Research Journal of Finance and Accounting ISSN (Paper) ISSN (Online) Vol.4, No.13, 2013

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1 Implementing Crss-brder Payment, Clearing and Settlement Systems: Lessns frm the Suthern African Develpment Cmmunity Albert Mutnga Matngela Operatins, Retail and Business Banking, First Natinal Bank f Namibia 25 Schnlein Street, Windhek West, P.O Bx 285, Windhek, Namibia Tel: amatngela@fnbnamibia.cm.na Abstract This paper investigated the experience in implementing crss-brder payment, clearing and settlement systems in the Suthern African Develpment Cmmunity (SADC). Such systems are critical in the circulatin f mney and the general ecnmic activities in the regin. In line with the SADC Prtcl n Finance and Investment, central banks in the regin are t c-perate in rder t define and implement a crss-brder payment strategy. Reginal blcks that are in the prcess f implementing reginal integratin prjects can learn frm the implementatin prcess in the SADC regin. Keywrds: Suthern African Develpment Cmmunity, Crss-brder, Payment Systems, Success Factrs, Challenges 1. Intrductin This paper investigated the experience in implementing crss-brder payment, clearing and settlement systems in the Suthern African Develpment Cmmunity (SADC). Crss-brder payment and settlement systems are different frm dmestic systems. The latter are meant fr transactins riginated, prcessed, cleared and settled in the brders f a particular cuntry. There are situatins in the payments literature where a payer is dmiciled in ne cuntry but the payee is in anther. In this regard, transactins between the tw parties shuld ideally be cleared and settled in reginal payment, clearing and settlement systems. Crss-brder payment, clearing and settlement systems such as Real Time Grss Settlement Systems (RTGS) and autmated clearing huse (ACH) systems are better cmpared t crrespndent banking relatinships. Challenges assciated with the latter include n direct relatinship with dwnstream banks; limited data transprt capabilities; high cst fr services due t multiple banks invlved in the payment prcess; and that it is difficult t implement change as there is n central authrity t mandate r direct new prcesses. A study n crss-brder payment, clearing and settlement shuld be appealing t Namibia fr tw reasns. Firstly, there is scarcity f research in this area in the SADC. Cnsequently, this is an attempt t fill this knwledge gap. Secndly, reginal blcks that are in the prcess f implementing reginal integratin prjects can learn frm the implementatin prcess in the SADC regin. The paper is cmprised f the fllwing sectins: an intrductin; the literature review; implementatin f crssbrder payment, clearing and settlement systems in the SADC regin; success factrs; challenges experienced; and cncluding remarks. The literature review fllws next. 2. Literature Review The United Natins (2005: 122) defines payment system as a set f institutins, laws, regulatins and ther mechanisms needed fr a buyer t make a payment and seller t receive payment. This is related t the definitin by Sheng (1995: 1) wh said it is a basic infrastructure that facilitates trading. Payment system is part f a wider natinal payment system althugh these tw terms are ften used interchangeably in practice. Accrding t the Payment System Management Act 2003.s.1, the natinal payment system (NPS) means the payment system as a whle, and includes any payment system, settlement system, clearing system and payment system arrangement used in the prcess f effecting payment between payers and beneficiaries. Participants in payment systems include banks, nn-banks and central banks. There are users f payment systems 195

