New Technology, More Problems

Cheque Clearing System Chokes Business Activities

For decades Ethiopia’s financial sector was defined by costly and risky cash and cheque based transactions. So when the National Payment System (NPS), which was supposed to clear and settle payments electronically, was launched in June 2011, it was seen as a transition to modernity. The new, USD9 million system set up by the National Bank of Ethiopia (NBE) was supposed to give banking in Ethiopia a new face. People expected to be able to transfer huge sums of money efficiently and securely.
However, rather than speeding up the existing system, the NPS has made life more complicated for banks and their clients. Previously it would take a maximum of three days to clear a cheque but the new system extended the time required for the process by weeks and even months in some cases. Coming up with a centralized system for clearing and settling cheques became more difficult and time consuming than anticipated. Initially, NBE officials attributed the problem to the existence of weak integration between the CORE (Centralized Online Real-Time Exchange) banking systems it installed with other commercial banks. Though this was expected to be fixed through time, the problem continued.
The need for building an efficient system arose from the lack of quick transaction clearing facilities, which increased the risk, delays, difficulty and cost of using cheques anywhere in the country. In 2011, close to ETB35 billion worth of cheques were carried by messengers from bank to bank for clearance in Addis Ababa alone. This created a problem for many businesses, NGOs and government institutions, as well as their customers who wanted to settle bills in cheques. For the business community that uses cheques for most of their transactions, the new system was expected to be a major boost to efficiency and also bring many more unbanked societies to the banking system.
Many in the banking industry as well as their customers expected a significant transition from cash and paper-based transactions, including cheques and bank payment orders, to electronic payments which are faster, more secure and less costly. Officials of the NBE also promised to build an efficient system comprised of a real time gross settlement, which functions for large value and time critical payments as well as an automated cheque clearing house that will allow banks to clear cheques faster than before.
With the aim of facilitating commercial activity, economic growth and the ability of the country to participate in global trade, the NBE ordered all commercial banks to install a CORE banking system and establish links to the NPS. This required most of the banks to upgrade their existing systems, which were initially created in-house and consisted of branch-bound networks. As a result, most of the banks made a huge investment to automate their systems in order to link them with the NBE system. This was expected to allow them to clear cheques electronically.
However, after the system began operating, the intended results became farfetched. In fact cheque clearance has become extremely slow, taking several days and weeks at times. This has significantly contributed to the current business slowdown in the country. With all the risks associated, the situation has on several occasions forced companies to require payments to be made in cash. In fact some companies in Addis Ababa have started requiring their clients to first deposit cash in their account and give the bank advice to the payee to get a receipt for payment.
Such companies like, Zemenwan PLC, a landlord which runs Aberus Complex on Africa Avenue in Addis Ababa, has recently issued a letter to its tenants that it no longer accepts cheque payments because of the slow process of cheque clearance at the banks. Its repeated experience that some tenant’s accounts had insufficient funds forced the landlord to change its rules.
Although cheques have been in use since the 9th century, it was during the 20th century that they became a highly popular non-cash method for making payments. By the second half of the 20th century, as cheque processing became automated, billions of cheques were issued annually; these volumes peaked around the early 1990s. Since then cheque usage has fallen, being partly replaced by electronic payment systems. In an increasing number of countries cheques have either become a marginal payment system or have been completely phased out. But in countries like Ethiopia, they are still the dominant way of making payments, particularly in the formal economy. It is only recently that the central bank started initiatives to gradually replace them with electronic payments. That was the main reason the NPS was established. However, instead of facilitating a fast cheque clearing system, the initiative has further slowed the old way of doing business.
There are many reasons why the project failed to materialise. Industry players blame the poor Internet connection existing in the country for the inefficiency of the NPS. Most bank presidents EBR approached stress that the telecom network problem in the country needs to be improved to ensure reliable, fast and secure communication and exchange of data in the new payment system. As the result they called for a network that has a banking industry wide character. “Although the problem is improving the weak Internet connection still poses a problem,” Mesenbet Shenkute, President of Abay Bank told EBR.
However, for Dereje Beamlak, an IT expert involved in the installation process of CORE banking for three private banks, the major problem lies with the lack of skilled manpower at NBE that can administer the system effectively and efficiently. “The NPS has to adapt continuously to future challenges, technological developments, changing needs and possible threats,’he told EBR. This, he says, requires a technically skilled labour force, which at the moment is missing at NBE.
For businesses, which require a fast cheque clearing system in order to operate efficiently, the problem is intolerable. Since most of the businesses currently are facing a financial liquidity problem due to government policy measures, moving the limited amount of money they possess quickly is necessary for their survival. “The last time when I wanted to clear a cheque, the bank took almost three weeks, Ibrahim Ali, a wholesaler at Merkato, Addis Ababa’s big open market reflected. “In the mean time I was forced to borrow the equivalent amount from a friend to run my business.”
How large is the risk? The amount of cheques cleared in the country could reach 70 billion Birr in 2012, according to World Bank estimates. With such an inefficient system of clearing cheques, the question arises over who will bear responsibility for any loss while doing things manually. According to the expert, since large value cheques are especially initiated by the government and the banking industry itself, they will be the most affected. But its impact on businesses that are currently under financial stress will be worse since they do not have enough money to fill the gap. EBR

2nd Year • March 2014 • No 13