SWIFT AFRICA REGIONAL CONFERENCE ADDRESS BY DR. PAUL A. ACQUAH GOVERNOR, BANK OF GHANA LA PALM ROYAL BEACH HOTEL, ACCRA MAY 23, 2005 Mr. Chairman, Invited Guests SWIFT Executive Delegates and Exhibitors Ladies and Gentlemen 1. First of all I would like to welcome you all to this conference. We have a distinguished group of participants here and this is a testimony of the importance we attach to this meeting. There are high expectations that we will all leave here with a great deal of satisfaction, and I hope this would include your assessment of the hospitality industry in Ghana. I would entreat you to take some time to enjoy the attractions of the city and, if you have time, around the country.
2. Mr. Chairman, this is a very important international conference and the theme, namely 'Market Infrastructure-your foundation for growth' is most relevant as the central issue on the international development agenda is how Africa can achieve the Millennium Development Goals. I understand that this is the first time a SWIFT African Regional Conference is being held in our sub-region and I wish to congratulate the SWIFT Executive for bringing this conference to West Africa, and specifically to Accra.
3. I am pleased to participate as a speaker. My topic today is “Improving Payment Infrastructure For Faster Economic Growth: The African Challenge”.
4. Mr. Chairman, dynamic and well-functioning economies depend on widely accepted forms of money and payment systems. The history of the growth of payments infrastructure is intertwined with the growth of the banking and securities industry and the markets and institutional underpinnings of the increasingly complex international financial and trading system. Barter, the first medium for the exchange of goods for other goods proved too slow and cumbersome, and so it was replaced by the use of shells in some countries and later, coins and bank notes. Subsequently, as economies grew more complex, financial transactions were effected through the use of cheques and other paper payment instruments.
5. Fundamental changes in payments and settlement systems have taken place over the past decade. The payment systems and infrastructure are being transformed by the application of improvements in telecommunications and information technology and the discovery of the internet.
6. Today, we are in the age of electronic payments where wire transfers, card-based payments( ATMs , Point of Sale systems, debit/credit cards), e-money, and internet payments or e-commerce are widespread and advancing rapidly. Indeed, with such rapid movements toward what might be called a cashless economy, the policy concern is how to achieve a balance between central bank money, i.e. currency notes and commercial bank money in the form of the wide array of payment instruments.
7. This new payment landscape demands a greater focus on risk management to reduce risks faced by market participants to ensure greater safety and the soundness of financial institutions and promote the goal of financial stability. Essential to this is the establishment of robust and resilient market infrastructure for the financial services sector, especially the banking and securities industry, that constitute the foundations for a market economy.
8. The adoption of electronic payments by countries has been found to open up vast opportunities and measurable benefits at the enterprise, organizational and macro level. It has been found to be associated with a significant expansion in the sales volume of goods and services, reduction in barriers to instant credit and liquidity, and the easing of geographic restrictions on trade and exchange. The overall result is an increased productivity that would be widespread throughout the economy, both in the private and government sector.
9. An efficient, robust payments infrastructure can provide a strong platform for growth. Let me illustrate this point with a few practical examples and empirical findings about the power of an electronic payments system.
10. First, the data available indicate an economy which relies predominantly on cash for payment transactions carries a deadweight cost as high as 5% of GDP though this cost is often not very apparent. It is also known that the cost associated with an electronic payment system is in the range of one-half to one-third the cost of a paper-based payment system.
11. The introduction of electronic payments results in significant savings for all stakeholders as transaction costs decline, and overall efficiency of the financial systems and the economy at large increases measurably.
12. The second piece of empirical evidence is provided by studies in several (12) countries including the US, UK, Canada and South Africa which have established that GDP responds positively to the introduction of electronic payments. Among other reasons, this is because consumers apparently tend to increase their spending when they have access to electronic payments instruments such as debit and credit cards, and this strengthens aggregate demand and output.
13. The US and UK Governments which have shifted to electronic payments for expense items such as travel, purchases and maintenance of vehicles have not only reported cost savings of 0.5 to 1% of GDP annually, but have also noted that the use of debit cards improve documentation and transparency for government services.
14. Mr. Chairman, Efficient payment systems enhance savings mobilization and financial intermediation. It is a fact that cash-based transactions in developed countries are significantly lower than in developing countries. Much of the difference in the currency ratio is explained by the gap in sophistication and efficiency of payment systems in developing countries. The introduction of electronic payments enables the public to have access to funds in the banking system twenty four hours a day and this encourages them to keep more money in bank accounts.
15. Mr. Chairman, more generally, a shift to electronic payments improves financial transparency. The informal or “shadow” economy tends to shrink with reduced tax evasion and fraudulent activities. At the same time, Government finances become more transparent and more financial flows in the economy can be tracked. This facilitates monetary management and fiscal control.
16. An important consideration to push for an efficient and transparent payment infrastructure, such as the central securities depository system, is to raise the comfort level of investors, domestic as well as foreign. For example, the successful functioning of the electronic settlement system for equities in India is thought to have had much to with its remarkable ability to mobilize, in recent years, equity investment, internally generated funds, and portfolio capital. Payment infrastructure development should be a necessary component of the private sector-led growth strategy for African countries.
17. Mr. Chairman, electronic payments are possible only when the appropriate infrastructure has been put in place. This is a source of major challenges for African countries. Four major infrastructure components are generally essential to the efficient functioning of the payments and settlements system, namely, telecommunications, acceptance networks, credit bureaux and education.
Telecommunications enable the electronic authorization, clearing and settlement of payment transactions. These are critical irrespective of whether these are high value transactions that are settled gross and in real time or value batch transactions that are settled on deferred basis, often at end of day. In addition, it is also essential that a robust and secure method for data transfer be in place.
