The payments system plays a very crucial role in any economy, being the channel through which financial resources flow from one segment of the economy to the other. It, therefore, represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the payments system, namely: the Monetary Policy role, the financial stability role and the overall economic role.
Given the important role that well-functioning payment systems have on monetary policy, financial stability and overall economic activity, the Central Bank of Nigeria has put in place a set of national payments system policy objectives as a broad guideline and framework for all payments system initiatives. In setting out the objectives of the National Payments System (NPS), the goal is to ensure that the system is available without interruption, meet as far as possible all users' needs, and operate at minimum risk and reasonable cost.
During the course of the past two decades, the Central Bank of Nigeria (CBN), in collaboration with the Bankers Committee, launched the first major initiative to modernize the payments system. The starting point was to automate the cheque clearing system through the introduction of Magnetic Ink Character Recognition (MICR) technology in 1993 and the Nigeria Automated Clearing System (NACS) in 2002 making it a veritable platform for the development of electronic payment channels. These innovations facilitated the reduction of clearing cycle to T+2 for both local and up-country instruments in clearing areas other than Lagos. The cheque clearing cycles for Lagos is T+1 due to implementation of cheque truncation.
The Nigerian Payments System witnessed remarkable achievements in the recent past, with the introduction of a number of initiatives under the Payments System Vision 2020 as listed below:
- Maximum Cap on Cheque
- Implementation of Nigeria Uniform Bank Account Number (NUBAN)
- Cheque Truncation
- Migration to EMV cards
- Help Desk on Card Related Complaints
- Card Fraud Prevention Strategies
- Introduction of second level authentication for card not present payment.
- Banks to have real-time online monitoring tools for PIN entry attempts.
- Automatic blocking of card after three unsuccessful PIN attempts.
- Set limit for card-to-card transfers, POS and web payments.
- Banks to segregate the process of PIN handling and card activation.
- Proper due diligence should be done on all merchants before POS is allocated.
- Enlightenment campaign on protection of PIN/card details for cardholders
- Establishment of Nigeria Electronic Fraud Forum (NEFF)
- Collaboration with banks, Switches, EFCC, NIMC, NCC, PCC, CPC and other institutions to fight e-payment fraud.
- Implementation of National Central Switch
- Implementation of Mobile Payment
- Standards and Guidelines on ATM and POS Operations in Nigeria
- Deployment of new RTGS System
- Cash-less Nigeria
The CBN adopted the following initiatives to reduce the cash intensity in the economy, encourage electronic payments and enhance the Nigerian Payments System:
- Fixed a daily cumulative limit of N500,000 and N3,000,000 on free cash withdrawals and lodgements by individual and corporate customers of banks respectively, effective April 1, 2012, in Lagos. Individuals that make cash transactions above the aforementioned limits shall be charged a service fee of 2% and 3% on deposits and withdrawals respectively while the service charge for corporates are 3% and 5% on deposits and withdrawals respectively.
- Disallowed encashment of third party cheques above N150,000 over the counter. Value for such cheques shall be received through the clearing house.
- Directed that Cash-in-transit lodgements services rendered to merchant-customers by banks shall cease. However, customers could engage the services of CBN licensed CIT companies to aid cash movement to and from their banks at mutually agreed terms and conditions.
- Stipulated that card schemes, foreign or local, shall not operate exclusive acquirer agreement or contract in Nigeria with effect from June 1, 2011. This is expected to facilitate interoperability of local currency POS transactions and increase its operational efficiency.
- Continued with the implementation of massive deployment of shared POS terminals under the shared service project, with a view to reducing cost of its operation.
1.1 National Payments System (NPS) Objectives
Following the CBN re-engineering and re-structuring processes in 1999, the second phase of the payments system reforms were embarked upon, with the national payments system objectives clearly spelt out to include:
- Promote efficiency. To be efficient and effective the framework for the payments system should:
- Be transparent , flexible and reliable
- Ensure integration/interoperability of the sub-systems
- Speed up exchange and settlement of funds and securities
- Promote safety: Protecting systemic risks by:
- Containing credit, legal, liquidity and operational risks.
- Compliance with international standards and recommendations
- Compliance with national standards and recommendations (e.g. Cheque and electronic banking standards).
- Migration to cash-less modes of payment, such as the use of debit/credit/prepaid cards for electronic payments via Point of Sale (POS) terminals and ATMs, internet banking, mobile payments, direct debits/credits, ACH payments and Real-Time Gross Settlement System (RTGS).
- Transparency: To run the NPS in a transparent manner, as one of the factors militating against the widespread usage of the former payments system, is the concern of market participants about transparency. Consequently, NPS would spearhead procedures and technology that perform end-to-end audit-ability, full transaction reporting to regulatory and reporting authorities. In addition, the NPS would publicly disclose the criteria for participation, in any payments solution, and permit fair and open access to all interested and qualified parties.
- Public Acceptance and Confidence. The NPS would open channels for effective information dissemination, customer convenience orientation and total quality delivery. In particular, the NPS would work towards widespread use of payment solutions and infrastructure that are nationally utilized and internationally recognized. The NPS would ensure that the legal and institutional arrangement is favorable to the achievement of its goals, and where such is not the case, appropriate regulations and review of guidelines would be undertaken from time to time in response to developments as the payment systems evolve.
