Situational Analysis and Stocktaking Report 

Executive Summary

1. Introduction

This report concludes the first phase of the National Payment System (NPS) modernisation project --situational stocktaking—- which took about a year and involved banks, users, regulators, providers and most parties with a stake in the country’s payment systems. It was carried out through literature reviews, research, study tours, interviews, surveys and workshops. The findings of this phase will form the base for the work to be undertaken in subsequent phases of this project.

The report focuses on the major factors influencing payment systems in the country. It includes:

1. An introduction of the problems associated with NPS, purpose of the project, factors affecting NPS, methodologies used and the report’s contents.
2. Background of the country’s socio-political culture, economy and an outline of its vision;
3. The infrastructure situation (i.e. power, telecommunication, transport, mail, courier) and the state of automation within and between bank branches and their customers;
4. The legal structures that affect payments e.g. legislation overlaps, the law not fully covering or accommodating modern payment systems, etc.
5. The key institutional structures in national payments and requisite human resource capacity;
6. The existing payment instruments, Inter-bank Clearance and Settlement systems.
7. The risks associated with Payments in the country, measures put to mitigate the risks and cost recovery methods for payment services; and,
8. A conclusion on the country’s national payment system needs, vision and some preliminary suggestions on the way forward.

1. The National perspectives and Background

Tanzania came into existence after the union of two countries (Tanganyika and Zanzibar). It is a vast country with over 945,000 square kilometres and a population of about 30 million. The travelling distance from a town in the North-West (Bukoba) to one in the South-East (Mtwara) spans over about 2000 kilometres.

Tanzanians have a harmonious co-existence and stability despite their diverse ethnicity and multiplicity of tribes, languages and beliefs. Swahili is the official national language while English is the business language.

Immediately after independence, Tanzania emerged as a nation founded on trust, unity, well cultured and without corruption. It then had a smooth payment system though this was not accessible to the indigenous Africans to whom the only accessible instrument was cash. This marginalised the majority population.

Tanzania is now making a difficult transition from a monopoly-politicised system to a market economy. A necessary condition for the transition to be successful is the development of market oriented, customer-based banking and financial markets including markets for money and credit. Such markets require an efficient payment system if they are to operate properly.

Further, over 85% of the population is rural   where there are no banks. This explains why cheque usage is generally limited to enterprises, government departments and a few urban dwellers.

The country’s evolution after independence in the context of payment systems is characterised by the following:

1. The period (1961 to 1967), immediately after independence:-

• The country started as a multiparty country but changed to "single" party. There was less interference in resource allocation in these years.
• This period saw a low inflation, surplus external sector, a stable and strong shilling and market determined prices. It was dominated by a foreign owned private sector with a number of well operated urban-based financial institutions but limited rural outreach and was subordinated to the London financial markets hence not promoting efficient domestic markets.

1. A socialist UJAMAA period (1967 to 1985):

This period saw the single party supremacy and nationalisation for Government control of all major economic activity. This had the following effects:

• It weakened the private sector and had excessive growth of aggregate demand without match in production growth;
• Political considerations dominated resource allocation in the economy as opposed to market forces further alienating people from formal financial systems.
• Government dominance made payment synonymous to a Government payment systems as the majority were crowded out from the financial system through low incomes.
• The informal sector grew bigger as the formal private sector was eliminated.

These policies coupled with other economic crises impacted the country’s payment systems. For example:

• The private sector had no role in the payment system.
• External linkages were weakened.
• Though increasing bank branch access to the public in the country a one bank monopoly undermined the services offered.

In consequence, inefficient services, weak institutions and growth of a big illegal informal sector developed together with corruption as institutional and legal structures deteriorated.

1. The transitional economic reform era period (1986 to present (1997)):

This brought de-confinement and de-controls of prices, elimination of foreign trade and exchange controls, structural reform in Government owned enterprises and review of the legal and regulatory framework. Further, drastic measures were taken to address economic imbalances, reduce the country’s debt and create an environment conducive to production and marketing of goods and services. As a result:

• The government now repays more than it borrows in its recurrent expenditure;
• Higher national GDP growth rates (currently 4.5%).
• Manufacturing --the only declining sector—- is now recording growth as privatisation starts to bear fruits.

