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ATPC African Trade Policy Centre


No. 11 Payments System and Intra-African Trade1

Economic Commission for Africa

1. Introduction
In spite of more than two decades of financial reforms, African payment systems to transact
trade and business have remained very cumbersome, underdeveloped, fragmented, costly
and inefficient. That has remained a key impediment to intra-Africa trade and an obstacle
in way of the completion of single market in the continent in its quest to achieve a common
market. While, for instance, it takes just a few minutes to wire money from one corner
of world to another, to transact business payment across borders in Africa may take days,
weeks or even months. Indeed, a lack of cost-effective payment systems in the region has
proved very costly both in terms of resources and time to most business men and women in
the region. Consequently, since independence, this has remained a key challenge to intra-
African trade.

A number of factors are at play as to why Regional Payment Systems have remained
dismal and underdeveloped for the past 50 years. Large parts of Africa are geographically
disadvantageous, with forty percent comprising of islands or landlocked economies. Most
African economies are cash based involving a lot of paperwork to effect payments and
transact business across borders, rendering the payment system very costly and inefficient.
As a result, finality of payment is not always guaranteed due to potential counterfeits and
the lack of financial discipline. In addition, most payments system in Africa are very small,
fragmented and lack competition resulting in low inefficiencies, high payments costs and
exorbitant bank charges.

Notwithstanding Africa’s sluggish, underdeveloped and inefficient payment system that has
hindered intra-African trade, which by extension, limit economic growth and development;
well-developed and cost-effective payment systems in general have many good attributes and
benefits to the economy as whole. As elsewhere, development of payment systems is closely
associated with the movement of goods, services, capital and people; reduces costs and
delays of effecting transactions as well as minimizing the risks of holding cash such as theft,

For further insights into this policy brief, done by Vincent Leyaro and Mkhululi N Ncube, refer to Chap-
ter 8 of ECA/AUC/AfDB joint publication entitled “Assessing Regional Integration in Africa (ARIA IV):
Enhancing Intra-Regional Trade” publiched in May 2010.

September 2010
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currency counterfeit and losing of interest and exchange had begun implementing broad reforms to upgrade their
rate value. Moreover, there more benefits accrue to well payment systems.
developed and efficient payment system both directly and
indirectly at national, regional and global level. The most important of these reforms involve automation
which comprises several modules, including: i) Real-time
Directly, it helps to promote cross-border trade, intra gross settlement (RTGS) or wholesale payments systems,
regional-trade and regional integration. This is so, as it which are the main arteries and usually dedicated to large
directly affects the efficiency of circulation of goods and value, systemically important and urgent payments. ii)
services and the pace of economic expansion due to enhanced The clearing systems for retail payments, characterized
competition, improved efficiency and productivity, and by a large volume of low-value transactions that need
increased effectiveness and efficiency in the flow of goods not be settled individually but rather on a net basis
and services in the regional groupings. Subsequently, this too between participants. iii) The card switch, which handles
has two way causal directions effects of further improving card payment operations, emanating from automated
efficiency, increasing competition and diversification as well teller machines (ATMs) and points of sale (POSs) to a
as reducing the costs of payment services. Indirectly, there cardholder’s banks information system and processes the
are other benefits of strengthening payment systems that transactions once they are authorized and executed and iv)
can help to promote intra-regional trade in addition to the The delivery-versus-payment (DvP), which is designed for
direct effects. These include: facilitating sound monetary government and stock-market securities transactions. One
policy and liquidity management; enhancing monetary and thing to note in addition to these is that a good payment
financial sector integration; expediting customs processing system includes not just the automated system, but also
and government transactions and supporting foreign soft infrastructure such as the payment instruments used to
exchange trading. It is against this backdrop that the fourth effect the transactions; the financial institutions that provide
edition of ‘Assessing Regional Integration in Africa’ Report payment accounts, instruments and services to consumers;
on the theme: Enhancing Intra-African Trade’ – ARIA the market arrangements for producing, pricing, delivering
IV, has paid special attention to the issues, challenges and and acquiring the various payment instruments and services;
difficulties facing the Systems in Africa in effecting regional to mention some.
payments and transactions. The focus being on: what is
the status of Payment Systems in Africa; it’s potential to At national level, reforms to upgrade the payments systems
promote cross-border and intra regional trade in Africa; were done both at supply and demand sides. At the supply
the performance to date and offer some recommendations side the reforms aimed at: reducing settlement risk;
and policy implications that would improve efficiency and enhancing public confidence in the national payments
functioning. systems; promoting economic efficiency; and enabling the
introduction of new payment instruments. At the demand
or users’ side, the reforms have been popular because they
2. Status of Payment Systems in could enhance access to cost-effective instruments and
Africa minimize risks associated with counterfeiting and fraud.
The payments systems reform projects have included,
Given their important role in trade and resource flows among others: reforms of the legal framework for payments
and in financial sector management, central banks in and securities settlements; ensuring that the systemically
Africa have since the 1960s, paid close attention to important payments systems comply with international
their efficient functioning. Even though, most payment principles by launching modern RTGS systems; coordinating
systems in the continent have remained very cumbersome, the integration of sound and efficient securities settlement
underdeveloped, fragmented, costly and inefficient. As a systems, the Central Securities Depository, with the new
result, there was an urgent need to restructure the moribund RTGS systems operated by the African national central
payment systems in Africa and tackle their inefficiencies. banks; introducing the automated retail payments clearing
Consequently, by the early 1990s most African countries system for retail payments, the exchange media, which has

