By Brian Aloo

A Visionary Initiative with Unintended Consequences

The East African Community (EAC) took a significant step towards deeper economic integration in 2014 with the introduction of a unified payment system. This system, aimed at facilitating easier and faster transactions across member states, is a visionary project with potential benefits for the region. But for the small businesses that form the backbone of East Africa’s economy, this well-intentioned initiative has become more of a burden than a blessing.

Small businesses are crucial to the economic health of the EAC, driving employment and contributing substantially to GDP. However, the rollout of the East African Payment System (EAPS) has exposed a series of challenges that threaten their survival.

Higher Costs, Lower Margins

One of the most immediate issues is the increase in transaction costs. While the system was designed to reduce expenses by eliminating currency conversions, the reality has been starkly different. Small businesses, which operate on thin margins, now face higher service charges and transfer fees. These additional costs, though seemingly small, add up quickly and can be devastating to small enterprises already struggling to stay afloat.

The East Africa Payment System (EAPS), designed as a real-time gross settlement system for high-value transfers of money or securities between banks in the region, is also not appealing to mobile network operators and is unsuitable for most mobile money transactions, which are typically of low value. The EAC should consider lowering the fees associated with the payment system, especially for small businesses.

Contextualizing the region’s digital divide

The reliance on digital infrastructure is another significant hurdle. To advance financial inclusion, innovators and policymakers across Africa have advocated for the adoption of financial technologies such as mobile banking and mobile money. Many small businesses, especially those in rural areas, lack the necessary technology to effectively use the new system. In 2023, mobile phone access across Africa’s 1.18 billion people remained limited, with a penetration rate of just 43 percent, equating to 489 million unique subscribers. Mobile internet penetration was even lower, at 25 percent, with only 287 million users across the continent.

“The future of East Africa’s integration depends not only on the success of large enterprises but also on the survival and growth of the small businesses that are the lifeblood of our economies.”

Limited internet access and the high cost of digital tools have left these businesses at a competitive disadvantage. Improving internet access and making digital tools more affordable across the region, particularly in rural areas, is essential. This could involve public-private partnerships to expand connectivity and provide small businesses with the tools they need to thrive.

Complexity and Security Concern on digital systems

Navigating the new payment system has proven difficult for many small business owners, who are more familiar with traditional methods of transaction. The system’s complexity, combined with inadequate training and support, has led to widespread frustration. Business owners find themselves unable to fully utilize the system, which in turn affects their operations and profitability.

Navigating the new payment system has proven difficult for many small business owners. Photo| RDNE Stock project via Pixels

Moreover, security concerns significantly hinder the widespread adoption of the East African Payment System among small businesses. With the increasing number of cyber threats and prevalent fraud schemes, many businesses are understandably hesitant to embrace new payment technologies. For instance, a major cyber attack recently caused the outage of internet-based and mobile money Payment platforms services in Kenya bringing businesses reliant on these services to a halt. This absence of strong cybersecurity measures therefore intensifies these concerns, leaving businesses exposed to potential financial losses and reputational harm. On the flipside, the EAC recently received a grant from the African Development Fund to set up a help desk system intended to provide support to users and facilitate it’s adoption across the region.

Taking the weekends off

The East African Payment System (EAPS) was designed to streamline cross-border transactions by allowing transfers in local currencies between Kenya, Rwanda, Tanzania, and Uganda. However, the system’s operational hours, limited to weekdays from 8:30 am to 4:00 pm East African Time, excluding public holidays, pose significant challenges for small businesses. These restricted hours fail to account for the unpredictable nature of small business operations, where transactions often need to be completed outside of traditional banking hours to meet urgent demands. This rigidity forces small businesses to either delay critical payments or find alternative, often more costly, methods to transfer funds, hampering their ability to operate efficiently in an increasingly fast-paced market. As a result, the very system intended to facilitate easier trade across borders ends up restricting the flexibility that small businesses need to thrive.

Balancing Integration with Small Business Needs

The new East African Community payment system has the potential to revolutionize trade within the region, but not at the expense of small businesses. These enterprises are vital to the economy, and their success is crucial to the overall prosperity of the EAC. By addressing the challenges, they face, we can ensure that the benefits of this system are shared by all, creating a more inclusive and thriving economic environment. The future of East Africa’s integration depends not only on the success of large enterprises but also on the survival and growth of the small businesses that are the lifeblood of our economies.

These are the writers own opinions and do not necessarily reflect those of Liberty Sparks, our board, or its representatives.