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Economywatch: A sigh of relief

Jul 18, 2012, 1:52 PM | Article By: Osman Kargbo

Individuals and corporate bodies in The Gambia will experience a new wave of change in financial transactions after August 1, when the Central Bank Manual Clearing House will give way to the electronic.

The Central Bank of The Gambia (CBG) few days ago announced that the Central Bank Manual Clearing House will cease to operate with effect from August 1, 2012, following the successful launch of the three payment systems, namely the Automated Cheque Processing/Automated Cheque Clearing (ACP/ACH), Real-Time Gross Settlement System (RTGS) and the imminent launching of the Security Settlement System (SSS), in line with the modernization of the country’s payments, clearing and settlement system infrastructure.

These payments systems – the ACP/ACH, the RTGS and the SSS –  are a set of instruments, procedures and rules for the transfer of funds among system participants (i.e. bank to bank, which actually comes from cheques received from bank clients and customers).

These payments systems make it possible and easier for a central bank electronic clearing house to be operational, instead of a manual clearing house as has been the case in The Gambia over the years.

A clearing house is any institution that settles mutual indebtedness between a number of organizations. The UK banks, through the Association of Payment Clearing Services, have: Bankers Automated Clearing System (BACS), which provides interbank clearing; Clearing House Automated Payments System (CHAPS), which now provides instant clearing for electronic transfers through the Real Time Gross Settlement System (RTGS), and EFTPOS for electronic funds transfer at point of sale.

There are similar institutions in other countries, e.g. the Clearing House Interbank Payment System (CHIPS) in New York.

There is also a global system for settling payments that flow through the foreign exchange markets, i.e. CLS services set up by the large banks.

There are similar arrangements on the commodity exchanges (London Clearing House), the stock exchanges (CREST), the futures markets and for payments in the Euromarkets.

By the recent announcement from the CBG, it means the public, through the commercial banks, will soon start to enjoy an efficient payments system which reduces the time taken to clear inter-bank transactions and eliminates or significantly minimizes settlement risk associated with payments in the banking system.

There are several reasons why introducing such a modernised payments, clearing and settlement system infrastructure for The Gambia is vital.

These include the fact that The Gambia is a cash-based economy, with payments of large transactions requiring heavy movement of cash with its attendant risks; the continued dependence on cash payments also results in delays in cheque processing and inefficiency; the cost of printing currency is quite high, thus an increase in the use of plastic cards will help reduce the wear and tear of currency; and the manual cheque  clearing system the Central Bank currently operates - where commercial banks meet to physically exchange cheques and net balances settled through their current accounts with the Central Bank - is time consuming, and less efficient in detecting cheque frauds.

Furthermore, the system when fully functional will, among other sound objectives, help the Central Bank to eliminate or minimize risks associated with payments, clearing and settlement system; eliminate float size of individual consumers and banks as well as significantly reduce  the float time for cheques with the possibility of reducing cheque clearance time from five days  to one day in addition to combating fraud and forgery; and pave way for reducing high cash intensity and gradual migration to help usage of electronic modes of payments. 

Another thing that needs to be taken into consideration is that the ACP/ACH only processes Magnetic Ink Character Recognition (MICR) coded cheques for clearing electronically, a “system available on every banking business day” between the hours of 8:00 am to 1:30pm.

“This means that all cheques that are printed without the MICR codeline will not be cleared as the Banjul Manual Clearing House will cease to operate,” a recent release by the CBG stated, adding that the automated electronic payment and clearing system (ACP/ACH) for cheques and direct credit remittances creates an efficient payment and clearing system for fund transfer.

The release added: “All the banks licensed by the Central Bank of The Gambia are mandatory participants of the systems and are Members of the Clearing House. The banks were directed to issue MICR-compliant cheques to their customers prior to the launch of the systems in December 2011.”

It stated further: “The general public is being informed that cheques bearing values above the D100,000 (One Hundred Thousand Dalasi) Maximum threshold for the ACP/ACH cannot be presented for inter-bank clearing through the Automated Clearing House irrespective of whether or not such cheques are MICR compliant. This requirement has no effect on cheques presented over the counter by the drawee at the drawer bank for cash payment.

“Payments with values exceeding D100, 000 should be made through the Real-Time Gross Settlement System which is accessible by every participant bank.”

It is however hoped that this sophisticated system will not pose too much of a problem for the banking public as all current account holders must possess books of MICR compliant cheques by the time the manual clearing house system will actually give way to the electronic.

The aspects of cheque handling/processing and cut mark for cheque bearing values also need to be carefully tackled.