Bank of Tanzania

PAYMENT SYSTEMS IN THE SOUTHERN AFRICAN DEVELOPMENT COMMUNITY - TANZANIA CHAPTER

Directorate of National Payment System

INTRODUCTION 4

1 INSTITUTIONAL ASPECTS 4

1.1 GENERAL LEGAL ASPECTS 4 1.2 THE ROLE OF FINANCIAL INTERMEDIARIES 5

1.2.1 The Bank of Tanzania (the central bank) 5 1.2.2 Commercial Banks 5 1.2.3 Non-Bank Financial Institutions (NBFI) 5 1.2.4 Other institutions that provide payment services 6

1.3 THE ROLE OF THE CENTRAL BANK. 6 1.3.1 Banking and Payment Services 6 1.3.2 Notes and Coins Issuance 7 1.3.3 Supervision and regulation 7

1.4 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR BODIES 7 1.4.1 The National Payment System Advisory Council (NAC) 7 1.4.2 Tanzania Bankers Association (TBA) 8 1.4.3 Bankers Clearing Houses 8 1.4.4 Tanzania Institute of Bankers (TIOB) 8 1.4.5 The National Board of Accountants and Auditors (NBAA) 8 1.4.6 The Tanzania Communication Commission (TCC) 8 1.4.7 National Payment System (NPS) Infrastructure Services Providers. 8

2 SUMMARY INFORMATION ON PAYMENT MEDIA USED BY NON-BANKS 8

2.1 CASH PAYMENTS 8 2.2 NON-CASH PAYMENTS 9

2.2.1 Paper based instruments 9 2.2.2 Prepaid cards 9 2.2.3 Other non-cash payments 9

2.3 RECENT DEVELOPMENTS 9 2.3.1 Tanzania SWIFT User Group 9 2.3.2 Automated teller machines (ATMs) 9 2.3.3 Electronic Money Products and Schemes 9 2.3.4 Paper instrument standards 9

3 INTER-BANK EXCHANGE AND SETTLEMENT CIRCUITS 10

3.1 GENERAL OVERVIEW 10 3.1.1 Cheque Clearing Circuit 10 3.1.2 Operation of the Cheque Collection Mechanism 10 3.1.3 Pricing policies 10

3.2 STRUCTURE, OPERATION AND ADMINISTRATION OF MAJOR LARGE VALUE SYSTEMS 10 3.2.1 Structure 10 3.2.2 Administration and regulation 11 3.2.3 Participants in the System 11 3.2.4 Types of Instruments handled, operation and processing of transactions 11

3.3 MAIN PROJECTS AND POLICIES BEING IMPLEMENTED 12 3.3.1 Large Value Transfer System (LVTS) 12 3.3.2 Electronic Clearing House (ECH) System 12 3.3.3 East African Payment System Harmonisation Committee 12

4 SPECIAL USE OF INTER-BANK TRANSFER SYSTEMS FOR INTERNATIONAL AND DOMESTIC FINANCIAL TRANSACTIONS 12

4.1 EXCHANGE AND SETTLEMENT SYSTEMS FOR INTERNATIONAL TRANSACTIONS 12 4.1.1 General Overview 12 4.1.2 Retail Transactions 12 4.1.3 Large Value Transfers for International Transactions 12

4.2 EXCHANGE AND SETTLEMENT SYSTEMS FOR SECURITIES TRANSACTIONS 12 4.2.1 Developments in Financial Markets in Tanzania 12 4.2.2 Settlement and Clearing Arrangement for Securities transactions 13

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5 THE ROLE OF THE BANK OF TANZANIA (BOT) IN INTER-BANK SETTLEMENT SYSTEMS 14

5.1 GENERAL RESPONSIBILITIES 14 5.1.1 Statutory responsibilities 14 5.1.2 Establishment of common rules 14

5.2 PROVISION OF SETTLEMENT AND CREDIT FACILITIES 15 5.2.1 Use of settlement accounts for payment services 15 5.2.2 Role in gross settlement systems 15 5.2.3 Role in netting systems 15 5.2.4 Role in the Settlement of Securities Transactions 15

5.3 MONETARY POLICY AND PAYMENT SYSTEMS 15

5.3.1 Objectives of monetary policy implementation 15 5.3.2 Instruments of monetary policy in Tanzania 16 5.3.3 Relationship between monetary policy and payment systems 17

5.4 MAIN POLICIES AND PROJECTS BEING IMPLEMENTED 17

TABLES 18

REFERENCES: 23

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INTRODUCTION

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The United Republic of Tanzania is made up of Zanzibar Island and Tanzania mainland. The countryhad a socialist-centrally-planned economy for about 30 years after independence with one state owned bank dominating the banking industry for about 25 years until 1993 when the financial industry was liberalised. There were no clearing houses until 1993 when one was introduced in Dar Es Salaam (The capital city). Before the clearing house was introduced, clearing of paper-based instrumen s was purely on bilateral arrangements.

Currently, there are a total of 19 banks with about 172 branches. Three banks have a countrywide coverage, one of them being a Micro-Finance Bank (with 95 branches), which is the only bank having branches up to district level1. The second and third largest banks (in terms of branches) have 34 and 22 branches respectively, all at regional level. Other banks only have between one and three branches, mostly concentrated in Dar Es Salaam.

