Cheque Truncation to Connect Rural Economies to the Centre

Published on 16th August 2011

As Kenya gears up to a County Government driven economy; the Central Bank of Kenya and Kenya Bankers’ Association has put in place a cheque truncation platform that will ensure smooth financial transactions in rural economies. Traditionally, upcountry bank customers had to wait for up to 10 days to have their cheques cleared. Their Nairobi based counterparts encountered only 3 – 4 day clearing period. Banks spend an estimated Ksh 256 million annually to courier cheques from upcountry to Nairobi to the central clearing System.

Upcountry employees and business deals had to wait for up to 10 days to get money on their account if paid by cheque. The economic cost of this long wait is yet to be quantified. One can characterize the cost of delayed payments by capturing delayed projects; poor cash flow and inability to make quick business decisions among others. For farmers, it means delayed response to onset of rains during planting season; which has potential to lead to low crop yields. That explains in part why upcountry business outlets always insist on cash. Woe unto a business entity if once a cheque goes through the 10 day period and is not honored for some reason; goods would have left and another cycle started to chase for the money. Carrying cash on the other hand gives rise to insecurity with thugs keen to grab brown paper bags and money stashed below the bed pillow!

Majority of Sub Saharan African governments unfortunately abdicate their role and operate as though they were private sector entities investing where markets are.  As a result, Kenya is grappling with unequal economic growth that has centered mostly in the capital city Nairobi and along major highway and railway line from the Coast to Western Kenya. The ongoing famine episodes in North and Eastern Kenya against the backdrop of food abundance in Western and parts of Rift Valley clearly demonstrate the devastating effects of politics and economics of exclusion.  The banking sector has traditionally followed a similar pattern of pursuing clientele along the “economic belt.”

Introduction of mobile phone money transfer popularly referred to as MPESA brought much relief to regions excluded from financial services through branchless banking. Mobile phone money transfer has it limits in terms of the highest amount one can send Ksh 70,000 in one go (up to Ksh 150,000 in one day and one can maintain up to Ksh 100,000 on the MPESA account) and unpredictability of availing liquid cash on time at the receiving end. A combination of the new Cheque Truncation System (CTS; which allows up to Ksh 999,999 on one cheque) and mobile money transfer systems will connect upcountry economies to the center of Kenyan economy and by extension the global economy.

The CTS entails transmission of a cheque image electronically to the central clearing system without having to move the physical cheque from the point of banking. It is envisaged that this system will improve customers service delivery (e.g. upcountry cheques processed within 3 days as opposed to 10 days); improve payment system efficiency;  reduce cheque handling costs; improve risk management;  reduce liquidity risks and ensure efficient processing of cheques. Banking insiders indicate that this system will also help curb cheque related fraud to almost 0%. According to Deloitte, Kenyan financial institutions lost close to Ksh 3 billion in 2010 alone through fraudulent activities related to identity theft, electronic funds transfer, bad cheques, credit card fraud, loan fraud, forgery of documents and investment scandals.

According to the CEO of the Kenya Bankers’ Association Habil Olaka; this initiative may soon catch up in the East African Community member states. Planners keen to push for County Governments economic blue prints ought to think long term and beyond the county pool to both national and regional markets. Kenyan banks have joined the mobile phone sector to lead the way on how to connect the economically excluded regions to the center through efficient cheque transaction initiative.

By James Shikwati.
The author james@irenkenya.org is Director of Inter Region Economic Network.


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