2 as well as prviders f payment system services. Central banks have a special rle t play in payment systems. They versee the entire payment system infrastructure with the view f achieving public plicy bjectives f ensuring their safety and efficiency (Fry et al 1999: 76; Spindler and Summers 1994: 164). Central bank legal and regulatry framewrk cver bth dmestic and crss-brder payment systems. Crss-brder payment and settlement systems are different frm dmestic systems. The latter are meant fr transactins riginated, prcessed, cleared and settled in the brders f a particular cuntry. Such systems take several frms and these cver card, cheque, electrnic fund transfer and high value real time grss settlement systems (RTGS). The first three systems are nrmally used fr lw value payments that are batched and submitted t a settlement system via an autmated clearing huse (ACH). Althugh settlement systems such as an RTGS system can als settle batched transactins, a high prprtin f transactins settled, in value terms, emanates directly frm direct participants such as banking institutins. Accrding t Nrman et al (2011: 19), settlement in mdern day mnetary systems ultimately ccurs in central bank mney s that central banks stand at the center f the netwrk f clearing and settlement arrangements in their currency. There are situatins in the payments literature where a payer is dmiciled in ne cuntry but the payee is in anther. In this regard, transactins between the tw parties shuld ideally be cleared and settled in reginal payment, clearing and settlement systems. Bech et al (2008: 65) shw that since the late 1990s, systems have emerged that allw payments t settle acrss natinal brders, facilitate settlement in multiple currencies, and permit participants t be lcated in a freign jurisdictin. They added that the key driver fr the develpment f crss-brder and ffshre systems have been the intrductin f the eur and the demand fr payment settlement in freign currencies as part f payment-versus-payment frex transactins. Park (2006: 16) indicates that transnatinal systems have traditinally fcused n prviding payments within a regin r t a small number f cuntries and usually supprt a single cuntry. Evidence shw that crss-brder payment systems in the frm f RTGS systems are replacing crrespndent banking relatinships. Bech et al (2008: 66) pinted ut that large value payment systems can be understd as substitutes fr traditinal crrespndent banking services. Rsati and Secla (2005: 7) say that RTGS systems ensure finality t take place fr each single transactin in real time. It shuld be understd that RTGS system nrmally use central bank mney fr settlement purpses as a claim n the central bank is free f credit and liquidity risks (Bank fr Internatinal Settlements, 2001: 34). Accrding t Park (2006: 5) mst f the wrld s majr banks maintain crrespndent banking relatinships with banks in each f the freign cities f the wrld and this tw-way link between banks is ne f many interbank relatinships, such as nstr/vstr accunts and selling f cash management and treasury services t ther financial institutins. Glenbrk (2011: 14) maintain that althugh there are great advantages t users f the current system f internatinal crrespndent banking, challenges are prevalent. These challenges include n direct relatinship with dwnstream banks; limited data transprt capabilities; high cst fr services due t multiple banks invlved in the payment prcess; and that it is difficult t implement change as there is n central authrity t mandate r direct new prcesses. Crss-brder payment, clearing and settlement systems have been implemented r are being implemented in a number f reginal blcks. In the eur area, tw main large value payment systems, Target and Eur 1 went live frm 1999 (Rsati and Secla, 2005: 5). The frmer system is wned and perated by central banks f the Eur System while the latter system is wned by the Eurpean Banking Assciatin. Implementatin f reginal large value payment systems is nging in East African Cmmunity (EAC); West African Mnetary Zne (WAMZ); and Cmmn Market fr Eastern and Suthern Africa (COMESA). 3. Crss-brder Payment, Clearing and Settlement Systems Implementatin in SADC This sectin dcuments the experience in the prcess f implementing crss-brder payment, clearing and settlement systems in Suthern African Develpment Cmmunity (SADC). Key aspects including backgrund infrmatin, gvernance, mdel, phases, success factrs and challenges are discussed. The rest f the sectin appears belw. 196

