Introduction

This paper explores the challenges inherent in the legal regulation of M-PESA. It would particularly examine the conflicting regimes of the banking sector and telecommunications and how the two can be bridged. Attention is placed on the Central Bank of Kenya Act as amended in 2003, the Central Bank of Kenya’s agency guidelines issued in 2011, the Kenya Information and Communications Act, the Consumer Protection Law, the Capital Markets Authority Act and the National Payment Systems Act of 2011. 

___STEADY_PAYWALL___M-PESA is a money transfer service that allows users to use their mobile phones to store and transfer money.^[1] Mobile money has become a common phenomenon in Kenya for the delivery of financial services to those groups of individuals who are unbanked.^[2] The new technologies have often preceded faster than the government is able to regulate them considering the new technologies traverse telecommunication and the banking sectors. Both sectors have rigorous and varying approaches to regulation. Considering the existence of this environment the state has had to relax its regulatory framework to accommodate continued innovation in the mobile money sector. The net effect is that numerous challenges still exist in operationalization of M-PESA due to multi-sectoral regulations requirements.

Background

The M-PESA as a money transfer system was developed in 2005 and formally launched in 2007. This was after the regulators had conducted due diligence that involved:^[3] the procurement of a legal opinion to the effect that Safaricom was not engaged in banking business in line with Section 3 of the Banking Act. It also ascertained the system’s security mechanisms and the provision for minimum standards. The Central Bank of Kenya (CBK), the Communication Commission of Kenya and Ministry of Finance assessed associated risks before commissioning the project. Other than providing oversight, the CBK put in place measures to ensure that minimum standards were to be met.

Mobile payments challenge regulatory capacity as they cut across various regulatory domains, including banking, telecommunications, payments systems, and anti-money laundering regimes. Where mobile payments have taken root, regulators have tended to adopt a “test and see” approach that allows operators to experiment and develop their business models under close supervision. Once market innovation and learning have satisfied the needs of regulators and mobile operators, regulation has been created and implemented to provide legal certainty and to create a level playing field to allow new players.^[4]

M-PESA on its part began with a loose regulatory structure whose role was to facilitate the development and success of the system. Safaricom, was given the leeway to craft a unique model that met the needs of the Kenyan market. It operates M-PESA under a special licence from Central Bank of Kenya, whose conditions are more relaxed compared to those of banks and other financial institutions. However, concerns still exist that this is a huge gamble which would have a catastrophic effects in the event of the system’s collapse.^[5]

The complexity of regulating electronic money transfer was highlighted in the Lehman Brothers case.^[6] In this case, the Lehman Brothers International Europe was involved in the multiple complex financial transactions on a daily basis. It got to a time when it could not meet its financial obligations and was declared insolvent. In the judgment, the Supreme Court was unable to determine with any certainty the amount of client monies held by Lehman Brothers International Europe to be pooled, or, once determined, who was entitled to participate in or receive money from that pool.

Since the creation of M-PESA as a mobile money transfer medium, a unified body of law has been elusive owing to the multi-sectoral regulatory frameworks that would be required. It is also partly due to the assumption that existing laws are sufficiently placed to address traditional paper based money transactions. What is often forgotten is that M-PESA is a technology based money transaction that would require modification of existing financial legal infrastructure.^[7] Other than paper based financial transactions, current ones heavily rely on technology to transact their business. In a fast paced world where technology innovations happen very fast, the government was faced by a real dilemma, what should come first, regulation or innovation? The government chose the latter and let regulation follow technology. Thus, the government has basically been reactive only creating regulations after industry has accepted the application of the technology.^[8] The widening gap between mobile money transactions and regulation illustrates the current state of mobile money legal framework.

Apparently, existing law is not flexible enough to address emerging issues in mobile money transactions. Regulation has followed international best practices^[9] of regulating mobile money transfer frameworks from other jurisdictions. What has remained constant is that regulation has failed to keep up with mobile money technologies.^[10] This creates credible concerns that the regulation regime is insufficient to address issues emanating from mobile transactions. The concern this raises is that continued application of traditional methods would stifle rather than spar innovation in the development of mobile money transactions.^[11]

Legal Regulation of M-PESA

For a better understanding of M-PESA regulation it would be imperative to put it into perspective by examining the structure of M-PESA each with its different regulatory regime. The completion of an M-PESA transaction consists of four transactions that answer to different regulatory regimes. The first is the mobile network operator (MNO), the bank, the agent and finally the consumer.