Nevertheless, the economy is still dominated by the Government and the private sector does not get sufficient credit. This is expected to continue for not less than two years since real incomes are low hence most public transactions are low value and handled by cash.

Although the private sector and the markets have an increased role, a real long term impact on payment systems is expected in the move from a few node government dominated system to a multiple node private sector payment system, which demands more efficiency as transactions increase.

The critical factor will be the development of a national culture of non-interference by government in financial systems and development of strong legal governance. This then should pave way to the culture of using instruments other than cash.

1. The Physical Infrastructure

The poor state of infrastructure is an impediment in efforts to improve the payment system.

1. There is a monopoly government owned public power utility company but it can not satisfy the country’s needs for electricity as it only covers mostly urban, less than 10% of the country’s population. The average tariff is USD 9 cents per kWh. About 80% of the consumed electricity is hydro-based --there is even less available when there are droughts. Plans are now underway to increase capacity (i.e. privatising and allowing competition).
2. The country has about 3 telephone lines per 1,000 people and a high disparity of lines per capita between rural, urban areas and towns. Most lines were manual and old until the recent modernisation/ expansion programmes and entry of private operators. These developments enabled most districts and some rural areas to link via electronic batch processing and digital telecommunication –-all centres with over 80% of the existing banking business are within reach of a modern backbone network. The government owned telecommunication operator that dominates this sector expects to be privatised in 1998. Depending on various factors, a minute’s call costs between USD 3 and 48 cents (local) and between USD 1.60 and 3.60 (international) --mobile phone tariffs are higher.
3. Freight and passenger road transport is the most used form of mobility in the country though only about 10,300km of trunk roads and 25,000km regional roads are all weather. Most regional centres are within 1000km of the commercial capital (Dar es Salaam) and all regional and the major district centres are linked and can be covered in 12 hours on most of these roads. Most roads need rehabilitation (already underway), particularly the rural and remote district roads that are inaccessible during rain seasons.
4. Small private operators and a dominant government airline cover air transport between most major trade centres though most airports are under-utilised. There are also plans to privatise the government owned airline.
5. Two railway networks exist. Most of the main (TRC) network has 2,605km lines of single track. They are over 70 years old and lack locomotives and freight handling facilities making it unreliable and slow. There are now plans to improve it. TAZARA is the other network --it has a reliable 975km line connecting Dar to land locked Zambia but is now faced with problems due to economic decline of both Tanzania and Zambia and increased competition.
6. Small sea transport private operators serve the coastal towns and islands. Inland water transport on the lakes is also inadequate (Victoria, Tanganyika and Nyasa). It is only recently that private operators have been encouraged but these services need improvement  particularly on reliability.
7. The state owned postal service transfers mail and postal financial instruments (money /postal orders and money fax) dominates this sector. There are seven other couriers private companies concentrating on international rather than domestic services. Few have contracts with banks to transport payment items. The biggest bank (NBC) has its own internal courier service.

Key payment problems related to poor infrastructure have been identified as:

• Excessive delays leading to costly floats, payment risks exposure, extra standby system costs, customers inconvenience and loss of confidence and trust.
• Fraud --using the delays to defraud banks and customers (e.g. Government).
• Excess Bureaucracy and controls as banks set extra checks to mitigate and control potential frauds --adding costs, over cover and operational problems.

The report concludes that the infrastructure needs further development. Nonetheless, despite this many banks already use computer processing and some VSAT, leased lines or dial up telecommunication systems. This shows readiness to move towards modern payment systems.

1. Legal-Regulatory Support Structure

The report takes stock of the Legal Framework for the Tanzania Payment System. It traces the origin and evolution of the Tanzanian Legal System in general and then goes on to identify the specific legislation which has relevance to payment systems.

At least 15 pieces of legislation, which govern different aspects of payment systems in Tanzania, are identified. These include banking laws (i.e. the Bills of Exchange Ordinance, the Cheques Act (1969), the Banking and Financial institutions Act (1991), the Bank of Tanzania Act (1995), etc). It is also noted that some of this legislation has their parallel in Zanzibar.

