G34/3715/2021

QUESTION 1

An analysis of the payment system legal and regulatory framework in Kenya.

In conducting a comprehensive analysis of the payment systems, reference shall be made to the
following statutes and caselaws which are relevant in understanding payment systems in Kenya.

i) The Constitution of Kenya.

The National Payment Systems Act (NSP Act) defines a payment system refers to an
arrangement that facilitates and enables the transfer of payments between a payer and a
beneficiary hence facilitating money circulation.1 The Central Bank of Kenya, established by dint
of Article 231 of the Constitution of Kenya,2 has been tasked with the responsibility of
formulating monetary policy and performing tasks conferred to it by the Central Bank of Kenya
2015. The High Court of Kenya, vide a 2021 judgment, also held that the definition given in the
NPS Act extends to any person engaged in the process of payment system.

The Central Bank of Kenya Act was hence enacted in 2014. One of the objects that the CBK
aims to achieve includes formulating and implementing policies that promote the regulation and
supervision of efficient and effective payment settlement systems. This is spelt out under Section
4A the CBK Act.3 The CBK has therefore been tasked with overseeing and managing the
establishment of payment systems in Kenya.

The primary piece of legislation governing payment systems in Kenya is the National Payment
Systems Act of 2011. The Act establishes payment service providers to include;

1
National Payment Systems Act of 2011, S2..
2
Constitution of Kenya, Article 231.
3
Central Bank of Kenya Act 2014, S4A(d).
 i) Persons, companies or organizations acting as providers in relation to sending,
receiving, storing and processing payments.
ii) Persons, companies or organizations possessing or controlling public switch networks
for the provision of payment services.
iii) Persons, companies or organizations that process or store data on behalf of payments
service providers.

This is stipulated under Section 2 of the Act.4 The Act empowers the Central Bank to
designate payment systems where the payment system poses a systemic risk, it is in the
interest of the public to designate such a system or such a designation is in the interest of the
integrity of the payment system.5

CBK derives it’s supervisory role from Sec 19 of the NPS Act.

The following are the circumstances under which a payment system may be revoked by the
Central Bank of Kenya;

i) Where the PSP fails to comply with the regulations set by the CBK which is the chief
regulator of PSP’s in Kenya.
ii) Where the PSP has ceased to operate.
iii) Where a PSP has furnished the CBK with false information or misleading material in
respect of it’s designation as a PSP.
iv) Where it is in public interest to revoke the designation.
v) A winding-up order has been made against the PSP.
vi) Where a PSP fails to pay the annual renewal fee within 90 days after the anniversary
date.
vii) Fails to pay monetary penalties imposed by the bank.
viii) Where a PSP amalgamates with another entity or sells its instrument to another entity.
ix) Where a PSP becomes insolvent and fails to effectively conduct its operations.
x) Where the CBK deems it’s fit to revoke such a system.6

4
Ibid, n1.
5
Ibid, n1, S3.
6
National Payment System Regulations, Section 55. .
A PSP operating in Kenya needs to have a constitution comprising of rules governing the system.
The CBK shall be the custodian of this Constitution.

The Central Bank of Kenya, released a directory of authorized payment system service providers
in 2023. As of that date, there are at least 34 payment service providers in Kenya. Some of them
include;

i) Safaricom PLC.
ii) Airtel Money Kenya Limited.
iii) Telkom Kenya Limited.

Under Section 7 of the National Payment Systems Act the Central Bank is mandated to
formulate and implement policies that best promote the establishment, regulation & supervision
of efficient payment systems. It is therefore the chief regulator.7 The Central Bank of Kenya also
has powers to prohibit any person from issuing a payment instrument where;

i) The issuance of the payment instrument would be detrimental to the reliable, safe,
efficient and smooth operation of a national payment system.
ii) It is in the interests of the public to issue such a prohibition.

Section 31 of the 2011 National Payment Systems Act gave the Minister for Finance and
Treasury the power to issue regulations that would give effect to the National Payment Systems
Act. As a result, CS Henry Rotich, vide Legal Notice No.109 of 2014, issued the National
Payment Systems regulations (hereinafter “the regulations”).8

The regulations have been key in defining, among many other things, the authorization of a PSP,
the application process and the core capital requirements of a PSP.

The following are the core requirements for anyone intending to operate a payment system in
Kenya.9

i) For an electronic retail payment service provider, the minimum capital is Kshs
5,000,000.
ii) For a designated payment instrument issuer, the minimum capital is Kshs 50,000,000.

7
Ibid n1, 27.
8
Legal Notice No. 109 of 2014.
9
Ibid, S11.
 iii) For an E-Money issuer, the minimum capital is Kshs 20,000,000.
iv) For a small E-Money issuer, the minimum capital is Kshs 1,000,000.

The regulations stress the need for payment service providers and their agents to comply with the
Proceeds of Crime and Anti-Money Laundering Act and the Prevention of Terrorism Act.10

The Kenex v Central Bank of Kenya Case.11

The Petitioner in this case, Kenya Commerce Exchange Service Bureau Limited, instituted a suit
against the CBK on grounds that it didn’t fall under the purview of the CBK Act as it was not a
payment system. Further, that the CBK had infringed on some of its rights including rights
enshrined under Article 47 of the CoK. Kenex argued that it was an authorized service bureau for
the Society for Worldwide Interbank Financial Telecommunications which offers a platform for
messaging to financial institutions so that they securely transmit information through a system of
codes hence facilitating payments. According to Kenex therefore, it was a facilitator of payments
rather than a fora for conducting payments. The respondents in the petition averred that they had
the power to implement policies that ensured there were efficient and effective payment systems.
The CBK further contended that Sec 19 of the National Payment Systems Act gave it the power
to regulate and supervise any payment systems.

Ong’udi J, in her judgment adopted a purposive mode of constitutional interpreting the National
Payment Systems Act. The court was of the view that statutes should be construed according to
the intention expressed in the statute itself. It was on this rule that the honorable judge found
KENEX to fall under the ambit of payment systems. The court stated that parliament’s aim was
to incorporate systems of the whole process involving payment systems and not exclusively for
institutions making payments or sending and receiving payment messages. This was the ratio
decidendi of the case.

10
Ibid, S60.
11
Constitutional Petition E181 of 2021