1.0 INTRODUCTION

The purpose of this policy statement is to disclose and explain the Central Bank of The Gambia’s role as overseer of payment systems.

1.1 Payment Systems
A payment is a transfer of value. A payment system is an arrangement that makes the exchange of payments between its users possible. This arrangement consists of the rules and procedures, people, institutions and networks that allow users to transfer funds amongst themselves.

When a transaction takes place, the item bought needs to be transferred to the buyer, and the payment made to the seller. Where payment is made by cash, settlement is immediate – the goods and the cash are exchanged at the same time. However, the buyer may, instead, issue a payment instruction to a bank where his account is held. This instruction would most probably be a cheque but may be an electronic instruction such as a debit card or telegraphic transfer. This complicates the issue. A mechanism has to be found for transferring the funds from the buyer’s bank account to the seller’s bank account. Banks have organised themselves into clearing houses to enable them to do this.

Payment systems require:

• An agreement on the means of transmitting payment messages between members;
• A set of agreed rules and procedures;
• A means of settling claims amongst members.

Safe and efficient payment systems are an important component of the financial infrastructure for the following reasons:

• Individuals, businesses and government agencies rely upon an efficient payments system to pay for goods and services, receive payments and pay for investments. Safe and efficient payment systems allow transactions to be completed on time with minimum risk. This reduces transaction costs in the economy and contributes to economic performance.
• They are the transmission channels for monetary policy and improve financial market liquidity.
• They allow end-users, the banks’ customers, to enter into financial transactions with people and institutions that bank with a different bank. Thus end-users’ decisions to open bank accounts are not constrained by worries that counterparties may not be able to make or receive payments from them. Therefore, they are able to focus on the quality and cost of services and the products offered by a bank in determining where to open an account. This levels the playing field somewhat and helps make the banking sector more competitive.

However, payment systems may also be a source of systemic risk and may be a transmission mechanism through which shocks in one part of the financial system are transmitted to other parts and to the economy as a whole. As a result, of late, safety and efficiency of payment systems have become important public policy concerns.

2.0 PAYMENT SYSTEMS IN THE GAMBIA

The most important means of payment in The Gambia is cash. Banknotes and coin are used for commercial transactions by retailers, in the rural areas and for low value transactions. Currency in circulation as at 31 December 2002 stood at D829.23 million or approximately 12 percent of GDP.

2.1 Non-Cash Payment Methods

Cheques. The main non-cash instrument is the cheque. It is used for most interbank payments. On average, about 1000 cheques valued at D25 million are exchanged daily at the interbank clearing. The value of cheques drawn on the Bank accounts for 50 percent of the value.

Other non-cash payment instruments are:

Direct Debits. Banks provide direct debit facilities for customers. However, this product is not extensively utilised.

Traveler’ cheques. Travelers’ cheques in foreign currency are sold by banks and bureaux de change in accordance with the terms of their licences issued by the Bank. However, given the premiums on the rates in the parallel market vis-à-vis the interbank market, a significant proportion of transactions take place in the parallel markets.

Debit Cards: One commercial bank offers a debit card. This is accepted at petrol stations and supermarkets.

Credit cards. Few businesses, hotels, supermarkets and restaurants accept payments by internationally renowned credit cards. Banks in the Gambia do not issue credit cards.

ATMs. One bank offers ATM services in the urban areas.

2.3 The Interbank Clearing

The Bank operates the only clearing system in The Gambia, the Bankers’ Clearing House. The clearing process is largely manual. It consists of the representatives of the participating banks exchanging items at the Bank premises in Banjul under the supervision of an official of the Bank. The Bankers Clearing House is governed by Clearing House Rules 1986 which stipulates that:

1. Any bank in The Gambia may participate in the clearing process.
2. The clearing is held daily from 10:00 am from Monday to Thursdays and at 9:00 am on Fridays
3. The clearing comprises of two processes, one for return of unpaid cheques and the other for the main clearing of the day.
4. Each participating bank delivers to the Central bank a statement that shows the number and value of checks received from other banks.
5. A netting procedure is then applied where the difference between the value of cheques presented and received will represent the amount for or against a participating bank.
6. VI. The banks are notified of their net positions by their clearing representatives. They are then expected to ensure that they have sufficient funds to facilitate successful settlement.
7. The settlement of the clearing takes place in the books of the Central Bank daily by debit or credit to a member bank’s account as the case may be.
8. The Central Bank, in the conduct of the clearing house incurs no liability or responsibility other than that falling equally upon all member banks.

