MOBILE MONEY TRANSFER IN KENYA

THE LEGAL IMPLICATIONS OF MOBILE MONEY TRANSFER

SERVICES TO THE ECONOMY IN KENYA: THE NEED FOR

REGULATORY REFORM

MUSEVE K. RONALD

REG.NO. G34/2674/2010

A Dissertation Submitted in Partial Fulfilment of the Requirements for the

Award of a Degree of Bachelor of Laws (LLB), University of Nairobi

UNIVERSITY OF NAIROBI

APRIL 2014

THE LEGAL IMPLICATIONS OF MOBILE MONEY TRANSFER

SERVICES TO THE ECONOMY IN KENYA: THE NEED FOR

REGULATORY REFORM

MUSEVE K. RONALD

REG.NO. G34/2674/2010

A Dissertation Submitted in Partial Fulfilment of the Requirements for the

Award of a Degree of Bachelor of Laws (LLB), University of Nairobi

Supervised by: DR. NJARAMBA GICHUKI

UNIVERSITY OF NAIROBI

APRIL 2014

DECLARATION

I, MUSEVE K. RONALD do hereby declare that this is my original work submitted for the

award of Bachelor of Laws Degree at the University of Nairobi and has not been submitted

for a degree or any other award in any other university. All secondary sources of information

have been duly acknowledged.

SIGNED ______________________ DATE _________________

MUSEVE KHAVAGALI RONALD

This dissertation has been submitted for examination with my approval as Supervisor,

University of Nairobi.

SIGNED ________________________ DATE ___________________

MR. NJARAMBA GICHUKI

TABLE OF CONTENTS

DECLARATION ..............................................................................................................................I

TABLE OF CONTENTS ............................................................................................................... II

DEDICATION ................................................................................................................................ V

ACKNOWLEDGEMENT ............................................................................................................. VI

ABBREVIATIONS AND ACRONYMS ..................................................................................... VII

LIST OF STATUTES AND BILLS ........................................................................................... VIII

ABSTRACT ................................................................................................................................... IX

CHAPTER 1 .................................................................................................................................... 1

INTRODUCTION ........................................................................................................................... 1

1.1 BACKGROUND ............................................................................................................... 1

1.1.1 The Kenya Communications (Amendment) Act 2009 ................................................. 2

1.1.2 The Kenya Communications Regulations, 2001 .......................................................... 3

1.1.3 The Banking Act ........................................................................................................ 3

1.1.4 The Central Bank of Kenya Act .................................................................................. 4

1.1.5 The Evidence Act, Cap 80 .......................................................................................... 4

1.1.6 The National Information and Communications Technology (ICT) Policy Paper of

March 2006 ............................................................................................................................... 4

1.2 STATEMENT OF THE PROBLEM ........................................................................................ 5

1.3 RESEARCH QUESTIONS ...................................................................................................... 5

1.4 HYPOTHESES........................................................................................................................ 6

1.5 JUSTIFICATION OF THE STUDY ........................................................................................ 6

1.6 RESEARCH METHODOLOGY ............................................................................................. 7

1.7 CONCEPTUAL FRAMEWORK ............................................................................................. 7

1.7.1 The Concept of Mobile Money Transfer ............................................................................ 7

1.7.2 The Concept of Mobile Banking Distinguished ................................................................. 8

1.8 THEORETICAL FRAMEWORK ...................................................................................... 9

1.8.1 The Theory of Technology Acceptance Model (TAM). ..................................................... 9

1.9 LITERATURE REVIEW ....................................................................................................... 11

1.10 CHAPTER BREAKDOWN ................................................................................................. 14

1.10.1 Chapter 1: ..................................................................................................................... 14

The Background to the Study ................................................................................................... 14

1.10.2 Chapter 2: ..................................................................................................................... 14

An Analysis of how MMT Operations Function and the Legal Implications ........................... 15

1.10.3 Chapter 3: ..................................................................................................................... 15

The Legal Framework for Regulation of MMT services ........................................................... 15

1.10.4 Chapter 4: ..................................................................................................................... 15

Recommendations for Necessary Reforms and Conclusion ...................................................... 15

CHAPTER 2 .................................................................................................................................. 16

AN ANALYSIS OF HOW MMT OPERATIONS FUNCTION AND THE LEGAL

IMPLICATIONS ........................................................................................................................... 16

2.1 INTRODUCTION ................................................................................................................. 16

2.2 HOW MMT OPERATIONS FUNCTION .............................................................................. 17

2.3 THE MOBILE MONEY TRANSFER PLAYERS .................................................................. 18

2.3.1 The Mobile Network Operator......................................................................................... 18

2.3.2 The Bank ........................................................................................................................ 19

2.3.3 Agents ............................................................................................................................ 20

2.3.4 The Consumer ................................................................................................................. 21

2.3.5 Regulators ....................................................................................................................... 21

2.4 LEGAL IMPLICATIONS OF MMT SERVICES ................................................................... 22

2.4.1 Proceeds of Crime and Money Laundering ...................................................................... 22

2.4.2 Privacy and Security ....................................................................................................... 23

2.4.3 Consumer Protections ..................................................................................................... 25

2.4.4 Credit Risk ...................................................................................................................... 25

2.4.5 Fraud .............................................................................................................................. 25

2.5 IMPLICATION TO THE BANKING SECTOR..................................................................... 26

2.5.1 At the Initial Stages of Development ............................................................................... 26

2.5.2 The Present Situation ...................................................................................................... 28

2.6 CONCLUSION ..................................................................................................................... 30

CHAPTER 3 .................................................................................................................................. 31

THE LEGAL FRAMEWORK FOR REGULATION OF MMT ................................................. 31

3.1 INTRODUCTION ................................................................................................................. 31

3.2 THE CURRENT REGULATORY FRAMEWORK ............................................................... 32

3.3 SHORTCOMINGS IN THE REGIME ................................................................................... 45

3.3.1 The Existing Laws .......................................................................................................... 45

3.3.2 Privacy and Data Protection ............................................................................................ 48

3.3.3 Prudential regulatory issues in mobile money .................................................................. 49

3.3.4 The Monetary Policy ....................................................................................................... 49

3.4 THE CHALLENGES FOR REGULATORS .......................................................................... 50

3.4.1 Different Objectives for Regulation of the Sectors ........................................................... 51

3.4.2 Inconsistencies in Regulation Resulting from Traditional Separation ............................... 51

3.4.3 Regulatory Arbitrage ....................................................................................................... 52

3.4.4 Uncertainty ..................................................................................................................... 52

3.4.5 Which authority should regulate what? ............................................................................ 53

3.5 CONCLUSION ..................................................................................................................... 54

CHAPTER 4 .................................................................................................................................. 55

RECOMMENDATIONS FOR NECESSARY REFORMS AND CONCLUSION ..................... 55

4.1 INTRODUCTION; ATTEMPTS TO REGULATE ................................................................ 55

4.2 RECOMMENDATIONS ....................................................................................................... 56

4.2.1 MONEY LAUNDERING AND TERRORISM FINANCING ......................................... 56

4.2.2 CONSUMER PRIVACY AND DATA PROTECTION ................................................... 57

4.2.3 FRAUD MANAGEMENT .............................................................................................. 59

4.2.4 CUSTOMER EDUCATION ........................................................................................... 60

4.2.5 AMENDMENTS ............................................................................................................ 61

4.2.6 LIABILITY .............................................................................................................. 62

4.3 CONCLUSION ..................................................................................................................... 62

REFERENCES .............................................................................................................................. 63

DEDICATION

I dedicate this work to my lovely family, starting with my loving mother Esther Khavagali for

all the love and support a mother can ever give to her son, no love can ever rival this love,

may you live long. To my Dad Christopher Khavagali, you are a wonderful gift to me, God

bless.

To my siblings and my in-law who have supported me both financially, emotionally and in

every other aspect, thank you so much for your contribution towards my achievement.

GOD BLESS YOU ALL!

ACKNOWLEDGEMENT

I first of all thank the almighty God for the gift of life and love. With him everything is

possible and by his grace I have come this far.

To my very dedicated and patient supervisor D

r. Njaramba Gichuki, you endured my numerous, disturbing phone calls and text messages

requesting for time to consult and you called and texted back with positive responses. Very

few supervisors can go the full extent of making phone calls to the supervisees reminding

them its time to consult, you ensured this work is done in the most correct way. You are one

in many and for that I say, thank you and GOD BLESS!

To my loving family, thank you so much for your support and love. You are the biggest

blessing I could ever get. Without you I couldn‟t be where I am today and this would not

have been possible. GOD BLESS this family. To my other friends cum family in Nairobi

particularly Dan Shikanga and Hillary Shikanga, God knows your kind hearts and he will

bless you and your families, I thank you.

To my parklands family (friends) especially my room mate Joseph Mwangi, we have come a

long way, we have endured so much together, we have supported each other in all aspects and

we have co-existed peacefully all this while since we set foot in parklands campus. I wish

you a happy life and a successful career. To my other friends and the 2014 class, all the best

in life.

And lastly to the love of my heart Viola Musavi, thank you for being there for me, to comfort

me when the push comes to shove and always putting a smile on my face, I love you.

ABBREVIATIONS AND ACRONYMS

1. CCK - Communications Commission of Kenya

2. CBK- Central Bank of Kenya

3. MMT – Mobile Money Transfer

4. TAM- Technology Acceptance Model

5. IT- Information Technology

6. PIN- Personal Identification Number

7. ICT- Information Communication Technology

8. NSPD- National Payment Systems Division

9. MFI- Micro Finance Institutions

10. SACCO- Savings And Credit Coop. Society

11. CPT- Consumer Protection Taskforce

12. KCA – Kenya Communications Act

13. MNO- Mobile Network Operator

14. PIN- Personal Identification Number

15. KEBS-Kenya Bureau of Standards

16. EAC-East African Community

17. ITC-Independent Television Commission

18. CPT- Consumer Protection Task Force

19. MOF- Ministry of Finance

20. CGAP- Certified Government Auditing Professional

21. FATF- Financial Action Task Force

LIST OF STATUTES AND BILLS

1. Banking Act Cap 488 of The Laws of Kenya

2. Central Bank of Kenya Act Cap 491

3. Kenya Communications Amendment Act, 2009

4. Evidence Act Cap 80

5. Kenya Communications Regulations 2001

6. Kenya Communications Act 2 of 1998

7. Kenya Communications (Electronic Transactions) Regulations, 2009

8. The National Information and Communications Technology ICT Policy of March

9. Science and Technology Act

10. Kenya Information and Communications Bill of 2007

11. Kenya Communications (Importation, Type Approval and Distribution of

Communication Equipment) Regulations 2010

12. Kenya Communication (Consumer Protection) Regulations 2009

13. The Kenya Information and Communications (Dispute Resolution) Regulations 2010

14. Retail Transfer Regulation 2011

15. The Proceeds of Crime & Anti-Money Laundering Act of 2009

16. National Payments System Bill 2011

17. The Kenya ICT Policy of 2006

18. Electronic Retail Transfers (2011)

ABSTRACT

This paper focuses on the mobile money transfer services in Kenya. What is majorly the point

of duelling is the legal implications the new innovation has brought along with it and whether

there is need to reform the existing legal regime to take care of the implications the

innovation has created.

It analyses the way MMT operations function with an aim of making it possible to tell where

there is a niche that the regulators need to fill after discovering the areas that are vulnerable to

exploitation by ill-intentioned individuals and in general the players in the MMT sector, and

the challenges encountered in the process.

The paper will also delve into identifying the specific implications caused by MMT. This will

be after the current regime has been critically analysed and the unregulated areas in the sector

identified. These are the areas that might be used as loopholes to escape responsibility by the

MMT players including the MNOs, the agents, the banks, the consumers and third parties

who might harbour intentions to take advantage of loopholes in the regime to carry out

criminal activities. Challenges encountered in the operations are also dealt with in the same

light.

Finally the paper will offer recommendations on how the challenges faced may be addressed

through regulatory reform. This will be to enable the regulators get a view of what effect the

implications have had and where to incorporate amendments or come up with new

enactments to regulate the industry and ensure its positive contribution towards the economy

in Kenya.

CHAPTER 1

INTRODUCTION

1.1 BACKGROUND

Mobile Money Transfer refers to the moving of money using mobile phone technology

operated by either a mobile phone company or an independent operator1.

The origin of MMT Services can be traced back to April 2007, following a student software

development project in Kenya who came up with the innovation. Safaricom mobile company

then took up the idea and launched a new mobile phone based payment and money transfer

service, known as M-Pesa.2 The service allowed users to deposit money into an account

stored on their cell phones, to send balances using SMS technology to other users (including

sellers of goods and services), and to redeem deposits for regular money. Users are charged a

certain fee for sending and withdrawing money using the service. Other mobile phone service

providers in Kenya and around the world have since adopted this idea and launched similar

services under their respective brands. In Kenya, other services include Airtel Money offered

by Airtel and Yu Cash offered by Yu Mobile.3

For one to access these services he/she needs to own a mobile phone and register for the

service with the respective service provider after which the account is open and the consumer

can access the services.

MMT service providers also operate in conjunction with specific providers of services and

goods which enable consumers to pay for the bills through their mobile phones by obtaining

pay bill numbers. This enables consumers to transfer funds to the mobile account or bank

account of the person they are paying the bill to.

These services have impacted to the economy of Kenya in various ways as shall be explored

by this research. Various sectors of the economy have been impacted upon by these services

mostly due them being cheaper compared to banking services and being readily available

around the clock, and easily accessible even to those living in very remote areas of the

1 Njaramba Gichuki (2013); Law of Financial Institution in Kenya, 2nd edition, LawAfrica Publishing (K) Ltd,

Nairobi, p. 235. 2 William Jack ,Tavneet Suri and Mit Sloan, 2nd version (August 2010), “The Economics of M-PESA,” p. 2 3 Njaramba Gichuki (2013) supra.

republic where banking services have not been extended to reach. Besides, the only

requirement for one to access these services is a mobile phone and there are no charges for

registration. This has made MMT business more successful and to spread so rapidly, by 2012,

a stock of at least 17 million accounts had been registered in Kenya,4 and has become the

most successful mobile phone based financial service in the developing world.5

However in as much as MMT services have greatly impacted the economy of Kenya, there

are no laws that specifically seek to regulate the business. Most of the existing laws touching

the areas of communication, electronic transactions, finances and banking do not address

MMT services. For instance, briefly examining these laws will bring out how the issue has

been left out:

1.1.1 The Kenya Communications (Amendment) Act 2009

In its definitions section, Mobile Money Transfer Services has not been offered a definition.

It‟s the definition of a computer that has been provided instead and the Act thereby goes on to

limit itself to electronic materials in computes as opposed to those in mobile phones. This is

why the Mobile Money Transfer Services remain unregulated by the Act6.

Electronic transactions have been provided for in part IV. A brief analysis of some sub-

sections under section 83 will reveal that the section does not specifically cover mobile

phones as they restrict themselves to computers alone.

The previous Kenya Communications Act 2 of 1998 that preceded this Act did not even

provide for regulation of electronic transactions and neither did it provide for Mobile Money

Transfer Services.

It is through the amendment that led to the 2009 Kenya Communications (amendment) Act

that electronic transactions are provided for.

4 Communications Commission of Kenya (2012). “CCK releases 2nd quarter ICT sector statistics for

2011/2012".

<http://www.cck.go.ke/news/2012/sector_statistics.html > (accessed on 29/11/2013) 5 William Jack ,Tavneet Suri and Mit Sloan, 2nd version (August 2010) supra, p. 1. 6 Njaramba Gichuki (2013) supra, p. 236.

1.1.2 The Kenya Communications Regulations, 2001

This legislation recognizes electronic transactions by defining the terms electronic mail

services, electronic mail services, electronic mail, electronic document interchange and

electronic voice mail but it does not have provisions regulating the use of MMT services. The

Act also does not define Mobile Money Transfer Services.

