WEST BANK AND GAZA: Remarkable Progress in the National Payment System Reform
Payment and settlement systems are a core component of the financial system underpinning its functioning. They allow financial markets to function smoothly and individuals, firms, and the government to receive payments and to pay for goods and services. Disruptions in these systems may cause disruptions in the financial markets, introduce inefficiencies all through the economy, impact the safety and soundness of the financial system; and affect public confidence in money. Inefficiencies in the national payments system (NPS) could increase costs for users and raise barriers to broader financial inclusion.
The Palestine NPS dating back to 2009 was inadequate, characterized by incomplete legal and regulatory frameworks, the absence of automated clearing and settlement systems, and a lack of dedicated oversight arrangements, which was detrimental to growth in electronic payment services such as prepaid cards, mobile payments, and e-money. Cash was the main important means of payment. The rudimentary settlement systems (that is, manual clearing, no encoding, no sorting, truncation, no interbank electronic switch, etc.) were inadequate to help the Palestine Monetary Authority (PMA) to ensure the safety and efficiency of settlement and payment transactions, to serve the needs of the financial sector and the development of the economy as a whole.
The PMA recognized the importance of modernization and oversight of the NPS as part of its broader monetary authority responsibility of ensuring financial stability and expanding financial inclusion, and approached the World Bank, among other agencies for assistance. With technical support from the World Bank’s PSDG, the PMA adopted an NPS strategy reform consisting of nine pillars to be implemented in a two-phase approach. Phase I focused on legal and regulatory reform and implementation of an RTGS system and automated clearinghouse system as an integrated platform called the Automated Transfer System (ATS). Phase II reforms focused on other elements of the NPS such as government payments, payment cards infrastructure, securities settlement, payment systems oversight, and cooperative arrangements.
Phase I, implemented during 2009–2011 with the TA project from the World Bank’s PSDG and funding from the Arab Money Fund, resulted in the launch of the RTGS system, called BURAQ, in 2010 as the backbone of the payment system, as well as the draft Payment Systems Law which was submitted to the Prime Minister’s Office for broader consultation and the establishment of a five-member Payment Systems Department under the PMA. Upon the completion of the World Bank project in November 2011, the PMA approached FIRST for TA to implement Phase II of the adopted NPS reform with a focus on (i) preparing the final packaging of the new Payment Systems Law by addressing comments received from the stakeholder consultation process, and developing enabling regulations and guidelines, including regulations on oversight and electronic funds transfer; (ii) developing the oversight function, oversight policy, and tools; and(iii) developing a detailed road map for Phase II, taking into account recent fastgrowing developments in banking and payments activities. The TA was successfully delivered during the period from November 2011 to June 2013. Riyad Awwad, director of the Payment Systems Department, shared his satisfaction about the TA:
I think that the TA that we received from FIRST is very important and valuable in the core of our business. The TA assisted us in building the Road Map for establishing the oversight function in the payment system and built the policy framework for the oversight. The TA also helped in evaluating the payment systems reforms steps that PMA adapted over the last years to measure the weakness and the pending issues to make sure of full implementation for all the payment system pillars according to the road map. (Client Survey, March 2015)
Phases I and II are widely accepted by the PMA and the industry as a success, and they have been instrumental in establishing a solid platform on which to further develop the financial infrastructure in the West Bank and Gaza. The establishment of Buraq has enabled the PMA to (i) manage the unique challenges faced in terms of the geographically separated territories; (ii) reduce reliance on cheques and hard currency, which require physical transportation across strictly controlled security crossings between Ramallah and Jerusalem; (iii) manage liquidity risks associated with the lack of any domestic currency and usage of four currencies—Israeli shekel, Jordanian dinar, U.S. dollar, and euro; and (iv) establish a mechanism for the PMA to rapidly issue a new currency and enable greater usage, when the situation is conducive.
FIRST’s TA was timely and has filled its important catalytic role together with other funding and development agencies to assist the PMA in implementing the comprehensive NPS reform, ensuring continuity of the reforms. The specific outcomes include the following:
- The Payment System Law was approved in November 2012.
- The Payment Systems Oversight Unit was established in February 2013 to define legal and legislative frameworks, plan the policies and strategies of the PMA in managing risks in payment systems, expand payment services, provide a competitive environment for payment services, and coordinate with the banking system and payment providers.
- The Road Map for Phase II reforms was adopted and is being implemented and is already making remarkable progress. The National Switch, an electronic payment system launched in May 2015, is intended to harmonize the retail payment infrastructures in an integrated ATM–point of sale (POS) network with standardized specifications, enabling citizens to use payment cards issued by any bank to access services at ATMs belonging to any other bank, with affordable transaction fees. This is intended to be subsequently extended to usage at POS terminals, e-commerce, and mobile payments. Overall, the introduction of the National Switch will help the PMA to shift to more modern electronic payment methods. FIRST’s role in catalyzing the implementation of the National Switch was acknowledged by Riyad Awwad in client survey as well.
The Road Map is expected to catalyze further reform implementation in government payments, international remittances, and mobile payments, among other important works, as laid out in the NPS reform framework. This will contribute to the further development of the Palestinian financial sector and economy. Phase III of the TA program is now being designed to support work on these areas with funding from the DFID-funded Harnessing Technology for Financial Inclusion (HiFi) trust fund.