Why Zain’s money service failed to get CBK nod

By David Ohito

Fresh details emerged on why Safaricom’s money transfer service was cleared by the banking regulator, even as an upgraded version by its competitor hit the skids.

In the absence of specific legal or regulatory guidelines to guide the operations of such services, CBK opted to use M-Pesa as a yardstick to deny Zain approval for its yet to be launched Zap service.

Meanwhile sources in Zain indicate that partners signed up for the service are getting increasingly edgy over the delay of its launch.

However, the company says it has not scrapped the project, despite the delay.

An audit by CBK cleared M-Pesa, but the sheer scale of the services to be mounted on Zap, appeared to have spooked Treasury mandarins, despite the many safeguards Zain built into the service to prevent its misuse.

Risks and remedies

Zain-Kenya Managing Director Rene Meza at a recent function. Despite delays in approval to launch its Zap service, the company has not scrapped the project. The service will take over from the Sokotele product. Photo: Tabitha Otwori/Standard

Central Bank of Kenya Governor, Prof Njuguna Ndung’u had ordered his oversight team to single out any risks posed by the M-Pesa service, and identify remedies.

The details are contained in a report by CBK entitled, Brief on M-Pesa Money Transfer Service.

Zain Kenya, formerly Celtel Kenya, have been developing Zap, to take over from the Sokotele product.

Econet has also proposed to introduce a similar product with product name Obopay. M-Pesa funds collected by agents are deposited in a trust account at the Commercial Bank of Africa. This account provides the legal protection for the beneficiaries.

Under M-Pesa, the money is not under the control of Safaricom, and cannot be employed for purposes such as lending, investing.

CBK says that since M-Pesa is a money transfer service, and not a bank account, it does not contravene the Banking Act.

Legal protection of the money in the trust account is provided for in the trustee deed. Interestingly enough, Zain has adopted similar safeguards, and even added others, but has still been unable to get the regulator’s nod.

Various legal instruments pertaining to this service, including the trustee deed and partnership agreements have already been presented to CBK.

Issues raised

A letter from CBK to Zain raised a number of issues. Among them was that it be a party to the agreement between Zain and its trustee bank, Standard Chartered Kenya, a curious request, considering that CBK is the regulator and has sufficient powers to intervene under current regulation.

Zain has signed agreements with Standard Chartered Kenya, a leading supermarket chain and Kenya Power and Lighting Company (for payment of electricity bills.

Funds in the trust account are deposited in Standard Chartered Bank, and are regulated by the Central Bank of Kenya under the Banking Act.

The report says that CBK "and other regulatory bodies have a challenge to provide an enabling environment for delivery of these technologically driven innovative money transfer services in order to deepen access to financial services in Kenya."

The number of customers using the M-Pesa service has increased from 876,000 in October 2007 to 3.7 million in August last year.

In the same period, transactions increased from Sh2.83 billion in October 2007, to Sh16.75 billion in August last year.