Cash has been the dominant payment instrument with little usage of cheques and telegraphic transfers as main debit and credit instruments respectively. As the existing payment systems are mainly cash based most transactions and payments are effected outside the banking system.

Inter-bank clearing is manual with net settlement at end of day. Settlement is done through clearing accounts held at the Bank of Tanzania (BOT). Inter-bank clearing in the cities within clearing houses latitudes is done in 3 days and a maximum of 28 days for remote clearing. However, in August 2001, inter-bank paper instruments will be cleared through the Electronic Clearing House.

Some banks use S.W.I.F T mainly for international funds transfer. While S.W.I.F.T. transfers can takeup to 3 days before the beneficiary’s account is credited, other means such as telegraphic transfers can take weeks before the Tanzania shilling cover is provided, even after payment has been cleared.

There had been no “free” financial markets2 until 1993 when Treasury Bills started to be traded in a primary “free” market using the physical script (This is explained in detail in Section 4.2 1). The Dar Es Salaam Stock Exchange (DSE) was incorporated in 1996. The formation of the DSE followed the establishmen of the Capital Markets and Securities Authority (CMSA) under the Capital Marke s and Securities Act 1994. CMSA is the industry regulatory body established with the initial mandate of promoting conditions for the development of capital markets in Tanzania.

Generally, there has been no comprehensive unified law governing payment, clearance and settlement systems.

Tanzania launched a National Payment System (NPS) modernisation project in August 1996. Its primary objective is to modernise the country’s payment, clearing and settlement systems in order to attain internationally accep able best practices by minimising risks and increasing efficiency.

As a result of these efforts, NPS Stakeholders3 agreed on the NPS Vision and Strategic Framework in January 2000. The document describes the Vision and Strategies to achieve an effective and efficient payment system in the country by Year 2005.

1 INSTITUTIONAL ASPECTS

1.1 GENERAL LEGAL ASPECTS

There is no general legislation governing the payment systems in Tanzania, though the Bank of Tanzania maintains a close involvemen in supervision and regulation. English common law is the origin of the law in Tanzania.

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1 Tanzania has 25 administrative Regions A region normally covers 2 to 4 Administra ive Dis ricts. 2 In the sense that before then, dealings in the money market were based on Government determined rates

43 NPS stakeholders includes all en ities that have interes in the well functioning of the country's payment system.

(a) The Bills of Exchange Ordinance, Cap. 215 and the Cheques Act, 1969.

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The Bills of Exchange Ordinance, Cap.215 is a statu e in pari materia with the Bills of Exchange Act, 1882 of the United Kingdom. The Bills of Exchange Ordinance largely governs the use of cheques. The Cheques Act provides for the protection of bankers in relation to transactions concluded through payment by use of cheques and other related instrumen s.

(b) Other Relevant Legislation

Apart from the Bills of Exchange Ordinance and the Cheques Act, 1969 there are several other pieces of legislation which touch on payment system. These largely vest certain institutions with regulatory and supervisory powers over various aspects of payment system services. These include:

(i) The Bank of Tanzania Act, 1995 which provides for definitive regulatory and supervisory powers of the Bank over other banks and financial institutions,

(ii) The Banking and Financial Institutions Act, 1991 which consolidated the law relating to the business of banking and harmonised the operations of all financial insti utions in Tanzania. (For a fuller description of this see Section1.3).

While the Capital Market and Securities Act, 1994 promotes and facilitates the development of orderly, fair, efficient capital and securities market in Tanzania, the Governmen Loans, Guarantees and Grants Act consolida es laws relating to loans raised by and guarantees givenby the government and provides for acceptance of grants made to the government.

The Fair Trade Practices Act, 1994 encourages competition in the economy and prohibits restrictive trade practices, regulates monopolies and the concentration of economic power and prices. It also provides for the protection of consumers. All standard form contrac s are required to be registered with the Commissioner of Fair Trade practices.

Efforts are underway to amend antiquated laws to match with technology. Draft proposals on the amendments to the Evidence Act, 1967 have already been submitted to the AttorneyGenerals Chambers. Also amendment proposals to the Bills of Exchange Ordinance to allow cheque truncation and the Bank of Tanzania Act, 1995 to vest explicit powers in the Bank of Tanzania to regulate and supervise payment systems are ready for submission to the Attorney Generals Chambers.

1.2 THE ROLE OF FINANCIAL INTERMEDIARIES

There are four main levels of financial intermediation that provide payment services to the Government, corporate and individual customers. The levels are: the Cen ral Bank, Commercial Banks, Non-Bank Financial Institutions and other Non Financial Institutions.

1.2.1 The Bank of Tanzania (the central bank)

The Bank of Tanzania is a banker to commercial banks and the Government (Please see Section 3 3 for details). The Bank has 4 branches positioned in different parts of the country.

1.2.2 Commercial Banks

Commercial banks are financial institutions authorised to receive money on current account subject to withdrawal by cheque. They receive funds f om the general public (corporate, individual customers, some Government departments and institutions) through the acceptance of money deposits payable upon demand or after a fixed period and after notice. The banks can also provide similar operations through frequent sale or placement of bonds, certificates, notes or othesecurities. Only commercial banks are allowed to participate in the clearing and settlement processes.

1.2.3 Non-Bank Financial Institutions (NBFI) 5

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These are grouped into deposit and non-deposit taking non-bank financial institutions.

