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					                                                        NPS Newsletter

                                                             Issue No. 3
                                                           September 2000


               Message from the Director of National Payment Systems

As impressive strides are being     joint approach in the payment      five days from BOT to the account
taken by the three East African     systems development and            of the payee at the NBC 1997
Countries of Kenya, Uganda          modernisation process.        It   Pugu Road Branch. The two lags
and Tanzania towards regional       therefore involves inter alia      of the same transaction cannot by
integration and the creation of     exchange of information and        any means be governed by the
an “Economic Community”, the        experiences,            sharing
Monetary Affairs Committee of       resources, transfer networks
the East African Central Bank       and     infrastructure,    and             TABLE OF CONTENTS
Governors,     cogniscent      of   working on the basis of            Message from the Director of National
possible trade ties and inter-      common agreed principles,
                                                                       Payment Systems ……………………………1
regional payment transactions       standards, procedures and
resultant from such economic        regulations. The process of
integration,    directed     that   striking agreements in these       The E.A.C Payment Systems Harmonisation
payment systems harmonisation       aspects among countries of         Committee Adopts Common Data Transfer
initiatives within the E.A.         different background and           Standards………………………………………2
Region be embarked on. To           environment could prove
that effect an “East African        traumatic. The question then
Payment                  Systems    comes up as to whether it is       Development of Bulk Electronic Transfer
Harmonisation Committee” was        necessary to have payment          System………………………………………….5
formed in 1998, and met for the     systems harmonised. In other
fist time in May 1998 at the        words why do we need to            The E.A. Monetary Affairs Committee of
“White Sands Hotel” in Dar es       harmonise payment systems,
                                                                       Central Bank Governor Issues a 15 – Point
Salaam and have held several        and with who do we have to
meetings ever since.         The    harmonise.                         Directive ………………………………………6
committee has come up with a
number of areas that require        A simple example may               Calendar of NPS Project Events ………….7
harmonisation in the Regional       illustrate the need.        A
Payment Systems scenario.           payment           transaction
However, it may be useful to        originating from New York in
ponder as to what may be meant      the USA via BOT accounts to
by        Payment        Systems    a payee maintaining an
Harmonisation.                      account with NBC 1997 Pugu         same     principles,    rules     and
                                    Road Branch, takes a               regulations.       They are not
One is tempted to define            maximum of       one minute        harmonised.             As       such
payment system harmonisation        from New York to BOT               responsibilities and roles of players
as the process of developing        accounts via SWIFT, and            differ. Obviously the lag that takes
common understanding and            takes approximately another        longer is prone to greater payment

systems risks, and has less            part   of    the    European         adopting common approaches and
certainty of settlement within a       Economic Integration. Other          developing common understanding
specified time.      Would an          payment               systems        and       common        procedures,
American trader be willing to          harmonisation initiatives are        regulations, principles, standards
expose his/her payment to that         being undertaken in Asia,            and systems. We all stand to gain
risk?                                  Latin America, and nearer            in the process.
                                       home within the SADC
The East African Community             Region.                              The reason as to why we need
Countries      are      obviously                                           harmonised       systems      seems
thinking      of     harmonising       Talking of “home” how do             obvious on the basis of benefits
payment systems in order to            we go about ensuring that            alluded to in the paragraphs above.
facilitate and promote cross-          payment systems of one               It is also obvious that we probably
border trade within the region,        institution in Tanzania say          need to harmonise our payment
to       maximize       economic       M/S Standard Chartered Bank          systems with all systems used by
advantages in the utilisation of       (T) Ltd can interface with           all parties we have payment
resources, and to enhance the          those of M/S National                transactions with.
development       of     financial     Microfinance Bank Ltd, and
markets and financial systems          that clients of the two banks        Considering cross-border payment
in the region. These aspects are       can confortably exchange             transactions, it appears our systems
considered       catalystic     to     value using their banks              need to be harmonised with the
economic         growth       and      without undue fear of                global systems. This calls for
development.         The EAC           exposure to payment systems          adoption        of      International
Countries are not alone in that        risks.                               Standards.
thinking. The harmonisation of
the TARGET based Payment               On home grounds there is                            I.H.Kilato
Systems in the European                therefore an equally pressing               Director National Payment
Community is based on the              need of harmonising the                              Systems
same reasoning as an integral          payment systems in terms of


     The E.A. Payment Systems Harmonisation Committee Adopts Common Data
                               Transfer Standards