1.1.3 The Banking Act

Basically regulates banking business and other connected services. The question has to be

asked is whether MMT services may fall under „connected services‟ of banking businesses as

envisaged by the Act. When Safaricom approached the CBK in early 2007, there were no

laws governing a mobile money service like M-Pesa, so the CBK issued a “Letter of No

Objection,” and M-Pesa was launched the following month. At the end of 2008, with the

huge success of M-Pesa and the growing concern of the Kenyan Bankers Association, the

Ministry of Finance asked that the CBK conduct a risk assessment of M-Pesa, which was

done and published in the newspapers and Kenya Gazette in early 2009, basically saying that

the CBK is satisfied with the risk situation and that they do not consider M-Pesa to be a

banking business.7

Section 2(1) (a) defines banking business as accepting from members of the public of money

on deposit repayable on demand or at the expiry of a fixed period after notice8. The act does

not provide for a definition of mobile money transfer services.

MMT will be similar to banking process in that there is the acceptance of deposits by the

agents of the service providers, and the transfer of money from one‟s mobile account to

another‟s as it happens in banking where there is transfer of funds from one‟s account to

another‟s. However despite the similarity, mobile money transfer services cannot be said to

fully and completely fall within the ambit of The Banking Act as seen under section 16(5) of

7 The CBK provides guidance to mobile money under Article 4 of the Banking Act, which covers Payment

Systems, rather than banks. As such, it is the National Payment Systems Division (NPSD) of the CBK that provides oversight, not the Banking Supervision Department. As a safeguard, however, CBK exercises full

supervisory oversight over the trust accounts for mobile financial services providers, which are held at

commercial banks. This effectively sequesters the float and protects it against any eventual financial failure of

M-Pesa. This also precludes M-Pesa from earning the interest on the float. 8 Banking Act (Chapter 488) of the Laws of Kenya, sec.2 (1) (a).

<www.bu.edu/bucflp/files/2012/01/Banking-Act.pdf > (accessed on 29/11/2013).

the Act which clarifies that such a business should be one that lends money to others from the

deposit or one that uses the deposit wholly or partly to finance its activities.

This provision operates to exclude mobile money transfer service providers from the scope of

The Banking Act.

1.1.4 The Central Bank of Kenya Act

This Act does not define mobile money transfer. It is involved in banking is defined by section

2(2) of the banking act which defines this as: the accepting from members of the public of

money on deposit repayable on demand or at the expiry of a fixed period after notice; the

accepting from members of the public of money on current account and payment on and

acceptance of enemies; and the employing of money held on deposit or on current account, or

any part of the money, by lending, investment or in any other manner for the account and at the

risk of the person so employing the money.

1.1.5 The Evidence Act, Cap 80

It does not expressly provide for admission of evidence from mobile phones. It only mentions a

„computer‟. This limits the use of technology. This should be amended to include electronic

gadgets like mobile phones.

1.1.6 The National Information and Communications Technology (ICT) Policy Paper

of March 2006

This policy paper does recognize the need for comprehensive policy, legal and regulatory

framework on ICT. Further it acknowledges the lack of adequate infrastructure in ICT but does

not provide for the solutions. It just states what the government intends to do. In as far as

Mobile Transfer Services and Mobile payment services are concerned this policy does not offer

any assistance.

These and other laws as shall be examined in detail are the existing laws that are supposed to

contain provisions for regulating MMT services but unfortunately they are insufficient to do so.

1.2 STATEMENT OF THE PROBLEM

Mobile phone business is regulated by the Communications Commission of Kenya (CCK).

Its worth noting, however, that CCK is neither sufficiently competent nor qualified to

regulate the mobile money transfer services sector on its own.9 This may be because the

Mobile Money Transfer services involve some banking aspect and information and

technological aspects that may be beyond the expertise of CCK. Besides, the convenience

with the use of mobile money transfer services may have contributed to the overlooking of

the risks involved and the subsequent lack of legal framework to regulate the enterprise.

There are no laws in Kenya specifically regulating the business despite the fact that it

commands a wide consumer base and vastly impacts to the economy in various sectors and

ways. The issues arising include: fraud that usually arises out of a vast range of unregulated

technology being used by consumers and service providers; unfair competition created by

new entrance of service providers who want to win over customers quickly to gain relevance

by offering rates that are prejudicial to other market players and employment of unfair means

of wooing clients; money laundering; and others as shall be explored by this study.

There is also need to determine who among the parties bear responsibility for liability

whenever there is a mistake or default in the course of the transactions; and to lay down

proper requirements to be fulfilled when hiring agents for conducting of transactions.

There is thus an insufficiency of laws regulating MMT services which prompts the need for

legal reforms in the area to cover this fast-rising sector of our economy in order to address the

concerns that accompany it as mentioned above and to enhance and increase the benefits that

come with it for the growth of the economy and achievement of Millenniums Development

Goals and the economic growth Vision 2030.

1.3 RESEARCH QUESTIONS

The following are the three research questions that this study will seek to explore and provide

answers to;

1. What is the legal implication of mobile money transfer services to the economy in

Kenya?

9 Njaramba Gichuki (2013) supra, p. 235.

2. Do we have a sufficient legal framework for regulation of mobile money transfer

services in the economy?

3. What are the necessary reforms that need to be put in place on the existing laws in

order to effectively regulate mobile money transfer services?

1.4 HYPOTHESES

This study will seek to prove or disprove the following put down hypotheses;

1. The emergence of MMT services has had legal implications to the economy of Kenya.

2. The existing laws are insufficient in regulating MMT business

3. Reforms are required to ensure the enterprise is sufficiently regulated for efficiency

and convenience purposes.

1.5 JUSTIFICATION OF THE STUDY

Mobile money transactions have operated in a widely unregulated environment since the

innovation was introduced in Kenya. The laws that existed by the time of emergence of the

services had not been promulgated with a prediction of this innovation behind the minds of

the legislators since it had not been foreseen by them that such would come up, hence the

laws do not address MMT services. The central bank of Kenya have offered too minimal

regulatory requirements, which left many players in the financial sector with fear that MMT

services would in some way have a choking effect on their business prospects.10

Thus, while looking at the beneficial impact of the innovation there is need to explore areas

that have posed challenges in terms of regulation, what regulations ought to be put in place

bearing in mind that too much tough regulations have the tendency of inhibiting further

innovation and frustrating the further development innovation. There is also need to point out

in the various existing laws the exact areas that need changes so as to ensue MMT is covered

by them. These will form the main part of my research work.

Banks in particular expressed concern as to why the services were operating in some kind of regulatory

vacuum. Their unease arose because many MMT subscribers actually use their mobile accounts as checking

accounts and thus a great deal of money has shifted from physical bank accounts to mobile phone accounts.

Different players from different sectors have had to engage in collaboration with mobile money service

providers and create networks in the financial ecosystem to co-exist and to some extent do away with the threat.

1.6 RESEARCH METHODOLOGY

In this research I will do a qualitative research in which I intend to rely on secondary sources

of data. The secondary sources will be mainly library research where I will use published

textbooks, journals, newspaper articles and magazines. I will also do desktop research where

I will peruse statutes, case law and government papers, reports and records. I will also to a

large extent research on the internet.

I will also analyse the way mobile money systems operate so as to have a clear picture of

what how they work before I can delve into the substance of my research topic.

The main challenge that will impede me from relying on primary sources is the unavailability

of such information due to scarcity of experts to provide the information and the expenses

accompanying such pursuit. Time required for travelling to places of interview and conduct it

will also be another limiting factor to the use of interviews.

1.7 CONCEPTUAL FRAMEWORK

1.7.1 The Concept of Mobile Money Transfer

Mobile Money Transfer refers to the use of a mobile phone in order to transfer funds between

accounts created via mobile phone, deposit or withdraw funds, or pay bills. This term is also

used for the broader realm of electronic commerce; it can refer to the use of a mobile device

to purchase items, whether physical or electronic.11

Although various definitions have been used when discussing the provision of financial

services through mobile phone networks, this paper will use the term “Mobile Money

transfer” to refer to the convergence of mobile telephony and financial services.“Mobile

Money” includes three elements: an electronic stored-value account linked to a user‟s mobile

phone; mobile money software that allows users to manage their accounts; and, a network of

agents where users can exchange between cash and electronic value. The software can afford

a variety of uses such as the ability to check one‟s account balance via text message, the

means to pay with or send money from a digital account on a mobile phone, or the practice of

receiving insurance or credit products over the mobile network including purchasing of

airtime from one‟s account.

11 <http://www.businessdictionary.com/definition/mobile-money.html#ixzz2iiNglcbE> (accessed on 29/11/2013).

The initial concept of MMT services started when Safaricom launched M-pesa which was

intended to create a service which allowed microfinance borrowers to conveniently receive

and repay loans using the network of Safaricom airtime resellers.12

This would enable

microfinance institutions to offer more competitive loan rates to their users, as costs are lower

than when dealing in cash. The users of the service would gain through being able to track

their finances more easily. When the service was piloted, customers adopted the service for a

variety of alternative uses and complications arose. In discussion with other parties, M-Pesa

was refocused and launched with a different value proposition: sending remittances home

across the country and making payments.13

Presently many mobile phone services provide the services which are not classified as

deposit-taking as the banks do. The service enables its users to deposit and withdraw money,

Transfer money to other users and non-users, Pay bills, Purchase airtime, and to transfer

money between mobile phone accounts.14

1.7.2 The Concept of Mobile Banking Distinguished

MMT is sometimes confused with mobile banking which is a different concept altogether.

Mobile banking is a system that allows customers of a financial institution such as a bank to

conduct a number of financial transactions through a mobile device such as a mobile phone

or personal digital assistant. The earliest mobile banking services were offered over SMS, a

service known as SMS banking. With the introduction of smart phones with WAP support

enabling the use of the mobile web in 1999, the first European banks started to offer mobile

banking on this platform to their customers.15

Mobile Banking is defined as the provision and availment of banking and financial services

with the help of mobile telecommunication devices. The scope of offered services may

include facilities to conduct bank and stock market transactions, to administer accounts and to

access customised information.

Hughes, N., & Lonie, S. (2007). M-PESA: Mobile Money for the "Unbanked": Turning Cellphones into 24-

Hour Tellers in Kenya. Innovations: Technology, Governance, Globalization, p. 63–81. 13 Hughes, N., & Lonie, S. (2007) supra p.6. 14 Vodacom. Send money by phone with Vodafone M-PESA, 19 February 2009.Roshan. M-Paisa—The Hawala

On Your Mobile!, 19 February 2009. 15 "The World's First WAP Bank is Norwegian" (2010-10-18).

In this paper I will be looking at specifically mobile money transfer services and not mobile

banking.

1.8 THEORETICAL FRAMEWORK

1.8.1 The Theory of Technology Acceptance Model (TAM).

MMT systems are majorly information technology (IT) based on procedures through which

users transact and move money within and across mobile networks. The adoption of the

MMT services is based on the greatest happiness principle of Utilitarianism that means

maximisation of utility. Studies show that the acceptance to use the mobile payments varies

with the context in which users are able to use a mobile payment procedure. Moreover, the

mobile payment procedures are functional services adopted for utilitarian reasons. This study

focuses on the impacts of MMT services and the possible reform recommendations needed in

that area and I will therefore base on the Theory of Technology Acceptance Model (TAM).

TAM is a theoretical model that explains how users come to accept and use a technology.16

The model suggests that when users are presented with a new technology, a number of factors

influence their decision about how and when they will use it. These factors are: perceived

usefulness defined as the degree to which a person believes that using a particular system

would enhance his or her job performance; and, perceived ease of use defined as the degree

to which a person believes that using a particular system would be free from effort.17

two factors are considered to be the primary determinants for adopting and using a new

technology and are influenced by other variables such as security concerns, cost,

convenience, and satisfaction. Perceived ease of use directly affects perceived usefulness and

both determine the user‟s attitude towards use, and eventually to the actual use of the system.

TAM has been widely used to predict user acceptance and use based on perceived usefulness

and ease of use.18

Consequently, TAM was chosen as the appropriate model and was extended

to include other factors such as perceived ease of accessibility of the MMT services,

perceived low cost of the services, perceived convenience, perceived security, perceived

16 Fred D. Davis (author), perceived usefulness, perceived ease of use and user acceptance of information technology, Published in Journal MIS Quarterly, Volume 13 issue 3 September 1989, pg 319-340. Published by

Management Information Systems Research Centre, University of Minnesota. 17 Fred D. Davis (1989) supra 15, pg 319-340. 18 Ndubisi, Nelson Oly; Richardson, Stanley. (2002).The Entrepreneurs’ Technology Acceptance Model;

Academy of Entrepreneurship Journal. An academic Journal Article from Academy of Entrepreneurship Journal

vol.8 No 2.

support from the mobile services provider and from the government, perceived satisfaction

and actual usage of the mobile payments.

Ease of accessibility is one of the main advantages of MMT services. People go to the bank

less often and business operators spend more time running their businesses. Many Kenyans

now receive and send money wherever they are in the country. Many people are now familiar

with the services due to the ease to operate and require no formal training.

The transaction costs are much lower when compared to what the banks charge.19

transactions had to be lower to make the total cost of the transaction competitive against

banks. The cost of the mobile payments should be affordable to most and below what banks

usually charge for their banking transactions.

In a country where majority of people have no access or cannot afford banking services,

MMT offers convenience and safety. People move around with their virtual money knowing

they can withdraw cash any time at a minimal fee. Accounts are secured by a personal

identification number (PIN) which is only known to the owner of the account and even

losing of mobile phones do not mean anyone else can access to their accounts. Safety

represents no delay, no transaction incompleteness, and no private information disclosure

during payment transactions. The use of the pin and secret code for the mobile money

transactions enhances the security and privacy issues.

Personal experiences for a lot of people indicate that the current technology is user friendly

and previous studies of the adoption of mobile payments show that it is the usability,

usefulness, speed, and convenience of the service itself that counts. The wide usage and

satisfaction that the existing customers have experienced has in turn influenced new

customers to take up the services.

The rapid spread of the mobile phone usage in Kenya means that the number of mobile users

exceeds by far the number of banked people. MMT services offer cheaper transaction costs

for the consumer. The MMT service is reaching the unbanked and the benefits are so

enormous that those who try to place regulatory pressure on it might feel guilty if they appear

to frustrate it.

19 Omwansa Tonny (2009), “M-Pesa Progress and Prospects: Innovations Case Discussion.” P 112

<http://www.strathmore.edu/pdf/innov-gsma-omwansa. pdf. > (Accessed on 29/11/2013).

The extent to which the mobile payment usage would impact on performance depends largely

on whether there is an enabling environment. Porteous20

defines an enabling environment as a

set of conditions which promote a sustainable trajectory of market development and one of

the conditions is a set of regulations touching every area that MMT may be involved, a

condition largely missing in the Kenya legal regime.

Although the mobile phone balances may seem low, the fact that there are balances proves

that there is storage which can be perceived as acceptance of deposits. This is a significant

indication of the high value placed on the convenience associated with the use of the MMT

services.21

1.9 LITERATURE REVIEW

Njaramba Gichuki22

notes that there are a number of unregulated issues that affect MMT

service provision. He explores various laws touching on mobile phone business including

communication laws, banking laws, technology laws, and evidence law.

In his examination of various communication laws he notes that the legal position in Kenya is

that there are no laws specifically regulating MMT services and mobile payment systems

despite attempts to amend some of the existing laws to that effect. He writes that mobile

phone business is regulated by the CCK but that mobile money payment services and mobile

payment services need more expertise than that of the communication sector because of the

banking aspects and information and technology aspects involved that CCK lacks, which

make it unqualified to regulate these services.23

Njaramba mentions the convenience that comes with MMT services and suggests that

perhaps this convenience could have led to the financial sector regulator to overlook the legal

and risk issues involved.24

In the various communication laws he examines, he brings out how each one of them is

deficient in mentioning mobile money transfer services as one of the issues regulated therein.