(a) Deposit taking non-bank financial institutions

They are deposit taking but incur liabilities in forms other than demand deposits, say time and savings deposits. Also they mobilise deposits, offering various types of deposit schemes (inTanzanian Shilling and foreign exchange); providing banking services (other than current / cheque accounts) and participate in money market operations. For example, Tanzania Postal Bank (TPB), which is popular for small value savers, uses Tanzania Posts Corporation offices on agency agreement to service remote par s (including rural areas) of the country.

Currently, there are 13 licensed deposit taking Non-Bank Financial Institutions. These institutions are not members of the clearing houses. They participate in the clearing system indirectly through the commercial banks. Most of them have single branches, except TPB which uses Tanzania Posts Corporation through its 214 branches spread all over the country.

(b) Non-deposit taking non-bank financial institutions

They offer leasing and hire purchase services, development finance, pension funds and insurance services. These institutions usually deal with bulk and recurring payments and have access to the payment system through an account in either a deposit taking non-bank financial institutions or commercial banks.

1.2.4 Other institutions that provide payment services

They are grouped into three major categories

(a) Bureau de change institutions

They provide a retail foreign exchange market. As non bank currency shops, they are not allowed to participate in the Inter-bank Foreign Exchange Market. Sixty-three Bureau de Change exists in Tanzania, with about 60% located in the Capital City.

(b) Sundry institutions

They offer auxiliary intermediation or support services to the national payment system, particularly the Tanzania Posts Corporation (TPC), which in addition to its traditional postal services, provides payment services through: postal mail transfers, local postal telegraphic transfers, money orders, money fax and Giro transfers. TPC plays a major role as courier service provider all over the country.

(c) Savings and Credit Co-operative Societies (SACCOS)

These are primarily small member-owned societies of cooperative movements that are active in some parts of the country. Over 400 SACCOS are in operation in Tanzania. They are potential intermediaries between the banking sector, the rural areas and micro-businesses in urban areas. SACCOS and other Micro-finance institutions use commercial banks and deposit taking non-bank financial institutions to access payment system services.

1.3 THE ROLE OF THE CENTRAL BANK.

1.3.1 Banking and Payment Services

The Bank of Tanzania plays the role of a central bank, which include currency issuance, banker’s bank, Governments bank and advisor to the Governments on banking matters (see Section 1.1 (d) above).

As a bankers’ bank: the Bank accepts deposits to act as prudential reserves for the commercial banks. It also discounts commercial and government paper and acts as lender of last resor to these banks. The Bank also provides central clearance facilities for the interbank transactions including acting as the settlement agent.

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As the governments’ bank: it is the banker, fiscal agent and provides depository facilities for the Government departmen s. It also plays the advisory role for the governments as far as matters relating to banking are concerned among others.

1.3.2 Notes and Coins Issuance

The bank has the sole right to issue notes and coins in Tanzania for the purpose ofdirectly influencing the amount of currency in circulation outside banks, thereby providing the economy with sufficient but non-inflationary liquidity.

The stocks of note and coins are distributed through Bank of Tanzania headquarters, its 4 branches and 6 safe custody centers at various comme cial bank branches, which were established under agreements.

1.3.3 Supervision and regulation

The Bank of Tanzania has been vested with the responsibility of supervising and regulating deposit-taking institutions in the United Republic of Tanzania. The Banking and Financial Institution Act, 1991 (refer item 1.1 above) gave the BOT a substan ially increased role in the supervision and regulation of the activities of banks and non-bank financial insti utions. To ensure the safety and soundness of the banking organizations that it supervises, the BOT conducts surveillance and on-site examinations, undertakes enforcement and other supervisory activities.

The Bank is also co-ordinating the NPS modernisation ini iatives in the country through its dedicated Directorate of National Payment Sys em. The Bank assumes such a responsibility as part of its efforts to ensure that there is in place, a well functioning and effective financial markets, including an efficient payment system as stipulated in the Bank of Tanzania Act 1995.

However, there are ongoing initiatives to ensure that there is a legislation that explicitly vest the Bank of Tanzania with powers to supervise, regulate and oversee payment systems in the country.

1.4 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR BODIES

Other entities that play a role in the Tanzania payments system include those that provide specialised clearing services, setting NPS policies accounting standard-setting or establishment of rules and regulations and Payment System infrastructure service providers. .

1.4.1 The National Payment System Advisory Council (NAC)

NAC is the supreme body involved in policy matters. It give directions and oversees the developments of the payment systems throughout the country. Its key functions include sanctioning reports and recommendations submitted by its 4 specialised committees4,.

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- t . 4 Namely: Automation, Standards, Operations and Legal Regula ory Committes

1.4.2 Tanzania Bankers Association (TBA)

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A body whose members are all commercial banks. It’s main objec ive is to safeguardmatters of common interest to its members. TBA is key stakeholder in payment system, as its members are the only institutions that participate in inter-bank clearing operations.

1.4.3 Bankers Clearing Houses

Five Bankers Clearing Houses situated in 5 major cities exists. Membership is limitedto licensed commercial banks. Their main role is to facilitate the clearance of paper-based inter-bank instrumen s, principally cheques.

1.4.4 Tanzania Institute of Bankers (TIOB)

Its main role is to act as a regulatory and disciplinary body for banking professionals and conduct all bankers’ research activities and professional examinations. Membership is restricted to corporate members, that is, commercial banks and non-bank financial institutions and individual members from the corporate members.