The East African Payment               on M/S dbs Financial Systems
Systems          Harmonisation         Clearing Solutions were similar        The       committee       further
Committee met in Nairobi               with      minor     customised         examined          the        File
Kenya from the 27th to the 28th        differences. In anyway they            Authentication System (FAS) in
July 2000 to examine inter-alia        meet their existing business           use by KBA and BOTECH as
Data Transfer Arrangements             requirements and fit their             developed by M/S RACAL for
and Security Standards in use          environments.                          security provision and found the
within the East African Region.                                               system       complying      with
The committee examined the             The committee noted also that          international requirements.
“Kenya Bankers Association             EDIFACT Standards are based
(KBA) Standards, the Bank of           on universal practice for              The committee        resolved    as
Tanzania Electronic Clearing           administration, commerce and           follows:-
House (BOTECH) Standards as            transport, and do not specifically
well as the Electronic Data            relate to payment transaction          i.   SWIFT message format for
Interchange for Administration,        aspects. SWIFT Standards on                 East African Regional
Commerce       and    Transport        the other hand, cater for a wide            Transfers be adopted.
(EDIFACT) Standards, and the           variety of payment transactional       ii. Existing legacy systems and
Society     for      Worldwide         applications.    The committee              those under development in
Interbank             Financial        specifically considered        the          Kenya and Tanzania be
Telecommunication (SWIFT)              application of MT 206 and MT                retained    for    domestic
Standards.     The Committee           256 message formats for Cheque              clearing.
noted that the Kenyan and              Clearing and Electronic Funds          iii. An interface that will be
Tanzanian     Data     Transfer        Transfer (EFT) Systems and                  able to translate existing
Standards as developed based           found them suitable.                        legacy systems into SWIFT

    Message Standards and           e.   SWIFT message formats               arrangements in place that
    vice versa be acquired               can      accommodate     the        cover them fully against
    within 5 years, to provide           existing requirements of the        payment system risks.
    required links between               legacy systems
    SWIFT based systems and         f.   The SWIFT system is            b.   Maintenance Of Clearing
    the legacy systems.                  future proof and caters for         House Agreements
iv. The use of SWIFT formats             the demand of a global              Consistent      with      the
    for domestic transfers               village.                            expected move towards
    should be encouraged, and       g.   The E.A. countries are              autonomous           clearing
    a migration plan should be           considering SWIFT to                houses in East Africa, the
    developed.                           support their Real Time             Committee recommended
v. Any new systems to be                 Gross Settlement (RTGS)             that     clearing      house
    acquired or developed                Systems.                            agreements be kept and
    should be SWIFT-based.                                                   maintained        by      the
    (This does not include          EDIFACT Standards were not               respective           banking
    enhancements of existing        preferred on the basis of the            associations (i.e. Kenya
    systems.)                       following:                               Bankers'         Association
                                                                             (KBA), Uganda Bankers
The Committee’s Resolutions         i.   EDIFACT has no legacy               Association (UBA), and
were mainly based on the                 system application in East          Tanzania            Bankers’
understanding that:                      Africa.                             Association (TBA).
i. Migration of the current         ii. EDIFACT has about 30-35              The agreements are to
     transfer systems to SWIFT           suppliers for a variety of          clearly spell out rules,
     would      be     expensive.        uses.    It is difficult to         regulations,     obligations,
     Kenya has a working                 determine which one to use.         responsibilities, penalties
     system.        Tanzania is     iii. EDIFACT has no existing             and     sanctions      where
     implementing its Electronic         communication network.              applicable.
     Clearing House (ECH) and       iv. EDIFACT has a wide
     has already commissioned            application base and can be    c.   Ownership Of Clearing
     a software house.                   confusing                           Houses
ii. There       will    be     no                                            All clearing houses should
     compromise on existing         In consideration of security             be autonomous by the year
     information.                   systems,       the  committee            2005. In this context, an
iii. They      meet      existing   recommend the use of FAS as              autonomous clearing house
     Business Requirements          provided by RACAL or any                 refers to one that is not run
                                    other system that meets all              or managed by the Central
The strong points for the           requirements provided by FAS             bank.
adoption of SWIFT Standards         for domestic payments, and the
included the facts that:            use    of     SWIFT   Security           The       clearing     house
                                    Standards for cross border               autonomy, however, does
a.   SWIFT message format is        transactions.                            not obviate the Central
     tried and tested.                                                       Banks’ role to ensure that
b.   SWIFT applications are         Other issues considered by the           rules, procedures and
     already in use for both        East African Payment Systems             operations of the clearing
     domestic and international     Harmonisation       Committee            houses do not compromise
     credit transfers in East       were:-                                   or        constrain       the
     Africa.                                                                 accomplishment             of
c.   The SWIFT network exists       a.   Sponsorship      of   Non-          monetary, fiscal and other
     and is secure.                      Clearing Banks                      national           economic
d.   The EA Payment Systems              Clearing     banks     that         objectives. The clearing
     Harmonisation Committee             sponsor non-clearing banks          houses should be run on
     has proposed the use of             (i.e. clear instruments of          private sector principles,
     SWIFT for both domestic             non-clearing banks on               including        professional
     and international transfers.        behalf of those banks)              management, full cost
     Adoption of the SWIFT               should ensure that they             recovery and execution of
     message format is therefore         have adequate information           periodic audits of their
     in line with the EA                 with regard to the risk             activities.
     Payment            Systems          profile of the non-clearing
     Harmonisation stand.                banks being sponsored.         d.   Membership      Of      The
                                         They should have proper             Clearing Houses