3.0 THE CORE PRINCIPLES FOR SYSTEMICALLY IMPORTANT PAYMENT SYSTEMS

Because of the importance of payments systems, the Committee on Payment and Settlement Systems (CPSS) of central banks of the G-10 countries was formed to develop core principles for payment systems that have potential to create systemic risk. The CPSS formed a Task Force on Payment System Principles and Practices in May 1998 to determine what principles should govern the design and operation of payment systems in all countries. This Task Force included representatives of central banks of non G-10 countries as well as the IMF and the World Bank.

The work of the Task Force resulted in the publication of a draft “Core Principles for Systemically Important Payment Systems” . This report tried to develop a common, internationally accepted set of principles for payment systems and the role of central banks. This attempted to mirror somewhat what the Basle Committee had achieved with its core principles for banking supervision.

The report introduced the concept of systemically important payment systems. These are systems that have the potential to create systemic risk if they fail. An important objective of public policy in relation to payment systems is to understand the various types of risks faced by payment systems and to devise policies to minimise those risks.

Box 1 lists the various risks on the basis of definitions contained in the report “Core Principles for Systemically Important Payment Systems”.

The report came up with ten principles. These are contained in Appendix 1. It also came up with four central bank responsibilities. These are contained in Box 2. The Bank has adopted these core principles and central bank responsibilities as a guide for designing its oversight standards for the payment system in The Gambia. This policy statement seeks to comply with central bank responsibility A, that is, to define and disclose the objectives of the Bank’s payment systems oversight.

4.0 THE CENTRAL BANK’S OVERSIGHT ROLE

4.1 General Responsibilities

The Central Bank is the overseer of the payment system. This is an important function of the Bank which is directly linked to its core functions of maintaining monetary stability and ensuring the safety and soundness of the financial system. The Bank’s oversight role relates to the fact that it operates the payment system and that it provides the settlement asset. The Bank is also a significant user of the payment system in its role as fiscal agent of government and banker to the banks.

4.1.1 Statutory Responsibilities

The legal basis for the Bank’s oversight of the payments system is based on Common Law and the Central Bank of The Gambia Act 1992. The CBG Act 1992 provides that the Bank may open accounts for and accept deposits from banks in The Gambia. The Bank may also grant banks advances secured by securities. Specifically, Part VIII: 39 authorises the Bank, in conjunction with other banks, to organise a clearing house at such place or places as may be desirable and to prescribe by notification the rules to govern its operations and prescribe procedures and standards to be followed in the conduct of its operations.

4.1.2 Establishment of Common Rules

The Gambia does not have a specific payment systems law. However, the Bank has prescribed Clearing House Rules to govern the operations of the Bankers Clearing House. This is the closest to a form of oversight tool the Bank currently has at its disposal. However, these rules are inadequate because they only cover the cheque clearing component of the payment system. For instance, the rules do not deal with settlement issues such as finality and default.

4.2 Provision of Settlement Facilities

The Bank maintains the settlement accounts of the commercial banks through which interbank settlement obligations are met. The Bank may make advances to the banks through these accounts in its capacity as lender of last resort. The use of Central Bank money as the settlement asset is aimed at minimising the credit and liquidity risks involved in settlement and satisfies core principle VI.

To participate in the clearing, all banks must ensure that they have sufficient balances in their settlement accounts to meet their obligations as they fall due. If necessary, the Central Bank will buy government and Central Bank securities from the banks in the secondary market to inject liquidity and enable them to meet their settlement obligations.

