Effect of adoption of Real-Time Gross Settlement system (RTGS) on inter-bank settlement efficiency in the Kenyan Banking Industry

Abstract

The main objective of the study was to assess the effect of adoption of real-time gross settlement system on interbank settlement efficiency in the Kenyan banking industry. One important strategic objective stated by the National Payment System (NPS) Division of the Central Bank of Kenya in the Framework and Strategy Document (2004) was to introduce an efficient and modem inter-bank payment system that would eliminate slow transaction speeds, longer settlement times, high costs of transactions, errors and fraudulent transactions in financial institutions. A census survey was conducted in which the study collected responses from all the fortyfour licensed commercial banks operating in Kenya. Both primary and secondary data was used in the study. Primary data was collected through a semi-structured questionnaire and secondary data was collected from statistics accumulated from the payment systems both at the Nairobi Clearing House and the Central Bank of Kenya. Data collected was quantitative in nature and analysis was done using descriptive statistics. The study concludes that the adoption of real-time gross settlement system has improved the efficiency of interbank settlement in the Kenyan banking industry. The real-time gross settlement system has led to increased volumes of processed payments, while decreasing the volumes of Cheques and EFT through the Automated Clearing House. The study findings serve as stimuli to policy makers to understand the industry better and to acknowledge that embracing technology, particularly in the banking sector and will bring benefit both in the micro and macro economy.