ETHIOPIA: Strengthening National Payment Systems
In 2008, Ethiopia had a largely unbanked population and an economy in which cash was a predominant means of payment. Checks were the dominant non-cash-based payment instrument; however, these were mainly supported by manual, paper-based systems for clearing and processing. The lack of check standards established and adopted by member banks in the clearinghouse meant that there was no common foundation for quality printing and processing of checks and therefore put at risk both safety and efficiency in the payment system. Overall, the retail payment infrastructure was highly fragmented and inefficient, with no interoperability between the ATM and POS networks of different banks.
The government of Ethiopia had developed and issued its Growth and Transformation Plan (2010–2015), which highlighted the promotion of financial inclusion as a main priority in the development agenda. To promote broader inclusion, it was necessary to strengthen and modernize the NPS and contribute to establishing an accessible, efficient, and competitive financial system across the country.
By 2013, Ethiopia had made remarkable progress in the modernization of the payment system, as envisaged in the Vision and Strategic Framework for the Modernization of the National Payment System in Ethiopia of May 2009. Notable developments included the establishment of an appropriate legal framework, including the Payment System Proclamation; implementation of the Ethiopian Automated Transfer System (EATS), which comprised the RTGS system and the automated clearinghouse system; introduction of check standards and automated check processing; and implementation of state-of- the-art core banking systems. Although these developments were essential for the overall NPS and for creating the necessary foundations for an efficient retail payment system and broader financial inclusion within the country, more reforms were still needed along with additional support from external sources.
Recently, the government launched its Second Growth and Transformation Plan (2016–2020), which places greater emphasis on strengthening modern payment systems and developing regulations based on international standards. In January 2016, the National Council for Financial Inclusion also approved a national financial inclusion strategy for the next five years. The main target for financial inclusion will be to increase the number of transaction accounts in banks and microfinance institutions from 47 per 100 adults (age 18 and older) in 2015 to 80 per 100 by the end of 2020. Furthermore, on the demand side, the aim is to increase the proportion of adults who own transaction accounts in regulated financial institutions to 60 percent. Thus, expanding financial inclusion and strengthening payments systems remain high priorities for the government.
In 2013, the National Bank of Ethiopia (NBE) requested FIRST assistance in improving and further developing payment systems. In particular, the NBE sought to develop a comprehensive strategy that ensures retail payments developments take place in a more coordinated manner and promotes interoperability and wider access to payment services. In addition, the TA would strengthen the capacity of the NBE to oversee the payment system and ultimately contribute to maintaining financial stability. FIRST TA delivered by the World Bank during the course of 2014–2015 supported the NBE in three efforts:
1. Strengthening the NPS Oversight Framework: The project team provided a detailed review of prevailing oversight arrangements and the supporting legal and regulatory framework, and developed a comprehensive oversight framework. The oversight framework stipulated the activities to be executed by the NBE and the tools to be adopted for discharging its statutory oversight responsibilities. The document was designed in the spirit of the principles set by the standard-setting body, the Committee on Payments and Financial Market Infrastructures.
2. Developing a Retail Payments Strategy: On the basis of an assessment of the retail payments landscape and identification of impediments to the functioning of an efficient payments system, the team developed a retail payments strategy that articulated the national vision for the development of the retail payment system, in accordance with the agreed fundamental principles. The development of a coherent strategy was extremely important for providing useful inputs into the implementation of the national switch. In particular, these inputs raised awareness that it is important to significant policy considerations and fundamental principles before determining the technology solutions for a national switch for retail payments. These considerations include the risk management frameworks that increase the efficiency and the transparency of the financial sector. The strategy ultimately will lead to enhanced stability of the system and to greater financial inclusion.
3. Strengthening the Capacity of Payment and Settlement Systems Staff: The team conducted a practical session on how to apply the PFMI, a detailed session on central bank responsibilities and how a framework for cooperation with other regulatory authorities can be designed, and training on assessment methodology.
Since the completion of the TA, the NBE has achieved a number of tangible outcomes:
- It adopted the retail payment strategy and could catalyze DFID funding (“Harnessing Innovation for Financial Inclusion,” executed by the World Bank) to support the implementation of key actions and the broader payment system agenda.
- Interoperability of ATMs was achieved with the live run of Eth-switch.
- The payment systems oversight department has been strengthened and distinct functions identified, and it has started its oversight work.