1.4.5 The National Board of Accountants and Auditors (NBAA)

NBAA is the overseeing authori y and regulatory body for both accounting and auditing standardization. Accounting issues in NPS, are influenced by standards issued by this body.

1.4.6 The Tanzania Communication Commission (TCC)

TCC has been entrusted to oversee and regulate all communication activities in the country. It is the only body having responsibility for issuing licenses to all operators of communicationservices.

1.4.7 National Payment System (NPS) Infrastructure Services Providers.

There are several companies, which provide their infrastructure for NPS operations. These include voice and data communications service providers and courier service providers. Most ofthese service providers are licensed and regulated by TCC.

2 SUMMARY INFORMATION ON PAYMENT MEDIA USED BY NON-BANKS

2.1 CASH PAYMENTS

The BOT currently prints and issues notes in four denominations and mints and issues coins in eleven denominations as summarised by Table A below The cur ency circulates freelyin the whole of the United Republic of Tanzania.

Table A: Notes and coins in circulation Currency type Denominations in

Tanzanian Shilling (TZS) Share of Currency in Percentage (as at 31st December, 1999)

Notes 500, 9.47% 9.84% 21.72%, 54.94%,

Coins 200, 100, 50, 20, 10. 1.96%, 0 00%, 0.00%, 0 12% and 0.02% 5 cts, 10cts, 20cts, 50cts, 1 and 5

1000, 5000 10,000

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As at 31st December 1999, the coins in circulation constituted 1.93% of the total notes and coins in circulation.

Bank notes and coins issued in 1999 stood at TZS 339.3 billion and the value of notes and coins held by banks was TZS 405.2 billions. The value of notes and coin in circulation with the

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public increased from TZS 257,662.80 millions in 1996 to TZS 384,848.00 millions in 1999 (see table 4). Cash payment accounted for 4.01% of the total payment instruments in use.

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2.2 NON-CASH PAYMENTS

2.2.1 Paper based instruments

Payments made by cheque have been increasing significantly since 1995. The volume of transac ions increased from 50,309 in 1996 to 746,274 in November 1999. The total value also increased during these periods from about TZS 153Million to TZS 3.3Billion respectively. Usage of cheques accounted for 7.4% of the total payment instruments in use.

2.2.2 Prepaid cards

The prepaid cards that exist are single purpose cards. They comprise of phone-cards and electricity bill prepaid cards popularly known as LUKU. The most significant development in thisarea has been the Tanzania Electric Supply Company Limited (TANESCO), which intends to expand its services to other regions as currently they are concentrating in Dar Es Salaam only.

The use of multi-purpose prepaid cards, i e. those that can be used to purchase goods and services from a range of suppliers at the point of sale terminals are not available at present However, Automated Teller Machines (ATM) cards are available (See Section 2.3 2).

2.2.3 Other non-cash payments

Telegraphic T ansfers (TTs) are the mostly used credit payment transfer instrument,which in 1999 accounted for 85.57% of the total payment instruments in use. TTs are mainly usedfoe wholesale payments. Others are money orders (0.17%) and composite transactions (2.81%), which are mainly for retail payments. Tanzania Postal Services has recently introduced GIRO facilities for high volume, small value payments.

2.3 RECENT DEVELOPMENTS

2.3.1 Tanzania SWIFT User Group There are ten banks live connected to the SWIFT network of which five are sub

members and five are participants, which form the Tanzania SWIFT User Group Message traffic for2000 were as follows:

(a) Monthly traffic sent 10,984, which represents 26.51% growth rate. (b) Monthly traffic received 15,559, which represents 14.87% growth rate. (c) Distribution of traffic messages sent and received are in the following categories: Customer

payment and cheques, financial institutions transfer, foreign exchange and money markets, documentary credit and advises and balance repor ing.

2.3.2 Automated teller machines (ATMs)

The first ATM was introduced in 1997, Currently 6 ATMs exists, mostly in big cities and are operated by only one bank tha operates i s private network. ATM transac ions are reported as being about 60,000 per annum.

2.3.3 Electronic Money Products and Schemes In January 2000, the Bank of Tanzania issued Guidelines for introduction and

operation of card based e-money products and schemes in Tanzania.

2.3.4 Paper instrument standards Standards for paper based payment instruments have been agreed upon by NPS

stakeholders. The standa ds are common for the East African Community.

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3 INTER-BANK EXCHANGE AND SETTLEMENT CIRCUITS

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3.1 GENERAL OVERVIEW

Inter-bank payments are p ocessed and settled primarily through the cheque clearing mechanism Using this sys em banks exchange payment instrument either through the clearing houses hosted by the BOT at its branches and the Head office or through bilateral arrangements between themselves in areas where there are no clearing houses.

3.1.1 Cheque Clearing Circuit

The bilateral clearing arrangements ( own clearing) provides a mechanism for the same day clearing and settlement of high-value paper instruments within the limited geographical area.

Clearing Houses, provide a mechanism of exchanging debit instruments (mostly cheques) among its members. However clearance takes a period of between three and twenty eightdays depending on the geographical location.

Net Settlement is effected through the accounts that commercial banks hold with theBank of Tanzania. The other system is between commercial banks, through inter-bank correspondent accounts, governed by bilateral agreements. There is also a special clearance facility for instruments that need to be cleared and settled urgently.