The other identified legislation deals with aspects related to financial markets, such as the Capital Markets and Securities Act (1994), the Government Loans, Guarantees and Grants Act (1974), etc.

Lastly it covers legislation catering for governing of various relevant aspects and judicial enforcement. These include the Contract Ordinance, the Penal Code, Civil Procedure Code, the Companies Ordinance, the Fair Trade Practices Act (1995), the Arbitration Ordinance and Transfer of Businesses (Protection of Creditors) Ordinance. Issues such as the introduction of commercial courts, ambudsman, Zanzibar-Tanganyika dual legislation, etc. are also discussed.

Importantly, the report identifies deficiencies prevalent in each of the named Acts which if plugged by way of either amendment or enactment of new laws would create a sound legal environment to regulate a payment system. Notable in the deficiencies are the lag or failure of the laws to cope with developments in technology.

The cited examples include:

Whereas the Bills of Exchange Ordinance requires physical presentment for acceptance of a bill, technological advancement has made it possible to present bills by transmitting essential data electronically without having to present the instrument physically. The Ordinance should therefore be made to accommodate this.

Equally important is the admissibility of electronically generated information in evidence by courts. The current status is that the law does not openly recognise such information if tendered as evidence. The Evidence Act, 1967 needs to be amended to make such evidence admissible without ambiguity.

The identified deficiencies will be dealt with according to an order of priorities categorised as short, medium and long term measures.

2. Institutional Structures, Transfers and Intra-bank systems

Tanzania’s institutional "Structures," functions and operational institutions are centred around the Central Bank (Bank of Tanzania, BOT), Commercial Banks, Non-Bank Financial Institutions and other Financial Intermediaries such as SACCOS, Micro-Finance institutions, Non Governmental Organisations (NGOs), etc. The relevant operational aspects of major customers (mainly Government) and main service and infrastructure providers (e.g. the Telecommunication Company, TTCL) together with regulatory bodies and associations   mostly tuned to servicing government enterprise. However, the situation is changing now with the establishment and strengthening of regulatory bodies. For example, the Capital Markets and Securities Authority (CMSA), the Tanzania Institute of Bankers (TIOB), the National Board of Accountants and Auditors (NBAA), Tanzania Bankers Association (TBA) and other collective forums.

The transfer and clearing operations used by banks between branches, the accounting procedures, credit transfers and level of automation are also new to operating in free markets. Non-Bank institutions’ payment transfer systems are also similarly new and are still dominated by the volumes of Government and Post Office transfers.

The excessive movement of paper ( cheques, vouchers, credit/debit advice and their copies and attachments) covering wide distances across the country from the collecting bank branches to the paying branches, the collecting bank Head Office/ Clearing Departments, etc. underscores the current situation.

The report observes the following institutional concerns:

• The banking sector is improving with better regulation and supervision, restructuring and privatisation, split of the dominant bank (NBC), expansion of private banks’ competition into more parts of the country, etc;
• Major customers’ cashiers (e.g. revenue collectors, breweries, utilities and pension funds) carry huge amounts of cash between office stations. This adds processing overheads and tempts people in the process. Similarly, the same applies to paying customers who are forced to pay in cash –-banks normally do not honour cheques upon presentation except for special customers;
• The Postal bank (TPB) with over 200 post office outlets (going through the NBC bank) is a key player in the country’s high volume small value customer transfers and savings mobilisation despite its relatively higher operations cost. TPB also acts as an agent for Western Union international fund transfers.
• Money Fax is rapidly replacing the traditional telegraphic money orders due to speed and convenience (bank telegraphic transfers are not readily available and can randomly take over 30 days);
• Apart from bank products, there are few other non bank financial products in the market though the number is expected to increase in a few years;
• The only existing standards in payment systems are the MICR cheque/ document standards, national accounting standards and SWIFT (in international transfers).

Human resources capacity building noted were as follows:

• Survey of the financial sector training reveals capacity training though diverse but lacks focus on real institutional needs hence a shortfall exists of critical technical staff,  lack indepth experience and professional standards to cope with modern payment systems.
• Apart from a few suppliers organisations, most training facilities are government owned and their curriculum do not address fully payment system capacity building needs including staff retention;
• Most organisations have yet to create suitable and sustainable structures to address training needs and manage payment systems.
• The public needs to be sensitised, better informed and promote best payment practices.

