NPS Newsletter

Issue No. 2  June 1999

TANZANIA NATIONAL PAYMENT SYSTEMS NEWSLETTER

TABLE OF CONTENTS

Message from the Director of National Payment System   ….1

Introductory Note by NPS  Advisor …………3

Payment and Settlement Systems Risks. The Tanzanian

Case …….3

Calendar of NPS Project Events ….8

Glossary  ….….…10

Message from the Director of National Payment System

The main theme in this issue of the National Payment Systems Newsletter is "Payment and Settlement Systems Risks". These are risks that payers, payees, bankers, clearing and settlement institutions are exposed to in the process of paying and settling financial obligations. Payment systems analysts classify these risks on the basis of the causes of the failure to settle, or on the basis of the impact of the failure to settle obligations. It is the probable loss or disturbance failures to settle may cause to the payer, payee, payer’s bank, payee’s bank, to the payment system itself, to other related systems, to the financial sector as a whole and to the economy.

There is a variety of types of payment system risks based on this classification. The main types are however those that fall in the economic risks category, that is Credit Risk, Liquidity Risk, and Foreign Exchange Settlement or Cross Currency Settlement Risks. Although technically any failure to settle can lead to a systemic failure, the economic risks are thought to be more likely to expose participating Institutions to systemic risks.

Payment systems analysts attribute the main causes of payment systems risks to inadequacy in the robustness of payment system designs in addressing the aspects of security, reliability, timeliness, certainty of settlement and accuracy.

They further agree that volumes of transactions per period, value of transactions per instruction and the length of payment cycles influence to a very large extent the degree of riskness of any payment and settlement system exposure.

The "Stock Taking" exercise on Payment Systems in Tanzania revealed that there is hardly any payment system design in existence on the basis of which payment transactions’ efficiency can be measured. In other words payment arrangements in Tanzania do not address the four aspects mentioned above. The "Payment and Settlement Systems Design" is fragile, weak and non-definitive. It needs to be defined, made robust, structured in such a way that it addresses all payment systems risks exposures experienced in Tanzania.

The "Stock Taking" exercise further revealed that settlement cycles in Tanzania took three to five days within municipalities of Clearing Houses for local instruments, and up to 30 days for transactions involving bank branches that are situated far away from Clearing Houses. This is definitely a long period for a payee to wait for his or her funds that he or she needs to make further financial transactions or invest. Various initiatives on individual bank levels are being taken to address these long settlement lags.

BOT, CRDB and two or so other banks including the Post Office have inter-branch communication networks which have made possible the transmission of funds from one branch to another within a day, facilitating faster changing of value between two parties. Tanzania however needs to put in place a common approach strategy to address these settlement delays, and hence exposure to risks.

The "Stock Taking" exercise revealed in addition that the value of payment transactions that pass through the five Clearing Houses of Dar es Salaam, Mwanza, Arusha, Zanzibar and Mbeya per day amount to about Shs. 7.3 billion on the average. A five days settlement cycle means that Shs. 36.4 billion is at anyone time circulating within the banking network as float money, and subject to all sorts of risk exposures. A 30 days settlement delays would lead to a Shs. 218.0 Billion float equivalent to 10% of GDP at factor cost. A payment system that allows as much as 10% of its GDP Value to hang in balance, exposed to all sorts of settlement risks cannot be seriously thought of as an appropriate payment system.

Finally, the banking sector in Tanzania is aware of numerous pilferage and criminal acts that are made in the process of transferring value from the payer to the payee. Substitutions have been reported, armed robberies of funds in transit have occurred, mispostings are common, and outright thefts have taken place. Banks and other financial institutions are spending billions of shillings to put in place control measures and security systems to keep watch over currency and such other valuable documents in the form of physical payment instruments that keep on disappearing and or misused.

Exposures to payment and settlement system risks take even greater dimensions and more serious proportions when cross border and international transactions are put in perspectives. The change in technologies and business environment, the global outreach and systems interactions are making the payment and settlement system risk aspects even more complex. It is important and necessary for us all to address this issue together, reinforcing each other’s efforts and adopting common strategies at the same time maximising on the resources that are available to the industry as a whole.

The most obvious targets to pursue include cutting down the settlement lag, reducing as much as possible the human element in payment and settlement processes and adopting credit transfer mechanisms wherever possible, thus reducing the use of debit based instruments like cheques. The base line is therefore automation and modernisation.

I.H. Kilato

Director National Payment Systems


INTRODUCTORY NOTE

BY MIKE ROBOTHAM

The NPS Advisor

Firstly, I would like to take this opportunity to introduce myself as the most recent member of the National Payment Systems Project Team and to express my thanks to everyone I have come into contact with to-date for the warm welcome that I have received in Tanzania. I feel very much at home and among friends.