3.1.2 Operation of the Cheque Collection Mechanism

Typically, deposit-taking institutions located in the same geographical areas exchange cheques directly. Commercial banks/ branches also par icipate in local cheques clearing arrangements. To-date there are five zonal cheque-clearing cen es hosted in BOT branches, where commercial bank members exchange cheques and use the set lement services of the BOT to set le their net positions.

Cheques drawn on commercial banks located outside the geographical area may be deposited by the collecting bank with a corresponded bank or the Bank of Tanzania branch. Correspondent banks/branches with established relationships present cheques drawn on each other directly.

3.1.3 Pricing policies The Bank of Tanzania hosts all the five clearing houses located in its zonal branches

and the head office. The costs of operating these clearing houses are therefore met by the BOT. While member commercial banks receive free clearing house services some do charge their customers collection fees per instrument. These fees are individually determined depending on the location ofthe collecting bank branches.

However, efforts are underway to transfer the ownership of the clearing houses to the TBA before year 2005. It is expected that when this is accomplished, charges for the clearing house services will be established and agreed by the members.

3.2 STRUCTURE, OPERATION AND ADMINISTRATION OF MAJOR LARGE VALUE SYSTEMS

3.2.1 Structure The Bankers Clearing House has its headquarters at the BOT Head Office in Dar es

Salaam and Zonal Clearing Centres located in the four BOT branches. They hold two clearing sessionsdaily, one for Tanzanian Shilling (TZS) instruments and another for United States Dollar (USD) cheques.

While the operations in all the centres are identical to those at the head office in Dares Salaam, the net settlement positions at the centres are transferred to the head office for consolidation and final settlement in the individual member’s accounts on a daily basis. That is,

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clearing is decentralised while settlement is centralized, the BOT inter branch Wide Area Network facilitates the process.

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3.2.2 Administration and regulation

There is a Management Committee chaired by the Governor of the BOT constituted of all the Chief Execu ive Officers of the member banks. This committee sets up Rules and Regulations of the Banke s Clearing House which all the members must follow. Changes to these Rules and Regulations may be made upon majority consent of the members during their general meetings, which may take place upon request, by any of the two members, the Tanzania Bankers Association or the Chairman.

Since there is no legislation directly refer ing to the Clearing House establishmen andoperation, the present Rules and Regulations are st uctured around the Bills of Exchange O dinance and the Tanzania Cheques Act 1969.

3.2.3 Participants in the System

There are cur ently 18 commercial bank members participating in the Dar es SalaamBankers Clearing House including the BOT. If branches o the same comme cial bank, exists in o her parts of the country, they participate in the zonal clearing centres. Commercial bank branches do not participate in the Dar es Salaam Bankers Clearing House (DBCH).

If a non-bank financial institution wishes to use the clearing system must do so through a member commercial bank. The Bank of Tanzania is both the host and settlement agent

3.2.4 Types of Instruments handled, ope ation and processing of transactions

The inter bank transactions are the only type of instruments handled in the clearingand settlement mechanism. They include instruments such as cheques, drafts and debit vouchers.

Cheques are exchanged in the clearing houses and settlements made after netting arrangements are completed. Net settlement positions are sent to the settlement agent ( he Bank ofTanzania) where settlement accounts are held.

Commercial banks hold the following accounts with the Bank of Tanzania

a) Tanzania Shillings (TZS) Current Account (for settling TZS denominated instrumen s)

b) United States Dollar (USD) account (for settling USD denominated instruments). c) Statu ory Minimum Reserves (SMR) account (for monetary policy implementation

purposes).

Clearing is done once a day at 10.30 a.m. Members meet at the clearing house toexchange instruments and present diskettes with the clearance data for processing of the net settlement positions in case of TZS ins ruments. Within one hou , the processing is completed and the necessary vouchers with corresponding diskettes are presented to the respective members.

Another clearance session for USD instruments takes place at 11.30 a.m and the same procedures are followed This takes about 30 minutes to complete. By 12.30 p.m. the settlement positions from the centres are received and consolidated and the total settlement position of the members is communicated to them. The members compare the settlement position with their account balances and are given up to 2.30p.m. to make good their account positions before final settlement is made through those accounts by 3.00 p.m Unpaid instruments are presented separately during the sessions

In cases of inadequate balances in the settlemen accounts the BOT may offer a collateralised credit (See details in Section 5.2 3).

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3.3 MAIN PROJECTS AND POLICIES BEING IMPLEMENTED

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3.3.1 Large Value Transfer System (LVTS)

In line with NPS Vision and Strategic Framework document, pre-requisites for a large value transfer system are being evaluated. Once the task of evaluation is over, the system will be designed to effect settlement through two options, namely Real Time Gross Settlement and DefferedNet Settlement options. .

3.3.2 Electronic Clearing House (ECH) System

Electronic Clearing House that will use code line clearing principles is expected to be live by 1st August 2001. Thereafter, double clearing session will be introduced for the purposes of achieving same day high value clearing and also reduce countrywide clearing time to 5 days.

3.3.3 East African Payment System Harmonisation Committee

Following re-establishment of the East African Community, of which Tanzania is a member, the East African Payment System Harmonisation Committee was formed in 1999. The Committee has the following main objectives: to co-ordinate and harmonise payment system developments within the East African region and to promote a sound regional payment system to further economic integration within the region.