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the most visible bearing on average size trade and everyday multilateral clearing system known as (SICA-UEMOA);
transactions and establishing effective payments system and; (iii) the development of a regional inter-bank card
oversight functions. based payments system known as (CTMI-UEMOA). A
Payment Incidents Centre was established as a tool to ensure
3. Payments System and payment system safety and is undergoing modernization.
The WAEMU regional payments project has achieved its
Regional Economic primary objective: STAR, SICA and CTMI are operational
Communities in Africa as designed - resulting in increased speed of cross-border
transactions, transaction fees paid by end-users for low-value
Given the instrumental role it plays as a stepping stone transactions having declined by 25 percent and the number
into Africa’s integration with the global economy, most of available ATMs POS outlets as well as the number of
focus of reforms to upgrade Payment Systems in Africa has card transactions now also expected to increase.
been towards improving and easing of Regional Economic
Communities (RECs) cross-country exchange. Rapid
CEMAC: The CEMAC Member States use the same
integration has linked RECs and put increasing demand on
currency and are fully integrated in terms of monetary
their Member States’ national payments systems to extend
policy, laws and trade rules. This is laudable considering
services across borders and facilitate regional trade. Pressure
that none of them had an automated payment system
also comes from technological innovations, especially mass
when BEAC, the Regional Central Bank, determined
use of broadband internet and mobile technology which
the strategy of the regional payments system. In 2003,
has given some RECs the chance to provide retail payments
the BEAC launched a reform project for the payments
services across borders. Consequently, a number of RECs
and settlement system in CEMAC countries. The reform
and their institutions, including AMU, SADC, COMESA,
renders the regional and national payments systems more
WAEMU, CEMAC and WAMZ have implemented or
effective and secure through usage of modern payment
planned to establish regional payments system arrangements
instruments. Its objective is to increase the average bank
on the backbone of these technological advancements. This
use rate to 10 percent by 2012. The reform project focuses
can be done, either by linking various national payments
on harmonization of payment and settlement instruments
systems in a network or by setting up specific clearing and
and the standardization of formats for information and
settlement systems dedicated to cross-border transactions
data exchange amongst various participants. The new
as a separate process from domestic transactions. Few
payment system is not yet fully introduced throughout the
RECs have taken huge strides, with the likes of the West
region. A plan is scheduled to improve the performance of
African Economic and Monetary Union (WAEMU) and
the system by improving the performance of the payments
the Communauté Économique et Monétaire de l’Afrique
infrastructure and the performance of the platforms, as
Centrale (CEMAC – Economic and Monetary Community
well as increasing the level of competence of the payments
of Central Africa) being in economic and monetary unions
system users within the CEMAC banking community.
with a single currency, and having adopted an integrated
regional system using the same structure for national
and cross-country payments. The others are free-trade or COMESA: COMESA adopted a phased monetary
common market areas without a uniform currency, oriented harmonization programme towards establishing a
towards establishing links and mutual accounts among their monetary union and in 1999 became the first REC
RTGS systems. We briefly look the status of each so far. to implement a separate payment system dedicated to
cross-country transactions. The initiative was intended
to increase speed, lower transaction costs and reduce
WAEMU: Payments systems reform in WAEMU, initiated
risks associated with currency convertibility in an effort
by the Central Bank of West African States (BCEAO), rests
to promote intra-regional trade. Systematically, it was
on three pillars, namely, (i)the establishment of an RTGS
designed to enable the participation of other African banks
for systemically important payments, known as (STAR-
as well as European and Asian banks in countries that have
UEMOA); (ii) the operationalization of an automated
commercial exchanges with COMESA Member States. As

