DJIBOUTI: Upgrading the Financial Sector Infrastructure
The NPS in Djibouti is at a very rudimentary stage of development. It is dominated by cash and physical exchanges of paper instruments, and lacks the basic infrastructure to support the development of the financial sector and financial inclusion. The only interbank system in Djibouti is the manual check clearinghouse operated by the Central Bank of Djibouti (CBD).*1 The lack of efficient payment products is problematic for companies (large and small), merchants, government agencies, and customers. It impedes efforts to modernize the financial sector and limits access by the population to noncash payment instruments. It also creates systemic risk and could affect the financial stability of the country. Thus, the legal and institutional framework for payment systems needed to be strengthened. The lack of a specific law providing a strong legal basis for payments and settlements in Djibouti has resulted in a lack of legal certainty about transactions. The CBD did not have the formal authority to oversee payments and to catalyze their modernization.
Djibouti currently has no credit information agency, and risk management by Djibouti banks is conducted manually, making it very slow and expensive for both consumers and lenders. Replies to loan applications can require weeks for review and decision making, with the average time for processing an SME consumer loan being five days.
The system for data collection related to risks is based on banks loading information into an Excel file and generating preformatted PDF files. Although no longer manual, the system still suffers from serious shortcomings. The adoption of a credit reporting system would contribute to a considerable reduction in these delays and the establishment of improved risk management practices.
The CBD turned to the World Bank and FIRST for a TA project for modernizing the country’s financial infrastructure (covering 2013–2015). Specifically, the project supported the development of an NPS strategy, which laid out the key building blocks for
payments systems modernization based on international best practices, identified technical specifications for an automated payment system, and provided TA in the drafting of an NPS law. The project also supported the development of a draft law and national strategy for a credit reporting system, including a detailed action plan and a survey of data providers.
Both the NPS law and the credit reporting system law were adopted by the Parliament in June 2016, providing a solid legal foundation for the modernization of the financial infrastructure. The governor of the CBD has expressed the commitment of the bank to implementing an automated payment system based on the recommendations of the NPS strategy. The FIRST project is helping to catalyze a new World Bank loan operation that will finance the purchase and implementation of the software and hardware needed for an automated transfer system (ATS).*2 The ATS will combine the functionality of an RTGS system, for large-value and time-critical payments, and an automated clearinghouse for low-value retail payments. The system will also include a separate module as a central securities depository, which will support the development of a safe and efficient market for government securities.*3 Under the action plan for the credit reporting system, several working groups of public and private stakeholders have been created to prepare for the modernization of the system.
Taken together, an NPS and a credit reporting system form the backbone of a country’s payment and credit infrastructure, and are instrumental in improving the business environment and promoting financial inclusion. These improvements in the financial sector infrastructure are essential steps toward creating an environment in which enterprises and institutions of all sizes have safe and efficient payment systems for conducting business, and financial institutions can more easily obtain information that can facilitate the provision of credit and can help lenders diversify product and service offerings to better meet the needs of borrowers. Financial infrastructure is the foundation for financial access and inclusion, and the implementation of an ATS in Djibouti is a critical enabler for payment aspects of financial inclusion.
* 1 It processes both large and low-value checks on a deferred net basis, exposing the participants and also the CBD to credit risk. There is no intraday processing.
* 2 Specifically, this concerns proposed additional financing (US$5 million) for the World Bank’s Djibouti Governance for Private Sector Development Project, which started in 2014. About US$2.6 million of this amount will be dedicated to financial infrastructure (investments in software and hardware). The loan is expected to be approved in the fourth quarter of 2016.
* 3 The RTGS system would serve as the system for settlement of all large-value and systemically important payment transactions. The clearinghouse would enable the banks and other eligible institutions to offer credit transfers and direct debits that can be used for a variety of retail payment needs, such as salary payments, bill payments, and tax payments. It would also support the automation of check processing. The central securities depository would enable electronic recording of securities ownership, which would also enable efficient usage of these securities as collateral for liquidity support in the RTGS system and also for repossession and other open-market operations.