Personal Credit rating in Kenya

In the mid 90s there was a wakeup call as major Banks struggled with non performing loans which were greatly affecting their bottom line. The government of Kenya had to bailout some banks where it was the major shareholder to prevent obvious closure. This resulted in a great debate in Parliament and some defaulters ended up being mentioned in Public. So when the suggestion to have a Credit Rating Bureau was made many welcomed the idea.

 Justification of Personal Credit rating in Kenya

Personal Credit rating in Kenya compiles and maintains an individuals’ credit history and aims at evaluating the ability of the potential borrower to repay a loan that is Credit rating. It is a recognized evaluation of an individuals’ repayment ability based on financial transactions carried on in the past, that is, credit worthiness of an individual. This credit worthiness is essentially determined through statistical analysis of the available credit data.

With introduction of products by the banks such as unsecured personal loans, mortgages, and unsecured overdrafts, it is important for banks to have good credit rating system. Personal Credit rating in Kenya is still not yet fully functional because most data is still being collected.

Banks are still using their own Credit Scoring models. An individual’s credit score affects his or her ability to borrow money through the banks.

 Some of the factors that influence Personal Credit rating in Kenya include:

• Ability to pay a loan pegged on asset base.
• Debt ratio/ level of the individual.
• Spending patterns of the person.
• Interest rate charged on existing loans and the future loans.
• Saving patterns of the individual.

 Personal Credit rating in Kenya can be used for the following:

1. To help determine whether an individual can be offered any credit facilities, for example, unsecured personal loan, credit cards etc.
2. It can be used to determine and adjust the insurance premium being charged to an individual. This especially applies to insurance policies taken when being granted a credit facility.
3. The ratings are also important to substantiate an individual’s eligibility for employment.

Personal Credit rating in Kenya has definitely changed how banks and even individuals do business because it is used to establish the integrity of an individual.

Electronic payment services and online banking accounts

Paperless banking concept which has been in existence for the last decade has however recently been accepted in the developing economies or countries. In a tradition where all banking transactions are evidenced on paper it has been a very difficult concept to accept especially with the rural population in these countries.

Change is inevitable and in order for these countries to remain competitive in what has become a global market, they must adapt electronic payment services and online banking accounts.

Demand by the customers (Market) for faster and more efficient service has increased greatly and these changes must be embraced. E- Payment also known as Electronic Payment services and Online Banking is a revolution in the banking industry. It is an efficient and faster way of banking and making payments.

Apart from the positive side of this revolution, there is a downside to it. The disadvantages include:

Electronic Payment services and Online banking accounts Fraud

Fraud is on the increase. Fraudsters have taken advantage of this technology to defraud unsuspecting buyers by giving them substandard goods or services, at other times none at all. Most payments are made without actual verification of these goods.

Fraud may be due to error performed by well-meaning staff. Since the transactions are real time, errors can be difficult to reverse before the funds fall in the wrong hands.

Electronic Payment services and Online Banking accounts have increased potential for systems security.

There is compromise to system security with hackers obtaining confidential customers account information and using the same to make unauthorized transactions from the accounts resulting in millions of shillings being lost.

Electronic Payment services and Online Banking accounts different legislation

The difference in legislation and laws of each country make it tedious and time consuming to follow up on payments made in error or even fraudulent transactions in the various accounts. This is a challenge in cross border transactions resulting in frustration to bring the culprits to book

Auditing Electronic Payment services and Online Banking accounts

Auditing of systems is quite complicated, unlike auditing of paper which has been done over the years. One must have special skills to be able to audit systems making it difficult to arrest fraudulent transactions.

Electronic Payment services and Online Banking accounts systems failures

System failures are rampant especially in situation where the software in place is not able to cope with the volumes of the transactions resulting to payments not being made on time and which could result in penalties being charged.

There must be continuous upgrade of both the software and the hardware to enable the Electronic Payment and Online Banking be efficient therefore bring the issue of  huge capital outlay by the companies at all times.

Electronic Payment services and Online Banking accounts and anti-money laundering.

It has also encouraged money laundering through drug trafficking and terrorism and since many organizations have no capacity to audit the system, these have gone undetected.

Electronic Payment services and Online Banking accounts is a good concept which is fast and convenient but the above challenges need to be addressed to enhance safety and security.