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a step further, in 2009, the payment system was morphed resources to develop, it holds great potential for furthering
to enable and allow direct linkages with Member States’ financial integration in the region as well as regional trade,
national payment systems. Minimal costs associated with possibly to the same levels that Member States have with
the usage of the reformed system should attract a larger mainly Europe and Asia.
volume of smaller transactions (including cash-and-carry),
while helping to level the playing field for smaller banks. SADC: The SADC payments system project was launched
Amongst challenges hindering the use and expansion of the in 1996. The obstacle to implementing the plan is that
system are observed insufficiencies in the conceptual model of variable development in each of the national payment
such as exchange-rate risks brought about by sequential systems of SADC countries. At present, only two countries
settlement and clearing and high expenditure incurred have implemented the SADC regional payments system.
due to implementing the telecommunications network. Currently, the project implementation is on developing
Variable readiness of Member States and low volumes of a proposal for a cross-border payments settlement system
intra-regional trade also hinder cost-effectiveness. based on a single currency. SADC is also promoting mobile-
payment arrangements, allowing commercial banks to use
EAC: EAC plans to have a single currency by 2012. It mobile technology to access banking infrastructure within
has designed a regional payment system, EAPS, based and ultimately across borders. Mobile banking is already
on national payment systems’ links amongst the EAC underway within other RECs, though headway is yet to be
Member States. The EAC’s solution has the advantage of made on mobile payments across borders.
same day transaction settlements. EAC regional authorities
face a significant obstacle in implementing EAPS because WAMZ: The West African Monetary Zone (WAMZ)
national payment systems of Member States are also of was formally launched in December 2000, to establish a
variable advancement in implementation. Even though common central bank and introduce a single currency. The
EAC’s solution is cheaper than building a dedicated system monetary union was to commence in January 2003 after
to regional transactions, the low level of regional trade a convergence process. However, the launch has suffered
may negatively impact on the costs related to unitary two postponements following the inadequate status of
transactions. Moreover, the effort required by commercial macroeconomic convergence. On December 1, 2009, the
banks to manage multiple settlement accounts brings WAMZ authorities adopted an expanded work programme
challenges in effectively implementing the system. and action plan for its delivery in accordance with the
Banjul Declaration of May 2005. A recent report by the
AMU: The idea of establishing a regional payments system West African Monetary Institute (WAMI) on the WAMZ
within AMU’s Member States was first considered in 1992. regional payments system’s progress indicates significant
Albeit slow progress, ongoing efforts to upgrade national progress in developing a regional payments system.
payments systems have provided an opportunity to push for However, similarities with all other regional payment
harmonization in the region. Work is underway to simplify systems’ implementation lie in the differential levels of
the system and encourage buy-in from Member States. As a systems development amongst Member States. Uncertainty
result of efforts in payments system reform, Member States, still remains as to specific dates on the launch of a monetary
to differing degrees, have improved their national payments union.
systems to cater for harmonisation in the region. Payment
systems in AMU are still predominantly cash-based, with
manual procedures and paper-based cheques marring the 4. Performance of Payment
systems in some instances. This contributes to the slow- System in Africa
down of financial flows and increases intermediation
costs. Regionally, AMU is confronted by inadequate
Following the reforms to upgrade Payment Systems, most
Member States’ support as well as an incomplete roadmap
African countries have made progress both at national and
to implementing a regional payment system. Whilst the
regional levels. To list some: by January 1 2008, 1,004
AMU regional payments system would require considerable