Mobile Network Operator

The mobile network operator (MNO) plays an important role in the M-PESA money transfer. MNO are generally regulated by the Kenya Information and Communications, 2012. The objective of the legislation is to “provide for the establishment of the Communications Commission of Kenya, to facilitate the development of the information and communications sector (including broadcasting, multimedia, telecommunications and postal services) and electronic commerce to provide for the transfer of the functions, powers, assets and liabilities of the Kenya Posts and Telecommunication Corporation to the Commission, the Telcom Kenya Limited and the Postal Corporation of Kenya, and for connected purposes.”^[12]

The MNO (telecommunication operator) is licensed under section 79 of the Kenya Information and Communications Act. MNO is the telecommunications company that provides and extends the wireless network messaging functionality to provide payment services that 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.^[13] The way it works is that funds in transit are deposited by the remitter but not yet withdrawn by the recipient.^[14] Money is deposited in a segregated account normally with one or more banks as a trust account within the financial system. In this context, the service provider executes a client payment instruction but different from credit and risk evaluation which is reserved for banking institutions.^[15] For that matter MNO do not require the kind of regulation envisaged under the Banking Act since the depositing bank arises no responsibility for payment through MNO. MNO only provide the infrastructure and communication service, agent oversight and quality control.^[16]

The Banks

The banking industry in Kenya is regulated by the Banking Act,^[17] as “an Act of Parliament to amend and consolidate the Law regulating the business of banking in Kenya and for connected purposes.”^[18] The Act restricts who can be licensed to carry on banking business in Part II. Banking business can only be carried on by institutions or mortgage finance companies that should be licensed by the Central Bank of Kenya.^[19] The Central Bank of Kenya plays an oversight role over the entire banking industry. The role of banks in the context of M-PESA is to offer banking services through the mobile telephone. Banks hold the E-float on behalf of MNOs and hand cross border transactions as they manage the foreign exchange risks. Banks are well placed to play this function because they are well acquainted in tasks of risk management that ensures regulation compliance. The e-float is deposited in a bank account which cannot be accessed by customers on a need basis. The latter distinguishes an M-PESA transaction from a bank account. According to the Banking Act: banking business refers to:

(a) 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;

(b) the accepting from members of the public of money on current account and payment on and acceptance of cheques;

(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; and

(d) such other business activity as the Central Bank may prescribe.^[20]

The Agent

The Banking Act defines an agent as “an entity contracted by an institution and approved by the Central Bank or sub-contracted by such entity to provide the services of the institution on behalf of the institution, in such manner as may be prescribed by the Central Bank.”^[21] In the context of M-PESA, agents are retailers who are either MNO owned stores or other retailers like small stores operating on behalf of MNOs.^[22] The relationship between the agent and the principal is subject to agency rules. The agent accepts and disburses cash, provides cash in cash out service using a consumer’s mobile phone. Agents therefore serve as branches to the MNO and points of sale for M-PESA services, it is therefore a liason between the MNO and the consumer. The agent bears responsibility for account opening, customer due diligence as well as programme compliance. Agents expand mobile providers reach to rural areas and a higher penetration to the unbanked market that do not have physical banks or those outside the traditional banking institution.^[23] Agents provide liquidity with funding from other business activities such as sell of airtime. They also act as points of contact for reporting suspicious transactions in line with the Anti-Laundering and Combating the Financing of Terrorism requirements.^[24]    

A more recent agent is the bank branch that has integrated mobile network operator services into the banking system. Other developments have involved mobile users using the phone to transfer funds to the bank account and vice versa.^[25]

The Consumer

In an M-PESA transaction, the consumer is a mobile payment user who creates demand for mobile payment.^[26] A consumer according to the Consumer Protection Act, 2012, consists of four segments:

(a) a person to whom particular goods or services are marketed in the ordinary course of the supplier’s business;

(b) a person who has entered into a transaction with a supplier in the ordinary course of the supplier’s business, unless the transaction is exempt from the application of this Act;

(c) a user of particular goods or a recipient or beneficiary of particular services, irrespective of whether that user, recipient or beneficiary was a party to a transaction concerning the supply of those particular goods and services; and

(d) a franchisee in terms of a franchise agreement, to the extent applicable in terms of this Act.^[27]

Consumer protection is generally provided by the Consumer Protection Act.^[28] The purpose of this statute is “to provide for the protection of the consumer, prevent unfair trade practices in consumer transactions and to provide for matters connected with and incidental thereto.”^[29] Consumers in an M-PESA transaction have generally developed trust in the system that is responsible for its phenomenon success. Consumer protection in M-PESA transactions is important because it helps to maintain confidence in the system. Consumer protection legislation enables consumers access information needed to make decisions. Additionally, consumer protection regulation ensures the service is fairly priced, protects consumers from fraud, misrepresentation^[30] and activities that would be termed as discriminatory in nature.^[31]

A Unified Body of Law on Payment Systems

A unified law on payment systems including M-PESA was enacted in 2011 known as the National Payment System Act.^[32] The purpose of this law was to “make provision for the regulation and supervision of payment systems and payment service providers, and for connected purposes.”^[33] The date for the commencement of this legislation was slated to be on 24th March, 2014. The Act clarifies the roles of Central Bank of Kenya as the most important institution as far as payment systems are concerned.^[34] Some of the roles include: clearance of payment, netting and settlement agreements and designated payment instruments.^[35] The Act has concretized the oversight role of CBK over all payment systems in the country.^[36] The powers and functions of the Central Bank are set out in Section 17(1) as the formulation and implementation of policies as best in the promotion of the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems, exercise all the powers and perform all the functions conferred and imposed on it by this Act, the Central Bank of Kenya Act^[37] and any other law. However, the CBK can delegate these duties to other designated officers to any of its powers and perform any of its functions under this Act.^[38]

