Central Bank Strives to mordernise Payments System in Lesotho

The Central Bank of Lesotho is in the process of reviewing commonly used payment methods by individuals and businesses with the intention of introducing a modernised payment system..  This process comes in the wake of a realisation that current payment practices are slow, costly and unsafe.

Limitations of Traditional Method of Payment

It has been realised that the current methods of payment have various shortcomings such as inordinate delays, high costs, and the risk of fraud.  The most common instruments that characterise these payment methods are cash, cheques, and to a limited extent electronic payments.

Cash payments are only convenient and easy to use for small, one-on-one or point-of-sale transactions.  Since carrying cash around is risky, most large transactions are paid for by cheques or through electronic mechanisms.  Although paper-based payments or cheques reduce the risk of theft, their major drawback is that they are processed manually particularly in countries that are less technologically advanced.  This makes them labour intensive and thus prone to errors.   As a result, cheque payments tend to increase the time lag between when payment for goods and services is made and the time the supplier actually receives the value for goods or services provided.  This delay is referred to as the settlement period.  At one time, settlement period in Lesotho was as high as 21 days.  In more developed countries same-day settlement is commonplace.  This means that Lesotho has a long way to go in reducing settlement period.

Objectives of Modernising the Payment System

The major focus of the Central Bank is to improve the payment system in Lesotho with particular emphasis to reducing settlement period.  In this new system, it is envisaged that the costs of making payments will also be reduced.  The Bank also intends to meet international standards in terms of providing secure means of making payments.  Some of the distinguishing factors of the traditional method of payment and the proposed modernised system are captioned as below:

In an effort to transform the traditional payment system into the modernised one that will conform to the international standards, the Bank set up the Lesotho National Payment System Modernisation Project, which was launched in 1999.  A project manager was employed as from 1^st August 2000 to work on the project on a full-time basis.  The aim was to review the current payment system, to analyse the current and future payment needs and requirements of all population and the economy, and to review, upgrade and improve systems that are currently in operation.

Lesotho Businesses and Individuals to Benefit from the New System

All players in the economy are set to benefit from the improved system.  For one thing suppliers will get value for their services within two days even if payment is done by cheque.  Secondly, the need to carry large amounts of cash, with the attendant risks of theft will be reduced.  Lesotho businessmen wishing to procure goods from South Africa will no longer have to carry cash with them as cross-border payments will be just as efficient and cost effective as payments in South-Africa.

What has been done so far

In its quest to make headway for the implementation of this new system, the Central Bank has already made a significant progress.  The Clearing System between Banks and branches in Lesotho was reviewed and changes  that reduced the settlement periods from up to 21 days to a maximum of 3 days were implemented.  Secondly, a computerised clearing system was introduced at the Central Bank with the objective of streamlining the procedures and eliminating a number of manual processes.  Lastly, an Agency Agreement and Clearing House Rules between commercial banks in Lesotho were developed and signed on the 25^th October 2000.  The purpose of this agreement is to create uniform rules and regulations within which banks must act, and to set mutually agreed time frame within which certain actions must be finalised, for instance, dishonour of cheques.

The foregoing activities constitute Phase I of the Payment System Modernisation Project.  Efforts are now underway in regard to achieving the objectives of Phase II that will deal with ways of further enhancing the functionality and speed of the domestic payment arrangements, including the use of electronic payments methods.  Phase II is envisaged to concentrate on cross-border settlement arrangements which will be pursued in tandem with SADC Payment System Project.

The stocktaking and situational analysis  was completed in 2003, and it indicated the need for the reform of the payment system. Based on the results, a vision was formulated and was adopted by the Lesotho National Payment System Council . The latter is composed of the Governor, the Chief Executive Officers  of Commercial Banks, Telecommunications and Energy Industries, and the Principal Secretary for the Ministry of Finance and Economic Planning. The vision states that "By 2015, Lesotho will have a widely accessible, secure, reliable and efficient payment and settlement system. the system shall facilitate and support Lesotho's development objectives."