- Integration with the financial infrastructure: In order to achieve the full benefit of well-functioning payment systems, financial value should be able to flow from one market to the other in a seamless manner. Therefore, the NPS would be a major driver of changes in the financial markets, and would encourage collaboration and cooperation. As Nigeria moves towards a common monetary zone with five other West African countries, the reform of the existing payments process for compatibility, standardization and cross-border settlement becomes imperative.
1.2 General Legal Framework
There is no law that explicitly and exclusively deals with Payments systems in Nigeria. Rather, the CBN Act, as amended in 2007 gives the Bank the implicit powers to oversee and regulate the payments system. Section 47 (1) of the CBN Act provides that "it shall be the duty of the CBN to facilitate the clearing of cheques and credit instruments for banks carrying on business in Nigeria and for this purpose, the bank shall at any appropriate time and in conjunction with other banks establish clearing houses in premises provided by the Bank in such places as the Bank may consider necessary". Section 47 (2) provides that the Bank shall continue to promote and facilitate the development of efficient and effective systems for the settlement of transactions Section 17 provides that "the Bank shall have the sole right of issuing currency notes and coins throughout Nigeria--". Also, the Nigeria Deposit Insurance Corporation (NDIC) in exercising its responsibilities as provided by NDIC Act, 2006 complements the supervisory function of the CBN in the nation's payment system. The extent of this responsibility is the insuring of all deposit liabilities of banks in order to protect depositors against bank failure and instill public confidence in the system. Also the Nigeria Stock Exchange plays a dominant role in the Nigerian Payments and Settlement landscape as the trading in equities is conducted via the floor of the Exchange based on encompassing laws and regulations.
1.3 Institutional and Organizational Framework
The CBN is the main institution that regulates the Payments System. Banks, discount houses, Nigeria Inter-Bank Settlement System (NIBSS), Nigeria Stock Exchange, payment service providers and switching companies, remain the key players in the Nigerian payments system. The CBN, complemented by the Nigeria Deposit Insurance Corporation (NDIC) provides the necessary oversight function to ensure the efficiency and effectiveness of the payments system.
1.4 The role of Central Bank in the National Payment System
There are six major responsibilities of the Bank that are derived from the Act establishing the CBN, as amended. They include:
- Act as Banker to banks and provide the smooth operation of payments, clearing and settlement systems.
- Act as Banker and adviser to, and as fiscal agent of Government.
- Issue currency notes and coins
- License and supervi se authorized dealers (except stock brokers that are licensed by Securities and Exchange Commission and supervised by the Nigeria Stock Exchange).
- Formulate and implement foreign exchange reserves.
- Hold and manage its foreign exchange reserves.
Furthermore, the Bank is empowered by the CBN Act to formulate and implement monetary policy, to achieve and maintain stability in the general level of prices and make regulations for the proper functioning of a stable market. It is also charged with the responsibility to oversee the operations of deposit money banks and other financial institutions.
Provision of Settlement and Operations Accounts
Provides settlement and operation accounts for Deposit Money Banks to facilitate inter- bank settlement and other obligations
maintains accounts for financial institutions
keeps accounts for government
facilitates the clearing house operations
lender of last resort
The risk reduction measures:
Settlement arrangement for cheque clearing, whereby only settlement banks are allowed to maintain settlement accounts with the Bank, provided they meet the minimum requirements of N15 billion in treasury bills and FGN bonds. The non-settlement banks maintain settlement accounts with their respective settlement banks in line with the agency agreement. However, they maintain operations accounts with the CBN for treasury and foreign exchange operations as well as to meet their statutory cash reserve requirements.
All settlement accounts must be funded, otherwise holdings in government securities/the clearing collateral would be utilized to provide intraday facility, to fund the account.
1.5 SUMMARY OF PAYMENTS SYSTEM ACHIEVEMENTS IN NIGERIA - 1993-2010
Implementation of MICR - 1993
Establishment of NIBSS - 1994
Setting up of Technical Committee on
Automation and appointment of consultant for
NACS - 1996-1997
Full implementation and live operation of NACS - 2002
Reduction of the clearing cycle to T+3 and T+5
for local and upcountry instruments, respectively - 2002
Guidelines on e-banking - 2003
Establishment of switching companies and
interoperability of /shared ATM/POS - 2004
New Settlement Framework (for Cheque Clearing) - 2004
Cheque Standard and Cheque Printer accreditation
Scheme - 2005
Reconstituted National Payments System
Committee and set up technical sub-committee - 2005
Implementation of RTGS System, T 24
eFASS and ERP - 2006
Payments System Strategy Team inaugurated - 2006
Establishment of National Central Switch 2006
Cheque Standard & Cheque Printers Accreditation - 2006
Payments System Vision 2020 ` - 2007
Harmonization of clearing cycles (upcountry and local) at T+2 2008
(Three working days)
Deployment of NACS to Port Harcourt Clearing Zone 2008
Deployment of NACS to Kano, Ibadan and Enugu 2009
Issuance of Mobile Payment Regulatory Framework 2009
Guidelines on Transaction Switching 2009
Guidelines on Stored Value/Prepaid Cards 2009
Direct Debit Rules 2009
Cheque cap of N10 million 2010
Migration to EMV Cards 2010
Guidelines on ATM Operations 2010
Nigeria Uniform Bank Account Number (NUBAN) 2010