Treasury Mobile Direct in Kenya

June 15, 2012

Istanbul

Framework for Treasury Mobile DirectConcept:

• Design and implement the distribution of public debt/ government securities (Treasury bills and Bonds) through mobile phone technology in Kenya.

• Includes the placement, interest payment and redemption of the securities through the mobile platform.

• Provides a low cost distribution access channel and increase access to formal savings instruments.

Why is it Innovative?

• Use of mobile technology to reach millions of potential investors, who have mobile phones (with or without a bank account), in a cost effective way.

• Extends mobile technology beyond money transfers.

Objectives of Treasury Mobile Direct

• Enhance distribution capacity of the central bank which has been trying to reach retail investors and has lowered minimum investment amounts but without success

• Support democratization access to public debt – increase access by retail investors

• Reduce financial intermediation (brokers and banks) margin on retail products

• Broaden choice of saving products for retail investors

• Broaden use of mobile technology as distribution channel for savings products

Broadens access to finance and develops sustainable debt markets

-Total number of Customers using mobile money is currently at 19.2 million.-Safaricom’s brand M-PESA transfered 98% of all transactions in 2011 more than Ksh 828 billion equivalent to US$ 9.98 Billion in 420 Million transactions at reasonably low transaction costs.

4

CBK has Provided Space for Innovative Solutions including mobile money trasfers

Mobile Money Market in Kenya

Volume (USD Mn) of Money Transfers by Mobile Provider as at December

2011

Safaricom

Airtel

Yu

Orange

Tangaza

Mobikash

98%

1%

No. of Customers (19.2Mn) by Mobile Provider as at December 2011

Safaricom

Airtel

Yu

Orange

Tangaza

Mobikash

79%

16%

3%

Mobile Money Market in KenyaRegulation and Safeguards

• The Communications Commission of Kenya signed an agreement with the International Telecommunications union to safeguard cyber activities in the country.

• National Payment System Act 2011 provides for the regulation of mobile money transfers by the Central Bank of Kenya.

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Retail Market Participation in Kenya

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6

Commercial Banks50.66%

Co-ops & Others3.71%

Pension & Trust Funds

30.92%

Insurance Companies

10.89%

Non-Bank Financial

Institutions1.18%

Individuals (Retail)2.63%

Outstanding Securities by Holder as at End March 2012

• Which instrument?

• Which services?

• Custody and institutional arrangements

• Marketing and financial literacy

• Phasing of the project

Project Decisions

Which instrument for direct distribution to retail?• Phased proposal to launch three complementary

instruments for different target investors

Phase Instrument Target client Nominal Liquidity

Phase1

• T-Bills with automatic rollover option

Un-banked and banked

Low: Kshs500?

Primary and secondarymarket

• T-Bond Banked Mid: Ksh50.000?

Secondary market

Phase 2

• Savings bill Un-banked Low: Kshs50?

Controlledredemption

Phase 3

• Government specialized money market mutual fund

Un-banked and banked

Low: Ksks250?

n.a.

• Account opening*

• Investment*

• Coupon and principal payments*

• Account statement on demand*

• Automatic re-investment

• Liquidity facility

• Transferability to third parties

• Pledging for loans

(*Pilot phase)

Which services through a mobile phone?

Custody and institutional arrangements

Two non-exclusive options:

1. Private CSD provides retail custody accounts

2. CBK provides retail custody accounts

In both Mobile Services Providers operate as agents

Stylized diagram of infrastructure/institutional arrangements

Eligible Retail Investors

• Hold mobile money account• Have opened retail custody

account with CDSC

MNO 1 MNO 2 MNO 3

Unbranded T-bills distributed through authorized MNOs

MNO Distribution channel/ Customer interface/ Transaction processor 1. Opens custodial accounts for retail investors at CDSC 2. Takes retail cash deposits 3. Channels data/ money flows in T-bills* MNO – Mobile Network Operator

Central Depository & Settlement Corporation (CDSC)

Authorized custodian/depository agent for retail T-bills

Account Provider/ Settlement1. Appoints authorized Mobile Service Providers

(MSPs) as agents 2. Ensures compliance with KYC requirements

Central Bank of Kenya (CBK)

Issuer of T bills

CDSC Nominee account

Final Settlement 1. Appoints CDSC as custodian/depository agent for

retail T- bills2. Holds nominee account for CDSC

T bills

sold

to re

tail i

nves

tors

thro

ugh m

obile

mon

ey p

rogr

ams

Retail Investors

• Instrument design:

o Nominals and add-ons

o Maturity dates

o Liquidity and mobilization features (e.g. pledging)

• Account opening and KYC requirements

• Presentation of features in mobile menu

• Call center

• Tariff structure

• Branding and marketing

FSD Kenya is conducting a market research project

Marketing and financial literacy

Treasury Mobile Direct Project

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13

PROJECT PROGRESS

WB in coordination with FSD Kenya: market survey,

product testing, marketing strategy

for unbanked investors (phase II)

CBK/CDSC key role to (with WB support):- Upgrade existing software for retail custodial services- Validate MNOs software to channel investments-Interface with MNOs- KYC compliance

Project Steering Committee MOF, CBK, CMA, CDSC, FSD Kenya and MNOs

Pilot project decisions taken and under implementation:

- CBK assessing CDSC’s service proposal- WB providing advice on design, institutional and technical implementation

Thank you!

Questions?

Comments?

ANNEX: Pilot Phase Description.

Objective: Test the robustness of the operational architecture using mobile phones.

ITEM FEATURES IN PILOT PHASE

Nominal Amount Kes 100,000 (Current exchange rate USD/KES 83.2164)

Cap on Investment Kes 20 Million

Placement Mechanism On Tap Basis, from Thursday and to Wednesday 2pm the following week after the weekly auctions.

T-bill Tenors 91-Day, 182-Day, 364-Day. Each issue will stop being placed when a new issue for that particular maturity is auctioned.

Yield Weighted average of previous auction for the remaining maturity of the T-bill. CBK will provide the “dirty settlement amount” on a daily basis.

Settlement Cycle T + 0

Settlement Bank Chosen by CDSC (Appointed Custodian)to settle through swift on CBK account

Maturity Payment If under 140,000 ksh to mobile account. If above 140,000 ksh to bank account.

Account Opening New clients defined as those that do not have a bank account associated to their Mobile money account. MNO will follow KYC requirements established by CDSC following CMA’s rules. Existing clients defined as those that have a bank account associated to their Mobile money account. MNOs may upload client accounts in CDSC.

Where does client CustodyInformation reside?

At CDSC data base At the MNO data base Regular reconciliation processes will be required.