After a dry run to test its efficacy, three members of the five-nation East African Community are now fully engaged in the East African Payment System, which allows cross-border transactions to be made in any of the three currencies without involving intermediary international banks. The new system will not only speed up transactions, it will cut costs and boost inter-regional trade. Wanjohi Kabukuru reports from Nairobi.
The East African Payment System (EAPS) is now fully on. The system has started with Uganda, Kenya and Tanzania businesses transacting cross-border trade in their three different currencies.
This trio forms the initial, and larger economies of the five member East African Community (EAC) bloc nations which have advanced financial services structures. The two other community members, Rwanda and Burundi will join at a later date – most likely before end of this year.
Last year, EAC members signed the East African Monetary Union protocol. A key feature of this agreement was the institution of the East African Payment System (EAPS) which went on a dry run starting from 25th November. After a successful test run, the system was officially launched in May.
Through the EAPS, businesses within the three nations can receive and make payments in real time and it will take less time to clear cheques from the current 21 working days. A Ugandan-based firm can now pay for services in any of the three nations using the Ugandan shilling and the respective clients will receive payments in their preferred currency.
This is a major milestone achievement for the bloc. In the last five years the region has experienced frenetic integration initiatives marked by the rolling out of a single customs union, a common market protocol and a single customs territory. In the last decade, the regional central banks have been under pressure from businesses and the EAC to fast track a workable and business-friendly payment system.
EAPS works in a similar fashion to normal banking ‘real time gross settlement system’ (RTGS), which is preferred to the cheque system in the movement of cash between banks and branches.
It functions across borders and is supports all currencies. The plan to integrate RTGS regionally was started in 2012.
High-value payments, small and medium-sized expenditures, school fees and other transactions are now possible with fewer bureaucratic hassles and affordable commissions across the region. Landlocked members of the region have had a tough time in the past complaining of costly fees and regulations imposed by regulators, not to mention being surcharged for currency conversion when executing cross-border payments.
For years, the lack of an effective payments systems has been a hindrance to businesses in the region and in the continent as a whole. According to Payments Systems and Intra-African Trade, a study conducted by the African Trade Policy Centre, which is a division of the Addis Ababa-based United Nations Economic Commission for Africa (UNECA), “in spite of more than two decades of financial reforms, African payments system to transact trade and businesses have remained very cumbersome, underdeveloped, fragmented, costly and inefficient”.
Every country has maintained its own banking payment system with costly cross-border transactions riddled with burdensome procedures, expensive commissions and red tape. It is this barrier in regional trade that has now been addressed in the eastern African region.
By unveiling EAPS, the regional bloc has followed in the footsteps of COMESA’s Regional Payments and Settlement System, which had been set up as a separate payment system way back in 1999 to deal with cross-border payments. Other regional economic community bodies such as the Economic and Monetary Community of Central Africa (CEMACC) have also undertaken reforms of their regional central bank, BEAC, to reduce settlement and payments systems within the central African regional member states since 2003.
Other economic blocs, the Southern Africa Development Community (SADC), the Arab Maghreb Union (AMU) and the West African Economic Zone (WAEZ) have braved severe nationalistic hurdles and governance challenges to set up regional economic payments systems within the last decade. All these efforts are geared towards realising the elusive African Union’s long-held African Economic and Monetary Union ideal.