The Art of Constructing
The banking community, including the leadership provided by the Bank of Mauritius, cannot but be warmly praised for the progress made this week to further the payment system of Mauritius Anil Gujadhur
The Bank of Mauritius and the Mauritius Bankers Association launched this week the cheque truncation system of Mauritius. This system allows cheques to be cleared among banks by transmitting digital images of cheques to the banks on which those cheques are drawn. This replaces the manual clearing of interbank cheques that has been in existence ever since more than one cheque-issuing bank has operated in the country. The cheque truncation technology, applied to cheques drawn on the same bank against customer accounts held at its different branches, should also make the clearing of those in-house cheques much less cumbersome and more expeditious than it is the case normally.
The crux of the matter is that funds which are meant to change hands from one account holder to another by the issuance of cheques will now be handed over to the beneficiary much faster than it has been the case before the technology was adopted. Cash flows of individuals, firms and revenue departments of the government will thus be dramatically improved provided everyone from the cheque issuer to the service providers sticks to laid down rules and security features in place. Improving cash flows has other implications: it reduces the extent of uncertainty from the point of view of recipients inasmuch as a settlement which might take days to be fixed is more risky than one which is almost instantaneously settled or settled with a shorter lag than before.
This is thus a move forward in terms of systemic stability in view of the fact that it will cover about a fifth of daily total payments in the country which are accounted for by cheque transactions. This may look a bit stretched out but there are country experiences in which even small business units like microfinance enterprises get stuck up in their production activity because anticipated cash flows did not materialise in time to feed into their production cycle. In any event, an efficient payment system eliminates undue holding back of dues from transactions. The cheque truncation system adds therefore a further refinement and dimension to the payment system of Mauritius.
It may be recalled that a little more than 10 years ago, that is before 2001, the bulk of payments in Mauritius were carried out via cheques. Huge amounts of unpaid values remained stuck at banks, waiting to be manually cleared the next day or days after. When substantial amounts of funds do not flow fast and smoothly across the system, this situation points to inefficiency; liquidity that might have been used to lubricate the wheels of production in a timely manner was literally trapped in the payment system even if it was overnight. In that sense, our payment system infrastructure was comparable to that of several under-developed countries. The pace of exchange was slow; operators were content to wait for their liquidity to materialize at set intervals sometimes spreading out over one week; taking bridge finance from financial institutions to tide over the time of waiting for the liquidity to materialize was commonplace; the bank overdraft system thrived while interest costs of raising such temporary finance was marked up into the final prices consumers were made to bear.
The central bank was aware of the element of cost that this slow-moving payment system inflicted upon stakeholders, producers and the public at large. It was also understood that banks could do little in this regard apart from organising special clearings in the evenings to get the larger values to some of their special customers’ accounts but that was applicable not to the generality of customers. It was the privilege of treasurers of some of the big business houses of Port Louis to get to the funds instead of allowing them to remain idle. This was the background against which work was undertaken to sort out this problem of backwardness of the payment system.
I had accompanied somewhere in late 1993 the then Managing Director of the Bank of Mauritius on mission to a European country. On the sides of the main meetings, there was a presentation by a Japanese company about how automated clearing houses (ACH) had been and could be set up with the help of electronic technology to improve the flow of money and hence economic transactions in a country. I was working in Banking Supervision of the Bank of Mauritius at the time. The MD asked me whether I could take up the responsibility to set up an ACH in Mauritius with a view to expediting the flow of money in the country. I assumed the job of project coordinator of this ambitious job which was not in the realm or reach of developing countries at that time. In our part of the world, it was only apartheid South Africa that had one such system. Working thus in close collaboration with selected teams from within the Bank of Mauritius and with colleagues from commercial banks, reconciling banking practices, considering the scope of information technology and adapting to existing legal restraints governing payments, this team successfully produced a template for fielding relevant electronic information across banks for an ACH setup by late 1995. It was at that time that the expert from the World Bank who was being consulted for the project, suggested that we could actually make a quantum jump by putting the entire payment system of Mauritius on one common electronic stream even if that meant catching up on it at a later stage with the ACH function.
This proposal made sense. When put to the Management of the Bank of Mauritius and to the Mauritius Bankers Association, it was agreed to in principle. We then proceeded to work briskly on the broader all-inclusive electronic payment system design for Mauritius. Collaboration between staff of the Bank of Mauritius and that of commercial banks was so good that before the first half of 1996, a new comprehensive project design, including accommodating for rapid cheque clearing, was already in our hands as well as the bid specification document therefor. Unfortunately, not much progress was made on this custom-made project design for the next three years.
It is said that there is an ill-wind that blows nobody any good. Actually, during the time the custom-made project did not progress, technology had advanced by leaps and bounds; costs had de-escalated dramatically; system design was made far simpler by early 1999 when I was called upon to resume responsibility for coordinating the payment system project as Managing Director of the Bank of Mauritius. With the assistance of the Consultants and expertise from the World Bank, the high speed real value electronic payment system for large transfers of funds, known as the MACSS (Mauritius Automated Clearing and Settlement System) was already implemented before the close of 2000 after going through all the nitty-gritty of production of project specification documents, Invitation for Bids and Bid Evaluation activity undertaken in strict accordance with the World Bank Manual for Procurement. Revenue departments of the government, commercial banks and the Bank of Mauritius suddenly found themselves networked together through one common stream of fast electronically driven payment settlement system. Fund transfers in small but ambitious Mauritius could as from now be executed within seconds for all large-value (about 80% of the total) and time-sensitive payments on a bank-to-bank basis, just as this was being done in advanced countries. The system we had put in place in Mauritius complied with the strict Lamfallussy standards which govern the running of reliable payment systems, except for one standard notably finality of payment which a clause of the Code Civil was found to be in conflict with and was removed later for full compliance.
We were henceforth playing in a higher league of countries having a modernized payment system based on the best technology although the cheque handling part still had to wait for cheque handling equipment and appropriate amendment in the laws. Credit goes to the dedication and commitment shown throughout this phase by colleagues from both the Bank of Mauritius and commercial banks, many of whom are no longer in office just like me while others who were involved are busy running it. The cheque truncation system now put in place by the banking community goes on to round up the circle which was set in motion in 1994.
The banking community, including the leadership provided by the Bank of Mauritius, cannot but be warmly praised for the progress made this week to further the payment system of Mauritius. Experience shows that it is only when you are willing to dirty your fingers that you can make material progress, especially progress that will in all likelihood affect the behaviour of economic agents of the present days but also that of coming generations.