Evolving a National Payment System legislation for Nigeria

Payments system is the infrastructure established to enable the transfer of monetary value between parties discharging mutual obligations. Its technical efficiency determines the efficiency with which transaction money is used in the economy, and the management of the risks associated with its use.

The Task Force on Payment System Principles and Practices put together by the Bank for International Settlements comprises representatives not only from G10 central banks and the European Central Bank, but also from 11 other national central banks of countries in different stages of economic development from all over the world and representatives from the International Monetary Fund and the World Bank. In undertaking its work, it consulted groups of central banks in Africa, the Americas, Asia, Pacific region and Europe.

It determined that “Safe and efficient payment systems are critical to the effective functioning of the financial system. Payment systems are the means by which funds are transferred between banks, and the most significant payment systems, which this report refers to as systemically important payment systems, are a major channel by which shocks can be transmitted across domestic and international financial systems and markets. Robust payment systems are, therefore, a key requirement in maintaining and promoting financial stability.”

To be sure, payment systems have been described as the means by which funds are transferred between banks, and the most significant payment systems, which this report refers to as systemically important payment systems, are a major channel by which shocks can be transmitted across domestic and international financial systems and markets.

“Robust payment systems are, therefore, a key requirement in maintaining and promoting financial stability. Over the past few years, a broad international consensus has developed on the need to strengthen payment systems by promoting internationally accepted standards and practices for their design and operation.”

Significantly, the report also explains the key role of central banks and sets out their responsibilities in applying the core principles. These responsibilities include assessing existing payment systems against the core principles and initiating or promoting action to ensure that they are implemented.

In addition, it discussed central banks’ responsibilities in applying the core principles, it similarly adds to the principles for cooperative central bank oversight contained in the Lamfalussy Report and extends them to domestic systems.

Presently there is no special legislation on Payment System in Nigeria. The Legal and Regulatory Framework for Payment System in Nigeria would be picked in bits and pieces from provisions found in a myriad of statutes such as the Central Bank of Nigeria Act,  the Evidence Act ,Banks and Other Financial Institutions Act (BOFIA) , the Bills of Exchange Act, the Dishonoured Cheques (Offences) Act, Foreign Exchange (Monitoring & Miscellaneous Provisions) Act, the Companies and Allied Matters Act (CAMA) , etc.; the general laws of Contract, Tort, Trust etc. and a number of rules, guidelines and regulations made by the CBN pursuant to the provisions of the bank’s enabling laws.

The National Assembly through its Committee on Finance is on the verge of passing a Bill for an Act on Payment System, Credit Bureau and Forex Management otherwise known as National Payment System Bill (NPSB). The objectives of the Bill include creation of a clear legal, institutional and regulatory framework that would ensure transparency, effective and efficient management, administration and operation of payment, clearing and settlement systems in Nigeria; provide uniform, comprehensive and effective mechanism for settlement of disputes arising from payments system management; create certainty and predictability in payments system management; and institutionalise best practices in payment systems management in Nigeria.

Absence of such framework exposes participants in the payments system to financial risks which in turn pose danger to safe and sound financial system.

The purposes of National Payments System Management include ensuring nationally utilised and internationally recognised payment system encompassing the total payment processes from issuance of instruction to final settlement; and enabling transacting parties to exchange values and to conduct business transactions efficiently.

However, the Payment Systems Bill seeks to create an entirely new agency to regulate its practices in Nigeria contrary to global best practice.

The Bank for International Settlements in drawing out the core principles for the Systemically Important Payment Systems already allotted the responsibility for regulating its practices on central banks.

The responsibilities of the central bank in applying the core principles according to the global institution include: clearly defining its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems; ensuring that the systems it operates comply with the core principles; overseeing compliance with the core principles by systems it does not operate and it should have the ability to carry out this oversight; and that central bank, in promoting payment system safety and efficiency through the core principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

Already, the Federal Executive Council has approved the Payment System Management Bill, 2016, which was a collaborative work by the Legal Special Interest Group of PSV2020 was charged with the responsibility of coming up with the Bill. The membership of the Group is drawn from the CBN, Deposit Money Banks (DMBs), payment system service providers, National Identity Management Commission (NIMC) and the Federal Ministry of Justice. The Group studied legislations on payments system of some countries including India, Namibia, Ghana, South Africa, Croatia, Australia, the European Union and Malaysia in carrying out its task.

Aside another Bill on Payment System also titled “Payment System Management Bill, 2016” sponsored by Senator John Owan Enoh. These two bills have ben harmonised at the instance of Senate Committee on Finance with a new title “Payment System Management Bill, 2017” (PSMB 2017). Rather than continue work on its submission to the Senate Committee on Finance, the bank had urged the committee as well as the Senate to adopt the harmonised version of the Bill.

Under PSMB, the CBN is the sole authority for management, regulation and oversight of the Payment System with Payment Scheme Boards and a Strategy Committee (with membership drawn from other regulatory agencies and relevant stakeholders) providing support services to the bank.

The Bill was so structured because the key infrastructure, systems and participants in the Payment Systems are statutorily under the purview of the Bank. Therefore, the arrangement ensures that there is no gap between the management of Payment Systems and the monetary policy transmission mechanism. This is the structure preferred by the Committee on Payments and Market Infrastructure (CPMI) which is the international body on development of payment systems.

However, the National System Payment Bill (NPSB) provides for recognition of an association of payment system participants as regulators of the members. In other words, most regulatory and oversight of the Payment System under the NPSB is through the instrumentality of self-regulation by system participants through their association or associations.  NPSB also placed a role on the Minister Finance thereby introducing another governance structure.

The international best practice on Payment System as stipulated by the Committee on Payment and Market Infrastructure (CPMI) places the responsibility of oversight of Payment Systems on central banks. The Core Principles of Systemically Important Payment Systems (CPSS) principles in placing the responsibility of oversight of the Payment System on central banks require them to ensure compliance with the core principles by payment and settlement systems. The CPSS also require the central bank to cooperate with other central banks and any other foreign or domestic entity for promotion of payment systems safety and efficiency.

Furthermore, most payment systems settle in central bank money for safety, availability efficiency, neutrality and finality. Indeed, the largest settlement system that settles the large value transactions in Nigeria is the CBN RTGS. It will be more difficult for the Central Bank to perform this role should the governance not be fully vested in it.

Significantly also, NPSB empowers the Minister of Finance to exempt any person or categories of persons from the provision of the Bill prohibiting persons other than payment system participants and their agents from operating a payment system. However, since the Minister is not involved in any of the processes in the payment system under the Bill it is difficult seeing how this will work out.

However, there exists within the CBN, the requisite capacity both human and infrastructure for the effective management of the National Payment Systems capable of optimal achievement of the objectives of the PSMB as set out in section two of the Bill. Involving the Minister in a key decision of exemption of a payment system from the requirement of authorisation is capable of creating a regulatory arbitrage and gaps between the management of Payment Systems and the monetary policy transmission mechanism with the potentials for instability in the financial system.