Advancement in Mobile Banking Use

Mobile Banking

Mobile banking is where one can send money through the phone and the receiver access the funds without having to go through the bank.  Majority of the mobile phone companies have collaborated with Banks to enable their subscribers access money in their bank accounts through these money transfer facilities on mobile phones.

The bank customers must subscribe to Mobile banking facilities. subscribers must ensure that confidentiality is maintained. They must also avoid fraud, by use of the secret code which sent to the customer. This code is also known as the Personal Identification Number, which should only be known to the customer and should at no time be revealed to any third party.

This has been a great breakthrough for banks given that their customers can access money conveniently.  They recieve Funds anytime, anywhere and not restricted by banking hours.

Mobile Banking range of services

There are a range of services which the bank’s customers  and banking industry in kenya can enjoy through this collaboration

• They can inquire their bank account balances without necessarily visiting the banks premises or the Automatic teller machine (ATM). This reduces queues in the banking halls and improving on customer service.
• The customer can purchase airtime or phone credit  through their accounts without having to withdraw the cash first and then purchasing the airtime saving on the time for the customer.
• The customer can sign up to be alerted by the bank anytime there is a deposit in their account, for example, salary deposit. Customers do not have to visit the bank premises to be able to budget and even make transactions.
• Bank customers do not have to carry cash which can be a great risk. They are still able to easily pay for goods or services through transfer of the money to the vendor. some of the services include Kenya Airways Tickets purchases, pay for water and electricity bills.
• The customer can transfer money from their bank accounts to their mobile accounts and access the funds.
• In recent days, some mobile service providers have teamed up with international money transfer companies like Western Union. this partnership allows people in the Diaspora to transfer money back home safely and conveniently. the Recepients of such funds are not bound by banking hours to acess these monies unless the bank is an agent of Western Union.

 Mobile Banking and Government Development  Policy and  Planning

With the Vision 2030 in Africa and indeed the developing world,  gearing up for twenty four hours economyis becoming a reality through mobile banking.  Banking in Kenya has greatly been revolutionized by mobile banking with bank customers able to  access of their money from the bank accounts twenty four hours a day, seven days a week.

 History of Front office services Activity

Front Office Services Activity

Traditionally Savings and Credit Societies facilitated provision of affordable loan facilities to its members. Majority of these Savings and Credit Societies usually loan their members three times the shares they hold with the society. These types of loans are categorized as school fees loan, emergency loans or quick loan and development loans. The loan repayment period is usually between twelve and thirty six months.

The idea of Front Office Services Activity was birthed in these Savings and Credit Societies. AT that time, banking services were out of reach for the middle and low class income earners due to the high account maintenance commission and minimum account balance.

The main purpose of this Front Office Services Activity was to enable members open accounts and operate them. Even though this was a good idea there are some un-scrupulous members of Central Management Committee membership who were determined to swindle their members of their hard earned income through this Front Office Services Activity.

 Challenges of managing front office services activity

Front office services activity is a savings and deposit taking enterprise. this attracts unscrupulous people. They are supervised by the Ministry of Co-operative Development. The Ministry does not have or seem to have capacity to adequately supervise the FOSAs.

Due to loopholes created by inadequate supervision, corrupt Committee members embezzle funds from the front office services activity account-holders’ savings accounts.

Central Management Committee members are elected into office. Majority of them do not have qualifications to manage this Front Office Services Activity.

 Measure that can used to protect front office services Activity members

In order to protect members deposit and save the Front Office Services Activity, the following should be put in place:

• A regulatory body should be establishing to monitor the activities of each Front Office Services Activity. This body should also vet the Savings and Credit Societies who intend to start offering these services.
• Qualified personnel should be engaged to effectively run these services. These staffs will be tasked with making sensible business decisions, formulating policies and controls, and taking responsibility of  financial performance of the front office services activity.
• The deposit protection fund should be expanded to include the front office services activity, to protect the members from losing their hard earned monies.
• The services of independent auditors should be obtained as opposed to the Ministry of Co-operative Development auditors. Final accounts should be availed to all members and the public at large.
• A Board of Management should be constituted to ensure that the  Front Office Services activity are professionally managed.

The critical role played by front office services activity in the economic development should be recognized and encouraged. Countries should adopt this kind of banking channel to ensure financial inclusion for its poor and marginalized citizens. Front office services activity could be considered as a type of Agency banking.