He mentions various sections that regulate related areas but they fail to specifically mention

20 David Porteous, (2006), “The enabling environment for mobile banking in Africa.” A report commissioned by the department for international development (DFID), definitions section p 4. 21 Adrian D Kamotho Njenga (2009), “Mobile Phone Banking: Usage Experiences in Kenya.” (pdf) 22 Njaramba Gichuki (2013), Law of Financial Institutions in Kenya, 2nd edition, LawAfrica Publishing (K) Ltd,

Nairobi. 23 Njaramba Gichuki (2013) supra, P 236. 24 Ibid.

MMT services as one of the areas within their ambit. He points out the deficiencies in the

various statutes in terms of provisions therein and how they do not relate directly to MMT

and how the provisions could be amended to envisage MMT services within the particular

statutes.

In his examination of the banking laws which are specifically the Banking Act chapter 488

and the Central Bank of Kenya Act, he brings out clearly how these laws do not cover mobile

money transfer. He does this by examining the sections of the Banking Act and brings out

clearly how MMT does not qualify to be classified as banking services therefore not falling

within the ambit of the Act. It follows then that the Banking Act as bit is does not qualify to

regulate MMT services.25

The Central Bank of Kenya Act does not define mobile money

transfer services and mobile payment systems. It deals with traditional banking perhaps

because during the times of its enactment the legislature had not foreseen the development of

technology to the extent of it being used to pay for bills and transfer money especially

through mobile phone. He points out sections in the Central Bank of Kenya Act that if

amended would be of importance to MMT services and mobile payment services.26

When he explores technology laws he mentions the laws available and to the extent that they

address MMT services. For instance the National Information and Communication

Technology (ICT) Policy of March 2006 recognizes problems facing ICT departments in

Kenya but not provide any assistance in as far as MMT services and mobile payment services

are concerned. The policy has set goals yet to be achieved but he notes that in so far as legal

issues are concerned, little, if any, is addressed.

However, in his work only majors in what is provided for under the existing laws, but does

not address other issues unrelated to the scope of the relevant statute examined which perhaps

would warrant new legislation in light of MMT service provision, for instance setting total

transfer amount per each service provider per day, tackling money laundering brought about

by existence of mobile money transfer and which is not handled under the Proceeds of Crime

and Anti-Money Laundering Act of 2009, and any others as shall be brought about by this

study. In this respect his book fails to mention other vices that could be outside the scope of

the existing legal regime on MMT.

25 Njaramba Gichuki (2013) supra, p 247. 26 Njaramba Gichuki (2013) supra, p 248.

Another area I will seek to fill by this study is that he point out clearly some of the areas of

deficiency but fails to make any recommendations on how these defects could be cured. I aim

to make recommendations

Lorretta Michaels, in his report27

submits that in Kenya, mobile financial services have

evolved in a largely undefined regulatory space. The Central Bank of Kenya (CBK) has been

informed and watchful, and has provided oversight and deliberate guidance from the very

beginning of the industry. The relationship between the CBK and MMT service providers has

evolved through willing collaboration and innovation in an entirely new domain in financial

services. In this context, the CBK and MMT Service providers have addressed emerging

challenges in introduction of mobile payments services as well as consumer protection that

have attracted international interest and recognition.

However, he observes, the consumer protection measures that exist are as yet not codified in

law or regulation in the industry. The CBK provides guidance to mobile money under Article

4 of the Banking Act, which covers Payment Systems, rather than banks. As such, it is the

National Payment Systems Division (NPSD) of the CBK that provides oversight, not the

Banking Supervision Department.28

As a safeguard, however, CBK exercises full supervisory

oversight over the trust accounts for mobile financial services providers, which are held at

commercial banks. This effectively sequesters the float and protects it against any eventual

financial failure of MMT services. This also precludes operators from earning the interest on

the float.29

He notes that at the end of 2008, with the huge success of M-Pesa and the growing concern of

the Kenya Bankers Association, the Ministry of Finance asked that the CBK conduct a risk

assessment of M-Pesa, which was done and published in the newspapers and Kenya Gazette

in early 2009, basically saying that the CBK is satisfied with the risk situation and that they

don‟t consider MMT services and mobile payment systems to be a banking business. In the

last few years, with the introduction of three additional mobile money service providers30

the huge growth of the sector, the CBK has chosen to introduce a more formal regulatory

27 Lorreate Michaels, “Better Than Cash: The Kenya Mobile Money Assessment,” appendix IV, Kenyan Mobile

Money Regulatory Framework.” November 2011. This report was produced for review by the United States agency for international development. It was prepared by Accenture development partners under the global

broadband initiative. The author of the report is Lorretta Michaels. 28 The NPSD traditionally focuses on the integrity of the IT platforms and service delivery

Systems in line with BIS guidelines, rather than consumer protection and risk. 29 The interest on the float is channelled into a charitable account. 30 The new mobile money services were approved and supervised under individual Letters of No Objection.

framework over the entire branchless banking sector. He sites the actions taken to date,

actions which shall be explored further in ensuing chapters.

According to Tonny Omwansa,31

The growth in the mobile sector was primarily a result of

the friendly regulatory environment the Kenya Communications Act (KCA) created in 1998.

However, KCA only regulates communications services; it does not address electronic

commerce, mobile commerce, or mobile banking.

In 2006, the Kenya ICT Policy was published to promote electronic commerce and other

electronic services such as mobile banking and mobile transactions. But the country still

lacked a clear framework for electronic transactions, which it needed to participate

effectively in the new internet economy. It needed an appropriate and comprehensive

information bill to address the specific details of electronic transactions including the critical

laws for this sector.

He notes that though Kenya‟s government did publish the Electronic Transactions Bill of

2007 to address electronic commerce issues such as recognition of electronic transactions and

electronic signatures it has not enacted the Kenya Information and Communications Bill of

2007.Many interested parties including mobile operators, merchants, banks, entrepreneurs

and consumers want to see the accurate and inclusive ICT enacted soon, to enhance trust in

electronic transactions and more specifically, mobile transactions.

1.10 CHAPTER BREAKDOWN

This research paper will be organised in the following manner.

1.10.1 Chapter 1:

The Background to the Study

In this Chapter there is discussed the background to the study. This includes the background

to the research topic, the statement of the problem, the theoretical and conceptual framework,

literature review of some of the written work done related to the research topic and the

justifications of carrying out the research.

1.10.2 Chapter 2:

31 Tonny Omwanza (2009), “Progress and Prospects: Innovations Case Discussion,” P. 109-110.

An Analysis of how MMT Operations Function and the Legal Implications

This one contains an analysis of how MMT operations function to bring out a clear

understanding of how these services are rendered. The legal impact of MMT services

including the vices that have come up due to the use of this technology will be also contained

in this chapter.

1.10.3 Chapter 3:

The Legal Framework for Regulation of MMT services

In this Chapter I will look at the present legal framework for regulation of various sectors of

the economy related to mobile money transfer among them the financial sector,

communication sector and electronic transactions regulations. I intend to explore these areas

in this chapter pointing out the shortcomings in the various legal instruments in light of how

they ought to contain provisions addressing issues concerning MMT services.

1.10.4 Chapter 4:

Recommendations for Necessary Reforms and Conclusion

This Chapter will contain recommendations for necessary reforms that need to be put in place

to ensure sufficient regulation of the services as required is provided. This I will do in light of

the impact and vices discussed in chapter two above. The conclusion will also be contained in

this chapter.

CHAPTER 2

AN ANALYSIS OF HOW MMT OPERATIONS FUNCTION AND THE

LEGAL IMPLICATIONS

2.1 INTRODUCTION

“Mobile Money” or “M-Money” is a form of electronic money and refers to services that

connect consumers financially through mobile phones. Mobile money allows for any mobile

phone subscriber, whether banked or unbanked, to deposit value into their mobile account,

send value via a simple handset to another mobile subscriber, and allow the recipient to turn

that value back into cash easily and cheaply.32

In this way, Mobile Money can be used for

both mobile money transfers33

and mobile payments.

In the last dozen years mobile technology has flourished throughout the developing world

faster than any other technology in history. The latest phenomenon spawned by mobile

technology is mobile money. This trend is providing money transfer services to millions of

previously under-served people in the developing world, allowing them to safely send money

and pay bills for the first time without having to rely exclusively on cash. The global leader in

mobile money is Kenya, where mobile network operator Safaricom launched M-Pesa in

The initial concept of M-Pesa was to create a service which allowed microfinance borrowers

to conveniently receive and repay loans using the network of Safaricom airtime

resellers.34

This would enable microfinance institutions (MFIs) to offer more competitive loan

rates to their users, as costs are lower than when dealing in cash. The users of the service

would gain through being able to track their finances more easily. When the service was

piloted, customers adopted the service for a variety of alternative uses and complications

arose with Faulu, the partnering MFI. In discussion with other parties, M-Pesa was re-focused

and launched with a different value proposition: sending remittances home across the country

and money. Users are charged a small fee for sending and withdrawing money using the

Commission on Payment and Settlement Systems[CPSS], “Survey of Developments in Electronic Money and

Internet and Mobile Payments 4” (2004), available at http://www.bis.org/publ/cpss62.pdf. Accessed on

13/02/2014. 33 “Mobile Money Transfers” are remittances using mobile phones. 34 Hughes, N., & Lonie, S. (2007). M-PESA: Mobile Money for the "Unbanked": Turning Cell phones into 24-

Hour Tellers in Kenya. Innovations: Technology, Governance, Globalization, 2(1–2), 63–81.

service. M-Pesa has spread quickly, and has become the most successful mobile phone based

financial service in the developing world.35

The continuing success of MMT in Kenya has

been due to the creation of a highly popular, affordable payment service with only limited

involvement of a bank.

Other mobile phone service providers ventured into the market on the realisation of how

Safaricom had succeeded. Orange Money launched IKO PESA, with its main mechanisms

being that it‟s able to retain money within circulation as it‟s a partnership between Orange

Telecoms and Equity Bank.36

Airtel offers Airtel money and YU has Yu cash.

2.2 HOW MMT OPERATIONS FUNCTION

The service allow users to deposit money into an account stored on their cell phones, to send

balances using SMS technology to other users (including sellers of goods and services), and

to redeem deposits for regular money. Users are charged a certain fee for sending and

withdrawing money using the service. For one to access these services he/she needs to own a

mobile phone functional with a SIM card and register for the service by providing

information about him/her that will be used to identify the account as his/hers. The

registration is done with and by the respective service provider after which the account is

open and the consumer can access the services.37

A customer may deposit money at a MMT outlet in return for e-float, called a "cashin"

transaction. The customer is required to show a valid identification document, and his

identity and the amount of the deposit are logged in a book kept at the outlet. Upon receipt of

the money, the agent at the outlet enters the customer's telephone number and deposit

information into his/her cell phone, and the customer waits at the outlet window until he/she

receives a confirmation text message that e-float has been deposited. Unless the system is

running slowly (which happens occasionally), the whole transaction takes about a minute or

less.38

A customer may exchange e-float for cash at a MMT outlet, called a "cash out" transaction.

Again, the customer must show a valid identification document, and the transaction is logged.

Jack, William; Suri, Tavneet (August, 2010), The Economics of M-PESA. 36 The East African, on 22nd Nov. 2010. 37 Jack, William; Suri, Tavneet (August, 2010), supra. 38 Isaac Mbiti, “Mobile Banking: The Impact of M-pesa in Kenya.” published by the National Bureau of

Economic Research,1050 Massachusetts Avenue. Available at http://www.nber.org/papers/w17129 accessed

on 13/02/2014.

The customer tells the shop clerk how much cash he/she wants, then chooses "withdraw

cash" on the mobile money service menu on his phone, enters the amount to be withdrawn

(plus the relevant fee), and enters the agent number and his/her personal identification

number (PIN). The agent then receives a text indicating that the transaction is complete, and

the agent then gives the appropriate amount of cash to the customer. This whole transaction

takes about one minute.39

Finally, a user may transfer e-float from his/her phone to another phone referred to as a

“person-to-person transfer,” even though one or both of the parties may be an institution or

firm. The user enters the phone number of the recipient and the amount to be transferred on

his/her cell phone. The sender and recipient each receive a text message stating that money

has been transferred.40

These three basic transactions can be combined in a number of ways. For example, a user

may deposit cash and send the full amount deposited to another user, who can then withdraw

the full amount transferred. We refer to this use as "deposit-transfer-withdraw." Alternatively,

a user who receives a transfer from one person may transfer the e-float to some other user

instead of withdrawing cash. E-float could circulate in this manner indefinitely, like

conventional cash. A third usage possibility is where a user deposits cash and then later

withdraws it him/herself without having transferred it. Anecdotally, it is said that people do

this for safety when they are travelling.41

MMT service providers also operate in conjunction with specific providers of services and

goods which enable consumers to pay for the bills through their mobile phones by obtaining

pay bill numbers. This enables consumers to transfer funds to the mobile account or bank

account of the person they are paying the bill to.42

2.3 THE MOBILE MONEY TRANSFER PLAYERS

2.3.1 The Mobile Network Operator

A Mobile Network Operator (MNO) is the telecommunications company that provides and

extends the wireless network messaging functionality to provide mobile money services that

39 Ibid. 40 Ibid. 41 Jack, William; Suri, Tavneet (August, 2010) supra. 42 Ibid.

enable customers to remit funds to each other that can be settled through its own established

agent network. Individual payment transactions occur entirely within the MNO and do not

require the service user to have a bank account.43

The funds in transit paid in by the remitter but not yet withdrawn by the recipient are within

the formal financial system. Since the service provider is only executing client payment

instructions and is not performing the credit evaluation and risk management function of a

bank, these services do not, according to the Banking Act,44

constitute “banking.”45

Therefore

the MNOs do not require the level of regulatory oversight needed for deposits held in banks.

The MNOs provide the infrastructure and communications service while providing agent

oversight and quality control.46

Mobile payments in Kenya are carried out through the use of MNOs and this is defined as a

MNO-led mobile payment system as opposed to a bank-led. In the MNO-led payment model,

the MNOs offer mobile payment services as a means to add value to their core

communications services. This however presents legal challenges that this research will

highlight in ensuing parts.47

2.3.2 The Bank

In the mobile payment context, banks offer banking services via the mobile device. They hold

the e-float on behalf of the MNOs and handle cross-border transactions while managing

foreign exchange risk. In Kenya, retail payments are dominated by banks whose primary

function is to gather deposits for deployment in loans and other permissible investments.