3 3.1 Histrical Backgrund The need t have reginal payment systems in the Suthern African Develpment Cmmunity (SADC) is well dcumented. Such systems are critical in the circulatin f mney and the general ecnmic activities in the regin. In line with the SADC Prtcl n Finance and Investment, central banks in the regin are t c-perate in rder t define and implement a crss-brder payment strategy (Suthern African Develpment Cmmunity, 2006: 63). Ensuring a safe and efficient payment system, in each SADC cuntry, based n internatinally accepted principles is essential in implementing a reginal strategy. It is nted that the Framewrk fr SADC Visin, Principles and Strategy dcument utlines fur strategic bjectives f the reginal crss-brder payment strategy (Suthern African Develpment Cmmunity, 2012: 1). These are: Enhance and harmnize the reginal legal and regulatry framewrks t facilitate reginal clearing and settlement arrangements; Implement and integrate reginal crss-brder payment settlement infrastructure; Implement an integrated reginal crss-brder payment and pst-trade clearing infrastructure; and Establish a c-perative versight arrangement based n the harmnized regulatry framewrk fr reginal crss-brder payment and settlement amng participating member cuntries. 3.2 Prject Gvernance The Cmmittee f Central Bank Gvernrs (CCBG) reslved that the SADC Payments Prject be launched in the Suthern African Develpment Cmmunity (SADC) in line with the requirements f the SADC Finance and Investment Prtcl. Cnsequently, the SADC Payment System Prject Team was set up under the CCBG t prvide leadership fr the day-t-day implementatin f the massive prject. Cmmercial banks were encuraged t fully participate in the rll-ut prcess since January In this regard, the SADC Banking Assciatin was tasked t c-rdinate the implementatin f the prject t ensure that banking institutins in SADC take part in all prcesses leading t full implementatin. There is als an versight cmpnent t the implementatin prcess. The respnsibility t versee implementatin rests with central banks thrugh varius structures including the Cmmn Mnetary Area Crss-brder Payment Oversight Cmmittee (CMA CPOC) and SADC Payment Oversight Cmmittee (SPOC). 3.3 Agreed Mdel Several mdels were discussed n hw crss-brder payments can be prcessed, cleared and settled. Cnsequently, the regin agreed n a suitable mdel r mdels fr crss-brder payments. In this regard, it was agreed that natinal real time grss settlement systems (RTGS) systems t cntinue be used fr dmestic transactins and that crss-brder transactins be settled in the reginal r central settlement system (Suthern African Develpment Cmmunity, 2010: 11; Suthern African Develpment Cmmunity, 2011: 2). This invlves participants cnnected directly t the central system. With respect t the lw value r retail payments, participants are at liberty t link t the reginal autmated clearing huse (ACH) directly r via a dmestic ACH. The reginal ACH interfaces the central settlement system. 3.4 Prject Phases The implementatin f the SADC Payments Prject was divided int manageable phases. It was reslved that the SADC Integrated Reginal Electrnic Settlement System (SIRESS) be implemented first in 2013 and the autmated clearing huse (ACH) t be implemented in 2015 in the Cmmn Mnetary Area (CMA). This rute was accepted cnsidering that currencies f Lesth, Namibia and Swaziland are linked t the Suth Africa Rand. In terms f the visin, implementatin in the wider SADC regin is t fllw after the systems have been successfully rlled-ut in the CMA regin. 197

4 4. Success Factrs frm the SADC Regin This sectin dwells n key factrs that cntributed r leading t the successful implementatin f the SADC Payments Prject. Only ne phase, SADC Integrated Reginal Electrnic Settlement System (SIRESS), has been cmpleted n 22 July 2013 in CMA with the remaining part, autmated clearing huse (ACH), t be realised by The fllwing factrs can explain why the SADC Payments has been r is being rlled-ut well in the regin. 4.1 Dedicated Team at the Secretariat Level In general, the SADC Banking Assciatin is ding a sterling jb as far as c-crdinating crss-brder activities f member cuntries is cncerned. It is crdinating the implementatin f the SADC Payments Prject well. Where there are issues in the prcess, the SADC Banking Assciatin is being instrumental in ensuring that these are reslved within reasnable time limits in assciatin with relevant bdies and institutins. 