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users in 52 African countries were connected to the Society reforms, especially at the regional level, the results have not
for Worldwide Interbank Financial Telecommunication been evident.
(SWIFT) and enjoying the benefits of instantaneous
and secure global reach. The last few years thus have
seen countries upgrading their connection to SWIFT 5. Recommendations
by introducing RTGS systems on to SWIFT. More than
two-thirds of African countries either have or are putting In spite of the reforms pursued so far, the status of Payment
RTGS systems in place, making their payment systems System in Africa, both at the national and regional level, is
safer, stronger, and more secure. Furthermore, the advent still poor, costly and inefficient. However, given its critical
of automated clearinghouses technology has paved the way role in effecting payment and easing business transactions
for direct deposits and payments, ushering in emergent that are so needed to expand intra-African trade, enhance
products such as mobile banking and mobile money regional cooperation and promote growth, a number of
transfers in some countries. actionable items to reverse the poor performance are worth
considering here:
Despite these achievements, African payments systems
often remain inefficient in terms of supervision, cost and 1. African countries should continue with the reforms to
time, compared with international practices. Despite the upgrade their Payment System, modernizing by taking
connection to SWIFT, wholesale systems are uncompetitive advantage of technological advancement and other
and therefore more costly and slower than in other international development so as to be able to cope with
developing countries. This has been due to insufficient increasing demands due to globalisation.
or weak technical infrastructure in most African national
payments systems. 2. At the national level the Payment System reforms should
continue to tackle the payments infrastructure as well
Regarding region-centric payments systems, much remains as the matters of regulatory reforms and institutional
to be done in Africa. While some RECs adopted this capacity-building. This includes improving payments
approach in the 1990s, implementation has been slow. system infrastructure by encouraging standardization
In 2009, in many areas, regional payments systems were and automation for mass application, encouraging
still at a rudimentary implementation stage. About a third interoperability among payment network arrangements
of African countries had still not been connected to the and promote competition.
RGTS payment system, which creates serious weak links in
international payments processes, delaying payments by up 3. At the regional level, through respective RECs, it is
to a month in some cases. For instance, on average, cross- necessary to construct an integrated payment services
border transfers cost several times higher in Africa than market at continental level that is derived both by
in Asia, the Middle East or Central Europe. In the 129 national authorities as well as by continental and
countries across Europe, Africa, Middle East, Asia and the regional authorities that give practical guidance
Pacific region, about 2.4 billion payment related messages and coordinate national initiatives and finance the
were sent and received via SWIFT in 2007. Africa’ share was missing pieces. Since the final goal is to establish an
only 0.0046 per cent of the region and 50 per cent lower African Economic and Monetary Union, the vision
than Italy’s. Besides, 209 banks in 40 African countries are for payments system integration in Africa should be
SWIFT members, but this is fewer than the number of banks that of an integrated, cost-effective, easily accessible
in Italy and Russia. The small size, fragmentation and lack and risk-free system. Thus RECs should implement
of competition in the African payments systems also result appropriate programs to help achieve this vision such as
in inefficiencies, high costs and exorbitant bank charges, implementing multi and common currency systems.
which hurt the competitiveness of African enterprises,
especially the SMEs. As a matter of course, though regional
integration has provided the impetus for payments system

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4. In order to reduce risks introduced by competition partnerships improve participation in the design and
- governance, risk management, compliance and implementation of systems, including the setting
oversight of the financial infrastructure, should be of an acceptable balance between cooperation and
strengthened at national and regional levels. Rigorous competition.
standards for financial reporting improve the self-
discipline of payment-management institutions 7. To ensure sound payments systems development
and instill confidence in adoption of national and in Africa, RECs and their Member States should
regional payment systems. In addition to harmonizing strengthen their related capacities. Capacity-building
accounting standards and introducing international of skilled and knowledgeable human resources is as
auditing standards, a credit registration bureau can critical as the development of the physical infrastructure.
play an important role in enhancing transparency. Central banks need to lead this process, sharing their
knowledge and expertise about the emerging trends
5. Regional payment systems development and payments and issues on national and regional payments systems
services’ liberalization present opportunities and development and on ensuring system efficiency and
challenges. Owing to the relatively low level of security.
knowledge on the relevant regional issues, RECs
should implement programmes to sensitize the major 8. The development and integration of African payments
stakeholders such as central banks and political services should undoubtedly be driven by Africans
authorities, to these issues as per the issue of resources is concerned. Overseas
Development Assistance is very much welcome in
6. Long-term commitments and demands of developing addition to packaged institutional strengthening
and implementing effective regional payments systems and capacity-building in the short term – without
require constant engagement with key stakeholders, any conditionalities. International aid should not
including market regulators, service providers, and substitute countries’ efforts to achieve internal
financial infrastructure organizations such as payment development objectives. Member States need to pool
transaction, clearing and settlement network operators their respective budgetary resources and governments
and securities exchanges amongst others. Such must encourage participation of the private sector in
financing modernization and integration.