4 SPECIAL USE OF INTER-BANK TRANSFER SYSTEMS FOR INTERNATIONAL AND DOMESTIC FINANCIAL TRANSACTIONS

4.1 EXCHANGE AND SETTLEMENT SYSTEMS FOR INTERNATIONAL TRANSACTIONS

4.1.1 General Overview

The international transfer of both small and large-value payments is effected through corresponden banking relationships. In some instances those rela ionships are based upon ownershiplinks, while in others the relationship is purely on a commercial basis.

The principal means by which large-value payments are transmitted internationally by deposit-taking financial institutions is by use of S W.I.F.T. In Tanzania, membership of S.W.I.F T. is open to those deposit taking institutions that are also members of TBA.

4.1.2 Retail Transactions

Cross-border transactions are effected hrough international money orders, banker's drafts, travelers' cheques and the services offered by networks of Western Union as well as Money link/ Moneygram. The main foreign currencies used in such cross border transactions include United States Dollar(USD), British Pound Sterling (GBP) and the Euro.

4.1.3 Large Value Transfers for International Transactions

Transfers of large-value and predominantly international transactions, take place through the Inter-bank International Payment System using S.W.I.F.T. (refer section 2.3.1 above).

4.2 EXCHANGE AND SETTLEMENT SYSTEMS FOR SECURITIES TRANSACTIONS

4.2.1 Developments in Financial Markets in Tanzania

(a) Government Securities Market

Government securities transac ions are divided into two categories; namely the primary market (primary issuance) and the secondary market. The former involves transactions related to direct participation in government securities auction by a selected group of participants and

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the latter are the operations by Primary Dealers who act as either agents or market makers in secondary market.

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However, the magnitudes of secondary market transac ions are not significant as revealed by value of securities (bills) traded in the market amounting to TZS 1,069.40 million fromDecember 1999 to March 2000.

The securities market activity has been limited, due to the newness of the market, inadequate market infrastructure and lack of adequate expertise in liquidity management by some of the market players. The absence of a well developed national payment and settlement system thatwill ensure fast and easy transactions without much risk of de ault or fraud are also some of the factors retarding development of active money markets trading in the country.

(b) Inter-bank Cash Market

The Inter bank Cash Market in Tanzania, currently provides a forum for the participants to lend and borrow money on different maturities and tenors. The market serves the purpose of equilibrating the short-term liquidity position of commercial banks and non-bank financialinstitutions. Participants use this market as a source of funds and as a market for placing out surplus funds.

The market’s attraction works in a such that when the banks and non-bank financialinstitutions have surplus funds, the inter-bank market provides machinery for them to lend to each other in order to avoid zero return. If they were to place them with the BOT they would not get anyinterest.

Prior to 1995/96, inter-bank cash market transactions were on a limited scale. The Central Bank started recording the reported transac ions in 1996/97 when TZS 4,250 million was traded. During 1997/98 and 1998/99, the volume transacted increased to TZS 111,819 million and TZS 425,315 million, respectively. A total of TZS 1,553,472 million has been transac ed in 1999/2000 of which TZS 1,358,466 million equivalen to 87.45 pe cent was traded as overnight transac ions.

(c) Repurchase Agreement (Repo) Market

The Bank uses repo facility only as a monetary policy tool for temporarily mopping upapparent excess liquidity in the economy and in some cases may be used as a means of fostering a secondary development fo government securities.

This instrument was first introduced in Tanzania in July 1997. Up to December 2000repos worth TZS 229,381 million had been transacted between the Bank and commercial banks. Onaverage, the volume transacted yearly in the repo market is approximately TZS 57,345 million. This is equivalent to which equivalent to 13.50% and 3.70% of total volume transacted in the inter-bank cash market in 1998/1999and 1999/2000, respectively

The volume of repo transactions is lower compared to volume transac ed in the inter bank cash market as the former always operate at the discretion of central bank while the latter at discretion of the commercial banks.

4.2.2 Settlement and Clearing Arrangement for Securities transactions

(a) Clearing and Settlement5

(i) Primary Market

In primary market (issuance), the settlement for three, six and twelve–month paper issued at discount is T+2 while settlement for 2 yea maturity paper quoted on interest ra e basis isT+1. All trades are settled for value date after the auctions.

(ii) Secondary Market

Secondary market settlement is agreed between counterparts and can be same day, next day or T+1 or several days or weeks later but it is common practice to settle next day (T+1).

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5 In this context, securities settlement system means government securities settlement.

This arrangement allows the counterparts to complete transfer documentation and delivery of script(s) to the BOT for settlement.

(iii) Delivery versus payments (DVP) mechanism

DVP mechanism does not currently exist, since the cheque payments made by direct participants in treasury auction have to be cleared through normal banking clearing system. For transactions channeled through Primary Dealers’ (PD accounts)

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6 maintained at the BOT, the value isrealized on settlement date since the funds are automatically transferred from the PD’s account to government account on value date.

Exchange for value settlement will be achieved once the existing electronic book entry system for Government securities (which was introduced in 1998) is interfaced with BOT Accounting System. This will entail payment and settlement to be done on the value date once the buyer and seller confirm the transactions.

5 THE ROLE OF THE BANK OF TANZANIA (BOT) IN INTER-BANK SETTLEMENT SYSTEMS

5.1 GENERAL RESPONSIBILITIES

5.1.1 Statutory responsibilities

As pointed out earlier in this documen , there is no specific legislative framework governing the operations of the Tanzania payment and clearing systems, nor does the Bank of Tanzania have any statutory responsibilities in connection with them. The BOT's interest in the qualityand security of these systems is recognized by its various core responsibilities as a central bank.