In conclusion, the existing structures may need further detailed strategies to create the necessary institutional governance and capacity appropriate for national payment system development.

1. Tanzania Inter-Bank Payments Business Perspectives

1. Inter-Bank Payment Instruments

Instruments used to initiate inter-bank clearing are customer cheques, bankers cheques, drafts, mail transfers, clearance transfer vouchers and direct debits. Debit paper instruments and few Mail transfers are the main inter-bank exchange instruments.

Tanzania is a cash society given that only about 40% of business are handled through the banking system. The instrument usage by sector includes:

• Cheques are mainly used by government;
• The commercial sector prefers drafts and cash; and,
• The general public prefers cash and rarely cheques or drafts.

This situation raises the following observations concerning cash:

The level of development favours cash use since the majority does use banks. About 40% in volume and 8% in value of commercial bank transaction uses cash but Cash cost implications are in general not well appreciated.

Banks have started introducing ATMs. As banks did not offer any cash substitutes, utility service companies introduced pre-paid smart and magnetic stripe cards for electricity bill payment and phone cards. Domestic credit or debit cards are yet to be introduced.

Only few debit instruments are available and these raise the following issues:

Cheques

About 60% in volume and 50% in value of total non-cash transactions in the country is by cheque.

Cheque costs are mostly subsidised, which make cheques more popular to business enterprises --particularly paying companies (due to big floats) but not to payees (risk of bounced cheques).

Threat of fraud has resulted into higher printing security costs. Banks also clear cheques on collection since trust is low and the public lacks confidence in cheques --mainly due to presence of dishonest staff, unreliable courier services, difficulties of enforcing the law and clearing delays.

Increased fraud, forgery and unfunded cheques lead to beneficiaries preferring payment by Bankers cheques (e.g. government and big business).

International travellers’ cheques are available in banks and bureaux de change. The former NBC (now split into NBC (1997) and NMB) is the only bank issuing shilling travellers’ cheques for local use (yet to be popular).

The only domestic credit instruments in use are the Mail Transfer (MT) and Telegraphic Transfers (TT):

Mail Transfers(MTs)

• MTs cost less and are preferred where telecommunication is poor and speed is not critical.

Telegraphic Transfers (TTs)

• Big businesses and Government transfer large values domestically and across borders through TTs.
• Fraud, forgeries and errors are associated with the abnormal delays experienced now (i.e. from 13 up to 28 days). Telecomm lines congestion, electricity unavailability (for days sometimes) and staff have been linked to this problem resulting into few branches getting authority and facilities for such payments. The absence of SWIFT and telecomm encryption devices at upcountry branches also deters use of TTs.
• Four banks use SWIFT at present but there are plans to adopt it for domestic inter-bank transfer messages by mid 1998.

1. Inter-Bank Payment Clearance

Bilateral clearing of paper based instruments existed until 1993 when the first Clearing house was established. The members of the existing clearing houses are the demand deposit taking (commercial banks) and the central bank in Dar, Arusha and Mwanza. All other non-bank financial institutions (including savings banks) must clear through the members.

The four non-cash inter-bank payment streams in the country are the Shilling, US dollar, Bank credit and Foreign exchange transfer clearance. There are also proposals for a Dar stock exchange and a domestic inter-bank SWIFT transfer system.

The clearing practice in Tanzania is similar to elsewhere in the world. It is done through different localities or zones as outlined below:

Local clearing

• All branches sort their items into batches by drawer bank for dispatch with schedule to a co-ordinating branch in a clearing house. There they are summarised by paying banks, number of items and amount and sent to the local clearing house on next start of clearing.
• There is only one daily clearing session at the clearing house where all members participate normally. It takes about an hour, starting at 10 am for shilling denominated items followed by a US dollar clearing. Outward items are exchanged and booked as inward items by recipient members and then all netted out using standard clearing forms and registers. A settlement certificate is ultimately issued and signed by the Central Bank and clearing house supervisors when all banks settlement balances have been balanced.
• Returned items are included with the outward clearing items. The clearing house rules recognises 34 reasons for return of items from a branch where it is drawn from.
• When banks receive inward clearing items from the clearinghouse with copy of the settlement certificate, they debit (or credit if returned items) mirror accounts of the paying branch. The bank’s clearing house position is also checked for the next clearing.