      Clearing             House                                             All the three countries
      membership will be open            The       East    African           (Kenya, Tanzania and
      to licensed commercial             Transactions and Reason             Uganda) are expected to
      banks. Admission will be           for Return codes will be            achieve same day high
      subject to fulfilment of           reviewed after one year.            value clearing by January
      transparent criteria set by        Thereafter, they will be            2002,      and      cheque
      the Bankers Associations           reviewed on a bi-annual             truncation by year 2005.
      in consultation with the           basis.
      Central Banks in each                                             i.   Regulation and Procedures
      country.                      g.    Reasons      For     Fines,        Clearing Houses should
                                          Charges And Penalties              develop their own rules,
e.    Withdrawal              Of          The             Committee          regulations and operational
      Membership                          recommended that the               procedures         including
      Any member of a Clearing            reasons for fines, charges         secure locking of their
      House that intends to               and penalties should be            items and use of electronic
      withdraw should give                harmonised.       In this          file         authentication
      notice of not less than 28          connection, and subject to         methods. Such rules and
      days, both to the Clearing          periodic    reviews,    the        procedures should be
      House Administrator and             reasons enshrined in the           consistent     with      the
      the Central Bank of the             KBA Standards should be            countries macroeconomic
      respective country.                 adopted     as    Regional         objectives and should be
                                          Standards.       Individual        predicated      on      self-
      Such notice should clearly          countries may however add          regulatory principles.
      state, the reasons for              more reasons as their
      withdrawal and indicate             specific conditions may            The     Regulations    and
      alternative       clearing          dictate.                           Procedures should comply
      arrangements for items in                                              with the recommendations
      transit.                      h.    Clearing Time and Cycle            outlined above and should
                                          The clearing time and              be harmonised. To that
f.    Transaction And Reason              cycle for clearing regional        effect members of Clearing
      Codes                               items       should       be        Houses within E.A. should
      The      Transaction    and         harmonised following the           form     an     association
      Reason for Return codes             linkage of the Automated           through which they will be
      within the East African             Clearing Houses (ACHS).            exchanging notes and
      countries      should    be                                            experiences.
      harmonised with a view to           However,      at   national
      facilitating the processing         levels, the three Central     The East African Payment
      of payment instruments in           Banks should undertake to     Systems           Harmonisation
      the three East African              achieve the following:-       Committee is aware of the
      countries.                                                        technical     and     operational
                                         Item     Target     target
                                                                        implications of the proposal that
      As Kenya’s Transaction                      cycle      date       the E.A. Data Transfer and
      and Reason for Return          General      3 days     January    Security Standards should be
      codes        are     more      Clearing                2002       based on a tested and
      comprehensive than either      Remote       10 days    January    international accepted standards
                                     Clearing                2002
      Uganda’s or Tanzania’s, it     High value   Same day   January    as SWIFT.          This is in
      was agreed that Kenya’s        Clearing                2002       recognition of the general
      codes be adopted as “The       Cheque                  Within 5   technological trend to turn the
      East African Transactions      Truncation              years      whole world into one global
      and Reasons For Return                                            village.
      Codes”.                             It should be noted that,
      It was however agreed that          both Kenya and Uganda         In view of the above the
      the following instruments           currently comply with the     Committee recommended that
      be included in the list of          target cycle for both         an Association consisting of
      transaction codes:                  General     and    Remote     representatives of East African
                                          Clearing.     Tanzania is     National SWIFT User Groups
     (i)     Government Cheques           expected to meet the 3        be formed to look into among
     (ii)    Banker’s Cheque              days and 10 days general      others:
     (iii)   Banker’s Draft               and remote clearing cycles
     (iv)    Promissory Notes             in January 2002.

   Risk management issues                                                community      within     their
    related to East African          The committee requested that         respective countries, and that
    Regional Data Transfer.          the Central Banks of the three       the said banking communities
   SWIFT message formats            E.A. Countries make it possible      forward their views to the
    and usage                        for these proposals for Data         committee.
   Rules of Operation of East       Transfer Standards to be made
    African Data Transfer.           known     to    the    banking