Challenges of Regulating M-PESA

Although M-PESA has experienced phenomenon success its core challenges still persist especially the fact the process is mainly led by non-banking institutions whose operations are outside the scope of financial regulation. This has been made worse by the novelty of M-PESA as a new concept where the regulators have very limited examples to draw upon. The existence of numerous mobile platforms that cut across various sectors and none of the regulators is conversant with all the operational aspects has not helped matters. This has been exacerbated by M-PESA as a unique innovation that makes it difficult to keep up with the rapid changes. The implication is that laws should be flexible enough to accommodate the new changes and not necessarily confined to the development of new products.

Conclusion

M-PESA has shown remarkable success in improving the living standards of the unbanked marginalized Kenyans. However, despite these benefits there are numerous challenges to the regulatory framework. For example it involves two or more sectors that have traditionally been regulated separately. It has become evident that the responsibility for regulating M-PESA is diverse owing to multiplicity of regulatory regimes. The approach taken by Kenya is legislation that targets electronic transactions through the Kenya Information Communications Act. This is however not sufficient as it leaves out major aspects of the transaction unregulated. Within the value chain are banks that hold funds in trust for the consumers before they are withdrawn. This is not a banking service within the meaning of Section 2(1) of the Banking Act. Therefore banking regulations would clearly not be appropriate for M-PESA. Since M-PESA involves financial transactions it attracts CBKs oversight and supervisory role. For that matter, the regulation of M-PESA still faces a dilemma of using fixed regulation for fast paced technological innovation. Ideally the approach should consist of flexible mechanisms capable of accommodating a technological advancement in mobile money operations.  

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* Jennifer Gitiri is an advocate of the High Court admitted to the Kenyan bar. She is a firm believer that if the rule of law is properly applied and adhered to, the world would be a better place. She enjoys traveling when not practicing the law.

^[1]  Mercy Wanjau, Mpesa: Regulatory Framework, available at https://www.wto.org/english/tratop_e/serv_e/…/wanjau_e.pdf, accessed on 28 September 2018.

^[2]  Joy Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014).

^[3]  Wanjau, Mpesa: Regulatory Framework, available at https://www.wto.org/english/tratop_e/serv_e/…/wanjau_e.pdf, accessed on 28 September 2018.

^[4]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 17.

^[5]  See generally Wanjau, Mpesa: Regulatory Framework, available at https://www.wto.org/english/tratop_e/serv_e/…/wanjau_e.pdf, accessed on 28 September 2018.

^[6]  Lehman Brothers International (Europe) (In Administration) and In The Matter of Insolvency Act 1986, [2012] UKSC 6 .

^[7]  James Rogers, ’The End Of Negotiable Instruments: Bringing Payments Systems Law Out Of The Past’ (OUP: Oxford,  2012) at 3.

^[8]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 10.

^[9]  A. Watson, Legal Transplants: An Approach to Comparative Law (Edinburgh, 1974) at 11.

^[10]  Zeinab Karake- Shalhoub, Lubna Al Qasimi, The Diffusion of E-Commerce in Developing Economies: A Resource Based Approach  2006.

^[11]  Raymond T. Nimmer, ‘International Information Transactions: An Essay on Law in an Information Society’’, (2000) 26 Brooklyn Journal of International Law 5.

^[12]  Preamble, the Kenya Information and Communications, 2012..

^[13]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 6.

^[14]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 6.

^[15]  The Banking Act 1969 s 2 (a)(1), describes ‘banking’ 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. It also describes it as 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.

^[16]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 5.

^[17]  Chapter 488 of the Laws of Kenya.

^[18]  Preamble, Banking Act.

^[19] Banking Act, Section 3.

^[20]  Preamble, Banking Act.

^[21]   Preamble, Banking Act.

^[22]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 6.

^[23]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 6.

^[24]  Agent Requirements for example are detailed in Safaricom’s , available at  http://www.safaricom.co.ke/personal/m-pesa/m-pesa-agents accessed 24 August 2018.

^[25]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 9.

^[26]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 9.

^[27]  Preamble, the Consumer Protection Act, 2012.

^[28]  No. 46 of 2012.

^[29] Preamble, the Consumer Protection Act, No. 46 of 2012.

^[30]  Consumer Protection Act, No. 46 of 2012, Section 3(3).

^[31]  Malala, Consumer Protection for Mobile Payments In Kenya: An Examination Of The Fragmented Legislation and The Complexities It Presents For Mobile Payments (Kenya Bankers Association: Nairobi, 2014), at 9.

^[32]   Chapter 493E, of the Laws of Kenya..

^[33]   Ibid. Preamble..

^[34]  Section 2, National Payment System.

^[35]  Section 2, National Payment System.

^[36]  Section 17, National Payment System.

^[37]  Chapter 491.

^[38]  Ibid. Section 17(2).