Non Local clearing

• All cheques drawn on district branches have to be sent on collection.
• Bilateral agreements are used to determine the time, which branches should clear with one another and agency agreements for banks without branches at a location where no clearinghouse exists. This only involves inter-bank clearing between CRDB, NBC (1997) Ltd and NMB which have branches in other parts of the country.
• A net balance position is determined and settlement is effected through correspondent accounts. The net debit bank raises a draft or bankers payment cheque to the net credit bank, which forwards it to its central clearing department to be presented at the clearing house for settlement. This eventually debits a paying bank branch account.
• Up-country branches send their clearance items with banks in Dar by courier to the respective central clearing departments, en-route to the clearing house. However, clearance between two different up-country centres is done through a central clearing department by courier; or, directly through the nearest co-ordinating branch. The later is faster and with less paperwork or costs when available.

The proposed Stock Exchange and SWIFT Clearances

• The Dar Stock Exchange (DSE) is expected to start anytime. Trades will be matched and executed using its clearing and depository system with a daily confirmation report available by 15:00 hours. All brokers will be required to have their money accounts with a single bank that is not involved in securities business.
• Same day clearing and settlement of payment instructions between domestic branches whose banks are on SWIFT is soon to be implemented. Correspondent relationships will be initiated for participants in this scheme.

Observations & Assessment

• Banks are sending items to the clearing house through their central clearing departments for purpose of consolidation, treasury/ liquidity management and fraud control;
• Clearing of physical instruments between remote branches experience excessive delays due to transportation constraints.

1. Inter-Bank Settlement

The current settlement arrangements have the advantages of participants just maintaining sufficient funds for settlement at the end of the day. However the multilateral netting process exposes participants to a number of settlement risks, particularly intra-day credit exposure. Also, as a settlement agent, BOT implicitly guarantees finality of outgoing payments for the day, and thus covers members against intra-day credit risks.

1. Risks and Financial Costs

The nine types of Payment risks affecting Tanzania today are:- credit risk, liquidity risk, settlement risk, cross currency settlement risk, operational risk, legal risk, systemic risk, market risks and country risk.

There are several measures put in place to mitigate these risks which include Clearing House Regulations, Bank Supervision Regulations and guidelines, rediscounting and inter-bank market arrangements, and the introduction of security features and standardization of document processing features.

However despite these measures the system is still very much exposed to these risks. It is therefore proposed that:

• More hedging instruments be introduced to facilitate mitigation of foreign exchange risks.
• The legal safeguards against unfunded cheques be improved.
• Joint funds and insurance programmes be established to serve as a collateral in case of settlement deficit and as contingency fund when need arises.
• Capacity building and professionalism training as well as systems for recruitment of staff be enhanced.
• An "Early Warning System" (EWS) be established on the national payment systems risks.

The report concludes that most of the country’s payment systems costs are not properly costed and that there is need for more awareness to be developed on both direct and indirect payment systems costs.

1. The Way Forward.

Finally, this report concludes with an outline of the sectoral payment needs in the country and identifies areas to be addressed in the payment system modernisation project according to priority and timeframe (immediate or long term) based on the preliminary vision of these systems.

The four broad parameters are stated below:

1. High value, Small Value and retail end transactions.

• RTGS for high value (or net-settlements)
• Networks of ATMS, POS terminals and credit based instruments (e.g. Giro System) for small value high volume and retail end transactions.

1. Compatibility of short-term plans with long term plans. The short-term electronic data communication plans should be open to possible future expansions and hook up to a nation wide data communication set-up.
2. Spacial coverage. Data communication solutions need to cover as much of the economy as possible so as to make optimal use of the few institutions available in the country.
3. Standardization. Standards must be set in respect of instruments, message formats, security feature.etc to facilitate common use of the payment systems facilities.