The over reliance in the past on costly unreliable landlines has given way to the use of new and more efficient smart card and wireless technologies. These new technologies not only provide opportunities for 'on line' and 'off line' authorization but are more flexible and adaptable for various delivery channels.
18. Mr. Chairman, acceptance networks to a large extent determine the success of an electronic payments system. Users prefer robust and reliable acceptance infrastructure that is available twenty-four hours a day. A variety of terminals are available depending on the target segment. These include Point of Sale (POS) terminals, Automated Teller Machines (ATMs), telephones, internet and bank branches.
19. A credit bureau becomes required infrastructure when an electronic payments system extends credit to buyers. A credit bureau provides information for risk management; it helps to identify creditors and their use of credit facilities granted them in the financial system. This can sharply curtail defaults, processing costs and processing time of 25% or more, and ensure responsible lending.
20. Mr. Chairman, education is vital to change the behavior of market participants. The shift from cash and paper payment instruments to electronic payments will not succeed unless people appreciate the benefit of the change and are willing to adopt the new instruments. Adequate education and publicity is essential to inform and direct users and stakeholders on systems, rights and obligations, risks and opportunities. This is an area that poses great challenges to African countries. It is a difficult process to break the preference for cash, and more so to engineer a switch to electronic payments system on a larger scale.
The African Situation
21. Mr. Chairman, in the area of payments system development, good news is emerging in Africa; as there is on the macroeconomic level, where sub-saharan Africa hit a record eight-year high GDP growth of 5.0 percent in 2004, and inflation fell to the lowest level of 10.0 percent in 25 years. This is mostly the fruit of economic reforms in several countries.
22. Most African countries are in the process of improving and modernizing their payment systems and there are also trends towards harmonization, with active regional groupings seeking to develop and link cross border payment systems. Thus, whereas there was only one country in Sub-Saharan Africa with a Real Time Gross Settlement (RTGS) system in 2000 there are now over fifteen countries with RTGS systems and many more countries are at various stages of deploying RTGS systems. This indicates that as the financial systems of the Africa region are growing increasingly harmonized and integrated into the global system. The supporting payments infrastructure and settlement systems are also being improved to provide the needed platform for financial services and growth.
· Mr. Chairman, let me share with you what we have done and are doing in Ghana. Ghana was the first country in West Africa to install an RTGS system in 2002. Francophone West Africa followed in 2004 while Nigeria's RTGS system will be ready in 2005. The other six West African countries are conducting initial studies. Bank of Ghana also established a Central Securities Depository System in 2004 to cover government debt instruments and equities. · Furthermore, Ghana is taking measures to increase retail electronic payments with the planned introduction of cheque code line clearing with truncation and the establishment of an Automated Clearing House (ACH) for bulk electronic credits and debits. The Bank of Ghana has.supported and encouraged the commercial banks to jointly develop retail payment infrastructure for linked ATMs and POS systems.
· We are launching a Visa networked ATM platform for domestic transactions, which is expected to commence operations this month and all commercial banks will be required to migrate to this platform. There are also plans to network all rural banks in the near future.
23. Mr. Chairman, a quick shift to electronic payments in Africa though desirable can be a daunting task especially if coverage is to be nationwide. There are human resource, physical infrastructure and financial constraints in most counties. The legal systems in many countries are also not yet adapted to support electronic payments.
24. A large number of countries also lack reliable telecommunications and energy to support robust networks. Some countries lack skilled manpower especially telecommunications and electronic engineers. Hiring such experts from the international market is also costly. In other countries high illiteracy is a problem as many people cannot read or follow simple written instructions at electronic terminals. This implies that biometric technology must be acquired at extra cost if the whole population is expected to participate in the systems. The cost of telecommunications remains high in Africa even when it is available and reliable.
25. One major constraint to payment infrastructure development is lack of financial resources. In some countries, investment required in payment systems may not be given priority given the other competing demands on governments. Since Africa cannot afford to be left behind, it is essential that the countries especially in the various sub-regions work together and use economies of scale to obtain better prices from suppliers for both domestic and cross border payment systems. In this respect, the French-speaking countries of West Africa have shown the way. The progress made by the Southern African Development Community (SADEC) through joint action is also worth noting. The West African Monetary Zone has now established a coordinating committee to oversee payment systems development in member countries and between countries.
26. SWIFT and other major infrastructure developers and suppliers can also assist Africa to move forward if equipment cost and recurrent charges are made more affordable. The current methods of calculating recurrent charges where higher volumes attract lower per unit charges are unfavourable for African countries where markets are small and transaction volumes low. I have no doubt that there are other areas where the current standard practices can be adopted to be helpful to African countries, in developing their payment infrastructure and settlement systems.
Mr. Chairman, economic growth depends on several factors including sound policies, good management of resources, good governance and peace especially in Africa. Safe, robust, resilient and efficient payment systems infrastructure enable timely completion of transactions, underpin the stability of the financial system and therefore promote higher levels of economic activity.
The challenge for African countries comes in several forms. The first is to mobilise the necessary investments to put the critical components of the payment infrastructure and settlement systems in place, in the first instance. This has to be done against the constraint of competing demands on the Government, if it is to assume an important role, as may be the case in most African countries.
There is also the challenge to establish prudential safeguards, and secure adequate resources and internal controls to manage the risks inherent in an electronic market infrastructure to protect its integrity and rescue the stability of the financial system. Finally, it is fundamental that policies succeed in maintaining the stable macroeconomic environment that is a critical condition for successful payment infrastructure development and for growth.
Mr. Chairman, I thank you all for your attention and wish you fruitful discussions and gain I wish you an enjoyable stay in Accra.