Since arriving in Tanzania mid January this year I have certainly had a very busy schedule that has allowed me the opportunity of working closely with my colleagues within the directorate whilst also becoming familiar with the overall strategy and vision for the National Payment Systems of Tanzania.

I must express my admiration for the amount of background work that has been executed by those involved in developing the Stocktaking Exercise, Automated Bankers Clearing House Handbook, Vision, Strategy and Conceptual Overview drafts that we are examining now.

I feel privileged and excited to be part of this development and look forward to working together with all parties involved in the National Payment Systems development and would assure you of my ongoing commitment to this end.

_____________________

 

PAYMENT & SETTLEMENT SYSTEMS RISKS:

THE TANZANIAN CASE

By. G. Tabaro: Project Team

Introduction

The present Payment and Settlement System Operations in Tanzania are described as very risky. The undue exposure of payment transactions to risks in the country is attributable to the types of payment instruments in use, transaction processing in place, and the institutional set up. The value transfer systems in use, the inadequacy of legal coverage of value exchange transactions, and the absence of risk mitigating measures in the system, also add to the precarious risky position.

The most commonly used payment instrument in Tanzania is cash, covering over 85% of total payment transactions. In the process of handling large sums of money this situation is associated with security risk, a sub-set of operational risk. Incidences of funds being hi-jacked in transit to or from banks, and those of pick-pocketing are illustrative of such risk exposures. The recent hi-jack of Tanzania Brewery money in transit is a case in point.

Cheques are the next most popular instruments in use in Tanzania. The 1997 Situational Analysis Exercise revealed that over 70% of non-cash payment transactions in Tanzania are done by use of cheques. Cheque processing including clearing and settlement transactions is done manually. As such they are subject to human errors, delays, and fraudulent attempts. Delays in settlements constitute the main exposure factor to a number of payment and settlement systems risks such as credit risks and liquidity risks. Incidences of cheque bouncing, cheque substitutions, cheque alterations, cheque re-directions and even cheque disappearances, have been common in payment and settlement transactions in Tanzania, all made possible by long and ineffective processing procedures.

In terms of delays, the situational analysis further revealed that clearing periods in areas within municipalities of Clearing Houses, range between 3 and 5 days, while for areas outside these municipalities with Clearing House Centers, clearing periods range from 7 days to 30 days. In value terms, the float caused by such delays was estimated to be about 10% of GDP on the average at any one time. This means that up to 10% of Tanzania’s GDP in monetary terms is at any one time exposed to risks described in the paragraph above. In this regard the exposure is significant and warrants proper knowledge of the various aspects of payment and settlement systems risks.

What are Payment and Settlement System Risks?

Payment system risks are risks that participants in payment transactions may incur losses if their counterparts in the transactions fail to meet their obligations when due. The failure to meet their obligations may be due to a variety of causes, and may involve all participants viz. payers, payees, their bankers and the settlement agencies.

Payment transactions generate a range of risks for counterparts that undertake them

In large value inter-bank funds transfer system transaction failure may result in non-settlement leading to uncertainty of settlement finality of other payment transactions which were lined to be financed through the failed funds transfer. Such disturbances may bring about repercussions in the financial system and the economy.

There are many types of payment and settlement system risks. The major ones are liquidity, credit, operational, legal, foreign exchange settlement risks sometimes referred to as Hersttat risk, and the famous systemic risk.

A brief description of each of these risks may be in order.

Liquidity risk is a risk that a counterparty will not settle an obligation for full value when due because of his temporary illiquid position. The said participant may be able to settle the required debit obligations at some unspecified future time. The other banks in the system will therefore receive less in the settlement than they had expected. This situation adversely affects the ability to pay of the receiving banks, and of course their expected liquidity positions. If they must meet payment obligations, they may need to borrow funds elsewhere at short notice and/or disturb their investment portfolio. Under such a distressed situation they might borrow at a loss, or may forgo interest on part of their investments. Such costs are known as Adjustment or Replacement cost. And they generate subsets of Liquidity Risk known as Adjustment Cost risks, and Replacement Cost Risks.

Measures to manage liquidity risk include provision of mandatory large balances in settlement accounts with the Central Banks. Loss Sharing Agreements among members of a clearinghouse, which basically means that surviving member of the clearinghouse should share the loss of the defaulting participant, are also used to mitigate exposure to liquidity risks. The other measure, which is widely used, is the provision of intraday facilities. A participant in temporary liquidity problems may obtain funds from the money markets such as inter-bank borrowing or by selling its most liquid asset to finance the short-term cash flow. Some systems allow a participant to obtain intraday liquidity from the Central Bank by discounting their financial assets, securing overdraft facility, or using their other accounts such as the Statutory Minimum Reserve Account.

