New Africa pay platform just what doctor ordered

A new payments platform by the Africa Export-Import bank (Afreximbank), the continent’s trade finance institution, is now tipped to cut the time it takes to conclude cross-border payments from upto 14 days to 120 seconds.

Normally Intra-regional payments take between two to 14 days to complete.

Under the new system, a Kenyan trader will be able to issue a payment instruction in his or her local currency to their bank or payment service provider. 

The payment instruction is then sent to the new payment system, which is then expected to carry out all necessary validation checks.

The order is then forwarded to the beneficiary’s bank or payment service provider with the receiver’s bank clearing the funds in their local currency.

This will enable Kenyan traders to reduce costs and ease intra African trade, backers of the new system say.

Called the Pan-African Payment and Settlement System, or PAPSS, the system has been commercially rolled out after a yearlong pilot in six West African countries under the West Africa Monetary Zone (WAMZ).

It now plans to bring in other central banks in East Africa including Kenya to ease trade around the continent following launch of the African Continent Free Trade Area (AfCFTA).

"The PAPSS pilot in WAMZ central banks has been completed and all six central banks have tested and gone through the trial operations. In the last week of August 2021, all the central banks became live on the system and have since been sending through live transactions across the WAMZ region," PAPSS chief executive Mike Ogbalu said in a statement.

Instant payment

"We are in talks with central banks in East Africa including Kenya so that they join and help boost seamless trade in the continent."  The new system will enable instant payment whereby traders in Kenya and other regional countries will no longer need to convert local units into hard currencies.

"Why should we require hard currencies for trade between Kenya and Uganda or between Senegal and Guinea? Why should a trader in Malawi worry about receiving payments for goods shipped to Kenya? Why can’t we operate as if every African currency is convertible within Africa?" poses Afrexim president Benedict Oramah.

"And why should intra-African payments be routed via third countries outside the continent? Why should we pay $5 billion (Sh565 billion) annually, more than the nominal GDP of more than 25 African countries, in clearing charges to non-African banks for Africa-to-Africa transactions," he says.

There are 42 national currencies on the continent. Access to hard currencies required to transact across borders is very limited with current payment arrangements estimated to cost the continent about $5 billion annually.

"Beyond making payments more efficient, the Pan-African Payment and Settlement System will begin to strengthen African currencies and enhance their regional convertibility.  PAPSS will also serve as an added tool for monetary policy management for most African countries," says Dr Oramah.

"This is why, at the outset, Afreximbank plans to back the system with a $3 billion (Sh339 billion) overdraft facility to African central banks and other direct participants. This facility will provide resources to the central banks for settlements and clearing while bringing stability and predictability to external payment flows and current account management," he said.

Experts say one of the problems, which has hindered intra-African trade for a long time has been the reliance on third currencies- US dollars, Euros and the British Pound for the clearing and settlement of cross-border payments and transactions which in turn leads to high costs and long transaction times. 

The situation, analysts say, has persisted due to the weak and volatile nature of legal tenders in Africa.
Before the PAPSS, a buyer in Kenya who intends to purchase goods from a seller in Botswana would be required to pay the seller in a third currency from outside the continent- either US dollar, the Euros or the British Pound, pay the extra charges to have the agreed sum processed and sent to the seller and have to wait several days for transactions to clear.  

This is because, as a hedge for stability, businesses use foreign currencies to settle transactions, which tends to increase transaction time.

Aside from time constraints, the process of currency conversation adds to the cost of doing business. The PAPSS serves as the clearing, processing and settlement agent in the transaction.

Intra-African trade

It works through a process whereby a trader or business issues a payment instruction to their local bank or payment service provider, then the bank or the payment service provider sends the instructions to PAPSS.

After which, PAPSS validates the payment instruction and upon successful validation, it will forward the instruction to the beneficiary’s bank or payment service provider. 

The beneficiary bank or payment service provider will then pay the transferred funds, in local currency, to the beneficiary.  Development of a pan-African payment infrastructure has been made possible by some of the continent’s leading institutions.

The platform has been developed by Afreximbank, who also acts as the main settlement agent in partnership with participating African central banks.

Implementation of the infrastructure is taking place in collaboration with the AfCFTA secretariat with the endorsement of the African Union (AU).

It is one of the five additional instruments that will support the operationalisation of the African Continental Free Trade Area (AfCFTA).

According to Oramah, PAPSS has been designed to domesticate intra-regional payments thereby saving the continent more than $5 billion in payment transaction costs per year.

It is also expected to formalise a significant proportion of the estimated $50 billion of informal intra-African trade, and above all, contribute in boosting intra-African trade.

The bank has approved $3 billion for PAPSS to be implemented across the continent, but that will be after other national and regional central banks get on board.

Trade transactions

According to Wamkele Mene secretary general of AfCFTA the new system is crucial for promotion of intra-African trade.

"With the implementation of the AfCFTA, we shall see an increase in trade transactions in Africa. This will in turn create greater demand for cost-effective payments services, underpinning the important nexus between PAPSS and implementation of the AfCFTA," says Mr Mene.

The launch of the new system comes at a time performance of the East African Payment System (EAPS), which was launched in May 2014, has been hampered by reluctance of member countries to trade in each other’s currency, leaving Kenya to control over 98 per cent of the deals through the system.

EAC central banks have been exploring ways of transforming the system by linking it with other payment solutions in Africa to enable seamless transfer of cash across the continent at both retail and wholesale levels.

Effecting of EAPS was largely meant to enhance regional currency convertibility.

The agreement to make all regional currencies tradeable was also signed in 2014 by the EAC member states with a view to promoting intra-regional trade and as part of the preparation for a monetary union by the year 2024.

It is argued that reluctance by EAC member countries to transact in regional currencies is likely to dampen the regional central banks’ hopes of operationalising a system of tradable currencies ahead of a single currency regime in 2024.

It is also argued that regional currencies including the South Sudanese pound exhibit varying characteristics which are making it difficult to promote a freely convertible regional currency regime.

Other obstacles include increased strength of the Kenyan shilling in comparison with its regional peers, existence of parallel exchange rate markets in Uganda and South Sudan, difficulties inherent in repatriating Tanzanian and South Sudanese currencies and the hurdles in promoting acceptability of regional currencies.

Kenya’s central bank is working in partnership with other regional central banks to facilitate the acceptance of the EAC domestic currencies as a way of enhancing regional trade and lowering transaction costs.

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