M-Banking: Awareness Creation Required

Recent developments have seen banks like the Kenya Commercial ,Equity and Cooperative introduce mobile banking services.These range from services that allow deposit and withdrawal of cash amounts of a certain speficied value.

Whilst this may seem a good move by both the banks and the service providers, there is need for the public to be sensitized on this. This will help avoid scenarios that have resulted in the rise in cases of mobile fraud as been noted in the recent past.

there are of cases where M-Banking agents have been killed or robbed at gun point by persons posing as customers.There have also been instances where clients have been conned into transferring monies to people under false pretenses.

This scenario calls for  information creation strategies that would  help reduce these  situations.

M-Banking: Who should be empowered?

Both the Mobile banking agent and their customers should be enlightened on the following:

The agent:

• She or he should be trained on how to swiftly deliver banking services through mobile networks as per the procedures laid out.
  

  M-banking

• Should be sensitized on how to react when confronted with robbers who pause as clients. This will go a long way in reducing the number of deaths due to resistance from the mobile money transfer agents
• How to detect and  raise an alarm in case of any suspicious customers

The customers:

• Should be sensitized on how to choose wisely between banking services to be executed within a banking hall and those that can be transacted via mobile money agent.
• How to enhance their own safety by choosing appropriate time of the day and locations to carry out their mobile transactions

With the above sensitization’s executed, I do believe that there will be a reduction in the number of mobile frauds as is the case.

The Future of M-Banking

M-Banking is here to stay given the amount of online transactions people are engaging in due to:

• Convenience
• Reduction in access costs

It is therefore paramount for banks in Kenya to continuously device strategies that would enable majority of those already engaged in use of internet for their financial transactions to benefit immensely.

Some of these strategies can still ride on the existing mobile platforms that are commonly used by the public to help reduce on the costs.

As we move closer to Vision 2015,we as a country need to embrace mobile and M-banking as a means of promoting economic empowerment.

Most of the major Banks in Kenya and parts of South America have embraced Agency Banking as a way of improving their services to their customers and cutting a niche for themselves in an ever competitive market.

 Why Banks have embraced Agency banking

Agency Banking

Agency banking has enabled bank customers to access the basic banking services, for example, cash deposit, cash withdrawal and bank balance inquiry conveniently or what would be termed as within the comfort of their neighbor-hood. The convenience of access to banking services and the extended hours that the agencies work has been the most attractive features to the customer (as most agencies work between 8am up to 8pm). The rural population especially has heartily welcomed this idea since they have had to sometimes go through Vexing experiences to access banking services due to the poor road infrastructure and high costs.

 Benefits of Agency banking to Banks

It is not only the customers who have benefited from Agency Banking. Banks too have benefited a great deal at a time when most banks are working towards cost management. Some of these benefits are listed below:

• Huge savings on cost of construction of bank premises and leasing costs when banks are using the Agency premises.
• Human Resource expenses have reduced. The banks do not have to employ new staff to manage the agency and the cost of training if any is to the bare minimum.
• Savings on equipment like furniture and computers.

 Challenges of Agency banking for Banks

There are of course challenges that the banks need to address to avoid losing customers and maintaining the Banker- Customer relationship. The customer is still the responsibility of the Banks and the same has not been delegated to the Agency. Some of the challenges that need to be addressed are:

• Confidentiality – Every year Banks ensure that their staff members sign secrecy forms and maintain confidentiality for all customer information. This should be looked at as these agency employees are not bank employees.
• Security – Most of these agencies are in areas that are what would be considered ‘high Risk’. The Bank needs to audit the security measures being taken by the agencies to ensure the customer can transact confidently without having to look behind their backs.
• Customer service to the bank customer – Service is a huge challenge for the banks as they need to train and retrain the Agents so as to maintain high levels of customer service..
• Issues of Fraud – The agency staff will be a target by fraudsters as they are aware that they will not be able to easily identify fraudulent transactions for example identification  of documents for originality or if they are fake.

The bank must address the challenges that are posed by having agency banking while at the same time taking advantage of all the benefits of having this channel of banking. Agency Banking may eventually lead to financial inclusion in the countries where it has been adopted.

M-pesa bulk mobile money transfer works by listing the phone numbers and amounts of the beneficiaries in one SMS and sending the message to the listed recipients at the same time. The application to perform this task is given to the sender by the bank or financial institution.