As intimated earlier, the Tanzanian Payment System does not have specifically articulated liquidity risk mitigating measures in place. As a result parties involved in liquidity risks safely pass the brunt to the Central Bank virtually by the fact that the later implicitly guarantees outgoing inter-bank payments. The current arrangement compels the Central Bank to issue overdraft facilities to commercial banks when their settlement accounts are overdrawn. Such automatic overdrafts on accounts held at the Central Bank have monetary policy implications, as they constitute creation of new money and hence unintended expansion of domestic money supply.

Credit risk is the risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. This risk is also known as principal risk because parties involved in the transaction may loose the full value of the credit extended. Credit risks manifest themselves clearly when financial institutions including banks go under, and indeed Tanzania has experienced several such events.

The most appropriate remedy for this type of risk for covering clearing operations is for each participant to pledge a highly short term asset as collateral sufficient to cover the maximum possible net debit position on the settlement accounts. In an event of a failure to settle, the collateral would be liquidated and the resultant funds are used to cover the debit settlement position.

Other used remedies for credit risk mitigation involve instituting same day settlement finality of payments, and agree on payment limits each bank will be willing to pay out to each participant in the system in the event of that participant being short of funds in a settlement operation.

Measures to cover the whole financial sector include such arrangements as Deposit Insurance Funds coupled with proper Banking Supervision.

However it is very difficult to have in place a full proof credit risks mitigation arrangement in multilateral Deferred Net Settlement (DNS) systems. This is mainly because under DNS systems it is not possible to synchronize incoming and outgoing payments. It is only the end result of their clearing that come up with a deficit settlement position. In that regard another type of payment system risk termed Settlement risk defined as the risk that settlement in a transfer system will not take place when expected, is established. Settlement risk may comprise both credit and liquidity risks.

Foreign Exchange Settlement Risk, known also as Hersatt Risk or Cross Currency Settlement Risk, is a risk that arises because of lack of simultaneity of payment transactions between different countries dealing in different currencies and in different time zones. Time zones difference and the requirement for completion and confirmation of receipts from their correspondents abroad may result in large delays before payment is finalized. Such delays expose banks to credit risks in the event of a major financial disturbance occuring in the country of the the correspondent partner before the correspondent partner meets its settlement obligations. The delays also expose the participants to Market Risks resulting from adverse movement of exchange rates.

Developing economies are affected mostly by this type of risk because settlement finality depend on the corresponding bank abroad. Failure of correspondent banks may result into significant losses on the local bank. A good example is the BCCI bank, which was liquidated leaving a long trail of unsettled obligations. There are other big banks with which Tanzanian banks have correspondent relationships, have failed in the Far East in the last few years. Failures of such banks result in global financial vibrations transmitted through various national payment systems because of their global linkages and interactions.

The international fund message system such as SWIFT, the worldwide interbank communication network, have reduced foreign exchange risks by significantly reducing delays in cross border payments.

Market risks are risks associated with prices, interest and exchange rates volatility in capital and financial markets. Price volatility when dealing with derivatives may lead into liquidity and/or credit risk crisis. Hedging methods against interest and exchange rate risks can be adopted to reduce such risks.

Operational Risks are risks that payment settlement finality may not be achieved due to inadequacies in equipment (technical failure), fraudulent activities, and lack of competence on the part of operators. The risks involved in this case are security risk, technology risk, and intellectual risk. As a result of these risks the financial operations in the economy including macroeconomic management as well as the process of financial intermediation are all disturbed. Fraud loopholes, laxity, negligence and lack of technical and insufficient security systems are major causes of these risks.

In Tanzania operational risks are of three major types namely fraud, negligence and systems risks. In addressing these risks the Tanzania Payment System Project Team has embarked on automating clearing house operations. As an immediate solution the clearing house data information is exchanged using diskettes. The system is known as the Electronic Data Interchange (EDI) system. In the long run the clearing and settlement processes will be fully automated using Magnetic Ink Character Recognition (MICR) systems linked to settlement accounts to minimize human intervention. Authentication of payment data on telecommunication messages is also being considered.

Legal risks result from inadequacy in the regulatory coverage of payment systems provisions. Legal aspects which are not adequately covered in payment system issues include electronic transmitted instructions and data generated and stored electronically. There are also some ambiguities in the interpretation of results of a netting process under DNS systems, especially in cases of bankruptcy. In addition payment systems managers face difficulties in enforcing laws for cheques issued against insufficient funds, and intentional delays in settlement. Other inadequacies of the legal system include long court proceedings, and court injunctions resulting in financial losses to the parties in a payment transaction.

The National Payment System Modernization Project has embarked on revising all laws, rules and regulations relevant to payment systems. Efforts are being made to formulate adequate legal strategies and put in place an efficient and robust legal framework capable of adequately supporting the envisaged new payment systems in Tanzania. Additional areas being considered will include finality and irrevocability of payments, and powers of the central bank to regulate and oversee payment systems in Tanzania.

