By Arowoswegbe Benjamin Abiodun
On October 11, 2021, the Central Bank of Nigeria (“CBN”) took a fundamental step towards facilitating the settlement and payment of cross-border transactions within the African continent, by issuing a new regulation titled: Guidelines on the Operations of Pan African Payments and Settlement System (PAPSS) in Nigeria (the “Guideline”). The CBN is empowered under section 69 of the Banks and Other Financial Institutions Act (BOFIA), 2020 to issue regulations for the administration, standardization and governance of payment, settlement and clearance operations in Nigeria. The new Guideline is expected to facilitate the operation of the Pan African Payments and Settlement System (“PAPSS”), developed and introduced by Afreximbank in partnership with the West African Monetary Institute (WAMI). The PAPSS is currently being deployed as a pilot scheme in the West African Monetary Zone (WAMZ), before its operation is extended across all regions in Africa.[1]
PAPSS (Pan-Africa Payments and Settlement System) is a centralized payment and settlement for intra-African trade and commerce payments which was facilitated by afreximbank to formalize some of the unrecorded trade due to prevalence of informal cross-border payments and address the informality of cross-border trade within Africa. The reduction of reliance on hard currencies (such as USD, EUR, GBP) is a core value proposition of PAPSS, a transaction imitated in the local currency of the beneficiary country within Africa (currently limited to African member countries) Also; it involves Read-Time Gross Settlement (RTGS), which enables instant payments. With operationalize of the PAPSS, thesame business would only pay in Nigeria Naira for the goods, white the seller will receive Botswana Pula.
How does it Works
PAPSS works through a process whereby a trader or business issues a payment instruction to their local bank or payment service provider, then the bank or the payment service provider sends the instruction to PAPSS. After which PAPSS validates the payment instruction and upon successful validation, PAPSS will forward the instruction to the beneficiary’s bank or payment service provider will then pay the transferred funds in local currency to the beneficiary.[i]
BENEFITS
- It enables the efficient flow of money securely across African borders, thereby minimizing risk and contributing to financial integration across the regions.
- PAPSS real-time infrastructure provides a reliable, cost-effective answer for instant payments.
- It also provide alternative to current high-lost and lengthy correspondent banking relationship to facilitate trade and other Economic activities among countries through simples, low-cost and risk-controlled payment clearing and settlement system.
- Reduction in duration and time variability, decreasing of liquidity requirements of commercial banks; decreasing liquidity requirements of central banks for settlement as well as its own payments and strengthening central Banks’ oversight of cross border payments systems.
Financial intermediaries, commercial banks, fintech companies and payment service providers (PSPs) – Direct Participants and Indirect Participants – who together facilitate cross-border payments for their clients, benefit from:
- A platform for innovation and creativity, increasing access to markets;
- API capability, enhancing scale, performance, security and privacy;
- faster and more efficient customer service;
- no longer requiring multiple correspondent banking relationships in order to perform cross-border payments within the region – just PAPSS;
- Analytical information for management reporting from ISO 20022 standards messaging to support informed decision-making.
PAPSS further support three core processes namely;
- Instant Payment: Whereby participants will no longer need to convert local currencies into hard currencies. Compliance, legal and sanctions, checks are performed instantly within the system within 120 seconds
- Pre-funding: whereby PAPSS guarantee the availability of funds to complete the organization transaction before effecting the movement of debits and credits between participants’ accounts.
- Net Settlement: whereby PAPSS determine net position in local currency for all participants at the end of each day.
In Africa today, various barriers plague the payments systems of countries such as lack of infrastructure, regulatory requirements, and so on. With the PAPSS, these barriers can fall away and if implemented properly, it can revolutionize the way the continent trades. Customers and traders may no longer have to spend days waiting for the confirmation or receipt of funds to facilitate a trade as payments will be cleared and settled in real time. Another factor that delays the clearing and settlements of funds is the issue of currency denominations. Payments are not usually made in local currency because of remittance issues and poor payments infrastructure. So, what happens is that the goods or services are priced in foreign a currency (United States Dollars or British Pounds) which means payments will be made to a foreign payment service provider who then has to convert the foreign currency to the local currency of the beneficiary and then send it to their bank causing a delay. With the rollout of PAPSS, an instant payment for cross-border transactions without the hassle of currency conversion becomes possible. [2]
In conclusion, this is a positive development for intra Africa trade. It is a step in the right direction. It will promote cross border trade for African exporters, liberalize payments and will deliver payment that delivers value. Africa is here for real business. Africa is ready.
Arowoswegbe Benjamin Abiodun is a 300Level Law student of Ekiti State University who has keen interest in Financial Technology and Capital Market.
[1] https://www.banwo-ighodalo.com/grey-matter/fintech-update-intra-african-trades-get-a-boost-by-cbn-s-new-regulation-for-the-operation-of-pan-african-payments-and-settlement-system
[i] https://www.proshareng.com/news/Trade%20Investment/Launch-of-the-PAPSS—A-New-Dawn-For-Cross-Border-Financial-Transactions-in-Africa/60997
- ibid