Firstly, the primary objective of the BOT is to establish monetary conditions conducive fo price stability over time. As the ultimate provider of liquidity in the financial sector it pre-supposes efficient and reliable payment, clearing and settlement systems that serve the financialmarkets effec ively.

Secondly, the Banking and Financial Institutions Act of 1991 gives the BOT other responsibilities. These include: ensuring implementation of prudential controls concerning capital adequacy, liquidity, concentration of credit, risk diversification and modification/ monitoring of the minimum reserve requirements and foreign exchange exposure. Hence, the BOT has particular interest in credit and liquidity risks that may result in systemic crises - incurred by the banking industry, financial institu ions and their customers participating in the clearing and settlement systems

Thirdly, being the bankers' bank, it accepts deposits of prudential reserves for the commercial banks, discounts commercial and government paper, has the commitment to act as a lender of last resort to the banks and most significant in this context, is the settlement agent to these banks. It is therefore very much exposed via the clearing system.

Fourthly, the BOT has the responsibility of establishing an effec ive financial systemin order that financial transac ions (necessary for the smooth functioning of the economy and financial stability) can be carried out with minimum costs, risks and amount of time involved In this connection, the BOT facilitates the development and the implementation of modern transfer, clearing,and settlement sys ems.

Fifthly, the BOT provides and supervises clearing facilities for inter-bank transactionsthrough its four out of five branches.

5.1.2 Establishment of common rules

The BOT in collaboration with TBA es ablishes and regularly reviews the rules and regulations governing clearing houses and money markets. Excep for the accounting standards set

14

6 All registered Primary Dealers maintain clearing account with the Central Bank and must make sure that the current account is pre-funded before any transaction is passed in the account.

by the NBAA, no other rules, standards or procedures have been set on payment systems by otherorganizations.

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5.2 PROVISION OF SETTLEMENT AND CREDIT FACILITIES

The BOT plays various roles in respect of settlement and credit facilitation as explained below:

5.2.1 Use of settlement accounts for payment services

Commercial banks with settlement accounts in the BOT may use these accounts to settle their liabilities in the securities market, and the inter-bank foreign exchange market. These accounts are also used to make transfe s between themselves and receive transfers on behalf of theircustomers.

5.2.2 Role in gross settlement systems

Gross settlement system is not available in Tanzania payment system at present

5.2.3 Role in netting systems

In order to settle net obligations across the books of the BOT, each bank calculates, basing on all inward and outward entries, the net debit or net credit at the end of each business day.Commercial banks then present a settlement statement to the BOT indicating their net positions. TheBOT, in turn, posts the net settlement debit or credit entries to the respective banks' accounts.

All banks that have insufficient funds in their settlement accounts will be required to make sure that the accounts are funded before the end of the business day to avoid debit balances inthe books at the BOT. The BOT, with collateral of Government securities, may provide an overnight credit to those banks that may fail to fund their respective accounts; otherwise any bank having insufficient funds, at the end of the day may be excluded from participating in the following clearinghouse sessions.

5.2.4 Role in the Settlement of Securities Transactions

The Bank of Tanzania may purchase, hold and sell Treasury bills issued by the Governments and on its own behalf not later than twelve months from the date of issue. on its ownbehalf. Entries made during sales are directly passed into the accounts of the Government maintainedat the Bank of Tanzania The Treasury has access to the funds credited to their accounts. The investor is paid the interest earned on the due date and the principal amount of the security is redeemed on maturity.

The Bank may, on such terms and condi ions as it may be prescribed, purchase from, sell to and rediscount on behalf of a bank the said instrumen s, provided they bear the endorsement or acceptance of a bank and mature within 180 days from the date of acquisitions or rediscount by the Bank.

The systems, which effect these businesses, are automated and therefore all transactions are electronically recorded.

5.3 MONETARY POLICY AND PAYMENT SYSTEMS

5.3.1 Objectives of monetary policy implementation

The primary responsibility of the BOT is to formulate and implement monetary policy, directed to the economic objective of maintaining price stability, conducive to maintaining a balanced

15

and sustainable growth of the national economy of Tanzania7. That is, it is the primary responsibilityof the BOT to establish monetary conditions that will generate low and stable inf ation over time.

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In conducting monetary policy and enhancing financial stability, BOT seeks, among other things, to achieve effective payment systems, which will enable efficient circulation of money inthe economy

5.3.2 Instruments of monetary policy in Tanzania

As far as National Payment System is concerned four instruments are considered vital for implementation of monetary policy in Tanzania.

(a) Discount rate policy

To ensure that the activities of banks continue smoothly, the central bank uses its refinancing and open market policy to accommodate banks to assist them to meet their interbank obligations. Within the framework of the refinancing policy, the BOT establishes conditions for refinancing commercial banks. The refinancing policy can be the discount policy or the Lombard policy.

Within the framework of the discount policy, the BOT buys from the sells to banks trade bills, treasury bills, and other specified securities at a rate (discount rate) set by itself.

(b) Minimum reserve policy

The base for the determination of the minimum reserves of commercial banks to be held with the Bank of Tanzania, free of interest, includes all deposits, borrowing from the general public (foreign currency deposits are included) and 50% of vault cash. However deposits in the clearing account is excluded in the determination of statutory minimum reserve required. The minimum reserve ratio is uniformly applied to all banks although according to the Bank of TanzaniaAct, the ratio may differ by type of deposit.