Situational or Circumstantial Risk is a risk that finality of payment maybe prevented by factors outside the payment and settlement systems set up. These include natural disaster and other unexpected events, political uprising and the like. Political instability in developing countries affect payment systems in those countries quite significantly. Finality of payments is likely to be hindered when there is violence and war outbreaks.

Customer credit risk is a risk that a bank customer will fail to meet his payment obligations when due. This situation arises when a bank allows a customer to make a non-cash payment at the time when the customers account does not have sufficient funds. It also arises when a counterparty accepts debit transfer instruments, such as cheques from another counterparty and gives value against the instrument before it is cleared.

Although the Penal code, cap. 16 codifies that it is a criminal offence to issue a cheque against insufficient funds, bank customers do issue cheques without having funds in their accounts. Clearing house statistics indicate that returned items amount to 3% of the instruments processed. As a result confidence in debit instruments such as cheques have been eroded, and banks allow long clearing and settlement periods to facilitate confirmation of the availability of funds in the payee’s bank account.

Measures to restore the debit instrument credibility should be considered seriously.

Systemic risk. This is a risk that the failure of one participant in a transfer system or financial market to meet its payment obligation will result into other participants failing to meet their obligations when due. A failure of a large bank can have a knock-off effect on other banks leading to outright failure to settle by other banks. And due to uncertainty of the size of the disturbance other financial intermediaries may decide not to pay out funds thereby causing further uncertainties in the financials system spreading shocks to the market and economy as a whole. This is the main cause why the government through the Central Bank is concerned with efficient and robust national payment systems. Systemic risks constitute main potentials for the collapse of the financial sectors

 

CONCLUSION

Payment systems risks are a major factor of concern in payment system modernization efforts. Assessing risk exposures and managing risk are major elements and a challenge to the payment system designers and players. All players should understand the underlying risks in certain payment instruments and payment streams. There must be in place policies, procedures, rules and regulations for controlling and managing payment system risks. Banks should be urged to cooperate and come up with suggestions on how payment system risks can be effectively addressed. They should also play an effective role in ensuring that the systems in place are safe and sound.

 


"THE YEAR 2000 COMPLIANCE"

By NPS Project Team

The National Payment System Newsletter would be incomplete without a reminder of the "Year 2000 Compliance". In a few months time the financial industry will face its greatest test all over the World. The Payment System participants and all the services providers and infrastructural institutions must use the short time remaining to prepare thoroughly.

Has everyone in the payment system chain completed the identification of the "Mission Critical Systems" and done their testing? Remember testing is the most important way you can prepare for the "Year 2000".

What else must the "Payment Systems Community" think of? Contingency planning is crucial. So too is cooperation with each other. Payment systems are bound to each other in a very complex fashion, so we cannot afford to act in isolation. Communication providers, power providers (especially electricity) and systems developers, we all have a collective responsibility.

Don’t forget the testing deadline is 30th June, 1999. Don’t be late for a very important date!

 


CALENDAR OF NPS PROJECT EVENTS

By NPS Project Team

1994, July. As a result of recommendations of 1993 December MAE Mission of IMF. Mr. John Tait from IMF, was contracted to conduct a study and make proposals on possible ways to improve NPS. Mr. Tait presented a report entitled "Payment System in Tanzania" in his Aide Memoir of 22 July.

1994, November. Standards on document processing using MICR technology which were prepared by the Dar Es Salaam Bankers Clearing House (DBCH) technical team was adopted by MIS department. The standards eventually formed a basis for the current standardisation of document processing.

Standards on document processing using MICR technology which were prepared by the Dar Es Salaam Bankers Clearing House (DBCH) technical team was adopted by MIS department. The standards eventually formed a basis for the current standardisation of document processing.

1995, December. On December 1; Terms of References for consultants who were to carry studies on NPS were completed and sent to the World Bank – Financial Sector Development Department (FSDD) for comments and approval.

On December 1; Terms of References for consultants who were to carry studies on NPS were completed and sent to the World Bank – Financial Sector Development Department (FSDD) for comments and approval.

1996, January. On January 26, Letters of Invitation were sent to eleven consulting firms who were identified as being with potential to undertake an assignment for the study and design of the NPS.

On January 26, Letters of Invitation were sent to eleven consulting firms who were identified as being with potential to undertake an assignment for the study and design of the NPS.

On January 26, Letters of Invitation were sent to eleven consulting firms who were identified as being with potential to undertake an assignment for the study and design of the NPS.

1996, March. On March 18, the Governor formed NPS Unit within MIS department. The Unit comprising of 3 people was dedicated to all NPS activities.

On March 18, the Governor formed NPS Unit within MIS department. The Unit comprising of 3 people was dedicated to all NPS activities.

1996, April. On 17th April, tenders to engage a consultant to study and design NPS were opened and Price Waterhouse Urwirck of Australia won the tender.