Banks are best positioned to employ risk management programs that ensure regulatory

compliance.48

The banks‟ role in the mobile payment value chain is important as the mobile payment

system in exchange for e-float is deposited in bank accounts held by the mobile network

43 Cynthia merit (2010), Mobile Money Transfer Services: The Next Phase in the Evolution in Person-to-Person

Payments, Retail Payments Risk Forum White Paper, Federal Reserve Bank of Atlanta , p.8 44 The Banking Act Section 2(1) (a). 45

The Act defines banking business as accepting from members of the public of money on deposit repayable on

demand or at the expiry of a fixed period after notice45. The act does not provide for a definition of mobile money transfer services. 46 Cynthia merit (2010) supra, P.8 47

For instance, customer funds are commonly held in a prepaid account by the MNO or a subsidiary. Although

in some jurisdictions even if the MNO is the business owner (the entity which assumes the bulk of the financial

risk and operational responsibility of offering the service), a partner bank formally holds the license. 48 Cynthia merit (2010) supra, P.11.

operator. In efforts to diversify their risk, MNOs hold such deposits in different banks. These

accounts are regular current accounts where MNOs have no restrictions of access. In turn, the

banks face no special reserve requirements with regard to the MNO‟s‟ deposits. Similarly,

there are no explicit requirements for the MNO to give notice of their intention to withdraw

“large” quantities of cash at a given point in time, which shows that these trusts are treated as

any other current account deposit in terms of regulatory policy by the Central Bank. This then

shows the vulnerability that exists within the framework which mobile payments is currently

operating under as there are no legal obligations between the MNOs and the banks and if

there are any these obligations are one of the banks and account holders.49

2.3.3 Agents

Agents are nonbank entities such as retailers that handle customer registration and liquidity

needs for the mobile money users, on behalf of the MNOs. The primary role of an agent is to

accept and disburse cash and in essence providing cash-in and cash-out services from the

consumer‟s mobile device. In this role, the agents serve as branches for the mobile network

operators and act as the point of sale for the customer relationship. As the liaison between the

MNO and the consumer, the agent bears responsibility for account opening, customer due

diligence, and Know-Your-Customer (KYC) program compliance. The most typical

candidates for agents are the retail sales stores and airtime resellers because they tend to have

sufficient liquidity to satisfy consumers‟ needs to deposit and withdraw cash. This network of

local agents expands the mobile operator‟s reach to rural areas in order to achieve a higher

level of penetration in unbanked markets where there is no physical bank presence, which has

also been one of the main advantages to mobile payments essentially enabling a branchless

payment system, outside the traditional bank-led business model.50

Agents typically provide liquidity with funding from other business activities including

selling airtime in addition to other merchandise. They receive commissions for transactions

and hold balances on their own mobile phones. These mobile airtime balances and cash on

premises are the critical elements of the agents‟ liquidity management system. Agents are

also required to perform minimal customer due diligence which this paper will challenge as

49 Ibid. 50 Cynthia merit (2010) supra, P.7.

this due diligence is only limited to the provision of a postal address which this paper posits

is not enough.51

Agents also report suspicious transactions in accordance with Anti-Money Laundering and

Combating the Financing of Terrorist requirements as stipulated by the MNO they are

attached to.52

The agent is therefore the MNOs, interface between the cash flow and the

consumer. Registered mobile money users can make deposits and withdrawals of cash (i.e.,

make purchases and sales of e-float) with the agents who receive a commission on a sliding

scale for both deposits and withdrawals.53

The agents hold e-float balances on their own mobile devices, purchased either from the

mobile network operator or from customers, and maintain cash on their premises. Agents

therefore face a non-trivial inventory management problem, having to predict the time profile

of net e-float needs, while maintaining the security of their operations. Their function is to

provide cash in cash out transactions which cannot be executed without sufficient reserves of

both mobile money and cash at the agent outlets. Mobile money liquidity and cash liquidity

are therefore key areas of concern in a mobile money deployment. 54

2.3.4 The Consumer

The „consumer‟ in this study is the MMT service user. The MMT service users have created a

specific demand for the services in Kenya. Their adoption and trust in the system has been

one of the characteristics of mobile money success.

2.3.5 Regulators

Regulators also fill a critical role in the ecosystem, as they work to strike a balance between

providing prudential, risk-based oversight and encouraging innovation, efficiency, and

financial inclusion. Regulators will be challenged by the pace of innovation in mobile

payment services and the increasing opaqueness in payment transactions from a regulatory

Ibid. 52 Agent Requirements for example are detailed on Safaricom‟s website,

http://www.safaricom.co.ke/personal/m-pesa/m-pesa-agents accessed on 11/02/2014. 53Registration and deposits are free and most other transactions are priced based on a tiered structure to allow

even the poorest users to be able to use the system at a reasonable cost. Transaction values are typically small. 54 Cynthia merit (2010) supra, P.7.

oversight perspective. Mobile transfer systems are giving rise to new challenges in how to

establish effective regulatory infrastructures to provide oversight. 55

2.4 LEGAL IMPLICATIONS OF MMT SERVICES

2.4.1 Proceeds of Crime and Money Laundering

Money laundering refers to any action deliberately taken to conceal the proceeds of crime. It

differs from tax evasion in the sense that the money is considered tainted at the outset, and

the goal of those engaged in money laundering is to process these funds so as to make them

appear legitimate, or clean. Typically, money laundering cases involve a number of

transactions between businesses setup for the purpose, often via banking houses that may be

unaware of what is being done.56

According to John Cassara, who spent 26 years as a covert CIA case officer and US Treasury

agent investigating financial crimes;57

“Mobile money transfer is one of the big laundering methodologies that law

enforcers have to confront. It's difficult for law enforcement around the world to

get a handle on this problem because there is a lack of understanding and

reporting about it. There are 5 billion cellphones around the world that could be

used as virtual wallets, or personal ATMs. By 2020, some experts predict, there

will be 50 billion connected devices, and Mobile money payments will be most

likely be the most popular form of financial transfer services in much of Africa,

Asia and Latin America. However, the places where mobile money services are

skyrocketing also happen to be where corrupt governments, transnational crime

syndicates and traffickers of all stripes flourish. People use their phones to carry

and transfer cash and this has had a major impact on how money is hidden and

laundered and criminals are taking advantage of this."

The best example is Kenya; M-Pesa (Pesa means "money" in Swahili) now has over 15

million users, who transfer more than $1 billion a month in East Africa. Its model has been

imitated in more than 50 other countries, including much of Africa, Brazil, Afghanistan and

India. Thousands of street-corner shops in Kenya sell mobile-phone airtime, with more than

60% of them registered as M-Pesa agents, outnumbering the bank branches in the country by

far. Annual transactions on M-Pesa are equivalent to over 20% of the country's GDP.

Cynthia merit (2010) supra, P.8. 56 Josh Meyer (2013), “How mobile payments might be the global money-laundering machine

criminals have dreamed about.”

http://qz.com/94570/how-mobile-payments-might-be-the-global-money-laundering-machine-criminals-have-

dreamed-about/-accessed on 3rd April 2014. 57 Josh Meyer, June 17, 2013, supra.

Customers exchange cash for virtual value that goes into their phone, which becomes an

electronic wallet. They can then pay bills, buy things, transfer money and, receive credit on

the card.58

Besides being easy to use, it's usually cheaper than traditional money-transfer services.

Foreign workers can be paid by phone, and then transmit the money to their family back

home in seconds. Travellers can deposit lots of cash and then simply withdraw it in

another country. Many big banks are now rushing to incorporate mobile payments.

The system breaks down here: M-payments are most popular in countries with weak laws and

enforcement against financial fraud and money-laundering. Customers often need little in the

way of identification. The whole process often bypasses a country's financial reporting

system. That makes it almost impossible for authorities to monitor m-payments, even if they

had the expertise, which they don't. And because transactions are made via mobile phones

and text messages, there's usually no way to trace them or secure evidence for prosecutions.59

Mobile money solutions can be exploited by generating large numbers of low value

transactions, possibly using automated tools or software. This type of attack is difficult to

police and so regulators tend to set low maximum transaction values to minimise this risk

thus inconveniencing honest users of the payment system.60

In Kenya, MMT Services have been used to launder fake currencies, to bribe corrupt

officials, and to facilitate kidnapping and extortion and a range of other crimes. In response,

the service providers started requiring more customer information last year, especially for

those using prepaid cards for their phone service. But such stories aside, there isn't much

evidence of MMT facilitating crime.61

.Financial authorities seem to agree, and have been

raising concerns in recent reports, official testimony and public speeches.62

2.4.2 Privacy and Security

The concerns for securing the mobile channel mirror the risks seen in the online environment,

including authenticating the consumer‟s identity and protecting transmission of data from

interception enabled by viruses, malware, and phishing attacks. Anecdotally, the mobile

Josh Meyer (2013) supra, p.8. 59 Josh Meyer (2013) supra.- As John Cassara testified before Congress in May 2012, criminals always gravitate

toward the weak link in the financial system, and they've now glommed onto m-Payments. 60 Josh Meyer (2013) supra. 61 John Cassara says that's only because no one is monitoring the transactions for criminal activity. 62 Josh Meyer (2013) supra.

environment to date has been relatively secure compared to the online channel where privacy

and security of personal and business data is frequently compromised through the use of

malicious computer viruses, identity theft, and phishing schemes. The diversity of platforms

and wide range of operating systems make mobile phones less vulnerable to attack than

personal computers. The recent surge in smart phone applications may introduce

vulnerabilities to malware attacks, which may increase payments risk going forward as bad

actors gain access to personal information stored in the handset or accessed through a phone

application.

Security specialists say the swift growth of smartphone use inevitably is going to attract

fraud. And as more consumers use their mobile phones as payment devices, the potential

risks can increase. Malware and phony app sites can direct unsuspecting phone users to sites

where they give up sensitive personal information, such as account passwords. The same

technology also makes it easier for data analytics companies to get a better fix on where they

spend their time and where and what they buy. Data analytics companies already pore

through massive amounts of consumer data to give retailers and lenders a better idea of how

to market to them.63

Jeff Chester64

writes;

“Mobile payment services is about exposing your financial behaviour to a daisy

chain of financial and other marketers who have a very detailed understanding of

where you are, how you spend your time and money. At present there are no such

protections to the new kinds of data, which will proliferate with mobile payments.

The collection of data needs to be transparent and accountable. All these new,

non-traditional data services are unregulated, and they need to be regulated.

There should not be any kind of financial profile on a consumer that he or she

can’t have access to review and to challenge.’’

Shoulder surfing and device theft is another predominant type of card fraud. It provides the

main justification for biometric security controls. It involves a thief viewing the PIN entered

and then stealing the device or card then proceeding to transact disguised as the legitimate

holder of the account.

Finally, the growing use of SMS as a common technology for sending a transactions

message demands further examination of the need to strengthen data encryption technology.

Kirk Ladendorf, “Mobile payments raise security concerns,” available at

http://www.bostonglobe.com/business/2013/04/11/mobile-payments-field-grows-security-

concerns/54cV5GDvhHyjm3Qj3YYdlI/story.html - (accessed on 12/02/2014). Bebeto Matthews/Associated

Press/File. 64 A privacy advocate with the Center for Digital Democracy in Washington in an interview with McClatchy

Newspapers.

The optimal solutions to devising a secure and resilient transfer channel should be put in

place. Creating transparency is a key consideration in addressing security issues, when

consumers have the ready ability to view transaction histories on their handsets, the risk of

account fraud and other risks can be avoided or mitigated.65

2.4.3 Consumer Protections

Mobile money-specific consumer protections were not created with the need for financial

services regulation in mind. The limitations of the existing financial regulation to emerging

mobile financial services have resulted in gaps in legal governance and ambiguity with

respect to the responsibilities and liability among parties involved in the services. New

regulatory policy will require a comprehensive understanding of the new risks that mobile

transactions introduce to consumers, including lost payments through faulty transmissions,

fraudulent transactions, identity theft, or criminal activity on the part of the mobile operator,

agent, or other mobile money service provider.66

2.4.4 Credit Risk

Credit risk may emerge whereby the transaction is applied to the user‟s phone bill to be paid

later. Possibly because of their lack of experience in managing credit risk associated with

financial services, service providers have largely focused on providing prepaid services in

order to manage liquidity and mitigate risk. For example, Safaricom‟s M-Pesa mitigates

credit risk by collecting prepaid funds from agents. Safaricom deposits into a trust account

managed by a leading Kenyan Commercial Bank, which provides the legal protection for

consumers.67

2.4.5 Fraud

Recent successes in global-standards setting to promote interoperability among carriers have

simplified the ability for mobile users to roam across geographic markets. The roaming

agreements used by international operators to facilitate voice transfers can now be used to

end data in the form of cross-border payments. However, wireless data transmissions may be 65

Josh Meyer (2013), supra. 66 Cynthia Merritt (2010), “Mobile Money Transfer Services: The Next Phase in the Evolution in Person-to-

Person Payments,” Extracted from Retail Payments Risk Forum White Paper, Federal Reserve Bank of Atlanta,

pg 20.

https://www.frbatlanta.org/documents/rprf/rprf_resources/wp_0810.pdf - accessed on 3rd April 2014 67 Cynthia Merritt (2010), supra, pg 21.

vulnerable to access by unauthorized parties who identify some means to intercept the

communication between mobile devices. The growth in wireless telecom services has led to

an increasing number of roaming agreements between telecommunications companies in

different countries, enabling the transmission of international remittances via mobile phones.

Roaming fraud represents a potential threat to the security of cross-border mobile payments.68

Fraud has also been witnessed by service users using a false identity to obtain a line of credit

or using false information to set up an account or in some else‟s name and to obtain more

credit than the situation warrants is currently a widespread problem.69

Repudiation fraud by

subscribers i.e. “I didn‟t make that transfer – my phone was stolen” is also another problem

that Banks and EMV providers are trying to use their Terms and Conditions to place the

burden of proof on the shoulders of the customer. However regulators are increasingly

unwilling to allow these arrangements to continue and the burden of proof is again being

shifted to the providers.70

Fraud against subscribers, e.g. possible theft of their balances through staff involvement or

technical means is another indicator of fraud.

2.5 IMPLICATION TO THE BANKING SECTOR

2.5.1 At the Initial Stages of Development

Kenyan banks fought tooth and nail to have M-Pesa shut down one year after its launch as its

popularity was spreading like bushfire and posed a threat to their operations, a new book

launched last evening reveals.

This is according to the book titled 'Money, Real Quick: Kenya's Disruptive Mobile Money,

Innovation" which says that the Central Bank was forced to hire an IT consultant one year

after the launch of M-Pesa to conduct an operational risk audit before allowing the mobile

money transfer platform to continue operating. The banks argued that the mobile money

service was free to skirt onerous 'know you customer' regulations which made it easier to sign

68 Cynthia Merritt (2010) supra, pg 21. 69

“The Top 10 Risks for Mobile Payments; the Risk Management Group March 2012,” pg 9. Extracted from

TRMG's “Fraud and Revenue Assurance Guideline” |

https://www.google.com/search?q=The+Top+10+Risks+For+Mobile+Payments%3B+The+Risk+Managemen

t+ Group+March+2012&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-

a&channel=sb – accessed on 3rd April 2014. 70 Josh Meyer (2013) supra.

up subscribers with marginal background checks. "Cash merchants weren't even employees

of Safaricom and were total wildcards."71

CBK hired UK and US based Consult Hyperion to conduct a thorough audit on M-Pesa

which had been launched in April 2007 with just 54, 000 customers but spread as a wild fire

causing panic in the banking industry.72

It currently has more than 10 million customers which is more than the combined customer

base of all the local banks. Bankers felt that M-Pesa was not properly regulated thus had an

unfair competitive advantage which was putting the entire financial system at risk. Banks also

felt that they were absorbing costs to help M-Pesa run smoothly since they were supposed to

meet the demands of agents flush with e-float as more money flowed from urban areas to

rural areas.73

Bankers also questioned why Safaricom was allowed to have agents while banks could not

use them. At that time, agent banking regulations had not been effected but they have since

come into place. They accused the Central Bank of operating with a double standard of

giving Safaricom a free ride to undercut their long established business. There was also a

perception that M-Pesa customers' money might fall victim to money laundering and pyramid

schemes as well as potential fraud by agents.74

The Kenya Bankers Association representing 43 banks claimed that Safaricom had no

mechanism to compensate customer in case of loss, they created the impression that M-Pesa

was a disaster waiting to happen, adding that it was a gamble with people's money and the

government was not being proactive in protecting the public interest. In December 2008, a

group of banks reportedly lobbied the Kenyan finance minister to audit M-Pesa, in an effort

to at least slow the growth of the service.75

This ploy failed, as the CBK audit cleared M-Pesa

to operate after assurance that all its systems allowed for comprehensive reporting and

management so every transaction could be monitored individually and enmasse. Another

71 Peter Kiragu , “Authors reveal how banks fought hard to kill M-Pesa,” Wednesday,February 5, 2014,found at

http://www.the-star.co.ke/news/article-153875/authors-reveal-how-banks-fought-hard-kill-m-pesa - accessed on

3rd April. 72

Peter Kiragu, supra. 73 Ibid. 74 Ibid. 75 “Cash Transfers Pose Threat to Banks: Philanthropy Action,” 26 February 2009 found at

http://philanthropyaction.com/nc/mobile_cash_transfers_pose_threat_to_banks/Mobile - accessed on 3rd april

Financial Access survey had shown that 80 per cent of M-Pesa users were satisfied with the

service. 76

2.5.2 The Present Situation

The use of mobile money in the country has grown sharply in the last five years to overtake

banks according to a new study. According to the latest Fin Access National Survey (2013),

more than double the number of adults use mobile phone financial services compared with

banks. The use of mobile phone financial services has more than doubled to 62 per cent in

2013, up from 28 per cent in 2009. The use of commercial banks has also been rising over

time from 13.5 per cent in 2006 to 29.2 per cent in 2013 while use of micro-finance

institutions (MFIs) has remained at 3.5 per cent between 2009 and 2013. Use of SACCOs has

decreased since 2006. In most regions usage of mobile money exceeds 50 per cent, according

to the report compiled by among others Central bank, Financial Sector Deepening Kenya and

Kenya National Bureau of Statistics.77

This shows how MMT has rapidly grown to surpass all the other financial service providers

in the market. The players in the banking sector have realized this business threatening trend

and devised innovation ideas in effort to curb the competition posed by MMT and also to

capitalise on the dominance of the MMT services to boost their own returns and to retain

their stake in the market. This is after the banking industry players realised that there was

little or nothing else they could do to the rapidly rising globally-acclaimed innovation.