Introduction                          Systems (BET). Electronic             transmitting           payment
                                      Based Transfer Systems are            instructions from and to BET
Inherent delays in the transfer
                                      systems, which use electronic         processing centers. The front-
of funds is one of the issues
                                      pulses      to      disseminate       end processor will be linked
being addressed by the
                                      information. Information or           to the host computer of the
National Payment System
                                      instructions are transmitted in       Bank of Tanzania, and will
Modernization           Project.
                                      an agreed, standardized file          generate             inter-bank
Delays are the main causes of
                                      formats through magnetic              instructions, and also have an
payment floats. Funds are
                                      media or telecommunication            on-line monitoring capability
expensive and therefore floats
                                      links. This facilitates an            of participating bank accounts
are undesirable. A customer
                                      efficient      communication          with the Bank of Tanzania.
is denied utilization of funds
                                      between             institutions.
for productive purpose, is
                                      Likewise       it      enhances       Disaster recovery strategies,
exposed to losses originating
                                      processing efficiency and             contingency measures, and
from        exchange        rate
                                      accuracy since once data is           procedures, in case of system
differentials,    is     denied
                                      entered into a computer               failures for the BET System
interest earnings and misses
                                      media by the applicant at             need to be developed.
various                business
                                      source, it can be used by the
opportunities and advantages
                                      transferring      or      paying      Types of Transactions
when his funds are tied up in
                                      institution without re-entering
the financial systems as float
                                      or reposting the data. The            The system will process
                                      development of BET follows            credit push transactions.
Weaknesses in the internal
                                      achievements                 and      Credit push systems are
payment system structures are
                                      experiences gained on the             transfer system that place
the main causes of delays in
                                      development and adoption of           funds at the disposal of the
transferring,       processing,
                                      Electronic Data Interchange           beneficiary. The system will
clearing, and settlement of
                                      using diskettes exchanges.            therefore     facilitate    the
funds. While it can take
                                                                            transfer of funds all through
hardly two minutes to effect
                                      BET Architecture                      up to the payee’s account.
international transactions by
                                                                            The system will also facilitate
the Society for Worldwide
                                      The proposed system is a              truncation of paper based
Interbank             Financial
                                      fully automated one with              items and processing pre-
Telecommunication SWIFT,
                                      standardized         messages,        authorized direct debits to
it takes up to 28 days to
                                      record content, format, and           allow receivers to collect
transfer funds internally
                                      interface       based      on         payments      directly   from
depending upon the transfer
                                      internationally standardized          payer’s bank.
system used. This, coupled
                                      protocols such as the United
with high fund transfer
                                      Nations Electronic Data               Considering the current level
charges constitutes a major
                                      Interchange               For         of automation of most
setback to system users and
                                      Administration, Commerce              potential system users in
foreign investors.
                                      and                  Transport        Tanzania, the system is
                                      (UN/EDIFACT) and SWIFT.               expected to accommodate
In an effort to improve fund          To facilitate online linkage,         three methods of input data.
transfer systems in Tanzania.         each      participating bank
The NPS Vision for year               needs to be equipped with at          (i)   Paper based – which
2005 proposes development             least a front-end computer                  will be truncated to
of Bulk Electronic Transfer           capable of receiving and

     facilitate      electronic       The Bulk Electronic Transfer          (i)   Formation       of     a
     processing                       System is a Central System.                 consortium        having
                                      It should therefore be owned                adequate        members
(ii) Magnetic media – either          by the Central Bank, in joint               (banks) who agree to
     diskettes,    tapes  or          partnership      with     the               implement it within the
     compact disks, as an             members.                                    prescribed period.
     off-line option
                                      BOT is expected to incur the          (ii) Improvement             in
(iii) Telecommunication               cost of the host system and                automation of banking
      links – dedicated lines         initially manage the system                operations especially the
      or dial up lines, as an         until when the consortium of               on-line     linking     of
      on-line option.                 member banks is formed to                  branches to          their
                                      run the system. The BOT                    respective head offices.
A customer wishing to                 may recover the capital
transfer funds will issue             investment cost of the host           (iii) Availability of funds as
payment      instructions    to       system through usage charges                and when required for
his/her bank in one of the            based on volumes.                           capital investments in
above mentioned media. The                                                        procurement           of
bank will forward the request         Other members are expected                  computer         systems
to        the          system’s       to      acquire    front-end                (hardware and software)
clearing/switching center at          processors and contribute in                and training.
the BOT. On settlement date,          training programs to be
the center will process the           conducted.                            (iv) Adequate campaigns to
transaction,                and                                                  create public awareness
simultaneously            make        Implementation                             and sensitize the various
arrangements for inter-bank                                                      players.
settlement,    and      forward       Implementation of the project
payment instructions to the           is expected to start within           Trasactions will be Account-
beneficiary’s     account     at      financial year, 2001/2002,            to-Account, or Business-to-
his/her bank.                         and completed        in the           Business which means all
                                      following financial year. Pre-        participants,    users,   and
Financing and Ownership.              requisites for implementation         beneficiaries    must    have
                                      are:-.                                accounts      at   a    bank.


