Monday, January 7, 2008

BOUNCING CHEQUES

Kenya’s payment system in a fix as bouncing cheques hit banks Print E-mail
Written by Washington Gikunju
Image
A Cheque being processed
January 07, 2008:
The banking industry is grappling with a credibility crisis occasioned by an alarmingly high tally of bounced cheques.

Data from the Kenya Bankers Association( KBA) shows that the issuance of bad cheques, a practice that has continued to undermine the modernization of Kenya’s commercial sector and the integrity of the national payment system, is still high even after it was criminalised.

Statistics show that between January and September last year at least 34 of the 41 licensed commercial banks reported incidents of bouncing cheques, with the total value in the nine months estimated at over Sh2.2 billion.

Kenyans cut 148,211 bad cheques within the same period in the first survey of its kind to be conducted on the local banking industry as concerns over the sanctity of the system continues to rise.

The problem cuts across the board as big and small banks appear to suffer equally, with the biggest victims being Co-operative Bank, which reported 35,210 dishonoured cheques, KCB which recorded 19,064 and Equity Bank 18,886.

The figures appear to make a mockery of the law that criminalizes issuance of cheques to another party with the knowledge that they are not likely to be honored.

The law states that any person who draws or issues a cheque on an account is guilty of a misdemeanor if the they know that the account has insufficient funds; knows that the account has been closed; or has previously instructed the bank or other institution at which the account is held not to honour the cheque.

Criminalization of issuance of bad cheques in 2004 was meant to promote cheques as an alternative mode of payment to cash, which up to now remains the most widely used form of non-cash payment according to Central Bank of Kenya (CBK) statistics.

Cheques accounted for over 80 per cent of total non-cash transactions last year.

The CBK annual report shows that in the financial year to June 2007, the daily volume of cheques settled through the central clearing house averaged 46,833 cheques valued at Sh8.51 billion.

High incidents of bad cheques has however held down the usage of cheques as a means of payment, forcing the country to rely heavily on cash which is a much more expensive means of payment.

The situation has been complicated by the lack of a clear policy on how to enforce the law with most offenders going unpunished as would be complainants reach out of court settlements.

KBA chief executive John Wanyela says the rising prevalence of bouncing cheques has prompted industry players to take action hoping to make cheques a credible and widely acceptable means of payment.

The call to action is based on the realization that cash is a relatively more expensive means of payment to the economy.

“The government spends billions of shillings minting new currency each year while companies pay similar amounts to cash in transit companies to transport cash,” says Mr Wanyela.

“All these expenses could be greatly reduced if the country was to turn to non-cash means of payment such as use of cheques.”
Kenyan currency notes and coins are supplied by De La Rue, a UK based currency printing firm.

The company has had a 10-year standing contract to supply 170 million bank notes each year until 2003 when the contract expired.
Since then CBK has entered into short-term arrangements with the company to supply new currency, the latest of which has been a controversial Sh3.57 billion contract to print 1.71 billion bank notes.

The CBK annual report shows that the amount of currency in circulation as at the end of June 2007 was Sh89.94 billion, a growth of Sh13.6 billion or 17.8 percent above the previous year’s issued currency of Sh76.3 billion.

Notes in circulation grew by 13.0 per cent from 209 million pieces in the year to June 30, 2006 to 236 million pieces last year.

But even as bankers continue to explore ways in which they can popularize the use of cheques, their options are limited by the apparent legal loophole that allows drawers of bouncing cheques to escape unpunished even though this is a crime under the act.

Commercial lawyer and advocate of the High Court Emmanuel Wetangula argues that though the law appears to have failed to prevent the rising incidents of bouncing cheques not much can be done apart from probably calling for a behavioural change from the issuers.

“Even if you were to increase the penalty for offenders, the law still provides for out of court settlements and most victims of bad cheques are never interested in pursuing legal cases after getting compensation from the drawers of the cheques,” says Mr Wetangula.

The law provides for a relatively lenient penalty of a fine not exceeding Sh50,000 or an imprisonment term not exceeding one year or both for offenders.
Mr Wetangula says the out-of-court settlement is a legitimate way of settling disputes and has the advantage of checking against an escalation of the already unmanageable backlog of court cases.

Mr Wanyela also admits a capacity constraint in the courts that limits even central bank’s ability to police the situation.

“The CBK Banking Fraud Investigations Department is already overwhelmed by the number of fraud cases they are currently handling and the fact that not all case of bouncing cheques amount to fraud makes the problem even more complicated,” says Mr Wanyela.

As a result, the bankers have resolved to conduct massive public awareness campaigns to sensitize the public against the practice while also educating them on the importance of having a credible cheque payment system in the economy.

The KBA boss also says that the association will be conducting more regular surveys of the number of bad cheques in the system with a view to keeping a check on future trends.

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