On 17th April, tenders to engage a consultant to study and design NPS were opened and Price Waterhouse Urwirck of Australia won the tender.

1996, April. On 30th April, the Banks CEOs were informed of the NPS progress and in particular the outcome of evaluation of the NPS consultants.

On 30th April, the Banks CEOs were informed of the NPS progress and in particular the outcome of evaluation of the NPS consultants.

1996, May. On 30th May, a paper on "The Future of Payment System in Tanzania" was presented to the seminar on "Payment System in Eastern and Southern Africa: Development and Perspectives", held in Addis Ababa. It was the first paper to be presented on NPS in an international arena.

On 30th May, a paper on "The Future of Payment System in Tanzania" was presented to the seminar on "Payment System in Eastern and Southern Africa: Development and Perspectives", held in Addis Ababa. It was the first paper to be presented on NPS in an international arena.

1996, July. On 5th July, the Steering Committee of SADC Governors from SARB, Mauritius and Zimbabwe formed a core SADC Payment System project team to be based in Pretoria. Its objective being to assist SADC countries to establish NPS strategy and a regional approach towards cross-border payments. Each country nominated country representatives who would work from their home countries.

On 5th July, the Steering Committee of SADC Governors from SARB, Mauritius and Zimbabwe formed a core SADC Payment System project team to be based in Pretoria. Its objective being to assist SADC countries to establish NPS strategy and a regional approach towards cross-border payments. Each country nominated country representatives who would work from their home countries.

1996, August. On 14th August, the NPS Unit conducted an Orientation Workshop to NPS Institutional Co-ordinators from key NPS stakeholders. The Governor of BOT also officially inaugurated NPS Advisory Council (NAC) and officially launched the project to modernise payment system in the country.

1996, September. On 18th September, sensitisation workshop for CEOs from key NPS stakeholders was conducted. The workshop was opened by the Governor, and resourced by experts from the World Bank, Bank of England and the South African Reserve Bank.

On 18th September, sensitisation workshop for CEOs from key NPS stakeholders was conducted. The workshop was opened by the Governor, and resourced by experts from the World Bank, Bank of England and the South African Reserve Bank.

1996, October. On 21st October, Terms of Reference for NPS situational and stocktaking analysis were finalised and sent to the World Bank for comments and approval.

1996, October. On 25th October, the Project Manager presented, for the first, time, a paper on "The status of payment system in Tanzania" to the Governors of East African Central Banks

On 25th October, the Project Manager presented, for the first, time, a paper on "The status of payment system in Tanzania" to the Governors of East African Central Banks

1996, November. On 25th November, SADC Payment Systems experts conducted a technical workshop to NPS institutional project co-ordinators on the standardisation approach to stocktaking exercises.

1997, March. 4 Technical Committees of NAC were formed. The committees were Automation, Standards, Operations and Legal-Regulatory. They started their meetings in April and later on met once every month. 4 Technical Committees of NAC were formed. The committees were Automation, Standards, Operations and Legal-Regulatory. They started their meetings in April and later on met once every month.

1997, April. On 21st April, a paper on "Tanzania payment systems modernisation" was presented in London, to IBC Conference – Payment System Week. This being the second time Tanzania to be invited to present a paper in international conferences.

1997, May. Contracts for local consultants were signed and work on appraisal of the following started; physical infrastructure, non-bank financial institutions, government, legal and regulatory framework.

Contracts for local consultants were signed and work on appraisal of the following started; physical infrastructure, non-bank financial institutions, government, legal and regulatory framework.

1997, June. Intensive study on document processing using Magnetic Ink Character Recognition (MICR) technology started by based on Standards Manuals produced by Automated Payment Clearing Services (APACS) of UK.

The project team also started to study the use of Electronic Data Interchange (EDI) for bulk clearing.

Intensive study on document processing using Magnetic Ink Character Recognition (MICR) technology started by based on Standards Manuals produced by Automated Payment Clearing Services (APACS) of UK.

The project team also started to study the use of Electronic Data Interchange (EDI) for bulk clearing.

1997, September. On 12 September, Invitation to bid for supply of MICR and Disk Exchange were advertised in the local and international media.

On 12 September, Invitation to bid for supply of MICR and Disk Exchange were advertised in the local and international media.

1997, November. Quality assurance workshop for Situational Analysis and Stocktaking phase was held in Zanzibar on 16th November. Participants were from banks, business communities, academicians, service providers etc.

Quality assurance workshop for Situational Analysis and Stocktaking phase was held in Zanzibar on 16th November. Participants were from banks, business communities, academicians, service providers etc.

1997, December. On 12th December, 5 suppliers submitted proposals to supply document-processing system using MICR technology. Also evaluation of technical proposals started.

On 12th December, 5 suppliers submitted proposals to supply document-processing system using MICR technology. Also evaluation of technical proposals started.

1998, January. The first draft on situational stocktaking report was released.

