Payment clearing and settlement systems are a prerequisite for financial transactions between participants in the economy. They are vital for the smooth flow of funds within an economy, as well as between economies and are hence a cornerstone of deeper financial integration in the region.
SADC member states have therefore agreed to cooperate closely, among others, in the development of systems that will facilitate financial transactions and cross-border payments. Member states have established national and regional clearing-houses to which financial institutions submit documentation about financial transfers between institutions.
Since financial institutions make payments to and receive payments from other financial institutions the clearing houses calculate the net balances due to a financial institution that are then settled between the parties involved.
A milestone was achieved with the implementation of the SADC Integrated Regional Electronic Settlement System (SIRESS) two years ago that resulted in the phasing out of cross-border cheques with effect from July 23 2013.
Cross-border cheque payments accounted for only a small share of total cheque payments, but carried high risks. The implementation of SIRESS offers a faster and more secure way of transferring funds electronically across the border.
The number of participating countries, central and commercial banks, as well the amount of funds channelled through SIRESS, has increased rapidly since its inception. SIRESS went live on July 20 2013 with the four member states of the Common Monetary Area participating, namely Lesotho, Namibia, South Africa and Swaziland.
The four central banks and 17 commercial banks that were involved settled about N$13 billion in the first 20 days. Since then, five additional SADC member states have joined SIRESS (Malawi, Mauritius, Tanzania, Zambia and Zimbabwe), while three more are planning to join by October 2015.
A total of 61 banks (central and commercial banks) had settled an amount of more than N$1 trillion in almost 196,000 transactions by May 2015.
However, the Committee of Central Bank Governors, under the auspices of which the implementation of SIRESS falls, still needs to take a number of decisions. So far, the South African Rand is used as the settlement currency and a decision on the final currency is still outstanding.
There are a few options on the table, including using all SADC member states’ currencies that fulfil certain criteria to become settlement currencies.
Furthermore, SIRESS is currently centrally located in South Africa until a decision is taken to either continue with a centralised system located in South Africa, or any of the other SADC member states, or move to a de-centralised system based in each of the SADC member states and would thus use the respective member state’s currency as the settlement currency.
Progress has not only been made at the regional level, but also at the domestic level. Namibia has set up her own payment, clearing and settlement systems over time and developed the capacity to manage the systems that were previously based in South Africa.
The process started way before the ratification of the SADC Finance and Investment Protocol (FIP), namely in 2002 with the establishment of the Namibia Inter-bank Settlement System, followed by the Namibia Payment System and of Namclear, the Namibian clearing-house in 2003.
Namclear started with clearing Electronic Fund Transfers in 2004, processing cheques in 2005 and card payments through Nam-Switch in 2008. Establishing local infrastructure has reduced the dependency on infrastructure outside Namibia, and in particular, processing cheques locally rather than in South Africa has reduced the time needed and hence costs for businesses.
Namibia has thus fulfilled all five criteria used for Annex 6 of the FIP in the annual Monitoring and Evaluation matrix that tracks the progress made in the implementation of the SADC Protocol on Finance and Investment. Domestic payment systems are in place and based on the Payment System Management Act of 2003, as amended in 2010, to bring it in line with SADC’s Model Payment Law.
Furthermore, a Risk-based Oversight Framework, based on international best practise, is in place. Finally, Namibia was one of the first four countries that implemented SIRESS and is therefore linked to the regional settlement system.
* Festus Nghifenwa is the SADC FIP Implementation Coordinator at the Ministry of Finance. He can be reached by email: email@example.com. This article is the seventh in a series of 12 articles on SADC’s Finance and Investment Protocol. For further information see www.sadc-fip.gov.na