4.2 Implementatin f in-cuntry Gvernance Structure. The reginal gvernance framewrk, develped by SADC Banking Assciatin, requires each member cuntry t have an In-cuntry Payments Leader (IPL) wh shall c-rdinate the implementatin f the SADC Payments Prject at a banking industry level. Within each banking institutin, there must be a prject manager wh ensures that the prject is managed t realize its successful implementatin. The IPL links the SADC Banking Assciatin and the lcal banking industry and sees t it that there is a lcal dcumented gvernance framewrk in place t encurage participatin in the prject. 4.3 Reprting t Authrities Prviding prgress reprts t authrities n status f the implementatin f the SADC Payments Prject is crucial with the view f ensuring that stakehlders are aware f what is ging n. The In-cuntry Payments Leader (IPL) is accuntable in terms f prviding regular prgress reprts t varius industry stakehlders n the rll-ut prcess. These stakehlders include Payment Clearing Huse (PCH) grups; Payment System Management Bdy Management Cuncils; regulatrs; and banking assciatins. The principals f varius streams f the SADC Payments Prject and prject managers are playing a key rle in prviding input int reprts t and fr varius stakehlders. 4.4 Interactin at Dmestic and Reginal Level The SADC Payments Prject is prgrammed in such a way that there must be interactin at lcal and reginal level t ensure infrmatin sharing. Dmestically, relevant teams d meet as ften as pssible, in line with incuntry gvernance framewrk, t share infrmatin including actin items that require reslutin. There are meetings at the reginal level and these are used t discuss prgress made, issues being experienced, and matters t be tackled in future. Reginal meetings are attended by representatives frm member cuntries. 4.5 Clear Visin A clear visin is imprtant because it shws what needs t be achieved in future and hw t get there. The visin statement as cmmunicated by the regulatrs is very clear as far as implementatin f the SADC Payments Prject is cncerned. Fr example, member banks and ther participants knw that the rll-ut prgram includes a settlement system, clearing cmpnent, delivery-versus-payment mechanism, and sund regulatry framewrk. All these cmpnents wuld have been cmpleted by the time the prject is implemented. 5. Challenges Experienced In this sectin, challenges experienced during the implementatin f the SADC Payments Prject are utlined. These challenges include absence f a regulatin; take-ff phase; clarifying rles f different stakehlders; keeping in-cuntry members infrmed f the rll-ut prcess, and preparatin fr ging live. These are briefed discussed belw: 198

5 5.1 Absence f a Regulatin Apart frm the SADC Finance and Investment Prject, which requires central banks t implement a crss-brder payment, clearing and settlement strategy, there is n legal instrument that mandates members t implement the SADC Payments Prject and cnsequently ensuring that crss-brder payments are channeled thrugh central systems. Legal instruments culd take frms such as regulatin, directive r determinatin. The current apprach is mral suasin and it is expected that a regulatin will be issued nce central systems have been implemented SADC-wide. It is advisable that any frm f a regulatin t be issued shuld be clear n the cut-ff when all financial institutins are excepted t use reginal systems fr crss-brder transactins. Further, a regulatin shuld be clear when crrespndent banking relatinships shuld be phased ut t ensure certainty in the prcess and t avid a situatin where certain payments are prcessed utside the central systems. 5.2 Take-ff Phase It tk time and effrt t explain the ratinale f the SADC Payments Prject t different stakehlders. Several questins were asked at the start f this exercise. What will be achieved as far as the SADC Payments Prject is cncerned? What is the rle f banks and central banks in the prcess? Wh gave a g ahead fr such a prject t be initiated and implemented? Des the regin need central systems when the nstr/vstr relatinships are wrking well? The list is nt exhaustive. Cnsequently, stakehlders, SADC Banking Assciatin and regulatrs, played an imprtant rle in ensuring that members appreciate the imprtance f the prject and this led t cuntries embracing the implementatin. 