M-pesa bulk mobile money transfer

the Advantages of M-pesa bulk money transfer as listed below are not exhaustive.

Salary payments through M-pesa bulk mobile money transfer

M-pesa bulk mobile money transfer is designed mainly for corporate entities. The money transfer may be used to pay salaries to employees who do not even have bank accounts. This makes this banking channel very convenient both for the corporate and the employee. The mode of transfer is simple and fast.

Financial inclusion using M-pesa bulk mobile money transfer

Reaching the unbanked was a target for money transfer services and M-pesa bulk mobile mobile transfer or payment service is achieving this. M-pesa has a very wide reach in the Kenya and neighbouring countries. In Kenya, M-pesa agents are found in all parts of the country. The money is transferred to a cell phone and not an account and there are more people with mobile phones compared to those with bank accounts. The money may remain in the M-pesa account for use when it is required or it may be cashed when cash is required.

Convenience and costs of M-pesa bulk mobile money transfer

Since the funds are sent to the M-pesa bulk mobile transfer or payment service by the click of a button, the speed of transfer is very fast. When the networks are down, the transfer may take a while to reach the recipients.

Unlike banks that close their doors at some timeat the end of the day, M-pesa bulk mobile transfer service is available to the users twenty four hours a day, every day. The recipient can look for an all night M-pesa agent or an ATM that accepts M-pesa transactions, to cash the funds if need be.

Since cash is sent to bulk recipients, the audit of the funds sent becomes easier and the recipients do not have to carry cash in their pockets but can use M-pesa as an account and save their monies. When a cell phone is stolen, funds do not get stolen since the actual cash is not on the phone and a PIN is required to transfer funds. This makes this solution safer than cash payments.

Operating costs for M-pesa bulk mobile money transfer services are competitive. Banks charge less for M-pesa bulk mobile transfers compared to the costs of cheques and cash transfers.

CFC Stanbic bank is the a bank that has this M-pesa bulk mobile money transfer.

Agency Banking in Kenya

Agency banking is not new in the world. It has been used very well in Latin America and Asia. There are few African countries that have taken up agency banking. The agency banking in Kenya guidelines were enacted in 2010. Banks must first apply to central bank of Kenya to get approval to conduct agency banking business. The board of directors of each banking institution interested in agency banking must make policies guidelines and procedures to be followed to ensure that:

• the agents are credible,
• risk identification and mitigation measures are in place and
• Agents are audited on an ongoing basis to ensure that the Agents follow the guidelines from central Bank, their contracts and the banking policy.

Agency banking in Kenya requirements

Agents must also through the banks that sponsor them apply to run agency banking in Kenya business. The agency banking network approval requires the following conditions to be met, together with completing the Agency Banking Network application form.

• The proposed or expected number of agents in each province for the next three years
• The banks must produce a report of the due diligence policy and procedures for their agencies
• The service that the agency would provide on behalf of the bank
• The draft generic agency contract
• The policies, procedures and the technology the bank will apply and use at the agency outlet
• Risk management and mitigation policies in place
• Internal controls and audits performed prior to agents engaging in agency banking
• Policies on anti-money laundering
• Additionally the bank provides their channel, growth and business strategy for agency banking and how it fits in with the overall global strategy of the bank.

The application form for Agency banking is accompanied by a non-refundable fee of Kenya shillings 5,000. Where an application has been rejected, central bank responds to the applicant within thirty days of having received the application form the bank. After the conditions have been met, the bank can resubmit their application to central bank.

Agency banking in Kenya application

An agent application form is also sent to central bank for approval before the agent can start transacting on behalf of the bank. A fee of Kenya shillings of 1,000 per agent is required. An application is renewable annually and the fees are payable yearly. Details included in the forms include:

• Agent Name
• Location, postal addresses and telephone contacts
• The business the agent carried out for the last eighteen months
• The banking services that the agent will handle on behalf of the bank
• Confirmation or declaration from a senior member of the prospective agency stating the minimum qualifications required have been met.

Agency banking in Kenya approved activities.

Activities that the agency can engage are determined by the bank after assessment of the agency.  The agency does not have to perform all the activities. These include but are not limited to:

• Cash withdrawal and deposits
• Repayments of loans
• Bills payment
• Salary payments
• Funds transfer
• Balance enquiry
• Document collection for debit and credit cards, loan applications and account opening forms
• Cheque book requests and collection
• Collection of bank correspondence and mail
• Mobile banking services

Agency banking transactions are denominated in Kenya shillings.