For instance, Equity Bank Ltd. Kenya‟s largest provider of small loans formed a partnership

with Safaricom Ltd to more than double the number of accountholders through an initiative

where Kenyans would be able to open bank accounts through Safaricom‟s mobile money

transfer service known as M-pesa,78

Equity Bank and Safaricom also rolled out "an ultimate

bank account that would let customers transfer money to and from their M-PESA accounts

via their mobile handsets while enjoying other benefits that come with the bank account." 79

76 Peter Kiragu, supra. 77 James Anyanzwa, “More Kenyans using mobile money transfer than banks,”

Updated Monday, December 9th 2013, found at

https://www.standardmedia.co.ke/business/article/2000099737/more-kenyans-using-mobile-money-transfer-than-banks?pageNo=2, accessed on 17/02/2014. 78 Equity Bank of Kenya Aims to More Than Double Accounts in 2010, found at

http://www.bloomberg.com/news/2010-06-30/equity-bank-of-kenya-aims-to-more-than-double-accounts-in-

2010-ceo-says.html. accessed on 17/02/2014. 79 The then Safaricom Chief Executive Officer Michael Joseph said, “M-PESA is proud to launch another new

initiative with our partners Equity Bank by offering a new service that will target customers who are looking for

An M-KESHO account would offer short term loan facilities as well as pay interest on

mobile account deposits. Credit evaluation for loans will be based on scoring using 6 months

of history of the consumers M-PESA balances. There is no application form to fill - the loan

request is made by the consumer using the mobile phone.80

Another instance of co-operation

between the globally-acclaimed innovation and banking industry players happened when

Barclays Bank of Kenya joined the M-Pesa bandwagon where account holders who are

individuals would be able to deposit and withdraw directly from their phones while

Safaricom‟s M-Pesa agents who bank with Barclays would be able to buy the e-float for their

daily operations.81

In a similar fit Airtel money and equity bank rolled out a a service that would be available to

all Equity Bank customers with Airtel lines. That would enable customers from both Airtel

and Equity Bank to access Airtel mobile banking platforms, perform agency cash transactions

at Equity Bank branches and also enable Airtel Money customers to withdraw and deposit

money at any Equity Bank countrywide.82

equity bank and YuCash rolled out an agreement

that would enables account holders to move money from their Equity Bank Accounts to their

yuCash account instantly and vice versa, enables one to send money from a YuCash account

to other mobile numbers (any network in Kenya), both registered on YuCash and

unregistered. One has a unique option of inserting a free short message (SMS) as they send

money.83

These are just but a few examples of the collaboration between mobile money operators and

banking industry players in a bid to mutually benefit from each other on the one hand and

also to curb competition on the part of the banking industry posed by MMT services.

the convenience of a bank account that uses M-PESA as the tool to deposit money into their accounts. This is a

great idea that will drive customers to save into their bank accounts and enjoy the benefits of having the value

added services of both M-PESA and an Equity bank account." 80“M-PESA Meets Microsavings with Equity Bank Deal in Kenya,” on the CGAP blog.

Posted: May 18, 2010 |found at http://www.paymentsnews.com/2010/05/safaricom-equity-bank-bring-banking-

to-m-pesa-users-in-kenya.html. 81

“Barclays Bank and Safaricom Rolls Out Collaborative M-PESA Services,” Wednesday, October 13th,

2010,found at http://www.techmtaa.com/2010/10/13/barclays-bank-and-safaricom-rolls-out-collaborative-m-

pesa-services/ Acccessed on 18/02/2014. 82 http://www.equitybank.co.ke/index.php/self-service/mobile-banking/airtel-money accessed on 19/02/2014 83 “The Equity Bank -yuCashLinked Bank Account Services.”

http://www.yu.co.ke/index.php/yucash-equity-partnership , accessed on 19/02/2014.

2.6 CONCLUSION

In conclusion, MMT services has had varied legal implications to the economy in Kenya. It

has led to criminals exploiting the gaps in the existing legal regime to conduct fraud and other

related criminal activities using the technology that brought up the innovation. The law

enforcers have had very little they can do about it either because of their limited know-how in

sophisticated technology and cyber crimes, or the offenders are aware of the loopholes in the

laws regulating and have become elusive therefore very hard to bring them to book.

Moreover, as has been discussed, the existing legal regime is inadequate and most enacted

laws and regulations do not directly address MMT services.

Lastly the banking sector has eventually realised benefits out of the innovation, contrary to

their initial position they held that MMT would „kill‟ the banking sector. The collaborations

created between the banking sector players and MMT service providers, and the continuing

of the same is an indicator that it is an innovation of mutual benefit between the banking

sector and the MMT service providing companies.

CHAPTER 3

THE LEGAL FRAMEWORK FOR REGULATION OF MMT

3.1 INTRODUCTION

Innovation has been at the forefront of development in Kenya, primarily through the

integration of mobile telephony and retail financial services. Mobile payments have

transformed the way financial services have been delivered in Kenya, through bringing a

large number of „unbanked‟ and „under banked‟ persons into the financial realm. These new

technologies have almost always outpaced governments‟ regulatory responses to them. The

lack of specific legislation in this area has consequently left the Kenyan regulatory

environment open to various risks. As mobile payments comprise both banking and

telecommunications activities, differing perspectives exist on the appropriate regulatory

framework as well as which authority should regulate it. To enhance the potential benefits

from innovations in this area, governments need to make complementary adjustments to

domestic banking and financial regulations by offering specific regulation for Mobile Money

services. In so doing, certain questions should be asked in establishing a strong regulatory

regime as the Mobile Money system has brought forth new entrants and various stakeholders.

Therefore, this chapter discusses the current regulatory framework, the gaps that have been

left by the current regulatory framework and justifications for establishing a specific and

appropriate regulatory framework for mobile money transfer services and payments in

Kenya.

The growth in the mobile sector was primarily a result of the friendly regulatory environment

the Kenya Communications Act, (KCA), created in 1998. However, KCA only regulates

communications services; it does not address electronic commerce, mobile commerce, or

mobile banking.

Mobile phone business is regulated by the Communications Commission of Kenya (CCK)

under the authority of the KCA. So far, there are no laws in Kenya specifically regulating

Mobile Money Transfer Services. This is despite the fact that these two services are widely

used in Kenya by a large number of consumers which definitely necessitates adequate

regulation by legislation.

CCK is neither sufficiently competent nor qualified to regulate the Mobile Money Transfer

Services and Mobile Payment Services sector on its own. This is because the two services

involve some banking aspects and information and technological aspects that may be beyond

the expertise of CCK.84

Although both services are very instrumental in commercial transactions today, it should be

governed and regulated by our laws so as to curb the vices that are bound to be associated

with Mobile Money Transfer Services. As it is now, there are rampant cases of such

transactions being targeted by rogues implying that the peril is imminent. This chapter,

besides exploring the current legal regime and important areas that are not addressed by the

regime, will also look at the challenges that regulators might be faced with in the process of

trying to come up with a satisfactory regulatory reform.

3.2 THE CURRENT REGULATORY FRAMEWORK

The Central of Kenya Bank Act is involved in the traditional banking as defined by section 2(2) of the

Banking Act85

which defines as;

(a) The accepting from members of the public of money on deposit repayable on

demand or at the expiry of a fixed period after notice;

(b) The accepting from members of the public of money on current account and

payment on and acceptance of enemies; and

(c) The employing of money held on deposit or on current account, or any part of

the money, by lending, investment or in any other manner for the account and at

the risk of the person so employing the money;

Although the act does not define mobile money transfer under the interpretations section86

serves the object of Licensing and supervising authorized dealers in financial services.87

serves as an important provision viewed from the point of regulation of mobile money as a

financial service. It limits the mobile money transfer service providers to acquiring of a

licence if they wish to carry out any banking services and to get that license, then, some

conditions ought to be met.88

84 Njaramba Gichuki (2013) supra, p. 236. 85

Cap 488 of the Laws of Kenya. 86 This is because when this act was enacted, the mobile phone technology to pay bills and transfer money

through the mobile phone was not in existence and was equally not foreseeable to the law makers. As such it

was only meant to regulate the traditional banking system. 87 The Central Bank of Kenya Act, Cap 491, section 4A (c) 88 Njaramba Gichuki (2013) supra, p 246.

Under the act there is established the General Reserve Fund,89

to which shall be transferred at

the end of each financial year at least ten per centum or any other amount as the Board, in

consultation with the Minister, may determine, of the net annual profits of the Bank after

allowing for the expenses of operation and after provision has been made for bad and

doubtful debts, depreciation in assets, contributions to staff benefit funds, and such other

contingencies and accounting provisions is the Bank deems appropriate.

Consumers would feel safe in the awareness that their deposits with the mobile phones

account, a percentage of the same has been deposited in a General reserve Fund every year.

This is advantageous to the consumers because, with the allowance of the Central Bank and

the Communication Commission of Kenya, the money can be invested and also, in the case

of collapse of the business, they can then get a refund of their deposit with their service

provider to a certain percentage if not all.90

When banks collaborate with telecommunication companies offering the mobile money

transfer services, the central bank has to approve of the collaboration and therefore has to

ensure that the telecommunication company is stable and as such, Under section 32 the

Central Bank of Kenya, by inference can cause an inspection on the management of a MNO‟s

money transfer services, its records and books of accounts to ensure that there is transparency

and that the consumers can trust the management of their service providers.

The Banking Act Act defines banking business as the accepting from members of the public

of money on deposit repayable on demand or at the expiry of a fixed period or after notice;

the accepting from members of the public of money on current account and payment on and

acceptance of cheques; and the employing of money held on deposit or on current account, or

any part of the money, by lending, investment or in any other manner for the account and at

the risk of the person so employing the money.91

Under part II of the Act, there is a restriction that no person or an institution in Kenya shall

transact any financial business unless duly licensed or is a duly approved agency conducting

business on behalf of validly licensed institution. Every institution intending to transact

financial business has to, before commencing that business, apply in writing, to the Central

Bank for a license.

89 The Central Bank of Kenya Act, Cap 491, Section 9. 90 Njaramba Gichuki (2013) , supra p.248. 91 Banking Act cap 488, section 2 (2).

The Central Bank then assesses the professional and moral suitability of persons proposed to

control the institution to certify whether they are fit and proper to manage or control the

institution. The central bank also considers other issues as laid down under section 4 (5)92

This is done to cater for the consumers‟ welfare.

Under section 7, a license shall not be granted to an institution unless the institution meets the

minimum capital requirements specified in the Second Schedule. The mobile network

operator as such must have a good capital basis so that once it starts business it will not

collapse.93

Under section 32 of the banking act, the Central Bank of Kenya, by inference can cause an

inspection on the management of a MNO‟s money transfer services, its records and books of

accounts to ensure that there is transparency and that the consumers can trust the management

of their service providers.

The Central Bank of Kenya has been granted the power to advise and direct institutions94

different situations for example where the institution is being run in a manner that does not

comply with the law or not in the best interest of the consumers. This is by making

recommendations, issuing directions on measures to be taken by the institution to improve on

the management of the institution or even appointing suitable persons to conduct the

management of the institution.95

The auditing of the accounts of the MNO‟s may be done under the directions of the Central

Bank to ensure that they are in order. These are provided for under part V of the Act. The

Central Bank may, at any time, issue directions to an institution requiring it to maintain such

books, records or information, in addition to any books, records or information then already

maintained by it, as the Central Bank may consider to be necessary.96

Also, the transparency in management is put to the test here since a report of every audit done

is supposed to be published for the public to see.97

This therefore means that the consumers

92 The Central Bank of Kenya Act. 93 Ibid. 94 Ibid, section 33. 95 The Central Bank of Kenya Act. 96

Ibid. 97

can trust the management with their deposited money in their mobile accounts since they will

not only have to be accountable, but the accountability has to be seen.

The Banking Act was basically enacted to regulate banking business and other connected

services. The position at law is that there are no specific laws to regulate mobile money

transfer services in Kenya. The question has to be asked whether they may fall under

„connected services‟ of banking businesses as envisaged by the act. Section 2(1)(a) defines

banking business as accepting from members of the public of money on deposit repayable on

demand or at the expiry of a fixed period after notice. Section 2(1) does not define mobile

money transfer services.98

Despite there being some similarity between banking and MMT services, MMT services

cannot be said to fully and completely fall within the ambit of The Banking Act. If mobile

money transfer services and mobile payment systems are to be considered as falling within

the scope of Banking Act on basis that they may be seen to be carrying out banking business,

they will be taken to be in contravention to sections 3(1) (a) and 4 of the Banking Act which

require that no one is to transact banking business unless they are an institution holding a

valid licence and which licence is to be applied to the Minister of Finance through the Central

Bank.99

None of the requirements of which have been met.

The Kenya Communications Regulations, 2001 recognize electronic transactions by defining

the terms electronic mail services, electronic mail services, electronic mail, electronic

document interchange and electronic voice mail but it does not have provisions regulating the

use of MMT services the above. The Regulations do not define Mobile Money Transfer

Services.100

Under regulation 51, all telecommunications equipments shall prior to their installation or

connection to any public switched telecommunication network be submitted to the

Commission for type-approval which shall be granted for each type of equipment once and

subsequent users of the same model of equipment shall not apply to the Commission for type

approval Provided that any changes in models, design or specification of any equipment

which has been type approved by the Commission shall be resubmitted for type approval.

This is to ensure that the equipment is in good condition. The categories of network and

98 Banking Act cap 488 99 Ibid. 100 Kenya Communications Regulations, 2001

terminal equipment that require type approval include any customer premises equipment to

be attached to any part of licensed telecommunications.101

The Commission may conduct investigations regarding the working or use of any equipment

or apparatus which has been given approval or final type approval and may cancel such type

approval where it is of the view that a licensee has violated provisional type approval

conditions or the equipment or apparatus is causing or is likely to cause harmful interference

to telecommunications network or is a risk to human health or the environment. This may be

done upon its‟ own motion or upon a complaint by any person.102

Any person may make a representation in respect of working of any equipment that has been

approved or may object to the type approval of any equipment. This section gives persons

who are in doubt about working condition of any equipment to submit a complaint to the

Commission.103

The regulations do not provide for Mobile Money Transfer Services. The Commission may

type–approve the equipment used by the telecommunication companies but there are no

provisions on a body to type – approve the equipment (mobile phone) used by the consumer.

