2001 2002 2003 2004 2005 2006 2007 CGR T-Value

Source: CBK annual reports 2000-09 Notes: Figures for 2000, 2001 and 2008 on Volume and 2008 for Value was not available

Figure 1 Electronic Funds transfers POS

4000 3500 Trans ac tion Volume in '000s' 3000 2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 Volume Value 16000 14000 12000 10000 8000 6000 4000 2000 0 T ransac tion Value in Ksh Million

The funds are transferred instantly to the merchants accounts. In Kenya the rapid growing of super markets and hyper markets have increasingly started accepting the use of EFTPOS since the system is secure as it helps them from carrying physical cash for the sake of depositing in the banks. Table 2 and Fig1 shows that the value of electronic transaction processed through POS have been increasing from Ksh 1200 in 1999 to KSh 13995 million in 2006 and 11876 in 2007. The volume too recorded an increase from 311,000 to 3607,000 in 2006, and. The rapid increase in both transactions can be attributed to the public awareness of the importance of using e-banking and the disadvantages of traditional banking system. Also, it can be attributed to better security services provided by cards industries or merchants. 3.2 Electronic Clearing System (ECS) operations in Kenya Electronic clearing system includes the clearances of credit and debit payment. Credit payment has gained momentum since it was fist introduced into the money market in August 2000. They are used for transferring value between banks on behalf of

customers (NPSK 2003).Within Kenyas inter-bank exchange arrangement, electronic clearing system is used as a facility for processing payments electronically, via the

automated Nairobi clearing House between the Kenya Bankers Association member banks. Value is given on a same day basis while finality and irrevocability of the payment is guaranteed. Direct debit on the other hand which is in use in many countries around the world are fast becoming the preferred way of paying regular bills and making utility service related payments globally. They are preauthorized by the paying customer who gives permission for bank to debit account upon receipt of instructions initiated by the receiving customer e.g. insurance of mort gage companies.
Table3 Electronic Clearing House Transaction

VALUE (Ksh.Billion) YEAR 2001 2002 2003 2004 2005 2006 2007 2008 CGR TValue DEBIT CRED IT 1913 1901 1891 2052 1953 2642 3060 3616 9.7 4.84 115 144 168 230 355 479 592 676 31.6 19.06 TOTAL 2028 2046 2059 2282 2298 3121 3655 4293 11.8 6.29

VOLUME (Thousand) DEBIT CRED IT 12231 12177 12200 12329 11287 14513 16859 1867 1883 2311 2737 3586 3633 5032 5601 5496 17.8 11.96 TOTAL 14114 14488 14937 15915 14920 19945 22460 24166 8.4 5.63

Source: CBK Annual report 2000-09

The Kenya Bankers association introduced the direct debit scheme officially to be effective from 1s t June 2003. Direct debit transfer is based on the Direct debit authority (DDA) signed by the debtor and the service provider, provided his or her account has adequate funds to pay. In 2003, after the introduction of direct debit, KBA issued comprehensive rules and guidelines for its operation. During the same year the Kenya Bankers Association (KBA) strengthened clearing house rules and regulations in order to minimize risks by being strict on the requirement for prudential capital level maintenance.

Figure 2 Total distribution of value and volume of ECS transaction

5000 4500 4000 Volume in Thousands 3500 3000 2500 2000 10000 1500 1000 500 0 2001 2002 2003 2004 Value 2005 Volume 2006 2007 2008 0 5000 15000 Value in Ksh. Billion 20000 25000 30000

Figure 2 and Table 3 shows that ECHT or credit based payment transactions have been having upward trend since 2001, when the banking industry recorded the value of KSH 115 billion. The value expanded to KSh 114 billion in 2002 and KSh 168 billion in 2003. ECHTs transaction increased by 54.6 percent to KSh 355 billion in the year ended June 2005 compared with KSh 230 billion in June 2004. Also the industry continued to expand as it recorded an increase of 23.6 percent in 2007 to KSh 592 billion as compared to KSh 479 billion in the previous year. The continued increase has been due to the awareness of corporate sector about the importance of using EFT, over manual handling, of transaction. The realization of efficiency, payment of real time to critical time payments and an increased infrastructural development and advancement of ICT systems in Kenya, has also contributed to fast advancement of e-banking. The volumes of transactions processed through ECSs has been increas ing too since 2001 from 183 thousand transactions to 3586

thousand at the end of June 2004 and 5601 at the end of 2007. From this information it can be concluded that ECSs are the wave of the future banking industry. The tasks of standing on queues at bank halls or corporate offices waiting for salaries or dividends is made easy with the use of ECSs or credit payments though electronic means. The realization of efficiency, payment of real time to critical time payments and an increased infrastructural development and advancement of ICT systems in Kenya, has also contributed to fast advancement of e-payments. Figure 2 indicate that the total Electronic clearing transactions has been increasing from 14114 thousand and with the value of Kenya shilling 2028 million in 2001 to 24166 thousand valued Ksh. 4293 million in June 2008. The volume of debit transactions moved in June 2001 was 12231 thousand valued at 1913 million Kenya shillings as compared to 18670 transactions which was valued at3616 million Kenya shillings. The upward trend may be due to the awareness and perceived value of leveraging on technology for convenience, accuracy, cost reduction, fast services and secure transaction within the banking business. The future prospect looks bright for the industry as majority of financial institutions as spending much on technology adoption and product diversification. The overall result indicate that there has is a compounded growth of 11.8% in the entire period for the value of transaction conducted through ECS where ECS credit transactions has been compounded to 31.6% and Credit 9.7%. On the other hand the volume of credit transactions was compounded to a growth of 17.8% for the entire period.