    The East African Monetary Affairs Committee of Central Bank Governors Issues a 15-Points

The East African Monetary            Payment Systems Committee,        Affairs Committee of Central Bank
Affairs Committee (MAC) of           constituting of Central Bank      Governors after examining the
Central Bank Governors at their      officials in charge of National   Report of the East African
meeting of 1998 held in Arusha,      Payment                 System    Payment System Harmonisation
resolved that an East African        Programmes,            Banking    Committee resolved that:-
Payment Systems Committee            Operations and Information
(EAPSC) be established to inter      Technology programmes in          a.   Collateralisation of Central
alia coordinate and harmonise        their respective countries, was        Bank lending to banks be
developments in payments,            formed.                                implemented immediately.
clearing,    and     settlement
operations within the East           Up to June 2000, the EAPSC        b.   Development of data transfer
African Region. The Governors        had met five times, and its            standards      and     security
further instructed that the          taskforce that was formed to           specifications     for     the
coordination and harmonisation       follow up the processes of             Automated Clearing Houses
programs of payment systems          harmonising payment systems            within the Region be on board
should aim at facilitating           issues had met three times             by 30th June 2000.
possible East African Monetary
Union in the near future.            At its most recent meeting in     c.   Development of guidelines for
Subsequently an East African         April 2000 the Monetary                licensing and regulating e-

     money      schemes     and        h.   Minimum Standards for             limits for the value of debit
     products be embarked on                Clearing and Settlement           instruments     should     be
     by 30th September 2000.                operations should be              programmed to take place
                                            defined and set by 31st           within the coming 5 years.
d.   The work on modalities to              December 2000.
     facilitate clearing of Cross-                                       n.   The Autonomy of Clearing
     border instruments should         i.   A         comprehensive           Houses within the Region
     start by 30th September                checklist for Payment             should be enforced within the
     2000.                                  System Audits should be           coming five years.
                                            developed    by     31st
e.   East African SWIFT User                December 2000.               o.   An East African ATM
     Group should be formed by                                                Network and ACH linkage
     30th September 2000.              j.   Same day High Value               should be established within
                                            Clearing   should  be             the coming five years.
f.   An       adequate      Legal           introduced   by   31st
     Framework incorporating                December 2000.               Other decisions of the Monetary
     all possible amendments to                                          Affairs Committee of the Central
     existing       pieces     of      k.   Promotion of the Use of      Bank Governors included that
     legislation, and an enabling           SWIFT for domestic           banks should be encouraged to
     umbrella legislation should            transfers  should    be      develop       risk    management
     be in draft forms by 30th              embarked on by 31st          measures, and that all payment
     October 2000.                          March 2001                   instruments        should     be
g.   Harmonisation          of         l.   Implementation        of
     definitions of Payment                 Automatic       Clearing
     Systems concepts and                   Houses Should start by
     terms should start by 30th             30th June 2001.
     October 2000.
                                       m. Introduction     of   upper

                                       Calendar of NPS Project Events
                                            By NPS Project Team

1998, January. The first draft         1998, March. NPS Unit             system for East African Central
on situational       stocktaking       started to develop an EDI         Banks.
report was released.                   system      to       facilitate
                                       interchange of data between       1998,      May.      NPS      Unit
1998, March. As a result of            banks using diskettes.            demonstrated to members of the
recommendations       in   the                                           bankers clearing houses on how
Situational Stocktaking report,        1998, April.      Terms of        disk exchange system could be
a decision was reached by BOT          References for consultants to     used at interbank clearinghouses.
management that work on the            work on the second phase of
possibilities of introducing           NPS were completed and            1998, July. Effective 1st July, NPS
smart cards as a non-cash              sent to the World Bank for        Unit was upgraded to become a
substitute instrument should           comments and approval.            fully-fledged NPS directorate.
commence.                                                                Mr. Isaack H. Kilato was
                                       1998, April. MICR tender          appointed to be the first NPS
1998, March.         NPS Unit          evaluation was done. All          Director.
produced SADC Green Book –             suppliers were disqualified
Tanzania Chapter. The book             for lack of competency.           1998, July. On 28th July, Tanzania
was discussed and accepted by                                            Institute of Bankers (TIOB)
a Committee of Governors, It           1998, May. On 20th May,           organised a seminar on payment
was then sent to Bank for              NPS Unit, on behalf of the        systems, in which all resource
International Settlements to be        BOT, organised the first          persons were from the NPS
published.                             workshop    on    payment         directorate.