1998, March. As a result of recommendations in the Situational Stocktaking report, a decision was reached by BOT management that work on the possibilities of introducing smart cards as a non-cash substitute instrument should commence.

As a result of recommendations in the Situational Stocktaking report, a decision was reached by BOT management that work on the possibilities of introducing smart cards as a non-cash substitute instrument should commence.

1998, March. NPS Unit produced SADC Green Book – Tanzania Chapter. The book was discussed and accepted by a Committee of Governors, It was then sent to Bank for International Settlements to be published.

NPS Unit produced SADC Green Book – Tanzania Chapter. The book was discussed and accepted by a Committee of Governors, It was then sent to Bank for International Settlements to be published.

1998, March. NPS Unit started to develop an EDI system to facilitate interchange of data between banks using diskettes.

NPS Unit started to develop an EDI system to facilitate interchange of data between banks using diskettes.

1998, April. Terms of References for consultants to work on the second phase of NPS were completed and sent to the World Bank for comments and approval.

1998, April. MICR tender evaluation was done. All suppliers were disqualified for lack of competency.

MICR tender evaluation was done. All suppliers were disqualified for lack of competency.

1998, May. On 20th May, NPS Unit, on behalf of the BOT, organised the first workshop on payment system for East African Central Banks.

On 20th May, NPS Unit, on behalf of the BOT, organised the first workshop on payment system for East African Central Banks.

1998, May. NPS Unit demonstrated to members of the bankers clearing houses on how disk exchange system could be used at interbank clearinghouses.

NPS Unit demonstrated to members of the bankers clearing houses on how disk exchange system could be used at interbank clearinghouses.

1998, July. Effective 1st July, NPS Unit was upgraded to become a fully-fledged NPS directorate.

Effective 1st July, NPS Unit was upgraded to become a fully-fledged NPS directorate.

1998, July. On 28th July, Tanzania Institute of Bankers (TIOB) organised a seminar on payment systems, in which all resource persons were from the NPS directorate.

On 28th July, Tanzania Institute of Bankers (TIOB) organised a seminar on payment systems, in which all resource persons were from the NPS directorate.

1998, August. On 21st August, the NPS Directorate and some of the stakeholders discussed and issued the first draft of Vision, Strategies and Conceptual Overview of the Tanzania Payment System. The draft was later presented to the NAC meeting on 28th August.

1998, September. On 2nd September, the Bank of Uganda held a workshop on harmonisation of payment systems cheque standards in Entebbe. Some members of NPS directorate represented the Bank.

On 2nd September, the Bank of Uganda held a workshop on harmonisation of payment systems cheque standards in Entebbe. Some members of NPS directorate represented the Bank.

1998, September. On 24th September, the East African Central Banks cheque standards technical team met in the Central Bank of Kenya and agreed on the East Africa cheque standards.

On 24th September, the East African Central Banks cheque standards technical team met in the Central Bank of Kenya and agreed on the East Africa cheque standards.

1998, October. The directorate issued the second draft documents on NPS Vision, Strategies and Conceptual overview. The document and a questionnaire regarding the proposed vision strategies and systems were circulated to NPS stakeholders for comments.

1998, November. Between 2nd and 6th November, the Directorate conducted training on use of EDI to all IT staffs from members of the bankers clearing houses.

Between 2nd and 6th November, the Directorate conducted training on use of EDI to all IT staffs from members of the bankers clearing houses.

1999, January. The directorate issued a first NPS Newsletter. The newsletter aims at providing quick reading, informative briefs on pertinent issues on payment systems to stakeholders and the general public.

The directorate issued a first NPS Newsletter. The newsletter aims at providing quick reading, informative briefs on pertinent issues on payment systems to stakeholders and the general public.

1999, January. Mr. Mike Robotham joined the NPS Project Team on Secondment basis from the IMF as the NPS Advisor.

1999, February. On 19th February, the Directorate convened the first grand meeting of all NAC committees. The meeting set resolutions on way forward and activities to be completed for the coming six months, that is Jan – June 1999.

On 19th February, the Directorate convened the first grand meeting of all NAC committees. The meeting set resolutions on way forward and activities to be completed for the coming six months, that is Jan – June 1999.

1999, March. Between 15th – 16th NPS Stakeholder’s met in Mwanza to discuss the Tanzania NPS, vision and strategy framework.


GLOSSARY OF ABBREVIATIONS AND TERMS

CSD (Central Securities Depository) System: A securities trading system for holding securities in a book entry from and enables securities transactions to be processed and transferred in a dematerialised and immobilized manner. The system may incorporate safekeeping comparison, clearing and settlement functions.

Clearing: Clearing is the process of transmitting, reconciling and confirming payment orders or security transfer instructions prior to settlement. Clearing may include netting of instructions and the establishment of final positions for settlement.

