Uniting Africa under one payment system slow but steady process – Ogbalu

In July, the Pan-African Payment and Settlement System (PAPSS) marked three years since it was launched on July 7, 2019, in Niamey, Niger. The PAPSS chief executive officer, Mike Ogbalu III talked to Bamuturaki Musinguzi about the achievements, prospects and bottlenecks.

Why was the Pan-African Payment and Settlement System (PAPSS) developed?

The current level of intra-African trade is estimated at about 16 percent. This is very low as compared to other regions, even though there is established high potential for trade within Africa. There are several reasons why intra-African trade is relatively low. The barriers, or challenges to increased intra-African trade include lack of adequate trade information, structural rigidities, historical trading patterns (historical ties with former colonial countries), poor trade facilitation and regulatory issues, poor implementation of regional commitments, poor state of trade related infrastructure (barriers to the movement of goods), and fragmented payment, clearing and settlement infrastructure.

More than 80 percent of intra-African payments go through Europe or the US, resulting in high transfer and compliance costs. The establishment of the African Continental Free Trade Area (AfCFTA) has added to the need and urgency of providing an enabling continental payment and settlement infrastructure that will support the objectives of the AfCFTA.

At a time when cross-border trading is high on the agenda with AfCFTA now a reality, the single continental market makes it necessary for home grown payment gateway to facilitate trade and investment.

PAPSS was adopted in July 2019 in Niamey, Niger, by the African Union heads of state as the payment and settlement system to support the implementation of AfCFTA. It is a financial market infrastructure that has been developed and initiated through a collaborative effort of the AfCFTA Secretariat, Afreximbank and the African Union Commission.

How is PAPSS being implemented across the continent?

The journey started with a pilot phase in the West African Monetary Zone (WAMZ) where central banks of Nigeria, Ghana, Liberia, Guinea, the Gambia, and Sierra Leone successfully performed live transactions between each other. We chose this region because it presented decisive arguments for a pilot exercise, before considering a deployment of the system throughout the continent: six countries with different currencies, speaking English and French and carrying out a substantial volume of cross-border transactions.

With this successful pilot-run, we are now ready to bring any central banks and commercial banks on board. We expect to be in the five regions of Africa before the end of 2023, all central banks signed up by end of 2024 and all commercial banks by end of 2025.

 What has PAPSS achieved since it was launched in July 2019?

The project started in 2016 with various engagements to understand the existing regional payment systems, their pros, and cons and how best to approach the establishment of an Africa-wide payments infrastructure. Engagements took place with regional economic communities including COMESA, East African Community, and SADC, as well as with all major payment systems operators in Africa.

Furthermore, discussions with WAMZ commenced in 2017 and following successful interactions with them, the Central Bank governors of the zone agreed to implement a pilot scheme of the system as a proof of concept.

Subsequently, systems development commenced as well as development of the regulatory framework including the PAPSS Bye-law, Scheme Rules and Membership Agreements and other establishment structures required for instituting the system.

All these ensured we were ready and achieved our first milestone in 2019, when at its 12th Extra Ordinary summit held in the Assembly of the African Union (AU) launched PAPSS and adopted it as a key instrument for the implementation of AfCFTA. This was a great milestone as PAPSS was endorsed as the required payment system in Africa.

Today, we are at the point that all six central banks of WAMZ have been carrying out a pilot live exercise which began in October 2021 and have been successfully concluded. This, hence, paves the way for commercial bank transactions. In the last few months, two more central and more than 300 major commercial banks have joined the PAPSS network.

In parallel, we signed strategic partnerships that broaden our reach such as COMESA Regional Payment and Settlement System (REPSS) and The Buna platform, the first Arab regional payment system that allows the use of Arab currencies as settlement currencies alongside other international currencies. This is addition to partnering with AfricaNenda which whom we work with to build in-country capability for instant payments, preparing countries to be able to connect to PAPSS for cross border payments.

How many African central banks, switches and commercial banks has PAPSS managed to bring on board so far?

As we speak, our network is composed of eight central banks, seven switches and more than 30 commercial banks. More commercial banks will join soon as they are almost finalised the on-boarding and integration process.

How is this system enabling instant payments across African borders in local currencies?

At its core is an instant payment system built to the highest global standards, and then coupled to the systems of central banks. This forms the settlement layer of PAPSS. This is then coupled to the core systems of commercial banks who will be direct participants on the PAPSS network. On top of this, we layer on other banks, fin-techs and payment service providers as indirect participants. All these components together will create an innovation layer that will propel innovative solutions with the capacity to scale across the continent. Altogether, it is designed to ensure instant payments for goods and services between African jurisdictions, payments are initiated and settled in the local currencies of initiators and beneficiaries effectively eliminating the need for third (hard) currencies to consummate trades within our region.

Is PAPSS the solution to the disconnected and fragmented nature of payment and settlement systems that have long impeded intra-African trade?

Payment infrastructures have existed at both national and sub-regional levels for a while. These systems, however, lack interoperability. Fragmented national and regional payment systems cannot stimulate pan-African economic development and intra-African trade at the pace required to significantly increase the percentage of trade amongst African countries. While these national and regional payment systems have made a good start, bringing about significant modernisation within their jurisdictions, it is paramount that we now integrate all of Africa financially to hasten the pace of economic growth in the continent.

PAPSS will be the enabling infrastructure to spur the growth of intra-African trade and commerce, with the active participation of central banks, financial institutions, regional economic communities, private sectors, and other stakeholders.

Is PAPSS well positioned to deliver harmonisation across the continent through its comprehensive legal, regulatory and operational framework?

PAPSS would not interfere in national jurisdictional rules set by central banks, though we agree that standards are important, and a minimum is required to ensure the payments system can run smoothly. PAPSS, the Association of African Central Banks, and the AfCFTA Secretariat will work together to harmonise some standards and rules to facilitate the continent-wide implementation of the project.

How much is Africa saving annually in payment transaction costs through this platform?

Once it begins to operate at scale, PAPSS should save Africa countries an estimated $5b annually in payment transaction costs, while it plays an increasingly significant role in accelerating the continent’s transactions underpinning the operationalisation of AfCFTA.