The National Information and Communications Technology (ICT) Policy does recognize that

there is need for comprehensive policy, legal and regulatory framework on ICT in dealing

with issues of convergence, electronic commerce and e-Government. It states that there is

need to Support ICT development, investment and application; Promote competition in the

industry where appropriate; Address issues of privacy, e-security, ICT legislation, cyber

crimes, ethical and moral conduct; Support research and development in ICT and; Develop an

institutional framework for policy development and review.104

Further it acknowledges the lack of adequate infrastructure in ICT that has hampered

provision of efficient and affordable ICT services in the country but does not provide for the

solutions. It just states what the government intends to do, which includes Provision of

support infrastructure, such as, energy and roads; supporting software development;

101 Ibid. 102 Regulation 58, Kenya Communications Regulations, 2001. 103 Ibid, regulation 59. 104 National Information and Communications Technology (ICT) Policy

Promotion of local manufacture and assembly of ICT equipment and accessories; and

Provision of incentives for the provision of ICT infrastructure.105

The paper also does acknowledge that there is a challenge is for the country to establish an

adequate legal framework and capacity to deal with national security, network security,

cyber-crime and terrorism; and to establish mechanisms for international cooperation to

combat cross-border crimes. It proposes an e-security structure be developed in collaboration

with the relevant institutions.106

The policy paper also mentions Encouraging and accelerating investments and growth in IT

hardware, software, Internet, training, IT enabled services, telecommunications and electronic

commerce as one of its broad objectives.107

This policy does not offer any assistance in as far as Mobile Transfer Services are concerned.

This may perhaps be available if the Policy achieves its goals and strategies such as

promoting competition, increased customer choice and accelerated investment through

liberalization of sector and licensing of new players in the various telecommunication

service, the MMT services will be faster, more efficient and easily accessible.108

Under the Evidence Act to adduce sufficient evidence to support facts in issue involving

Mobile Money Transfer Services and Mobile Money Payment Services can a very tricky and

difficult task because the transactions are conducted through media and there are no paper

records to adduce in courts. Moreover, information on some transactions is deleted

immediately. For example some banks advice their customers to delete their financial

information from their mobile phones immediately after reading their message. For example

information relating to PIN numbers or even account balances. This advice aims at protecting

consumers‟ privacy since unauthorized persons may read this message in the mobile phone.

On the other hand it raises a dispute since the consumer will not have evidence to adduce in

court, partly because there are ways and phone applications of retrieving lost information on

mobile phones but it is sometimes expensive.109

Ibid. 106 Ibid. 107 Ibid. 108 Njaramba Gichuki (2013) , supra p.250. 109 Evidence Act.

Where hackers, password stealers, key loggers and the like are involved it becomes difficult

for the consumers to prove that they are not the ones involved in or authorized the transaction

more so where the consumers password and authorization codes have been used.

The Evidence Act110

provides documents printed computer are admissible without the

production of the original document. The only alternative to a consumer here is therefore to

ask the telecommunication company or bank to issue him with a copy of the transaction he

wants to rely on from the computers. This will not help much where the consumer seeks to

rely on the information to prove that he did not partake in the transaction. In situations where

the consumer is suing the bank or mobile service provider, getting the copy from either could

be cumbersome.

It also provides that any information contained in an electronic record is admissible as

evidence without the requirement of producing the original if the information is produced by

a computer.111

Again the word computer has been used hence having a limiting effect to

mobile phone. The word „produced‟ is not clear since it could be implying that as long as the

information was gathered, created or printed by a computer. Information could be gathered

from other sources say a mobile phone or could be sourced from a mobile phone but printed

by a computer.

For electronic records to be admissible, the following conditions shall be met;112

(a)the computer print-out containing the statement must have been produced by

the computer during the period in which the computer was regularly used to store

or process information for the purposes of any activities regularly carried on over

that period by a person having lawful control over the use of the computer;

(b) the computer was, during the period to which the proceedings relate, used in

the ordinary course of business regularly and was supplied with information of the

kind contained in the document;

(c) the computer was operating properly or, if not, that any respect in which it was

not operating properly was not such as to affect the production of the document or

the accuracy of its content;

(d) the information contained in the statement reproduces or is derived from

information supplied to the computer in the ordinary course of business.

110Ibid, section 65(5) (c). 111 Ibid, section 106. 112 Ibid, section 65(6)(a).

The evidence Act thus does not expressly provide for admission of evidence from mobile

phones. It only mentions a „computer‟. This limits the use of technology. This should be

amended to include electronic gadgets like mobile phones.

According to the Kenya Information and Communications (Dispute Resolution) Regulations

2010 the disputes that the CCK will adjudicate upon include disputes between a consumer

and a service provider (a licensee of the CCK) and between a service provider and another

service provider.113

The commission also has the power to hold hearings, inquiries and

investigations where it considers appropriate. After which it shall make a decision in writing

stating reasons for the decision, which shall be dated and signed.114

There is a provision for appeal if one is not satisfied with the decision of the Commission, to

the Appeals Tribunal established under regulation 102 of the Regulations within 15days of

the decision. The procedure for instituting a complaint with the Commission is very similar to

that in civil proceedings, though the Commission has the power to disregard technicalities if

it deems it appropriate and if in so doing it will not cause injustice to either of the parties.

The definition of "dispute" for the purposes of the Regulations is: any matter that is in

contention between a licensee and another, a consumer and a licensee, where one or both

parties is aggrieved by the conduct of the other and the parties have failed to reach an

amicable resolution after due effort has been made.115

The Kenya Communications (Electronic Transactions) Regulations, 2009were made by the

Minister of Information and Communications in consultation with the Communications

Commission of Kenya , in exercise of powers conferred by sec 83R of the Kenya

Communications (Amendments) Act, 2009 which is an amendment to the Kenya

Communications Act of 1998.

A Certification Service Provider will be licensed in accordance with the Kenya

Communications (Licensing and Quality of Service Provider Service) Regulations, 2009 and

shall operate and provide advanced electronic signature certificate management services to

the terms and conditions set out in the licence and under these Regulations.116

113 The Kenya Information and Communications (Dispute Resolution) Regulations 2010, Regulation 3. 114 Ibid, regulation 8. 115 Ibid, regulation 2. 116 Kenya Communications (Electronic Transactions) Regulations, 2009 regulation 3.

An applicant for a license must have a certification practice statement approved by the

Commission; and undergo and pass an initial audit before grant of the licence.117

An applicant for a license should be a company registered in Kenya; take out adequate

insurance, in accordance with guidelines published by the Commission from time to time,

against liability for loss for claims arising out of any error or omission on the part of the

applicant, its officers or employees; have a paid-up capital of not less than amounts to be

determined by the Commission from time to time and provide a performance bond or

banker‟s guarantee in favour of the Commission as determined by the Commission.118

A Certification Service Provider (personnel) shall take all reasonable measures to ensure that

every certification personnel is fit and qualified for the services provided; has not been

convicted of fraud, theft or any offence under the Act, Amendment Act or these Regulations;

is not an undischarged bankrupt or has entered into a composition or scheme of arrangement

with his creditors; has knowledge of the relevant provisions of the Act and these Regulations.

He should also be conversant with the Certification Service Provider's certification practice

statement; in possession of the relevant technical qualifications, expertise and experience to

effectively carry out his duties; and be in possession of any other qualifications that the

Commission may prescribe.119

Every licensed Certification Service Provider shall ensure that in the provision of its services

it materially satisfies the security guidelines that may be issued by the Commission from time

to time. In determining whether a departure from the security guidelines has occurred,

reasonable professional judgment shall be exercised as to whether a condition that does not

strictly comply with the guidelines is or is not material, taking into consideration the

circumstances and the system as a whole.120

There is the provision of a banker‟s guarantee or a performance bond in favour of the

commission as may be determined by it. A banker‟s guarantee is a commitment by the

guarantor to pay a certain sum of money to the beneficiary within a specified period of time if

those subscribing to its services fail to fulfil their contractual obligations under a given

transaction whereas a performance bond goes towards guaranteeing satisfaction and

117 Ibid, 2009 regulation 4. 118 Ibid, regulation 5. 119 Ibid, regulation 6. 120 Ibid, regulation 14.

completion of service provided as such there should be compensation for loss arising from

anything to the contrary.

The Kenya Communication (Consumer Protection) Regulations 2009 are aimed at protecting

consumers of telecommunication services from injury resulting from their dealings with the

telecommunication service providers.

They provide that the licensee is to inform subscribers about a particular risk of a breach of

security of the network.121

The regulations seek to protect consumers‟ rights which are not backed by the consumer

protection legislations although the Commission has not set out these consumer rights in the

Regulations.122

Regulation 10 provides for the licensee to establish content blocking systems that creates a

high duty of care for a licensee to ensure that no unlawful data passes through its system.

This ensures that the consumers‟ information is secure and private.

There is an Obligation on the service provider to submit a system of outage credits to be paid

to a subscriber for a period of time when his service is not operating for reasons not caused

by the subscriber.123

It also requires the service providers to deliver a code of commercial practice to all

subscribers within 3(three) months; to ensure that consumers are aware of how commercial

business is conducted by their service providers hence they will be capable of knowing when

they are wrong and when the service providers are wrong. This reduces liability on the part of

the service providers for a consumer‟s ignorance in case of a dispute.124

The regulations also require service providers to submit their subscribers‟ service agreements

to the Commission for approval.125

This aims at protecting consumers from unfair contractual

agreements especially in relation to Mobile Money Transfer Services and Mobile Money

Payment services which are at present mainly regulated by contractual terms between the

service providers and the consumers due to lack of laws and regulations to regulate them.

121 The Kenya Communication (Consumer Protection) Regulations 2009, regulation 4. 122 Ibid, regulation 7(5) (a). 123 Ibid, regulation 12. 124 Ibid, regulation 13(4). 125 Ibid, regulation 14(1).

Regulation 15(2) requires each licensee to establish a system to inform subscribers that

information is being collected about them. The subscribers have to approve this and are at

liberty to decline such collection of information about them.

The regulations also require the service providers to install billing systems to issue bills with

detailed rates, durations, charges and discounts for each call so that the consumers can know

when they are being over charged.126

This also forms a record on the transactions the

consumer undertook and forms part of the evidence required to be adduced in case of a

dispute.

Under the Kenya Communications (Importation, Type Approval and Distribution of

Communication Equipment) Regulations 2010, Regulation 2 which is the interpretation

section, while attempting to define “type approval” gives an impression that there are national

standards which the equipment must meet for the equipment to be specifically approved. It is

imperative that the “national standards” referred to be specifically stated as a matter of fact so

that there can be certainty. For example, the regulations can state that the equipment must

meet the standards of Kenya Bureau of Standards (KEBS).127

It defines “type approval”

means a method of checking the compatibility of communications equipment with any

operating communication network and the conformance of such equipment to national

standards.

Regulation 3 lists the type of equipment subject to type approval and includes all network

equipment and communications equipment. The Commission shall grant type-approval for

each type of equipment once and subsequent users of the same model of equipment shall not

apply to the Commission for type approval:

Regulation 5 provides that the Commission is under no obligation to return to the applicant

any samples of equipment submitted for the purposes of type approval and acceptance. This

has implications that will be discussed in the ensuing parts of this chapter.

Regulation 6 provides that The Commission may, conduct inquiries to determine whether

technical standards from other countries or jurisdictions should be recognized in Kenya for

purposes of exempting any equipment from type approval or testing requirements.

126 Ibid, regulation 20. 127 Njaramba Gichuki (2013), supra p.241.

Under regulation 9, the samples of equipment submitted should be in a good working

condition; properly configured for testing and complete with the necessary test adapters; and

clearly marked with the trade name, model and serial number.

According to regulation 23 an authoritatively officer of the Commission may at any

reasonable time enter any premises on which a supplier, importer or distributor is keeping the

importer communications equipment for purposes of inspecting the equipment if this

provisions is practiced, it is will ensure that the equipment that is faulty and does not meet the

required standards is not distributed in Kenya. This in a way protects consumers. The

regulations cover other important aspects like, display of type approval label for terminal or

equipment, revocation of type approval of device, conditions for importation and distribution

and import and sale restrictions.

The 1998 Kenya Communications Act was amended in part IV to include electronic

transactions. This was in the Kenya Communication (amendment) Act 2009. Both the 1998

and the 2009 Kenya Communications Act outlaws the operations of the Communication

systems and the provision of communication services without a license from CCK.

The systems and services targeted here include Telecommunication, Postal/ courier,

Broadcasting and Electronic transactions

This will imply that banks require licensing from CCK to conduct electronic transactions. But

disquiet arises as to whether banks require CCK license to conduct Mobile Money Transfer

Services and Mobile Payment Services this being so because the regulation of banks is not

within the ambits of the CCK‟s jurisdiction.

The previous 1998 Act did not provide for regulation of electronic transactions and neither

does it provide for Mobile Money Transfer Services and Mobile Payment Services.

It is through the amendment that led to the 2009 Kenya Communications (amendment) Act

that electronic transactions are provided for. In its definitions section, mobile phones and

Mobile Money Transfer Services have not been offered a definition. It‟s the definition of a

computer that has been provided instead128

and the Act thereby goes on to limit itself to

128 Section 4,“computer” means any electronic, magnetic, optical or other high-speed data processing device or

system which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or

optical impulses, and includes all input, output, processing, storage, software and communication facilities

which are connected or related as a system or network.

electronic materials in computers as opposed to those in mobile phones. This is why the

Mobile Money Transfer Services remain unregulated by the Act. The Act also defines

computer service and computer system.

Some sub-sections under section 83 in part IV will give an insight as to how and whether

Mobile Money Transfer Services are covered within it.

The functions of the commission in relation to electronic transactions include;129

1. Facilitating electronic transactions by ensuring the use of reliable electronic

records.

2. Facilitating electronic commerce and eliminate barriers to electronic

commerce.

3. Promoting and facilitating efficient delivery of public sector services by

means of reliable electronic records.

These functions are general to commerce. Section 83 J recognizes the formation and validity

of contracts electronically. Mobile Money Transfer Services are contracts that are performed

electronically, it is unfortunate, and however, that the section does not refer to mobile phones

so as to cover these transactions.

The act offers the recognition of parties of electronic messages for the acknowledgement of

receipt in electronic form. It also provides for legal recognition of electronic signatures.

All these sections and many more do not specifically cover mobile phones as they restrict

themselves to computers alone. If, however, these provisions were amended to cover mobile

phones too, then both Mobile Money Transfer Services and Mobile Payment Services would

be adequately covered.

Only two sections specifically refer to mobile phones, section 83 G makes it an offence for a

person not being a manufacturer to reprogram mobile phones while Section 83 H makes it an

offence for a person to unlawfully posses any material that can be used for reprogramming a

mobile phone. The section also makes it an offence for a person to distribute or manufacture

equipment specifically meant for interfering with the operations of a mobile phone.

Section 16(1) of the Banking Act is seen to restrict taking of deposits only to licensed

institutions. They will be in contravention of this provision too. Section 16(5) raises a

contradiction on whether mobile money transfer service providers can be seen to be in the

129 Kenya Communications (Amendment) Act 2009, section 83C.

deposit-taking business as it clarifies that such a business should be one that lends money to

others from the deposit or one that uses the deposit wholly or partly to finance its activities.

This provision operates to exclude mobile money transfer service providers and mobile

payment systems from the scope of The Banking Act as they don‟t lend out money / deposits

to other persons.

3.3 SHORTCOMINGS IN THE REGIME

3.3.1 The Existing Laws

The CCK regulates mobile phone business in Kenya. However, it is neither sufficiently

competent nor qualified to regulate the Mobile Money Transfer Services sector on its own.