3.3 Kenya Electronic Payment and Settlement system (KEPSS)

The Kenyas Real Time Gross Settlement system (RTGS) officially renamed KEPSS was implemented in September 2004 with the aim of addressing deficiencies in

the current payment methods that have, for along time, relied heavily on traditional payment methods, which include cash ad cheques. These methods are not only proving to risk of theft, cheque substitution and cheque bouncing, but one also subjected to delays in the clearing process (CBK press release 2005). KEPSS is part of the CBKs on going payment modernization efforts as documented in Kenya s National payment system framework, and strategy documents, which was developed in consultation with the Banking industry. The system utilizes the internationally recognized SWFT messaging network for safe and secure delivery of payment and settlement messages to the central Bank for settlement and subsequent payments by receiving banks. Table4 Annual flow trends in KEPSS transactions Year Transaction Volume in000s 120249 155131 232516 39.1 7.61 % Growth Transaction % Growth Average rate/ Value in rate/ Value/ previous Ksh. previous Transaction year Million year 7641197 61.4 29.0 49.9 7929003 14506951 37.8 1.96 3.7 83.0 51.4 62.3

2006 2007 2008 CGR T-Value

CBK annual reports 2006-09

All the commercial banks in Kenya will use the system to exchange payment instructions among them selves and with Central Bank. The system was launched in 29th July 2005 by the finance minister. Figure 3 and Table 4 indicates that KEPSS moved a volume of 23516 transactions worth Kenyan Shilling (Ksh.) 14507 Billion in the year to 30 June 2008, representing 49.6 percent increase in volume and 83.0 percent increase in value compared with the period ended June 2007.

Also it is indicated that the system moved only 120249 transactions worth 7641197 M illion Kenya shillings, in June 2006 since the launch in July the previous year. The average amount moved per transaction increased from 51.4 million to 62.2 million Kenya shillings, reflecting an increase of 21.6 percent.

Figure 3 Flow of annual KEPSS Transactions

250000

16000000 14000000

200000 12000000 10000000 8000000 100000 6000000 4000000 50000 2000000 0 2006 2007 Volume Value 2008 0 Value in Million Ksh. Volume in'000s'

150000

The number of transactions moved per day also increased by 51.4 percent in the year to June 2008 to 949 transactions, compared with 627 transactions in the year ended June 30, 2007. This increase was attributed to increase of awareness of KEPSS as a safe and efficient mode of payment for both high value and time critical payment and to a lesser extent the Safaricom IPO related transfer. For the few years of KEPSS operation, the compound growth of transaction volume was 39.1% over a period of three years and Value growth compounded to 37.8%. It was further indicated that the average value per transaction conducted was 61.4 in 2006, 51.4 in 2008 and 62.3 in 2008.

4. Findings and Concluding remarks The drastic changes in the payment system industry, has been attributed to the realization by the business community and consumers regarding the viability of using the new payment systems which has been accelerated by the changes in the recent advancements in the ICTs. From the analysis, it was found that, transactions through Retail EFTs increased from 311,000 in 2002 to 3,774,000 in 2007 indicating a compound growth of 49.6%. The projections show that in the near future the payment industry is going to record high figure on EFTs usage countrywide. The recent launched mobile banking financial transfer system of which of service has gone global (M -Pesa) which allows customers from UK to transfer funds to Kenya will also increase the up wards trends in EFTs. The transactions moved through ECS in Kenya, has been increasing from June 2000 (14,114) to 24,166 (70.9%) thousand by June 2008. The compound growth rate of the entire period of study in Kenya was 11.8%. Transactions moved through Kenyas RTGS officially known as Kenya Electronic payment and settlement system (KEPSS) has been increasing since its launch in July 2005. In 20008 (232,516), the industry recorded 93.4% increase from June 2006 (120,249).The growth of the entire period was compounded to be 37.8%. This is due to the initiatives of the CBK and continuous advice to banks to leverage on the new IT systems which reduce cost and which increases convenience and efficiency. 5. Policy recommendations and S cope for further work Though the industry experiences high trends, e-payment seems to be at its nascent stage in Kenya. The financial institutions that have implemented the systems partly should fully implement the systems for them to reap the fruits of technology. CBK in its responsibility should roll out updated guidelines which will cater for the confidence of

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