So far a draft strategic framework has been prepared. It has identified ;

- future characteristics of the new payment system

- critical success factors against which the successful implementation of the  reform process would be measured and

- the fundamental principles that will guide the development, deployment and management of the new system.

DEVELOPMENTS IN 2002

ORGANISATIONAL STRUCTURES

In August 2002 the Head of National Payment System Division was engaged to set up the Division and coordinate the activities of the Lesotho National Payment system Modernisation Project, with the assistance of the consultant Project Manager.

The organizational structure of the LNPS Project was strengthened with the set up of Sub-Committees made up of experts relevant to a payment system. These sub-committees are for Audit, Legal, Public Relations, Risk Management, and Information Technology and Infrastructure. These sub-committees were intended to assist the Steering committee in the payment system reform process.

Monthly meetings of the LNPS Steering Committee and Sub-Committees were revived and held throughout the year, to mainly assess progress on the work programme on assigned duties.

WORK PROGRAMME

Towards the end of 2002 a rather ambitious work programme was formulated by the Steering Committee and Sub-Committees, for the year 2003, the highlights and of which were to:

1.     To finalise the stocktaking and situational analysis exercise by March 2003

2.     To develop a vision and strategic framework document by June 2003

3.     To complete the business and technical specifications for the required system by August 2003 and to commence the implementation of strategies to attain the envisaged payment system.

FRAUD AWARENESS SEMINAR

In February 2002, a fraud awareness seminar was held for the local community to sensitise them on fraudulent activities.

DEVELOPMENTS IN 2003

STOCKTAKING AND SITUATIONAL ANALYSIS

Information gathering and stocktaking was a joint effort by all committees of the LNPS project, with the sub-committees assigned specific tasks. The head of National Payment System division was assigned the task of information gathering by way of questionnaires filled in by commercial banks, and the receiving and coordination of reports from different sub-committees. The exercise was finally completed.

 The results of the stock-take indicated the strengths and weaknesses of the current payment system. The main shortcomings observed were the rudimentary nature of the payment system infrastructure, especially in the rural areas, the narrow payment instruments base resulting in the dominance of cash and cheque usage, very limited automation in the payment processes, the limited number of financial intermediation in Lesotho, dominance of paper-based payment instruments and their manual processing, and the absence of a large value transfer system.

VISION STATEMENT

Based on the results of the stocktaking and situational analysis, a vision of the envisaged payment system was adopted which stated as follows: “By 2015, Lesotho will have a widely accessible, secure, reliable and efficient payment and settlement system. The system shall facilitate and support Lesotho’s development objectives”. The vision document outlined the main objectives of the reform process, which included putting in place an appropriate legal and regulatory framework, a technological infrastructure such as the RTGS system for management of settlement and other risks, facilitation of cross-border trade, harmonisation of the Lesotho payment system with international and regional systems, broadening Lesotho’s money and capital markets by way of introducing a payment system for handling large-value and time-critical payment instructions and delivery-versus-payment (DVP) for securities transactions, and drastically reducing the use of cash and ensuring that by 2015 eighty percent Lesotho households would have access to basic payment services within a 10 km radius of their homestead.

WAY FORWARD

Towards the end of the year, it was decided that in order to attain this envisaged payment system, it was necessary to engage consultants who were specialists in the payment system reform; especially in the SADC region to assist the Central Bank and other LNPS project committee members.

Policy issues were agreed beforehand which included the access criteria into the clearinghouse, settlement system and payment instructions transfers; the ownership and operator of the clearinghouse; and the funding of the clearing system and the settlement system.

DEVELOPMENTS IN 2004

Bankserv consultants were engaged to undertake the business analysis, conceptual design and business specifications of the new payment system. This assignment would be carried as joint venture between Bankserv, AST and Perago.

The project scope consisted of the conceptual design, formulation of strategies to align the current system with the one envisaged, breaking down the conceptual design into business specifications, and converting strategies into individual projects.

The project start date was 21 July 2004 and is expected to take 90 days. The methodology followed is by way of workshops and participants are from the commercial, the central bank, the Treasury department, Minim     telecommunications, energy and other stakeholders.