This is because the services involve some banking aspects and information and technological

aspects that may be beyond the expertise of CCK. Besides, the convenience of the services

might have made the financial service regulators to overlook the legal risk issues involved.130

Although the services are very instrumental in commercial transactions today, it should be

governed and regulated by our laws so as to curb the vices that are bound to be associated

with Mobile Money Transfer Services. However the current regulatory regime has its own

deficiencies and loopholes that regulatory reform need to address, as discussed below.

In Kenya communications (Amendment) Act 2009, Mobile Money Transfer Services are

unregulated. Amendments to the Act are required to provide for the same. The previous 1998

Act did not provide for regulation of electronic transactions and neither does it provide for

Mobile Money Transfer. In its definitions section, mobile phones, Mobile Money Transfer

Services and Mobile Payment Services have not been offered a definition. It‟s the definition

of a computer that has been provided instead and the Act thereby goes on to limit itself to

electronic materials in computes as opposed to those in mobile phones.

The act also fails to define the term commerce. The communications commission has not

fulfilled all its functions as there is no even legal framework established by the commission

to minimise incidences of forged electronic records and fraud in electronic commerce and

other transactions.

130 Njaramba Gichuki (2013) supra, p. 236.

The Kenya Communications Regulations, 2001, besides recognizing electronic transactions

in the definitions section, it does not have provisions regulating the use of MMT service nor

its definitions.

The regulations do not set minimum standards which the equipment used by the

telecommunication companies must meet for it to be type-approved, a process done only once

on the equipment. If company buys old equipment it need not apply for another type approval

on the equipment as long as the equipment has been approved before. This is a loophole

because equipment does become faulty with age. There is also the normal wear and tear of

equipment that the regulations overlook. The regulations do not either provide for inspection

due to the fact that equipment does wear out after a long time of use, and the fact that the

equipment requires proper maintenance which should be inspected to ascertain.

The Regulations also give persons who are in doubt about working condition of any

equipment to submit a complaint to the Commission. Here the ordinary consumers are not in

a position to have knowledge about the working conditions of the equipment used. The

employees are in better positioned to have this knowledge but very few are willing to act

against their employer‟s wishes. The Commission should regularly conduct inspections of the

equipment.131

Moreover there are no provisions on a body to type – approve the equipment (mobile phone)

used by the consumer, only the equipment used by telecommunication companies.

The Kenya Communication (Consumer Protection) Regulations 2009 seeks to protect

consumers‟ rights which are not backed by the consumer protection legislations although the

Commission has not set out these consumer rights in the regulations. It requires the service

providers to establish a content blocking system, which ensures that the consumers‟

information is secure and private. This has been criticized by the telecommunication service

providers as setting a high duty of care on them.

In the Evidence Act, it can be a very difficult task to adduce sufficient evidence to support

facts in issue involving MMT Services because the transactions are conducted through media

and there are no paper records to adduce in courts. Moreover, information on some

transactions is deleted immediately with an aim of protecting consumers‟ privacy since

131 Njaramba Gichuki (2013) , supra p.240.

unauthorized persons may read this message in the mobile phone. On the other hand it raises

a dispute since the consumer will not have evidence to adduce in court.

Where hackers, password stealers, key loggers and the like are involved it becomes difficult

for the consumers to prove that they are not the ones involved in or authorized the transaction

more so where the consumers password and authorization codes have been used.

The act also provides that any information contained in an electronic record is admissible as

evidence without the requirement of producing the original if the information is produced by

a computer.132

Again the word computer has been used hence having a limiting effect to

mobile phone. The word „produced‟ is not clear since it could be implying that as long as the

information was gathered, created or printed by a computer. Information could be gathered

from other sources say a mobile phone or could be sourced from a mobile phone but printed

by a computer.

In the Kenya Communications (Importation, Type Approval and Distribution of

Communication Equipment) Regulations 2010, provides that the Commission is under no

obligation to return to the applicant any samples of equipment submitted for the purposes of

type approval and acceptance. In some circumstances this might be really unfair since some

equipment may be very expensive. This also means that telecommunication companies may

be required to buy equipment in pairs, one to be submitted as a sample for type approval and

the other for their personal use since there is likelihood that the equipment they handed to the

Commission as a sample will not be returned to them. The companies will incur a lot of

expenses in such a situation and their only alternatives is to increase their so as to recover

their cost and this will affect the consumers greatly.133

Even though the dispute resolution powers are with the commission and maybe faster than

ordinary courts, it would have been made faster by removing the intricate and detailed

procedure since some of the laid down procedure maybe unnecessary due to the fact that it‟s

meant to be speedy, convenient and simple dispute resolution. The parties may not prefer the

commission in place of court because the difference is insignificant.

electronic services such as mobile banking and mobile transactions. But the country still

132 Evidence Act section 106. 133 Njaramba Gichuki (2013) , supra p.241.

lacked a clear framework for electronic transactions, which it needed to participate

laws for this sector. Though Kenya‟s government did publish the Electronic Transactions Bill

of 2007 to address electronic commerce issues such as recognition of electronic transactions

and electronic signatures, it has not enacted the Kenya Information and Communications Bill

of 2007. Many interested parties including mobile operators, merchants, banks, entrepreneurs

electronic transactions and more specifically, mobile transactions.

3.3.2 Privacy and Data Protection

Due to the convergence of the industries i.e., mobile money and banking, consumer

protection policies are not specific to the needs of mobile transfer services. In this case

privacy is of great concern although not one that the Kenyan market has highlighted.

Transactions and personal data are transmitted through mobile phone networks, handled more

often by third parties such as agents, and accessed remotely by customers and financial

institution employees, the risk of inappropriate access and usage rises.134

The main concern has been over the users Identification, geographic location and the value of

their transaction. Kenya‟s current legislation does not define who can get access to a mobile

money trail and how, when or under what conditions such access may be obtained. This

complicates efforts to keep consumer information private while at the same time conflicts

with the desire for regulators to keep customer funds safe against financial crimes. In

addition, the privacy regulations that apply to banks in respect of customer financial records

do not extend to Mobile Network Operators.135

While MNOs report having instituted internal controls to minimize unauthorized access to

consumer information, consumers simply have to trust the MNO to ensure that these are

observed. In this context, simple and transparent mechanisms are needed through which users

can authorize an entity to access this kind of information. Proper data protection laws need to

134 Joy Malala (2013), Consumer Protection for Mobile Payments In Kenya: An Examination of the Fragmented

Legislation and The Complexities it Presents For Mobile Payments , P.34. 135 Ibid.

integrate mobile money data or other information emanating from money transfers and ensure

that such data are not used for undesirable activities in the framework of general legislation

on data retention and privacy. Currently, the licensing requirements for communication

services mandate MNOs to provide access to user phone records in response to a legal court

order, but this does not explicitly cover mobile money records. As a result, who can access an

individual‟s mobile money records, when and for what purpose is not clear. Kenya‟s Draft

Regulation for the Provision of Electronic Retail Transfers attempts to address the issue of

privacy by mandating a provider to maintain confidentiality of all consumer information.136

3.3.3 Prudential regulatory issues in mobile money

Prudential regulations are aimed at dealing with risks to individual financial institutions and

systemic financial risks. Have a liquidity problem, save in the case of massive fraud.

However, the banks and the banking system can generate risks to users of mobile money

services.

The fact that a large total deposit of all the mobile money users is placed in a commercial

bank means that the system depends on the quality of the bank. MNOs are required to have

deposit insurance to protect their aggregate deposits. In the case where deposits exceed the

total deposit insurance, then there may be an issue as to who would repay depositors in the

case of a bank failure. A direct solution would be to require MNOs to maintain deposit

insurance up to the total value of all deposits. Moreover restrictions are not placed on what

these deposits can be invested in by the bank that is tied to the aggregate deposit nor is there

the rule that split their deposits across multiple banks to diversify bank risk.

Mobile money deposits are already operationally ring-fenced from the MNOs accounts but a

legal framework to protect these deposits from bankruptcy of the MNO is not yet in place.

The legal and accounting treatment should require that the overall deposit be protected both

from the MNO and its creditors. Adequate financial controls and regular audit are important

to enforce this.

3.3.4 The Monetary Policy

136 Ibid.

Developments in the mobile money can affect the outstanding supply of money. To the extent

that increases in mobile money balances represent a shift away from cash to deposits as

opposed to a shift from bank deposits to mobile money deposits, which seems unlikely, this

will increase the monetary multiplier. Such changes in the deposits, which are likely to occur

around holidays and harvests could affect the outstanding supply of money.

It is possible that mobile money could lead to an increase in the velocity of money. If mobile

money allows users to make transactions at a faster pace than usual, perhaps due to reducing

the logistical constraints of distance, then this could increase the velocity of money.

Reporting of monthly transaction and deposits into mobile money is required by the current

legislation, so the information required to monitor this is already at the MNO for use by the

regulator.

More generally, trends in the development of mobile money may in future need to be

included in estimates and forecasts of money growth and demand, and taken into account in

monetary policy through the central bank‟s management of the money base. This may affect

total money or inflation directly, given its size.

3.3.4.1 International Money Transfer

One of the frontier topics in mobile money is the emergence of cross-border interoperability

to facilitate international remittances. If not well regulated this is one avenue for money

laundering and terrorism financing which is a serious vice associated with mobile money

transfer. Moreover, The EAC with its increasing economic integration is well placed to tackle

these challenges to further facilitate international remittances at low costs. However, the

issues are not simple, involving limits on transactions, and currency controls.

3.4 THE CHALLENGES FOR REGULATORS

A common justification for the regulation of financial services is the need to protect the

consumer and other players in the economy. Such protection is wide and diverse and presents

the authorities with a range of challenges. One challenge is to design policies which take

appropriate account of the interests of those consumers who might be described as

disadvantaged.137

The convergence,138

of telecommunications and finance has given rise to

137 Peter Cartwright, „ The Vulnerable Consumer of Financial Services: Law, Policy and Regulation‟, T

Wilhelmsson “The Informed Consumer v the Vulnerable Consumer in European Unfair Commercial Practices

regulatory challenges for regulators. The limited regulatory intervention in these hybrid

business models has been left to market forces with only minimal general product regulation

such as consumer safety. In marked contrast, both telecommunications and financial firms

have been subjected to significant sector specific regulations. The ownership of MNOs is

restricted to multinational corporations, who have to invest heavily in getting their services to

serve the Kenyan population and on the other hand, banks have to raise the minimum capital

requirements.

The beginning of this convergence raises questions about the regulatory regime the industry

will face. The split in responsibility makes it difficult for regulators to take a strategic view of

priorities across the entire retail financial services sector. Decisions are driven by different

legal duties and powers of individual regulators. The existing laws do not provide a sufficient

legal setting for the mobile money sphere. These are some of the challenges that regulators

will face when establishing regulations in a jurisdiction that does not have consolidated

consumer protection legislation such as Kenya.139

3.4.1 Different Objectives for Regulation of the Sectors

The main objective of regulating MNOs is to ensure that consumers are protected from

operators reducing output to increase prices on low quality services.140

The other objective

should be to ensure that the new population included in the mobile money ecosystem is

protected. A third objective would be for financial institutions to ensure that the money

pooled in the mobile money ecosystem does not cause systemic risks in the long run. The

convergence of these industries makes regulation more difficult as there is a need to

determine which objectives to pursue and how to accomplish them now that several

industries provide multiple services.141

3.4.2 Inconsistencies in Regulation Resulting from Traditional Separation

Law – A Comment” in G Howells, a Nordhausen, D Parry and C Twigg-Flesner (eds) Yearbook of Consumer

Law 2007 (Ashgate, 2007) 211 at p 213. Convergence here shall be used to mean the hybridised business model where two sector specific industries

are merged to provide a service. 139 Joy Malala (2013) supra p.34. 140 Blackman, C. (1998). Convergence Between Telecommunications And Other Media: How Should

Regulation Adapt? Telecommunications Policy, p. 163-170. 141 Joy Malala (2013) supra p.35.

A regulatory vacuum is created due to the interconnectedness of telecommunications and

finance. When none of the existing government agencies has issued regulations on the new

services, the regulations could fall under the jurisdiction of two or more agencies which leads

to jurisdictional conflicts. MNOs are supervised by the CCK while retail payments provided

by banks are regulated by the CBK. In trying to resolve this, in the UK, for instance wired

television was under the jurisdiction of Oftel142

while the independent Television

Commission (ITC) regulated wireless television. When a service such as British Interactive

Broadcasting emerged conflicts arose,143

this type of problem eventually led to the creation of

the converged regulator Ofcom.144

3.4.3 Regulatory Arbitrage

When there are multiple regulators, companies can select the ones that advance their interest

the most. This could mean they select, for example, the most lenient regulator or take

advantage of the rules that most benefit them. This is problematic when regulation does not

yet exist for emerging convergent services that could fall under the supervision of more than

one regulator. In the presence of these alternatives they can choose the one that would entail

the least regulation, which may not necessarily be the best option for society or the industry

as a whole. It could be argued that multiple regulators are desirable because they can foster

institutional learning by eliminating obsolete legal models and expanding desirable ones. This

argument, although theoretically feasible, may not be practically possible. This is because the

interests of companies are not aligned with those of the government. Companies want to

maximize profits while governments aim to maximize societal welfare. The rules that

companies may wish to have applied to them do not necessarily lead to benefits for society.145

3.4.4 Uncertainty

The inability to reliably forecast the future due to rapidly changing technology, which has

given rise to unforeseen new products and services is another challenge for regulators.

142 The Office of Telecommunications (Oftel) (the telecommunications regulator) was a department in the

United Kingdom government, under civil service control, charged with promoting competition and maintaining

the interests of consumers in the UK telecommunications market. It was set up under the Telecommunications

Act 1984 after privatisation of the nationalised operator BT. 143

Collins, R., „Back To the Future: Digital Television and Convergence in The United Kingdom.‟

Telecommunications Policy (1998), 22:4-5, 383-96. 144 Ibid, The Office of Communications, commonly known as Ofcom, is the government-approved regulatory

and competition authority for the broadcasting, telecommunications and postal industries of the United

Kingdom. 145 Joy Malala (2013) supra, p. 35.

Regulators can only issue rules for the problems faced today, but it is always possible that

these rules will cause problems when new technologies become available. This is what

mobile money services have brought forth. The regulator then has to decide whether to do

nothing or to intervene. In light of this continuous innovation, regulators need to find

regulatory frameworks that allow them to cope better with uncertainty.146

3.4.5 Which authority should regulate what?

The current regulatory environment is immature in terms of how its governing and providing

guidance to the MMT industry. Regulators are still debating the fundamentals. How will such

transactions be taxed? What is the legal status of “money” that is stored on a mobile phone,

awaiting redemption by a local merchant, whose contract is with a telecom? How will “know

your customer”147

rules apply to people who may have no official government document

establishing identity? How can regulators assure a level playing field for all companies that

wish to compete? How will consumers be protected from possible fraud? In the event of a

technology failure, who is responsible for losses, the maker of the technology or the

organization that uses it to make transactions?148

A major issue in many nations, for example, is simply how to classify mobile-money activity

for regulatory purposes: If the system is run by a telecom, should it be regulated by

telecommunications authorities? Or by those who otherwise would supervise banks? Not only

do the answers vary, but so do ideas about how to ask the question.149

Perlman, of the South African Wireless Application Service Providers Association, agrees

and says,

“When it comes to regulatory ideas and practices, what we’ve got now are islands of

excellence that don’t talk to each other.”

146 Ibid. 147 Know your customer (KYC) refers to relevant information from their clients for the purpose of doing

business with them. The term is also used to refer to the bank regulation which governs these activities. Know

Your Customer processes are also employed by companies of all sizes for the purpose of ensuring their

proposed agents', consultants' or distributors' anti-bribery compliance. Banks, insurers and export credit agencies

are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify

their probity and integrity. 148 “A Continuing Challenge: Regulating Mobile Money and Keeping It Secure,” found at http://mobile.banking.s3-website-us-east-1.amazonaws.com/chap128227.html- accessed on 8/04/2014. 149 Ibid.