Clearing is the process of transmitting, reconciling and confirming payment orders or security transfer instructions prior to settlement. Clearing may include netting of instructions and the establishment of final positions for settlement.

Clearing House: A central location or central processing mechanism through which financial institutions agree to exchange payment instructions or other financial obligations. The institutions settle for items exchanged at a designated time based on rules and procedures of the clearing house.

Credit based Payments: Payments made by placing funds at the disposal of the beneficiary. The payment instructions and the funds described therein move together from the bank of the payer to the bank of the beneficiary.

Payments made by placing funds at the disposal of the beneficiary. The payment instructions and the funds described therein move together from the bank of the payer to the bank of the beneficiary.

Payments made by placing funds at the disposal of the beneficiary. The payment instructions and the funds described therein move together from the bank of the payer to the bank of the beneficiary.

Credit risk: The risk that a counterpart will not settle an obligation for full value either when due or at any time thereafter. It includes principal risk, cost risk. The counterpart may be insolvent.

Credit Transfer System (Giro System): A system through which payment instructions and the funds described therein may be transmitted for the purpose of effecting credit based payments.

A system through which payment instructions and the funds described therein may be transmitted for the purpose of effecting credit based payments.

Cross Currency Settlement Risk: Also known as Harsttat Risk is the risk that a transaction with a correspondent bank may not materialize due to insponcity of transactions caused by time zones differences and currency differences.

DNS (Deferred Net Settlement) Systems: Settlement systems in which payment instructions are bunched and off-setting positions calculated between participating banks before settlement is done. Netting reduces a large number of individual obligations to a smaller number of obligations based on multilateral net positions of participants. Netting may take several forms, which have varying degrees of legal implications especially in the event of default.

DVP (Delivery Versus Payment): A mechanism in an exchange-for-value settlement system that ensures that the final transfer of one asset occurs if and only if the final transfer of the other asset occurs. DVP is mainly used in reference to securities trading where the transfer of securities ownership is tied to the transfer of respective funds.

A mechanism in an exchange-for-value settlement system that ensures that the final transfer of one asset occurs if and only if the final transfer of the other asset occurs. DVP is mainly used in reference to securities trading where the transfer of securities ownership is tied to the transfer of respective funds.

Dynamic Collateralisation: A system in which automatic lending to a net deficit clearing participant is fully covered automatically by collaterals drawn from a reserve of liquid collaterals usually securities.

system in which automatic lending to a net deficit clearing participant is fully covered automatically by collaterals drawn from a reserve of liquid collaterals usually securities.

Float: The aggregate value of all payment instruments submitted for clearing and settlement through a payment system but not cleared. The float magnitude is a factor of volume of transaction per period (usually a day) value per transaction and the payment cycle or payment lag.

LVTS and/or LVCS (Large Value Transfer/Clearing Systems): Interbank funds transfer/clearing systems through which large value and priority funds transfers/payments are made between participants. They are sometimes referred to as wholesale funds transfer/payment systems.

Interbank funds transfer/clearing systems through which large value and priority funds transfers/payments are made between participants. They are sometimes referred to as wholesale funds transfer/payment systems.

Legal Risk: The risk that a loss in a payment transaction may be incurred because of inadequate non-coverage of a certain element in a payment process or arrangement. It also includes differences in two legal systems covering the same payment arrangement in the case of payment counterparts operating in different countries.

Liquidity Risk: The risk that a counterpart will not settle an obligation for full value when due, but may be able to settle the required obligations at some other time. The risk includes replacement cost risk and adjustment cost risk. The counterpart in this case is still solvent.

Local Clearing: Clearing of instruments originating from and destined to banks or their branches located within the municipality of the same clearing centre.

Loss Sharing Arrangements: Payment System Risks mitigating measures agreed upon by members of a clearing house or a transfer system which involve a bale-out mechanism or allocation of any loss arising when one or more participants fail to fulfil their obligation. They include "Defaulter Pays Mechanisms" which involve the use of the defaulter’s collateral to settle the deficit position, and the "Survivors" Pay Arrangement which means the surviving members assume the loss based on agreed formula.

Market Risk: The risk that a loss in a payment transaction may occur because of fluctuations in interest rates and foreign exchange rates. Market risks are linked to securities trading and trading in futures.

Operational Risk: The risk that a settlement finality may not be achieved due to mal-functioning of a system, mishandling, manipulations etc. Operational risks include systems risks, security risks, technology risk and intellectual risk.

PVP (Payment Versus Payment): A mechanism which ensures that the final transfer of one value is conditional to the final transfer of the correspondent value. PVP is used in foreign exchange or cross currency transactions.

A mechanism which ensures that the final transfer of one value is conditional to the final transfer of the correspondent value. PVP is used in foreign exchange or cross currency transactions.

Payment instrument: A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

Payment System: A payment system consists of a set of instruments banking procedures and interbank funds transfer systems that ensure the circulation of money.