1998, August. On 21st August,      1999, February. On 19th         included automation of clearing
the NPS Directorate and some       February, the Directorate       houses, formulation of legal
of the stakeholders discussed      convened the first grand        framework,     development   of
and issued the first draft of      meeting    of    all   NAC      cheque standards ..etc.
Vision,      Strategies     and    committees. The meeting set
Conceptual Overview of the         resolutions on the way          1999, July.     Electronic Disk
Tanzania Payment System. The       forward and activities to be    Exchange technology for Clearing
draft was later presented to the   completed for the coming six    House Operations was officially
NAC meeting on 28th August.        months, that is Jan – June      launched.
1998, September. On 2nd                                            1999, July. A meeting of East
September, the Bank of             1999, March. Between 15th       African      Monetary      Affairs
Uganda held a workshop on          – 16th NPS Stakeholder’s met    Committee (MAC) was held in
harmonisation of payment           in Mwanza to discuss the        DSM from 8th to 9th July 1999.
systems cheque standards in        Tanzania NPS, vision and        The meeting recommended that
Entebbe. Some members of           strategy framework.             the East African National Payment
NPS directorate represented the                                    Ssystem      Committee      should
Bank.                              1999, May. Editorial Team       assume responsibility for all NPS
                                   for NPS Vision and Strategic    circuit especially ATMs and
1998, September. On 24th           Framework document was          Credit Cards.
September, the East African        formed. It consisted of Mr.
Central      Banks      cheque     Isaack H. Kilato, Mr.           1999, August.           The NPS
standards technical team met in    Cashmir J. Nyoni, Mr.           Directorate did three important
the Central Bank of Kenya and      Edward D. Makwaia, Mr.          presentations    to    the   BOT
agreed on the East Africa          Leonard     Kisarika,    Mr.    Management as milestones to the
cheque standards.                  Bernard Dadi, Mr. Seronga       project.       The presentations
                                   Wangwe all from the Bank        covered:       NPS Vision and
1998, October. The directorate     of Tanzania, and Mr. Robert     Strategy Document (as a First
issued the second draft            Mathu from the Dar es           version),           Implementation
documents on NPS Vision,           Salaam Stock Exchange           Guidelines for Auditable Payment
Strategies and Conceptual          (DSE). Mrs Ashura Seif          Card Schemes in Tanzania
overview. The document and a       carried       administrative    (Version 1) and Areas for
questionnaire regarding the        arrangements for the Team.      Harmonisation of NPS activities
proposed vision strategies and                                     in East Africa (which also covered
systems were circulated to NPS     1999, June.        Bank for     agreed Standards for Document
stakeholders for comments.         International      Settlement   Processing       using      MICR
                                   (BIS) published and issued      technology). The three documents
1998, November. Between 2nd        first version of the SADC       were      forwarded     to    NPS
and     6th  November,     the     Green Book. The Tanzania        Stakeholders for adoption.
Directorate conducted training     Chapter is included.
on use of EDI to all IT staffs                                     1999, August.         A Payment
from members of the bankers        1999,     June.        NPS      Systems Management course was
clearing houses.                   Newsletter, Issue No.2 was      held in Pretoria South Africa from
                                   published. The main theme       16th to 20th August 1999.
1999, January. The directorate     was on the Payment and
issued the first NPS Newsletter.   Settlement Systems Risks:       1999; October. COMESA Smart
The     newsletter    aims    at   The Tanzanian Case.             Card Project Oversight Group
providing      quick    reading,                                   Meeting was held at the
informative briefs on pertinent    1999, July.      Mr. Abbas      Resident’s Lounge Nairobi Hilton
issues on payment systems to       Berya joined the NPS Project    Hotel-Kenya from 14th to 15th
stakeholders and the general       Team as Deputy Director         October 1999.
public.                            National Payment Systems
                                                                   1999, October.    East African
1999, January.     Mr. Mike        1999, July. The Bank of         Payment Systems Harmonisation
Robotham joined the NPS            Tanzania hosted the East        Task Force Meeting was held at
Project Team on Secondment         African     Central    Bank     Lake Victoria Windsor Hotel,
basis from the IMF as the NPS      Workshop in Arusha on           Entebe Uganda from 22nd to 23rd
Advisor.                           National Payment System         October 1999.
                                   Harmonisation.        Areas
                                   identified for harmonisation

