September 2007 VULINDLELA Payment System Project A project of the Committee of Central Bank Governors Annual Regional Conference International remittances and in Livingstone, Zambia retail payments central bank policy issues Introduction Mr Robert Lindley, a representative of the Bank for This edition focuses on a successful annual re g i o n a l International Settlements (BIS), presented the general c o n f e rence hosted by the Bank of Zambia in April 2007 principles for international remittance services. He at Livingstone. The theme of the conference was on showed that remittances were increasing steadily. The retail payments and included securities settlement presentation also highlighted that the importance of systems, development of correspondent banking remittances could not be ignored as they are a source relationships in the region and individual country for family income in many developing countries and reports. The Governor of the Bank of Zambia, contribute significantly to these countries’ gross Honourable Dr C M Fundanga opened the confere n c e . domestic product (GDP). Senior management attending the SADC annual regional conference held in Zambia, April 2007 From left to right: Mr M Mulomba, Director: Banking, Currency and Payment Systems, Bank of Zambia; Hon Governor Dr C M Fundanga, Bank of Zambia; Mr D Mitchell, SADC Payment System Project Leader; and Mr D Mminele, Executive General Manager: South African Reserve Bank 1 The principles on remittances developed by the BIS should be developed in the region? And, lastly, what Committee on Payments and Settlement Systems a r e the critical steps in developing financial markets provide that and what are the necessary pre - c o n d i t i o n s ? (i) market principles be transparent and have adequate consumer pro t e c t i o n ; The presenter proceeded to address these questions (ii) i m p rovements to payment system infrastructure be and pointed out the following issues: encouraged to increase efficiency of re m i t t a n c e s e r v i c e ; - Financial market development is critical to (iii) remittances be supported by a sound, pre d i c t a b l e , successful and sustainable economic development non-discriminatory and proportionate legal and and growth. Research over the years has led to a regulatory enviro n m e n t ; generally broad consensus that a sound financial (iv) competitive market conditions be fostered in the system, with financial markets at the heart of it, is remittance industry; and the lifeblood of a vibrant economy. The relationship (v) remittances be supported by appropriate gover- between financial markets and development and nance and risk management principles. growth should be of particular importance to low- income and developing countries, because it It was clear that consideration should be given to the enables a connection line and a positive relationship design of policies that are intended to achieve an between the development of financial markets and appropriate balance between costs and benefits poverty alleviation. including the regulation of remittances. - Economic reorganisation has become a necessary The general principles on retail payments and the precondition to assist large and small economies to role that the central banks should be playing were achieve a collective competitive advantage in discussed. What was noted in the presentation was today’s increasingly globalised economy. Regional that the pace of change in retail payments is economic co-operation/integration is required to slow due to consumer conservatism and the need guide smaller countries in the competitive system of for new laws. There is potential for change due to integrated financial markets. technological innovations and the influence of political developments, such as in the euro area and - The development of strong local banking systems the introduction of new non-bank participants in and securities markets re p resents a necessary first providing services which impact on retail payments developments. step to achieve regional integration. Additionally, the establishment of a sound macroeconomic policy The need for central banks to be involved in policy framework, which will serve as a basis for building an issues of retail payments is important as they will institutional framework for the financial sector that will ensure that any change in retail payments is aid development and growth, is key. Of critical beneficial. Additionally, central bank policy enables a importance would also be well-developed legal and central bank to intervene for the safety and efficiency regulatory systems. The rules by which the game is of the system. played should be clear and the re f e rees in the game must be consistent, predictable and fair. This would It was noted that central banks may differ in the extend to areas such as contract law and pro p e r t y application of their policies on retail payments due to rights. The next step would be a careful definition of emphasis on aspects such as safety and the any market reforms that may be necessary and their management of systemic risk. sequencing and prioritisation as part of developing financial markets. Good infrastructure, by way of The policy issues and actions by a central bank information systems and systems for trading, include the legal and regulatory environment, market clearing and settlements, is critical for the structure and performance, standards as well as development of regional financial markets. services offered by a central bank (the bank needs to stay abreast of the developments and also facilitate - Another critical component would be to ensure that innovation and competition). in both public and private sectors there is an increased focus on having a critical mass of skills Development of financial markets and continuously building capacity to be able to in the region meet future challenges. This requires a dedicated effort in cross-broader co-operation to ensure that, Issues on the development of the financial markets in on a regional basis, the levels of training and the Southern African Development Community development are such that they would not be a (SADC) region were presented by Mr Daniel Mminele, drag on the initiatives of regional integration, but an Executive General Manager of the South African rather catalysts for more rapid progress. In this Reserve Bank. In the presentation, the following regard the creation of market bodies and questions were raised: First, why are financial associations that will regularly interact with policy- markets and their developments so important? makers and authorities on issues affecting markets Second, why it is so important that financial markets must also be highlighted. 2 Development of correspondent their customers. This ensures that they adhere banking in the region to local and international laws, such as exchange controls, anti-money laundering, a n t i - t e r ro r i s m Mr Brian le Sar, a presenter from the Standard Bank financial action task force (FATF) and balance of of South Africa, put forward reasons why there is a payment (BOP) reporting re q u i re m e n t s . need for the development of correspondent banking relationships. Some of the cited reasons included the In conclusion, it was indicated that with the focus on fact that correspondent banking provides commercial macroeconomic convergence strategies for 2016, banks and central banks with an effective the time was ripe to utilise the correspondent mechanism to manage the flow of foreign currency banking mechanism to grow inter-SADC trade and into and out of the country while enabling the foreign trade within the region. When this reaches a payment of imports or receiving funds for exports. suitable scale, an intra-SADC real-time gross It is the responsibility of the central banks of settlement (RTGS) system can be devised. Members of the delegation who were present at the SADC Payment System Project’s annual regional conference held in Zambia, April 2007 the countries to ensure that there is a balance Real-time gross settlement cost between cross-border trade, economic growth, management of inflation, currency protection, and recovery models the management of risks associated with cross- border trading. Mr Tim Masela, an official from the South African Reserve Bank, briefly discussed issues relating to In addition, most central banks in the SADC re g i o n , RTGS cost recovery models and indicated that most and other parts of the world, have well-established of the central banks worldwide provide a settlement relationships with various foreign counterparties who service on a cost recovery basis. On this basis, the p rov ide the central banks with credit facilities. models are not driven by a profit motive. Having sound correspondent banking re l a t i o n s h i p s assist SADC central banks to stay abreast of market First, central banks should identify all the costs they developments and shifts in economic tre n d s . intend to recover from their participants. Second, they should indicate how such costs shall be However, commercial banks also need recovered. And, third, they have to publicly disclose correspondent banking for various reasons, such as their policy stance on RTGS cost recovery. to facilitate the transfer of funds on behalf of their customers who require a safe, secure and efficient Different approaches to cost recovery were mechanism; and to ensure they facilitate their own highlighted. These were referred to as cost recovery cross-border trade transactions as well as those of model pillars that included tiered pricing, ad valorem, 3 monthly fees plus transaction fees and account system, as the RTGS settlement service is management fees. In addition to the above, there viewed as one of the pillars of financial stability.