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Payment Systems

Intro | Roles | Modes | Clearing & Settlement | Framework | Achievements

Introduction

The payments system plays a very crucial role in any economy, being the channel through which financial resources flow from one segment of the economy to the other. It, therefore, represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the payments system namely; the Monetary Policy role, the financial stability role and the overall economic role.

Given the important role that well functioning payment systems has on monetary policy, financial stability and overall economic activity, the Central Bank of Nigeria has put in place a set of national payment systems policy objectives as a broad guideline and framework for all payment systems initiatives. In setting out the objectives of the National Payment Systems (NPS), the goal is to ensure that the system is available without interruption, meet as far as possible all users' needs, and operate at minimum risk and reasonable cost.

During the course of the past ten years the Central Bank of Nigeria (CBN), in collaboration with the Bankers Committee, launched the first major initiative to modernize the payments system. The starting point was to automate the cheque clearing system and making it a veritable platform for development of electronic payment channels. Hitherto cheques processing and computations of the net settlement position of banks were done manually. The implementation of the new procedures and rules based on MICR technology revolutionized the cheque clearing system. Consequently, a Centralized Automated Clearing process was established in Lagos clearing zone, whereby with MICR Reader Sorters, necessary information on cheques are captured, built into clearing files and electronically transmitted to the clearing house, from where the net settlement position of participating banks are automatically computed and also electronically transmitted to the Central bank for final settlement. The clearing cycle was subsequently reduced from 5 days to 3 days for local instruments and from 9 days to six days in respect of up-country instruments.

National Payments System (NPS) Objectives

Following the CBN re-engineering and re-structuring processes in 1999, the second phase of payments system reforms were embarked upon with national payments system objectives clearly spelt out to include:

• Promote efficiency. To be efficient and effective the framework for the payments system should
  • Be transparent , flexible and reliable
  • Ensure integration/interoperability of the sub-systems
  • Speed up exchange and settlement of funds and securities
• Promote safety: Protecting systemic risks by:
  1. Containing credit, legal, liquidity and operational risks.
  2. Compliance with international standards and recommendations ( e.g. the ten core principles for Systemically important Payment Systems)
  3. Compliance with national standards and recommendations (e.g. Cheque and electronic banking standards).
• Migration to cash-less modes of payment, such as electronic debit/credit instruments, credit/debit cards, ATM-sharing and Electronic Fund Transfer at Point Of Sales and Real-Time Gross Settlement System (RTGS).
• Transparency: To run the NPS in a transparent manner as one of the factors militating against widespread usage of the formal payment systems is the concern of market participants about transparency. Consequently, NPS would spearhead procedures and technology that perform end-to-end audit-ability, full transaction reporting to regulatory and reporting authorities. In addition, the NPS would publicly disclose criteria for participation, in any payments solution, and permit fair and open access to all interested and qualified parties.
• Public Acceptance and Confidence. The NPS would initiate channels for effective information dissemination, customer convenience orientation and total quality delivery. In particular, the NPS would work towards widespread use of payment solutions for government payments, in many areas. The NPS would ensure that the legal and institutional arrangement is favorable to the achievement of its goals, and where such is not the case, appropriate regulations and review of guidelines would be undertaken from time to time in response to developments as the payment systems evolve.
• Integration with the financial infrastructure: In order to achieve the full benefit of well functioning payment systems, financial value should be able to flow from one market to the other in a seamless manner. Therefore, the NPS would be a major driver of changes in the financial markets, and would encourage collaboration and cooperation. As Nigeria moves towards a common monetary zone with five other West African countries, the reform of the existing payments process for compatibility, standardization and cross-border settlement becomes an imperative.

Overview of the Payment Systems

General Legal Framework
There is no law that explicitly and exclusively deals with Payment systems in Nigeria. Rather, the CBN Act, as amended in 1999 gives the Bank the implicit powers to oversee and regulate the payments system. Section 41 of the CBN Act provides that "it shall be the duty of the CBN to facilitate the clearing of cheques and credit instruments for banks carrying on business in Nigeria and for this purpose, the bank shall at any appropriate time and in conjunction with other banks establish clearing houses in premises provided by the Bank in such places as the Bank may consider necessary". Section 17 provides that "the Bank shall have the sole right of issuing currency notes and coins throughout Nigeria--". Also, the Nigeria Deposit Insurance Corporation (NDIC) in exercising its' responsibilities as provided by NDIC Act of 1988 complements the supervisory function of the CBN in the nation's payment system. The extent of this responsibility is the insuring of all deposit liabilities of banks in order to protect depositors against bank failure and instill public confidence in the system. Also the Nigerian Stock Exchange plays a dominant role in the Nigerian Payments and Settlement landscape as the trading in equities is conducted via the floor of the exchange based on encompassing laws and regulations.

Institutional and Organizational Framework
The CBN is the main institution that regulates the payments system. Banks, discount houses, Nigeria Inter-Bank Settlement System (NIBSS), Nigeria Stock Exchange card and switching companies remain the key players in the Nigerian payments system. The CBN, complemented by Nigerian Deposit Insurance Corporation (NDIC) provide the necessary oversight function to ensure the efficiency and effectiveness of the payments system.

The major Financial Institutions
There are over 1000 registered institutions that provide payments/financial services in Nigeria. They include 25 consolidated deposit money banks (as at 31st December, 2005) with x branches, 5 discount houses, 759 community banks, 293 bureau- de- change, 111 finance companies, 90 primary mortgage institutions and 6 development finance institutions.