1999, November.            Risk     made in developing the           development of strategies African
Regulation Forum, met at            individual country’s NPS         banks should adopt in order to
Hilton London Metropole             Vision     and     Strategic     modernise quickly and harmonise
Hotel from 15th to 17th             framework and the adoption       their Payment Systems.
November 1999.           Issues     of Core Principles for
discussed include review of the     Systematically    Important      2000,     May      SADC       NPS
Basel Committee’s proposal on       Payment      Systems,     at     Harmonisation Workshop was
a new capital adequacy              National    and    Regional      held in Pretoria South Africa from
framework.                          Levels.                          8th to 10th May 2000.          The
                                                                     Seminar dwelt on identifying
1999, December. COMESA              2000, March. East African        areas of development within the
Smart Card Project Oversight        NPS Harmonisation meeting        payment system which are
Group Meeting was held at the       was held at the Fisherman’s      common or which should be
Resident’s Lounge Nairobi           Resort in Zanzibar from 29th     developed according to common
Hilton Hotel-Kenya from 9th to      to 30th March 2000. During       principles or standards within the
10th December 1999. Main            the meeting, the Task Force      region.
issues discussed included the       Report      on      identified
COMESA-Mondex Smart Card            Minimum Common Features          2000, May. International Seminar
Project.                            for     harmonisation     was    on Cash less Payments in
                                    discussed    and     adopted.    Germany and in the Euro System
1999, December. East African        Proposals were forwarded to      was conducted at Deutsche
Payment                System       the East African Monetary        Bundesbank – Frankfurt Germany
Harmonisation Task force            Affairs Committee meeting        from 14th to 19th May 2000. The
Meeting held at the Kenya           held in Arusha in April 2000.    Seminar which was attended by
School of Monetary Studies –                                         representatives from 30 Central
Nairobi Kenya from 15th to 17th     2000, April.       The East      Banks from developing countries
December 1999.                      African Monetary Affairs         basically dwelt on the Germany
                                    Committee meeting held was       and Euro systems and provided
2000, January. TBA adopted          in Arusha Tanzania on 10th       the     participants     with  an
the Paper Instrument Standards      April 2000 The Committee         opportunity to discuss and relate
which include cheque design,        deliberated and adopted a        what they have learnt with the
layout,     MICR      Codeline      phased approach in the East      situation in their countries.
specifications and document         African NPS harmonisation
processing arrangement.             initiatives. An activity plan    2000, May . The NPS Core
                                    was drawn to that effect.        Group met with all NPS
2000, January. TBA adopted                                           Committee       Chairmen       and
the Year 2005 NPS Vision and        2000, May. The Request for       Secretaries.     Issues discussed
Strategic        Framework          Proposal and Tendering in        during the meeting were based on
document.                           respect of establishment of      progress     report     from    the
                                    Electronic Clearing House        committees,         and      future
2000, February. Research for        for Tanzania, and MICR           committee’s           performance,
establishing Zonal Clearing         equipment for BOT, were          improvement measures including
Centers was carried out to          finalized.                       review of the composition of its
enhance NPS Project outreach,                                        members.
which is aimed at providing the     2000, May.        COMESA
basis for facilitating the          Seminar on the Development       2000, June. Ms dbs Financial
implementation      of    NPS       of Payment Systems in            Systems Ltd of UK was selected
modernisation programme.            Eastern and Southern Africa      to    provide     the   necessary
                                    was held in Kigali Rwanda        Electronic Clearing House System
2000, February.        SADC         from 3rd to 5th May 2000.        for Tanzania’s Clearing Centres
Country        Representative       The Seminar sought to help       in Dar es Salaam, Arusha and
Meeting was held in Windhoek        banks to identify ways of        Mwanza.
Namibia from 17th to 18th           maintaining an integral and
February 2000.         Issues       active role in payment
discussed included progress         systems and in particular the


                            GLOSSARY OF ABBREVIATIONS AND TERMS

CSD       (Central     Securities    be transmitted for the purpose     Float: The aggregate value of all
Depository) System:            A     of effecting credit based          payment instruments submitted
securities trading system for        payments.                          for clearing and settlement
holding securities in a book                                            through a payment system but not
entry    from and         enables    Cross Currency Settlement          cleared. The float magnitude is a
securities transactions to be        Risk:      Also known as           factor of volume of transaction per
processed and transferred in a       Harsttat Risk is the risk that a   period (usually a day) value per
dematerialised and immobilized       transaction        with        a   transaction and the payment cycle
manner.      The system may          correspondent bank may not         or payment lag.
incorporate          safekeeping     materialize due to insponcity
comparison,      clearing    and     of transactions caused by          LVTS and/or LVCS (Large Value
settlement functions.                time zones differences and         Transfer/Clearing        Systems):
                                     currency differences.              Interbank funds transfer/clearing
Clearing:      Clearing is the                                          systems through which large value
process      of      transmitting,   DNS        (Deferred       Net     and          priority         funds
reconciling and confirming           Settlement)            Systems     transfers/payments     are    made
payment orders or security           Settlement systems in which        between participants. They are
transfer instructions prior to       payment instructions are           sometimes      referred    to    as
settlement.       Clearing may       bunched and off-setting            wholesale funds transfer/payment
include netting of instructions      positions calculated between       systems.
and the establishment of final       participating banks before
positions for settlement.            settlement is done. Netting        Legal Risk: The risk that a loss in
                                     reduces a large number of          a payment transaction may be
                                     individual obligations to a        incurred because of inadequate
Clearing House: A central            smaller       number        of     non-coverage of a certain element
location or central processing
                                     obligations       based     on     in a payment process or
mechanism through which
                                     multilateral net positions of      arrangement.      It also includes
financial institutions agree to
                                     participants.    Netting may       differences in two legal systems
exchange payment instructions
                                     take several forms, which          covering the same payment
or other financial obligations.      have varying degrees of legal      arrangement in the case of
The institutions settle for items    implications especially in the     payment counterparts operating in
exchanged at a designated time
                                     event of default.                  different countries.
based on rules and procedures
of the clearing house.
                                     DVP       (Delivery     Versus     Liquidity Risk: The risk that a
                                     Payment): A mechanism in           counterpart will not settle an
Credit     based      Payments:      an         exchange-for-value      obligation for full value when due,
Payments made by placing             settlement      system     that    but may be able to settle the
funds at the disposal of the         ensures that the final transfer    required obligations at some other
beneficiary.     The payment         of one asset occurs if and         time.       The risk includes
instructions and the funds           only if the final transfer of      replacement      cost    risk   and
described therein move together      the other asset occurs. DVP        adjustment cost risk.          The
from the bank of the payer to        is mainly used in reference to     counterpart in this case is still
the bank of the beneficiary.         securities trading where the       solvent.
                                     transfer      of     securities
                                     ownership is tied to the           Local Clearing:        Clearing of
Credit risk: The risk that a         transfer of respective funds.      instruments originating from and
counterpart will not settle an                                          destined to banks or their branches
obligation for full value either     Dynamic Collateralisation:         located within the municipality of
when due or at any time              A system in which automatic        the same clearing centre.
thereafter. It includes principal    lending to a net deficit
risk, cost risk. The counterpart     clearing participant is fully      Loss Sharing Arrangements:
may be insolvent.                    covered automatically by           Payment System Risks mitigating
                                     collaterals drawn from a           measures     agreed   upon    by
Credit Transfer System (Giro         reserve of liquid collaterals      members of a clearing house or a
System): A system through            usually securities.                transfer system which involve a
which payment instructions and                                          bale-out mechanism or allocation
the funds described therein may                                         of any loss arising when one or