A payment system consists of a set of instruments banking procedures and interbank funds transfer systems that ensure the circulation of money.

Payment instrument: : A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

: A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

RTGS (Real Time Gross Settlement) System: A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

SWIFT (Society for World-wide Interbank Financial Telecommunication): A cooperative organisation that operates a network for the exchange of payment and other financial messages between financial institutions throughout the world. The organisation is owned by banks.

Settlement: : : An act that discharges obligations in respect of funds or securities transfers between two or more parties.

An act that discharges obligations in respect of funds or securities transfers between two or more parties.

Settlement lag: : The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

 

Settlement finality: Settlement that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant.

that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant.

 

Situational Risk: Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Systemic Risk: The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

Time Critical Payments: Payments whose settlement at due date trigger other financial transactions. Non-settlement of time critical payments lead to a non fulfilment of the secondary transactions.

Time sensitive payments: : Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

: Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

Truncation: A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission. A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission.

 

EDITORIAL BOARD

Isaack H. Kilato - Chairman
Cashmir J. Nyoni - Member
Angelita K. Mbatia - Member
Simmon E. Jengo - Member
Bernard J. Dadi - Member
A payment system consists of a set of instruments banking procedures and interbank funds transfer systems that ensure the circulation of money.

A payment system consists of a set of instruments banking procedures and interbank funds transfer systems that ensure the circulation of money.

Payment instrument: : : A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

: A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

RTGS (Real Time Gross Settlement) System: A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

SWIFT (Society for World-wide Interbank Financial Telecommunication): A cooperative organisation that operates a network for the exchange of payment and other financial messages between financial institutions throughout the world. The organisation is owned by banks.

Settlement: : : An act that discharges obligations in respect of funds or securities transfers between two or more parties.

An act that discharges obligations in respect of funds or securities transfers between two or more parties.

Settlement lag: : The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

 

Settlement finality: Settlement that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant.

that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant.

 

Situational Risk: Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Systemic Risk: The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

Time Critical Payments: Payments whose settlement at due date trigger other financial transactions. Non-settlement of time critical payments lead to a non fulfilment of the secondary transactions.

Time sensitive payments: : Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

: Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

Truncation: A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission. A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission.

 

EDITORIAL BOARD

Isaack H. Kilato - Chairman
Cashmir J. Nyoni - Member
Angelita K. Mbatia - Member
Simmon E. Jengo - Member
Bernard J. Dadi - Member
A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

: A device or system or physical unit used to initiate instructions for transfer of value from a payer to a payee in settlement of an obligation, Cash, cheques and cards are common payment instruments.

RTGS (Real Time Gross Settlement) System: A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

A settlement system in which payment instructions are processed one by one in their gross nature (no netting) continuously, that is in real time as they are initiated and received.

SWIFT (Society for World-wide Interbank Financial Telecommunication): A cooperative organisation that operates a network for the exchange of payment and other financial messages between financial institutions throughout the world. The organisation is owned by banks.

Settlement: An act that discharges obligations in respect of funds or securities transfers between two or more parties.

An act that discharges obligations in respect of funds or securities transfers between two or more parties.

Settlement lag: The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

The time-lag between the initiation of a payment instruction and its discharge by the final exchange of a financial asset for payment. It is sometimes referred to as a payment lag.

Settlement finality: Settlement that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant. that is irrevocable and unconditional. In this regard receiver finality refers to a point at which an unconditional obligation arises on the part of the receiving participant.

Situational Risk: Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Also known as circumstantial risk is the risk that settlement may not be achieved due to factors outside payment and settlement systems set up such as natural disasters, political uprising war etc. Situational risk includes country risks.

Systemic Risk: The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

The risk that the failure of one participant in a transfer system or in financial markets to meet its required obligation will cause other participants or financial institutions to be unable to meet their obligations too. The risk refers to a payment and settlement system. It is important to differentiate systemic risk from systematic risk a term used by financial analysts to describe a situation where all share prices may fall leading to a major market setback and losses in investment opportunities. Systemic risk is also different from systems risk a term used by computer programmers to describe the possibility of a failure or malfunctioning of a group of hardware, software and peripherals working together.

Time Critical Payments: Payments whose settlement at due date trigger other financial transactions. Non-settlement of time critical payments lead to a non fulfilment of the secondary transactions.

Time sensitive payments: Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

: Payments whose non-settlement at the due date draws immediate legal and other implications including penalties and other obligations.

Truncation: A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission. A procedure in which the physical movement of paper based payment instruments is curtailed or eliminated, and is replaced in whole or in part by their electronic data contents for further processing and transmission.

EDITORIAL BOARD

Isaack H. Kilato - Chairman
Cashmir J. Nyoni - Member
Angelita K. Mbatia - Member
Simmon E. Jengo - Member
Bernard J. Dadi - Member