By Jackson Okoth
It will soon be possible for commercial banks to eliminate the physical movement of cheques, with images.
This is expected to speed up the process of settlements and ultimately alter the clearing cycles from T+3.
Thus, the clearing cycle would be shortened, making it possible for customers to realise the proceeds of cheques early.
Industry officials confirmed that the tendering process for the much awaited cheque truncation project is complete, and an agreement with a key supplier of the required hardware and software for the electronic clearance house will be signed this week.
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"We have gone through the legal documentation and will be executing the agreements once all negotiations with the supplier are complete," Mr John Wanyiela, Executive Director, Kenya Bankers Association (KBA) told Financial Journal.
The Association is also in the process of negotiating with service providers for the supply of the Wide Area Network that will connect the clearance house to data recovery sites and member banks.
"Banks are working closely with project managers and we expect the new system to be delivered and rolled out in January 2011," said Wanyiela.
The five-year cheque truncation project is under the management of PricewaterhouseCoopers, with commercial banks footing the bill for this huge investment, estimated to be millions of shillings.
"We anticipate that modernisation of the clearance house will come with certain efficiency levels. For instance, only images will be used in an electronic clearance platform, thereby saving on transport cost of moving paper cheques," said Wanyiela.
Banks have been given the option of choosing whether to capture the images, transmit them to clearing centres from either the counter or to centralise the imaging process.
"The model that banks choose will therefore vary, but transmission of data will not be online. It will be done at intervals to mitigate the risk of communication breaking down," said Wanyiela.
He added that there is high expectation in the industry that with improved cabling and communication infrastructure, the risk of banks failing to transmit data to the clearance centres will be a rare occurrence.
"The law has already been amended and all that remains is setting up of an IT system to effect the truncation project," said Mr Kaburu Muguika, an associate consultant with the Kenya Institute of Bankers (KIB).
Cheque truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument is truncated at some point en-route to the drawee branch and an electronic image of the cheque is sent to the drawee branch along with the relevant information.
Modernisation of Kenya’s national payments system began with the Automation of the Nairobi Clearing House in 1998 with the aim of enhancing the clearing of cheques between banks using Magnetic Ink Character Recognition (MICR) technology and Electronic Funds Transfer (EFT) payments. The result of this policy shift was the reduction of clearing time from a high of 14 days to three days.
The second and third step in this modernisation process was the launch of Kenya National Payments System Framework and Strategy Document in September 2004 and the Kenya Electronic Payments and Settlement System (KEPSS) in July 2005.
KEPSS implementation helped phase out the previous paper-based inter-bank settlement system and completely transformed the management of liquidity in the banking industry.
In 2008, CBK in conjunction with Kenya Bankers Association initiated other modernisation programmes, which are ongoing.
They are cheque truncation, Value Capping, Failure to Settle Mechanism and the G- Pay Project. All these are aimed at mitigating risks and enhancing the efficiency and effectiveness of Kenya’s
payments system.
"The introduction of the Real Time Gross Settlement System (RTGS) has enabled banks to pull out high value cheques from the clearance house," said Wanyiela.
He cites the Kenya Revenue Authority as one of the beneficiaries of the RTGS, which has enabled the Authority to eliminate fraud in VAT collection as well as timely payments from large taxpayers
Low collection cost
"Cheque truncation speeds up collection and therefore enhances customer service, reduces the scope for clearing related frauds, minimises cost of cheque collection, reduces reconciliation problems and eliminates logistics problems," said Muguika.
He added that contrary to perceptions, cheque truncation is a more secure system than the exchange of physical documents in which the cheque moves from one point to another, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle.
In addition to operational efficiency, cheque truncation has several benefits to the banks and customers, which includes introduction of new products, re-engineering the total receipts and payments mechanism of the customers, human resource rationalisation and cost effectiveness.
