On May 17, 2021 the Central Bank of Kenya ordered financial institutions to dump the Kenya Commerce Exchange Service Bureau (Kenex) and get direct access to Belgium-registered global interbank communication network, Swift, sparking a war that will now be decided in court.
The war has revealed some of the inner workings of Kenya's financial sector, most prominently the near monopoly one company has enjoyed for close to two decades while providing access to one of the industry's most critical functions - a platform that allows the exchange of money across borders.
For 19 years, Kenex has been a mainstay in provision of access to the Swift network, and it currently serves 27 lenders, or 64 per cent of the local banking industry.
The Society for Worldwide Interbank Financial Telecommunication (Swift) is a network that allows banks across the world to send and receive messages securely, and which results in exchange of billions of shillings globally each day.
If an individual with an account at a local lender wants to send school fees for their children studying in Hong Kong, for example, their bank will not disburse cash to the desired destination.
The sender will issue instructions to their local bank, detailing the receiver financial institution in Hong Kong, amount to be sent, the account name and number.
The local lender then issues a payment order to the bank in Hong Kong through the Swift platform. The Hong Kong bank then releases funds to the stated account.
The secure network is registered in Belgium as Swift SCRL.
The owners of Kenex
Rather than procure the system directly from Swift SCRL, most Kenyan banks have been accessing the platform through Kenex.
Records at the Companies' Registry's online portal indicate that Kenex is owned by Mr Michael Karanja Bedan, Mr Prakasam Vasu, Mr Manoj Keshavlal Shah, Mr Ashvinkumar Ramniklal Ranpara and Mr Jyotibala Raminklal Damji Ranpara.
Each of the five reclusive millionaires providing critical access to 27 banks in Kenya owns one share in Kenex. The company was registered on March 6, 2002.
Ruttuny Associates is listed as the company secretary.
Through a circular to all banks, the CBK on May 17 said that it had negotiated special rates with Swift SCRL to have all lenders access the network directly, and ordered the institutions to dump Kenex and other third parties.
The negotiations were between the CBK and Swift Alliance Lite 2, a subsidiary of Swift SCRL.
The regulator also told lenders to prepare for a meeting 14 days later and ordered each bank to ensure that two senior managers in their ICT and operations departments attend the virtual session.
The meeting's agenda was to give finer details on the deal with Swift SCRL and lay down the transition plans.
A disgruntled Kenex filed a suit at the Constitutional and Human Rights division of the High Court, arguing that the CBK has no authority to issue such orders to banks.
Kenex argues that the CBK is abusing its regulatory powers to choke the private firm that draws 23 per cent of its revenue from connecting banks to the Swift network.
The firm adds that it has 21 employees dedicated to the provision of Swift access for banks, and that the CBK's move will also close the gate on approximately Sh30 million that Kenex pays in taxes every year, to the expense of the exchequer and Kenyans.
Attached to the circular to banks from the CBK was a catalogue of products and costs offered by Swift Alliance Lite 2.
To the CBK, its move was aimed at ensuring that all lenders are safely on the Swift SCRL network and that they have a contingency to ensure that payment services are available to depositors in the event a disaster threatens to paralyse banking services.
But to Kenex, the CBK was barking orders it did not have authority to issue, and which would threaten the private firm's business and employees while doubling banks' costs in accessing the Swift network.
Kenex says that each bank pays it Sh44 million to get access to the Swift network. This means that the firm raked in Sh1.2 billion to connect its 27 clients to the Swift network.
The firm insists that its rate is lower than a direct connection to the platform, as each lender would have to part with Sh83 million for direct access.
Kenex does not specify in court papers whether the fees are a one-off, or annual payment.
The firm also does not state why its rates are lower than those given to banks when sourced directly from Swift SCRL.
Interbank communication system
Kenex argues that the CBK is out of order in specifying how financial institutions access the interbank communication system, as the regulator has taken a bi-partisan stand by marketing a specific product and negotiating rates on behalf of lenders.
In response to the suit, the CBK argues that Kenya's banking industry is walking on thin ice as third parties providing connection to the Swift platform, like Kenex, do not have business continuity plans, hence it could spark an economic standstill if they were unable to continue operating for any reason.
The banking industry regulator added that third parties like Kenex are not regulated.
Business continuity plans are procedures or instructions that institutions use to ensure that normal operations proceed in the event of a disaster.
To back its move, the CBK has hinted to Justice James Makau that on February 20, 2020 there was a system problem on Kenex's side and which affected use of the Swift platform. As neither banks nor Kenex had a backup for access to Swift, several financial transactions stalled owing to the system issue.
The court papers seen by the Nation, however, do not give specific details of events that happened on February 20, 2020 and which interrupted connection to Swift.
The regulator had told banks that the move followed several other service disruption incidents.
"There is the risk of financial institutions that are connected to Swift through third parties continuing to operate without any back up for business continuity to support banking and payment systems stability and the risks as occurred on February 20, 2020, will continue to erode trust and confidence in the national payments system," the CBK said in court papers.
Outflow of foreign exchange
Kenex has denied allegations by the CBK that connectivity offered by third party bureaus like Kenex is slow and has resulted in delayed remission of payment messages.
The firm says that the CBK has not given any evidence to back the claim.
Mr Prakasam Vasu, Kenex's managing director, holds that if banks engage Swift SCRL directly, it will lead to an outflow of foreign exchange, when lenders pay for the same service they are currently accessing efficiently and without sending currency outside the country.
"Kenex offers competitive rates as well as additional value to its services, which are beneficial to its clients, which support the clients meet operational standards set out by the CBK. Kenex has been saving the country's foreign exchange. The outflow in terms of foreign exchange will be the equivalent of approximately Sh63 million as against virtually nothing at present."
"The CBK has breached the rules of natural justice by condemning Kenex unheard and making baseless and unsubstantiated accusations in its letter dated May 17, 2021 about purported incidents and disruptions allegedly caused by Kenex without providing an iota of evidence to support the spurious allegations or bringing them to the attention of Kenex and instead use them as the pretext to instigate the breach of contract between Kenex and its banking clients," Mr Vasu said in court papers.
Justice Makau stopped the CBK from holding the May 31, 2020 meeting with banks, and temporarily stopped the regulator from taking any action that will lead to termination of contracts between Kenex and its 27 clients.
The judge held that Kenex provided sufficient information to show the loss it will suffer if the contracts are terminated, while the CBK did not give enough reasons to stop his court from suspending the planned move by the regulator.
The orders will stay in force until Justice Makau has determined the suit.