Some argue that mobile money should be regulated according to the companies involved, that

it should be institution based telecommunications regulators should deal with mobile phone

operators, bank regulators should supervise financial institutions, and so on. Others, however,

believe that regulation should be transaction based. As Michael Klein and Colin Mayer wrote

in 2011 in their working paper for the World Bank,150

“Whether a telecommunications company or a bank is leading the effort sheds little

light on the precise risks associated with a particular mobile-money scheme.”

With the situation in Kenya there are lots of questions about compliance as standards are

being set. Compliance with laws aimed at preventing money laundering or aid to terrorism

can be very expensive.151

3.5 CONCLUSION

It is clear that the current regime, as this chapter brings out, does not support nor adequately

regulate MMT services together with other mobile money services. There is a huge

deficiency that creates loopholes that might be taken advantage of by those with criminal

intent. Such rogue individuals often exploit the loopholes by taking advantage of them to

propagate vices related to mobile money as discussed in the previous chapter. The regulators

need to be well informed of this areas that are exploited to help them put in place adequate

measures to seal them. However in the process there are a number of challenges involved as

has been discussed under this chapter. The following chapter will thus provide

recommendations on what should be done in what area so as to adequately put MMT services

properly in the realms of regulation.

150 Ibid. 151 Ibid.

CHAPTER 4

RECOMMENDATIONS FOR NECESSARY REFORMS AND

CONCLUSION

4.1 INTRODUCTION; ATTEMPTS TO REGULATE

In Kenya, mobile financial services have evolved in a largely undefined regulatory space.

The Central Bank of Kenya (CBK) has been informed and watchful, and has provided

oversight and deliberate guidance from the very beginning of the industry. The relationship

between the CBK and Mobile Money Service Providers has evolved through willing

collaboration and innovation in an entirely new domain in financial services. In this context,

the two parties have addressed emerging challenges in introduction of mobile payments

services as well as consumer protection that have attracted international interest and

recognition.

However, the consumer protection measures that exist are as yet not codified in law or

regulation in the industry. In the last few years, with the introduction of three additional

mobile money service providers152

and the huge growth of the sector, the CBK has chosen to

introduce a more formal regulatory framework over the entire branchless banking sector. The

actions taken to date include the following:153

The Proceeds of Crime & Anti-Money Laundering Act of 2009 was passed, and went into

effect July 2010;

In late 2010, the MOF and the Consumer Protection Task Force (CPT), in conjunction with

CGAP, conducted a study into consumer protection across all financial services in Kenya154

Their final report recommendations included: better disclosure with regard to pricing and

plain language, dispute resolution mechanisms and third-party recourse, regulations

clarifying liability and responsibility for third party agents, and public reporting of

performance;

The new mobile money services were approved and supervised under individual Letters of No

Objection. 153 FSD Kenya (2011), “Consumer Protection Diagnostic Study Kenya.”

http://www.fsdkenya.org/pdf_documents/11-02-22_Consumer_diagnostic_study.pdf - accessed on 3rd April

2014 154 Ibid.

In 2010, the telecoms regulator, CCK, issued its own consumer protection guidelines for the

telecommunications sector, which would include mobile money services;

In March 2011, the CBK issued a draft of the Retail Transfer Regulation 2011, which is a set

of comprehensive regulations for all e-money providers, including mobile money. It was the

main regulatory guideline for the sector, and further defined the players, increased the

capitalization requirements for non-bank providers, changed some of the transfer caps, etc;

Finally, in 2011, the CBK submitted the National Payments System Bill 2011, which would

put into law the framework under which all the new regulations would be governed. (This

Bill has been in the works for a few years, but opposition from the media sector has

prevented it from being put forward). The Bill covered all electronic payment systems and

instruments, including the RTGS, online and mobile money payment services, and aimed to

tighten consumer protections if a mobile or online service provider became insolvent.

electronic services such as mobile banking and mobile transactions. However, the country

still lacked a clear framework for electronic transactions, which it needed to participate

laws for this sector. Though Kenya‟s government did publish the Electronic Transactions Bill

of 2007 to address electronic commerce issues such as recognition of electronic transactions

and electronic signatures, it has not enacted the Kenya Information and Communications Bill

of 2007. Many interested parties including mobile operators, merchants, banks, entrepreneurs

electronic transactions and more specifically, mobile transactions.155

4.2 RECOMMENDATIONS

4.2.1 MONEY LAUNDERING AND TERRORISM FINANCING

The ease with which money moves around the world makes it easy to commit financial

crimes by those with such criminal intentions. There should be formulated a policy and

regulatory authority to establish, support, and enforce best practices against money

155 The National Information and Communications Technology (ICT) Policy of March 2006.

laundering and terrorist financing domestically, bilaterally, and through multilateral bodies.156

Special recommendations as adopted by the financial action task force FATF in September

2011 should be adopted by our policy makers to address terrorist financing and money

laundering. These recommendations cover money laundering, terrorist financing and the

financing of the proliferation of weapons of mass destruction.

According to the Recommendations the country should undertake a national risk assessment

to understand the money laundering and terrorist financing risks in the country and come up

with national risk-based policies, responsive to the risk assessment.157

Commercializing money laundering and facilitation of the forfeiture of illicit assets is another

step towards the same objective, and customer identification and record keeping obligations

as well as filing suspicious transaction reports and conducting enhanced due diligence when

opening an account.158

Registration of legal entities and opening an account for a legal entity

at a financial institution and the requirement to understand who owns or controls an entity is

another vital step that should be implemented.159

The final category of recommendations brought about by FATF addresses international

cooperation, including requirements to implement four international conventions.160

also include criteria addressing cross-border cooperation for civil and criminal investigations,

the freezing and confiscation of assets, extradition, and cooperation among supervisory

authorities.161

However a challenge for many countries is limited resources for supervision,

examination and enforcement.

4.2.2 CONSUMER PRIVACY AND DATA PROTECTION

Privacy and data protection concerns are distinct issues that arise in any electronic platform.

Due to the convergence of the industries, consumer protection policies are not specific to the

needs of MMT. In this case privacy is of great concern although not one that the Kenyan

market has highlighted. However, despite this fact, regulators have been confronted with the

156 Emery S. Kobor (2013), The Role of Anti-Money Laundering Law in Mobile Money Systems in

Developing Countries , P. 311. 157

Ibid. 158 Emery S. Kobor (2013), supra P. 312. 159 Ibid. 160 “The Vienna Convention, 1988; the Palermo Convention, 2000; The United Nations Convention against

Corruption, 2003; and the Terrorist Financing Convention, 1999.” 161 Emery S. Kobor (2013), P. 313.

question of how to regulate in such a manner that balances consumer rights to privacy with

the objectives of law enforcement officials who wish to combat money laundering.

Transactions and personal data are transmitted through mobile phone networks, handled more

often by third parties such as agents, and accessed remotely by customers and financial

institution employees. Here the risk of inappropriate access and usage arises. Also consumers

lack of education and lack of experience with formal financial services and technology may

raise security risks. In addition the privacy regulations that apply to banks in respect of

customer financial records do not extend to MNOs.

The MNOs need strict internal controls to minimize unauthorized access to consumer

information, simple and transparent mechanism are needed through which users can authorize

an entity to access this kind of information. Proper data and protection laws need to integrate

mobile money data or other information emanating from money transfers and ensure that

such data are not used for undesirable activities in the framework of general legislation on

data retention and policy.162

Currently, the mandate of MNOs to provide access to user phone records in response to a

legal court order makes it hard to tell who can access an individual‟s mobile money records,

when and for what purpose. Kenya‟s Draft Regulation for the Provision of Electronic Retail

Transfers (2011)163

attempted to address this issue by mandating a provider to maintain

confidentiality of all consumer information.164

Regulations should be consistent and robust enough to hold providers responsible for data

privacy, and they should be liable for privacy breaches and misuse of customer data.

Supervisors should evaluate the provider‟s risk management and mitigation systems and its

procedures to handle cases of privacy and security breach. There is need to work together to

understand security concerns and maintain the integrity of customer data.165

Organizations

should identify the data which are considered personal and sensitive and should ensure that

appropriate mechanisms are in place. In the case of financial data, data integrity should be

162 Joy Malala (2013), Consumer Protection for Mobile Payments In Kenya: An Examination of the Fragmented

Legislation and The Complexities it Presents For Mobile Payments , P.35 163 May be cited as the Retail Transfers Regulation, 2011, issued in terms of section 57(1) read with section 4A

of the Central Bank of Kenya Act which requires the Central Bank (the Bank) to formulate and implement policies to promote the establishment, regulation and supervision of efficient and effective payment, clearing

and settlement systems. 164 It stated that, “A provider is allowed to share any consumer information only with the consumers or their

authorised agent (authorized in writing), the Central Bank, in the public interest or in response to formal legal

requests.” 165 Joy Malala (2013) supra, p. 35

taken into account. Organizations should be found liable for unfair business practices if they

utilize customer data for purposes not included in the customer notices.166

Consumer education in Kenya has helped reduce breaches of privacy, and most mobile

money providers have taken initiative to build customer awareness and capacity to prevent

fraud by employees or third parties.

It should, however, be borne in mind that regulation should be technology neutral, since

imposition of specific standards and protocols in a rapidly evolving industry is likely to

hinder innovation. Only problems in existing businesses should be identified and

addressed.167

However a challenge arises where there is a trade-off between enhancing data security and

keeping the costs down to allow profitability of low-value financial transactions. here

providers and regulators must agree on technological platforms and business models that

align each other‟s goals and to achieve this an open dialogue between them is necessary,

particularly when there are major current regulatory obstacles to overcome.168

4.2.3 FRAUD MANAGEMENT

In order to manage fraud, mobile banking companies should implement strong fraud

prevention and detection services. This fraud service should include customer education,

strong authentication, secure mobile applications, strict account set up and management

processes, real time detective services, and round the clock customer support. Customers

should be educated on their options to prevent fraud and what to do if they suspect fraud.

Customers should be able to opt into strict process rules include limiting transaction value,

requiring dual approvers on high risk transactions, and not allowing changes to customer

sensitive data such as address or authorized transfer to individuals without strong restrictions.

Dual approver is a process that requires one person to initiate the transaction and a second

approver on a different device to authorize the transaction. Customers should be encouraged

to enrol in predefined alerts that will help in the area of fraud prevention. Other key data

166 Mobile Payments: Risk, Security and Assurance Issues, An ISACA Emerging Technology (November

2011), P. 12 167 Joy Malala (2013) , supra p. 35 168 Ibid.

points used in fraud prevention include IP reputation, endpoint identity, geo-location, user

history and behaviour.169

Additionally, the service should provide controls based on the transactional risk score such as

step up authentication where the customer is prompted for additional information as the

transaction initiated is more risky. Strong authentication is critical in the mobile space since

devices are easily lost and stolen. The most mature and widely deployed method is

knowledge based authentication which includes passwords, question and answer, and image

recognition. Another form of authentication can come from establishing a device identity.

There are many methods by which this can be accomplished but the essential element is to

authenticate to an ID from that specific device that is derived from attributes of that device.

While authentication through biometrics is not new, it is still challenged with issues related to

false positives. With advanced mobile device hardware such as cameras and voice

recognition, there will be increased use of biometric authentication in the use of mobile

money transfer.

4.2.4 CUSTOMER EDUCATION

One of the less technical areas of risk mitigation includes an effort around strong customer

education. There should be an established and well understood method of communication

with customers. Customers should understand that any deviations from this established

communication channel cannot be trusted. This will reduce the risks of customers falling

victim to attacks such as phishing. Customers should also have an established way to

communicate relative to suspected fraud and understand how their MNO will communicate to

them.170

There should be a basic customer education program relative to security including addressing

issues such as the importance of passwords, the structure of strong passwords, ensuring that

their device locks after a designated period of time, importance of updating their operating

system and the installed applications and implementing encryption and anti-virus whenever

possible. Additionally, if remote wipe is implemented by their carrier, the customer should be

169 Vanessa Pegueros (2012), “Security of Mobile Banking and Payments.” P.21

https://www.sans.org/reading-room/whitepapers/ecommerce/security-mobile-banking-payments-34062-

accessed on 3rd April 2014 170 Vanessa Pegueros (2012), supra p. 22

encouraged to implement the ability to remotely wipe their device in the event that it is lost or

stolen.171

Finally, customers should be educated on the importance of downloading from reputable sites

as well as understanding the behaviour of the application in terms of what data is gathered

and shared with potentially other services or applications.172

4.2.5 AMENDMENTS

Under the Kenya Communications Regulations, 2001, the CCK has taken the mandate of

approving the equipment used by the telecommunications companies to ensure it‟s is in good

condition. Unfortunately do not set minimum standards which the equipment used by the

telecommunication companies must meet. The type approval is done once on the equipment.

If company buys old equipment from another company it need not apply for another type

approval on the equipment as long as the equipment has been approved before. This is a

loophole because equipment does become faulty with age. There is also the normal wear and

tear of equipment and the regulations seem not to put this into consideration. The regulations

should also provide for inspection in use due to the fact that equipment does wear out after a

long time of use. They should also provide for inspection on the proper maintenance of

equipment and not merely on type approval only.173

The Kenya Information and Communications (dispute resolution) Regulations, 2010,

provides for dispute resolution through the tribunal which ought to be speedy, convenient and

simpler in approach as compared to the Courts. Thus, before the CCK has jurisdiction to

intervene, the parties must have made a good faith effort to resolve the dispute on their own

which could be achieved through mediation, arbitration or reconciliation for small disputes

with less financial implications. For detailed disputes, it could provide for direct access to the

tribunal without following the alternative dispute resolution mechanisms. This would help

maintain the commercial relationship between the parties to the dispute.174

The National Information and Communications Technology (ICT) policy of march 2006 does

recognize that there is need for comprehensive policy, legal and regulatory framework on

171 Ibid. 172 Ibid. 173 Njaramba Gichuki (2013), supra p.240. 174 Njaramba Gichuki (2013), supra p.243.

ICT. Further it acknowledges the lack of adequate infrastructure in ICT but does not provide

for the solutions, this should be looked into instead of it just stating what the government

intends to do. In as far as Mobile Transfer Services are concerned this policy does not offer

any assistance. However if the National Information and Communications Technology (ICT)

Policy of March 2006, achieves its goals and strategies such as promoting competition,

increased customer choice and accelerated investment through liberalization of sector and

licensing of new players in the various telecommunication service, the MMT‟S and Money

Payment Services will be faster, more efficient and easily accessible.175

4.2.6 LIABILITY

One of the unregulated issues in this sector is the matter of liability that is, who bears liability

on the incidence of a mistake. This is important to tell who should compensate in case where

a mistake has been done by either of the players in the MMT operations. Liability is not

defined in any legislation or regulations to which parties it will fall on or either the means of

determining it. It should be clearly laid down on whether the consumers will claim liability

falls on the bank or the telecommunication company; whether the bank will claim that

liability falls on the consumers or the telecommunication company and whether the

telecommunication company now will place liability on the bank or the consumers.176

Another determinant of where liability falls is the agents. However, they are not regulated by

any law and this should also be considered for reform.177

4.3 CONCLUSION

The regulatory reform should thus encompass these recommendations. These should be done

through three possible ways: thee first is by amending the existing laws so as to incorporate

these recommendations; the second is through enacting new statutes that tackle the

unregulated areas and; the last is through drafting of regulations that will deal with

deficiencies sited.

Ibid. 176

Njaramba Gichuki (2013), supra p.252. 177

REFERENCES

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LawAfrica Publishers (K) Ltd, Nairobi.

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