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TREASURY MOBILE DIRECT PROJECT

A GEMLOC/AFTFE Initiative

OUTLINE1. Retail Market Synopsis2. Introduction to Project3. Services to Investor4. Infrastructural /Institutional Arrangements5. Pilot Phase Description6. Core Operational Processes

1. Retail Market Synopsis

01/05/2012

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Primary market for Government securities comprised of institutional and retail investors.

Retail segment constitutes on average about 2.63% of amount of bids placed at any auction, but represent the largest share in terms of number of bids.

Commercial Banks50.66%

Co-ops & Others3.71%

Pension & Trust Funds

30.92%

Insurance Companies

10.89%

Non-Bank Financial Institutions

1.18%

Individuals (Retail)2.63%

Primary Market Composition as at End April 2012

…Retail Market Participation (Continued)

01/05/2012

Minimum investment in Treasury bills was lowered to KES 100,000 or USD 1,205 from KES 1,000,000 or USD 12,048 in January 2008 to attract more retail investors.

Minimum investment amount in Treasury bonds is KES50,000 or USD 602.

The public awareness and financial literacy programs are in place to increase knowledge of available investment options to the retail sector.

Treasury mobile direct project was suggested as one of the ways to reduce operational hurdles caused by direct participation of retail sector at auctions.

01/05/2012

CONCEPT: Developed by the Capital Markets Global Practice (CMGPSM) and Africa Region Finance and Private Sector Departments (AFTFP) of the World Bank

Distribute government securities to the retail market (banked and unbanked) through mobile phones.

Product will ensure efficiency, accuracy, safety and affordability of investment process.T-bills to be offered on tap basis as a start (Pilot Phase)Savings product for retail investors.

Aim

Benefits

2. Introduction to Project

01/05/2012

Savings & Investments

Redemptions

Custodial services/

Information

•Promote savings culture among low income households.•Channel investment instructions e.g. rollover•Channel and execute cash and securities settlement.

•Channel proceeds of matured securities to respective disposal accounts.•Channel early redemption instructions and settlement-rediscount arrangements (phase 2).

•Take advantage of CDSCs technical capacity and wider market reach. •Confirm settlement of investments•Option of third party transactions such as liens, gratis transfers, sale. •Provide CDS statements on demand

3. Services to the Investor

Contractual agreement signed between Central Bank (CBK) and Central Depository System Corporation (CDSC) to provide custodial services. CDSC to open a nominee account at CBK-CDS and appoint, a settlement bank(s) and authorized mobile money providers (Mobile Network Operators – MNOs as agents. Authorized mobile money service providers (MNOs) to serve as distribution channels.CMA to set up the regulatory environment and authorize this arrangement ensuring compliance with KYC.

4. Infrastructural/Institutional Arrangement

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/ Settlement

1. 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

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Retail Investors

5. Pilot Phase Description• At the start, product to be developed to suite current model for auctioning Treasury bills to

retail investors.

• 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.

6. Core Operational Processes

New Clients:- MNOs will open custody accounts on behalf of CDSC. -The details of the data will be sent to CDSC for storage, but they will also be stored by the MNO - CMA to confirm KYC requirements for new investors.

Existing clients: -MNOs will open custody accounts for all their active clients that have opted to have a securities custody account. -Data of these clients will be uploaded to CDSC.

A. Account Opening

CDSC to obtain from CBK available T-bills to be sold on tap with yield and dirty price per nominal unit, which will be pushed to the MNO so that they appear on the mobile screen.

Investor sends investment instruction through the menu on mobile phone, which will immediately debit its e-money account.

MNO sends an SMS to the investor acknowledging debit. CDSC receives from MNO on “real time or batch” (depending on existing flow with utilities):

Cash amount in settlement bank account chosen by CDSC. File with details of investor/account, and instrument (Issue code or maturity date)

CDSC reconciles cash received and securities in file received from MNOs. Reconciliation process should be similar to the one used by utilities with MNOs.

CDSC sends a message for T-bill settlement on T+0 (time of day would need to be defined) through its settlement bank. The file includes cash and securities to CBK on T+0.

CBK reconciles cash and file of securities received from CDSC. CBK credits T-bills to CDSC nominee account at CBK. CDSC credits T-bills to individual investors and notifies them through sms of purchase to final.

B. Investment Flows

On Maturity day, CBK will deposit the corresponding maturing amount in CDSC’s settlement bank account.

CDSC will debit the securities from the individual accounts and credit the maturing cash via its settlement banks through the MNO to the individual investors accounts as follows:

- Amounts under 140,000 KES will be credited to the e-money account. -Amounts above 140,000 KES will be credited to the investor bank account. (KES 140,000 maximum amount that can be held in a mobile account)

C. Maturing of T-Bills

To be offered by CDSC. Expected to provide information on a daily basis on the investment options available in the agreed format through MNOs. Provide account statements on demand. In a second phase the following additional services may be provided Provide the option to transfer securities to other accounts in CDSC outside Treasury Mobile Direct (e.g. banks and microfinance institutions with accounts) Provide the option of pledging securities in accounts.

D. Custodial Arrangements

Thank You