more participants fail to fulfil     a payee in settlement of an        Situational risk includes country
their obligation. They include       obligation,   Cash, cheques        risks.
“Defaulter Pays Mechanisms”          and cards are common
which involve the use of the         payment instruments.               Systemic Risk: The risk that the
defaulter’s collateral to settle                                        failure of one participant in a
the deficit position, and the        RTGS (Real Time Gross              transfer system or in financial
“Survivors” Pay Arrangement          Settlement) System:          A     markets to meet its required
which means the surviving            settlement system in which         obligation will cause other
members assume the loss based        payment instructions are           participants       or     financial
on agreed formula.                   processed one by one in their      institutions to be unable to meet
                                     gross nature (no netting)          their obligations too. The risk
Market Risk: The risk that a         continuously, that is in real      refers to a payment and settlement
loss in a payment transaction        time as they are initiated and     system.       It is important to
may      occur     because     of    received.                          differentiate systemic risk from
fluctuations in interest rates                                          systematic risk a term used by
and foreign exchange rates.          SWIFT (Society for World-          financial analysts to describe a
Market risks are linked to           wide Interbank Financial           situation where all share prices
securities trading and trading in    Telecommunication):         A      may fall leading to a major market
futures.                             cooperative organisation that      setback and losses in investment
                                     operates a network for the         opportunities. Systemic risk is
Operational Risk: The risk           exchange of payment and            also different from systems risk a
that a settlement finality may       other financial messages           term      used     by    computer
not be achieved due to mal-          between financial institutions     programmers to describe the
functioning of a system,             throughout the world. The          possibility of a failure or
mishandling,     manipulations       organisation is owned by           malfunctioning of a group of
etc. Operational risks include       banks.                             hardware, software and peripherals
systems risks, security risks,                                          working together.
technology risk and intellectual
risk.                                Settlement:    An act that         Time       Critical    Payments:
                                     discharges obligations in          Payments whose settlement at due
PVP       (Payment        Versus     respect of funds or securities     date trigger other financial
Payment):       A mechanism          transfers between two or           transactions. Non-settlement of
which ensures that the final         more parties.                      time critical payments lead to a
transfer of one value is                                                non fulfilment of the secondary
conditional to the final transfer    Settlement lag: The time-lag       transactions.
of the correspondent value.          between the initiation of a
PVP is used in foreign               payment instruction and its        Time       sensitive     payments:
exchange or cross currency           discharge by the final             Payments whose non-settlement at
transactions.                        exchange of a financial asset      the due date draws immediate legal
                                     for payment. It is sometimes       and other implications including
Payment instrument:             A    referred to as a payment lag.      penalties and other obligations.
device or system or physical
unit used to initiate instructions   Settlement             finality:   Truncation:      A procedure in
for transfer of value from a         Settlement that is irrevocable     which the physical movement of
payer to a payee in settlement       and unconditional. In this         paper based payment instruments
of an obligation,           Cash,    regard receiver finality refers    is curtailed or eliminated, and is
cheques and cards are common         to a point at which an             replaced in whole or in part by
payment instruments.                 unconditional       obligation     their electronic data contents for
                                     arises on the part of the          further       processing       and
Payment System: A payment            receiving participant.             transmission.
system consists of a set of
instruments banking procedures       Situational Risk: Also known
and interbank funds transfer         as circumstantial risk is the
systems that       ensure  the       risk that settlement may not
circulation of money.                be achieved due to factors
                                     outside      payment      and
Payment instrument: A device         settlement systems set up
or system or physical unit used      such as natural disasters,
to initiate instructions for         political uprising war etc.
transfer of value from a payer to                                                EDITORIAL BOARD

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


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