Local banks bet on Pan-African payment system to spur trade

Kenya's leading lenders KCB Group and Equity Group, are strategically aligning with the Pan-African Payment and Settlement System (PAPSS) to capitalise on burgeoning intra-African trade.

They view the platform as a key to unlocking growth as regional integration efforts gain momentum and global trade dynamics shift.

KCB Group, the largest lender by asset size, and Equity Group, boasting the largest customer base, have both joined PAPSS, a centralised financial market infrastructure developed by the African Export-Import Bank (Afreximbank).

This move positions them to facilitate seamless cross-border payments and trade transactions across the continent, reducing costs and processing times for their clients.

The integration comes at a crucial juncture as African leaders champion the African Continental Free Trade Area (AfCFTA), aiming to create a unified market of 1.3 billion people.

For countries such as Kenya, facing headwinds from ="https://www.standardmedia.co.ke/business/amp/financial-standard/article/2001511458/kenya-joins-new-payment-system-in-bid-to-end-dollar-dominance">rising global protectionism< and seeking new export destinations, the AfCFTA represents a vital new battleground for trade and economic expansion.

KCB Group, the first East African bank to sign up, highlighted that PAPSS's net settlement mechanism will alleviate pressure on demand for foreign currencies, fostering a more efficient and sustainable regional trade framework.

With a presence in seven African countries, including Uganda, Tanzania, Rwanda, Burundi, South Sudan and the Democratic Republic of Congo (DRC), KCB aims to leverage its extensive regional network to promote PAPSS adoption.

"PAPSS will deliver multiple advantages and efficiencies to intra-African trade payments, including real-time payments and a decrease in the liquidity requirements of commercial banks," KCB said.

“With a presence in seven African countries (Kenya, Uganda, Tanzania, Rwanda, Burundi, South Sudan, and DRC, KCB brings on board its payments and collections expertise spanning over a century.”

KCB reckons its customers will now have access to vast economic opportunities that will deliver multiple advantages and efficiencies, especially when conducting intra-African trade payments.

“PAPSS will deliver multiple advantages and efficiencies to intra-African trade payments that including a reduction in the duration and time variability of cross-border payments across Africa,” the lender says.

="https://www.standardmedia.co.ke/sports/amp/business/2001516795/afrexim-pushes-for-africa-trade-bloc-as-protectionism-bites">PAPSS is expanding<, now including 15 central banks, over 150 commercial banks, and 14 switches across Eastern, Western, Northern, and Southern Africa.

Its adoption has surged as financial institutions integrate PAPSS into their digital platforms, promoting greater access to services and economic integration.

The network expects to add more central banks soon, broadening citizen benefits from  AfCFTA.

KCB Group recently received regulatory approval from the Central Bank of Kenya (CBK) to progress the sale of National Bank of Kenya Ltd (NBK) to Access Bank PLC (Access Bank). 

The lender said the move marked a positive step towards the completion of the transaction that began in March 2024.

Since then, the two entities have been working together to complete the transaction, working with regulators and shareholders to acquire the requisite approvals. 

Equity Group's move to join PAPSS further underscores the growing confidence in the platform's potential the platform’s backers say.

While specific details of Equity's integration are still emerging, the bank's significant regional footprint, with subsidiaries in Uganda, Tanzania, South Sudan, Rwanda, and the DRC, positions it to significantly contribute to the system's uptake.

For the year ended December 2024, Equity's regional operations accounted for a substantial 49 per cent of its total assets and 54 per cent of its profit before tax, highlighting the importance of these markets for their growth strategy.

President William Ruto has been a vocal proponent of PAPSS, advocating for its adoption to reduce the reliance on the US dollar and other foreign currencies in intra-African trade.

CBK Governor Kamau Thugge recently confirmed ongoing discussions for Kenya's full integration into the system, emphasizing its potential to alleviate foreign exchange shortages and enable Kenyan traders to fully exploit opportunities within the AfCFTA.

Afreximbank President Benedict Oramah, the architect of PAPSS, estimates that the platform could save African businesses about $5 billion (Sh650 billion) annually in transaction costs once fully adopted.

By enabling payments in local currencies, PAPSS aims to bypass the need for costly third-currency conversions, easing pressure on local exchange rates and fostering greater intra-continental commerce.

As the AfCFTA takes shape, analysts say the strategic embrace of PAPSS by major Kenyan lenders like KCB and Equity signals a broader trend of African financial institutions positioning themselves to facilitate the anticipated surge in regional trade, seeking new avenues for growth beyond their domestic markets amidst a complex and evolving global economic landscape.

Oramah said earlier that under the new system, transaction costs will be lower because traders or investors do not need to convert each country’s currency into the US dollar, easing pressure on the local currency. 

Getting the coveted US currency locally has not proved easy in the recent past amid the depreciation of the Shilling. 

Kenyan businesses from diverse sectors have in recent months complained of difficulty in accessing the dollar in quantities they want, forcing them to wait for days to weeks to accumulate the funds to enable them to make payments to their overseas suppliers. 

This has forced the government to intervene, with President Ruto vowing to address the dollar crisis. 

Some Kenyan traders said weeks earlier they were unable to source enough dollars on a reliable basis, forcing them to scale down their operations. 

Currently, a buyer in Kenya who intends to purchase goods from a seller in neighbouring Uganda is required to pay the seller in a third currency from outside the continent, either the US dollar, the Euro or the British pound. 

But the new system will enable instant payment whereby traders in Kenya and other regional countries will no longer need to convert local units into hard currencies, its backers say. 

The Papss is tipped to reduce transaction costs through more efficient direct rates and faster transfers, according to the platform’s developer -Afreximbank. 

That way, Kenya and other African countries are expected to reduce dependency on the US dollar and other hard currencies, a situation that has particularly left Kenya facing external shocks that have choked supply chains. 

Under the new system, a Kenyan trader will issue a payment instruction in his or her local currency to their bank or payment service provider.

The payment instruction is then sent to the new payment system, which is then expected to carry out all necessary validation checks. 

The order is then forwarded to the beneficiary’s bank or payment service provider with the receiver’s bank clearing the funds in their local currency. 

This will enable Kenyan traders to reduce costs and ease intra-African trade, backers of the new system say. 

The new system is also tipped to cut the time it takes to conclude cross-border payments from up to 14 days to 120 seconds and facilitate payments for proceeds made from the African Continental Free Trade Area. 

Currently, a buyer in Kenya who intends to purchase goods from a seller in neighbouring Uganda is ="https://www.standardmedia.co.ke/article/2001475662/ruto-plan-to-end-dollar-dominance-in-african-trade-deals-gets-regional-backing">required to pay the seller in a third currency< from outside the continent, either the US dollar, the Euro or the British pound. 

They also have to pay extra charges to have the agreed sum processed and sent to the seller, and even then, they have to wait several days for transactions to clear. 

Aside from time constraints, the process of currency conversation adds to the cost of doing business within the continent.

One of the factors hindering trade according to experts is reliance on third currencies - the US dollar, the euro and the British pound - for the clearing and settlement of cross-border payments and transactions, which, in turn, lead to high costs and long transaction times. 

The new platform, consequently, is billed to provide a natural hedge for the business community to protect against risk exposure, thus creating diversification and ultimately boosting local currency exchange rate stability.