Activities prohibited for agency banking in Kenya

Some activities are prohibited and are listed below. When an agency continues to perform prohibited activities, their contract may be terminated. The list below is not exhaustive.

• Perform and carry out transactions when the networks and communication failure is experienced. The transaction must have acknowledgement or receipt.
• Charge customers any fees
• Carrying out agency banking business when agent is no longer a going concern
• Offer its own banking services apart from the sponsoring bank
• Anti-money laundering services
• Foreign exchange transactions
• En-cashing and depositing of cheques
• Provision of cash advances and loans
• Subcontracting to any business to run its agency banking

Agency banking in Kenya termination of services

A bank or central bank may terminate an agency contract. The bank that had registered the agent must inform the general public by posting the most appropriate notice around the premises or vicinity of the agent. A contract for agency banking may be terminated when the agent:

• When the agent is no longer a going concern
• The agent suffers damage or financial loss that is not remedied after three months
• is involved in criminal activities, fraud and financial mismanagement
• is declared bankrupt by the courts and is being wound up
• death of a sole proprietor or mentally incapacitated owner
• has expired business licences
• violates the provisions of the agency banking guidelines or the terms of the contract with the bank

Many Banks have started Agency Banking in Kenya and have trained the agents so as not to affect the service they offer to their customers.

What is cheque truncation system?

Cheque truncation is a clearing and settlement system that makes use of images and electronic payment data. It does not rely on the exchange of physical cheques. Cheques will no longer be taken to the automated clearing house by courier. Telecommunication links will be used by banks and their branches to send cheque data for settlement.

The customer will draw a cheque and present it to the bank. The bank where this cheque is deposited is known as the collecting bank. The collecting bank will take the image of the cheque leaf that has been presented and also read the information line with the magnetic ink character recognition (MICR) code on the cheque. The information together with the amount to be paid is sent to the paying bank through the automated clearing House for settlement.

The new cheque truncation system is relevant for Kenya shillings and domestic foreign currency cheques drawn on Kenyan banks. This includs United States, Euro and Sterling Pound cheques. For offshore drawn cheques, the old process will not be changed

Advantages for Bank cheque truncation system in Kenya

• Cheque truncation will reduce the time it takes to transmit data between banks.
• The time saved will reduce the clearing time
• There will be accurate reconciliation of accounts
• Paperwork will be minimal.
• Fraud avenues emanating from cheque substitution will be reduced because of the elimination of physical movement of cheques. Any changes on the cheque leaf can be detected.
• The liquidity of the economy will be generally improved because of the reduction of the clearing cycle. The time taken to clear funds will be faster ensuring funds circulate in the economy at faster rates.

Security features for the Bank cheque truncation system in Kenya

• The customer should use dark coloured ink which could either be black or blue when drawing the cheques. This is because the new cheques have been redesigned with security features that identify alterations and fraud attempts. Bank stamps should not be placed where they interfere with the clear appearance of the cheque image.
• Transmission of the cheque details from one bank to another will be encrypted and other security techniques enhanced, so that integrity of data from one bank to another is maintained. Banks cannot alter the cheques either and any attempt to make alterations will result in the image being returned to the originating bank.
• There is a security water mark in the design
• Extensive use of new ultra violet sensitive paper
• Tamper evident paper stock
• Micro text features
• Corporate size cheque leaves which are 4 inches width and 7 inches length. The size of the new cheques is important because of the enhanced security features and the new scanners will easily pick and transmit the cheque settlement details for the electronic clearing process.

Unlike in previous operations, where a cheque is unpaid it will not be returned to the customer. The collecting bank will instead issue an Image Returned Document (IRD) to the payee. The document contains the unpaid cheque image, the reason for the return and the payment information. The IRD can be represented depending on the reason for unpaying.The IRD is sufficient advice for the unpaid cheque.

Bank cheque truncation system customer requirements

The old cheque books must be replaced with the new ones. The deadline has been moved to August 2011 from 31^st May 2011. When the deadline expires, the old cheque books will no longer be valid. Customers have to order the new cheque books from their banks as they normally do. The Bank cheque truncation system channel in Kenya will improve the banking sector service to customers.