5.3 Clarifying Rles f Stakehlders The SADC Payments Prject has different rle players. These include SADC Banking Assciatin, regulatrs, cuntry representatives fr payment streams, prject managers; and In-cuntry Payments Leaders (IPL). Rles were clarified t make sure that each stakehlder knws what they are respnsible fr. Fr example, it was made clear that prject managers are respnsible fr implementing the prject within their institutin with the IPL ccrdinating at cuntry level. In additin, it was clarified that cmpliance falls utside the IPL as this is a respnsibility f payment regulatrs. 5.4 Keeping in-cuntry Members Infrmed One f the basic tenets f prject management is reprting t relevant stakehlders. Key stakehlders as far as the SADC Payments Prject is cncerned include payment regulatrs, Bankers Assciatins; Payment Clearing Huse Participant Grups (PCH PG); Payment System Management Bdy Management Cuncils (PSMB MC); and internal stakehlders within a particular member. All stakehlders had t be kept infrmed in terms f the prgress made. There is a cmmitment t keep them infrmed f develpments until the SADC Payments Prject has been successfully implemented SADC-wide. 5.5 Preparatin fr G Live Members acrss the regin had t fulfill necessary precnditins befre ging live in the prductin cmpnent f the reginal settlement system. Cnnectivity and transactins testing had t be cmpleted. Key dcuments including legal dcuments, business mdels, rules, exceptins handling prcesses, just t mentin but a few, were reviewed. Resurces including testing resurces had t be made available t ensure that the g-live date is met. 6. Cncluding Remarks This paper investigated the experience in implementing crss-brder payment, clearing and settlement systems in the Suthern African Develpment Cmmunity (SADC). It utlined the literature review afterwhich details in terms actual experiences were discussed. There are success factrs that led t the SADC Payments Prject being implemented successfully frm the settlement side. Challenges experienced were discussed in the paper. Ging frward, the regin expects the secnd phase f the implementatin, that is reginal autmated clearing huse phase, t be implemented with vigr and determinatin between nw and 2015 in the Cmmn Mnetary Area 199

6 (CMA). SADC-wide, implementatin is expected t fllw after CMA has been cvered. References Bank fr Internatinal Settlements, (2001). Cre Principles fr Systemically Imprtant Payment Systems. Basel: Bank fr Internatinal Settlements. Bech, M. L., Preisig, C and Sramaki, K. (2008). Glbal Trends in Large-Value Payments. Federal Reserve Bank f New Yrk Ecnmic Plicy Review, 14(2), Fry, M.J., Kilat I., Rger, S., Senderwicz, K., Sheppard, D., Slis, F. and Trundle, J., (1999). Payment System in Glbal Perspective. Lndn: Rutledge. Glenbrk, (2011). Crss-brder Payments Perspectives. [nline] Available at < Earthprt-Research-Brief.pdf> [Accessed 1 August 2013]. Nrman, B., Shaw, R and Speight, G. (2011). The Histry f Interbank Settlement Arrangements: Explring Central Bank rle in Payment System. Bank f England Wrking Paper N Payment System Management Act (2003). (c.1), Windhek: Gvernment f the Republic f Namibia. Rsati, S and Secla, S. (2005). Explaining Crss-brder Large-Value Payment Flws: Evidence frm Target and Eur 1 Data. Eurpean Central Bank Wrking Paper N Sheng, A. (1995). Payment Systems in Develping Cuntries: Lessns fr Small Ecnmy. SEACEN Occasinal Paper N.9. Spindler, J. A and Summers, B. J. (1994). The Central Bank and the Payment System. In: B. J. Summers, ed The Payment System Design, Management and Supervisin. Washingtn, Internatinal Mnetary Fund, pp Suthern African Develpment Cmmunity, Prtcl n Finance and Investment. [nline] Available at < Investment2006.pdf> [Accessed 5 August 2013]. Suthern African Develpment Cmmunity, (2012). Framewrk fr SADC Visin, Principles and Strategy (2015). Pretria: Suthern African Develpment Cmmunity. Suthern African Develpment Cmmunity, (2011). SADC Payment System Prject Prject Nte. Pretria: Suthern African Develpment Cmmunity. Suthern African Develpment Cmmunity, (2010). Prpsal fr the CMA Payment System Integratin Prject. Pretria: Suthern African Develpment Cmmunity. Park, Y. S. (2006). The Inefficiencies f Crss-brder Payments: Hw current Frces are Shaping the Future. [nline] Available at: < [Accessed 1 August 2013]. United Natins, (2005). Trade Finance Infrastructure Develpment Handbk fr Ecnmies in Transitin, New Yrk: United Natins. 200

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