4.3 The Objectives of Oversight

The Central Bank’s main objective of oversight of payment systems is to minimise risks and ensure that they are secure, reliable, rapid, cost effective and meet the needs of the Gambian economy. The Bank will seek to maintain confidence of members and end-users in the payment system and ensure that all member banks have equal and equitable access to payment services.

In its oversight of payment systems, the Bank is concerned about the different types of risks shown in Box 1. The Bank will put in considerable effort to identify and understand these risks and to design practices and processes that will minimise such risks.

An important element in this process is to ensure that there is adequate legal basis for the Bank’s operation and oversight of the payment system and that the rules are adequate and understood by all participants. During 2003, the Bank will initiate the processes to amend the CBG Act. Amongst other things, the amendments will make the Bank’s oversight role more specific and provide the Bank with the necessary statutory powers to conduct its oversight of payment systems effectively. In addition, the Bank plans to propose changes to the rules and procedures of the clearing and settlement systems to better manage risks. This it will do in consultation with member banks of the Clearing House.

An issue of current concern is to minimise the period during which members are subject to financial exposure. At the moment, the Bankers Clearing House operates on a deferred net settlement basis where the accumulated amounts are settled on a net basis only at the end of the day. This exposes the commercial banks and the Central Bank to substantial losses if one of the banks were to fail. The implementation of a Large Value Payment (LVP) system will enable the members to settle large value payments individually and immediately in their settlement accounts at the Bank. This will reduce the amount of time that members are exposed to liquidity risk and credit risk. During 2003, the Bank will work with the commercial banks to initiate the development of a LVP system.

As operator of the payment system, the Bank has primary responsibility for the smooth day-to-day functioning of the system. Thus the Bank is concerned about operational risk. Currently, the clearing process is mainly manual and there is little perceived operational risk. However, the Bank intends to automate parts of the clearing process as well as introduce a LVP system in the near future. This will mean that reliability of computer, telecommunications and human resource systems will become an important consideration for the Bank in its oversight of the payment system. The Bank will analyse these risks to determine what actions to take to minimise them.

5.0 RELATIONSHIP TO THE BANK’S OVERALL FINANCIAL STABILITY ROLE

Payment systems oversight, while complimentary to banking supervision, uses different tools and is concerned about different aspects of regulation. Bank supervisors focus on individual financial institutions and the risks they assume in the course of their operations. Overseers of payment systems are concerned about the risks to the whole payment system. The two obviously overlap. Risks arising out of the payment system may impact negatively on individual banks thereby creating a risk for that one bank prompting bank supervisors to take appropriate action. Likewise payment system overseers are also concerned that the participating banks are sound and can meet their obligations in the system as they fall due. The Bank will endeavour to regularly exchange relevant information between the departments that supervise banks and oversee payment systems.

6.0 RELATIONSHIP TO EXTERNAL PAYMENT SYSTEMS

The Bank’s main interest is in payment systems based in The Gambia. However, the Bank will cooperate with other payment systems overseers in the second West African Monetary Zone (WAMZ). Recently, member countries of WAMZ have each committed to forming national payment systems committees to formulate strategic frameworks to help them develop robust payment systems. These national strategies would contribute to a formulation of a cross-border payments strategy for WAMZ with the eventual aim of developing regional payments systems. The Bank will be an active participant in co-ordinating oversight activities at the level of WAMZ.

7.0 REPORTING ON PAYMENT SYSTEMS ISSUES

The Bank has disclosed its policy on payment systems oversight by means of this document. From 2003, it will also report its payment systems oversight activities in its Annual Report.

Appendix 1: Core Principles for Systemically Important Payment systems

* Systems should seek to exceed the minima included in these two Core Principles

Also download in PDF format : -

OVERSIGHT OF PAYMENT SYSTEMS

PAYMENT SYSTEMS - CLEARING HOUSE RULES

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