One of the objective of modernising payment system in Tanzania is to “improve macro economic management capabilities” through speedy transmission of funds and availability of relevant data and information regarding such funds.

(c) Open market policy

While the other monetary policy instruments have been exclusively dealing with commercial banks, open market policy includes non banks. The institutional framework for carrying out open market policy in Tanzania is still limited with the Bank mainly using Treasury bill auc ions, as a means of open market operations. Although the institutional framework for carrying out open market policy in Tanzania is still somewhat limited, the Bank has been resorting to Treasury Bill auctions, tap sales of Treasury bills and direct sales of certificates of deposits.

The proceeds from the sale of the liquidity papers are set aside in a special account created solely for monetary policy purposes and is not used to finance spending by either the government or the Bank of Tanzania.

The effect of open market operations in Tanzania has recently been enhanced substantially due to the increased amount of sterilised Treasury bills and the suspension of Government overdrafts with the Bank of Tanzania Repurchase agreement ( epos) a e used for fine tuning purpose.

Due to inefficient payment system, i has been impossible to facilitate speedy exchange of delivery against payment (See Section 4 2.2).

(d) Foreign exchange interventions

The Bank of Tanzania gradually eased foreign exchange controls after the enactment of the Foreign Exchange Act of 1991, with the establishment of foreign exchange bureaux in April 1992, introduction of foreign exchange auctions in July 1993, and the creation of the Interbank Foreign Exchange Market (IFEM) in 1994.

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t7 BOT Act, 1995 Section 5 sub-sec ion 3.

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The country’s trade and exchange system is now completely free of restrictions on making payments and transfers for current account transactions. The Government has already accepted the obligations of Article VIII of the International Monetary Fund’s Articles of Agreement, in order to boost the country’s attractiveness for foreign investors. The situation is being made more positive with further gradual relaxation of capital account transactions.

However, with absence of a large value transfer system for both domestic and cross-border transfers, it is considered as partly an obstacle for active IFEM.

5.3.3 Relationship between monetary policy and payment systems

Since the Bank of Tanzania’s monetary policy is geared to hold the price level stableover a period of time, it limits growth in the money supply. Hence, the central bank is also concernedwith the monetary policy issues relating to payment systems In dec ding on monetary policy actions,the Bank of Tanzania analyses a range o financial and economic variables, including trends in money, credit and total spending, the behaviour of costs and prices, and the ability of the economy to expand production to meet demand.

Regarding the practical relation between monetary policy and the payment systems, the credit system offers much flexibility. The basic idea in the system is that on the one hand the banks can take up intraday credit according to the value of the collateral deposited while on the other the overnight credit amount is limited on la ge value. Since this allows the banks to decide themselves their daily use of credit, it creates the possibility for absorbing daily fluctuations, stemming from a concurrence of circumstances in the payment systems.

Though as a rule BOT sets the financial institutions' combined credit limits sufficientlylarge to provide them with the necessary liquidity, the volume of credit granted by the BOT is subject to monetary policy considerations. As a result the unctioning of the current account system can, inprinciple, be influenced by monetary policy measures.

Furthermore, the BOT looks after the possible influence of changes in payment systems on monetary policy. For that reason the implications in this respect of any future steps towards improved and enhanced finality of payments are being thoroughly analyzed.

The Bank of Tanzania keeps the relationship between the operations of monetary policy and developments within the Tanzanian payments system under review from time to time. For instance when the large value transfer system (see Section 3.3 above) becomes operational the paper payment items will increasingly migrate to the new system. Cash managers of deposit-takinginstitutions will have information much earlier than at present on the clearing gains or losses of their respective institutions, influencing the demanded level of settlemen balances that are held by those institutions at the Bank of Tanzania.

5.4 MAIN POLICIES AND PROJECTS BEING IMPLEMENTED

The Bank of Tanzania, through the East African Payment System Harmonisation Committee, is considering to establish a mechanism that would enable oversight of payment systemsin the country.

Among other things, the Bank is proposing that Payment System oversight should use the Core Principles for Systemically important Payment Systems as a checklist to establish models for such an oversight

In the efforts to develop a large value transfer system for Tanzania (See Sect 2.3, there has been initiatives as regards to a decision on appropriate policy on the pressure that may be created by immediate and continuous (intra-day) demand for settlement balances to enable real time gross settlement. Differen policy options are being considered in this regard.

17

Tables Table 1

Basic Statistical Data

Years

1997 1998 1999 2000* Population (millions).

29.1 30 30.9 N/A

GDP (nominal, TZS millions).

4,281,600 5,125,311 6,113,362 N/A

GDP per capita (TZS).

147,134 170,844 197,843 N/A

Exchange rate (domestic cur ency r

vis-à-vis USD):

Year-end. 624.5712 681.0000 797.3300 803.3000 Average. 612.123 664.6807 744.9000 800.4000

*As at 30th June; N/A. implies not availab e. lt

Source: Bureau of S atistics, Per Capita GDP-BoT computation.

Table 2

Settlement media used by non-banks* (in millions of TZS).

Years 1997 1998 1999 2000^

Notes and Coins 287,877.1 307,798.7 384,848.0 339,928.3Transferable deposits** 229,131.7 255,668.3 258,828.6 278,408.6of which held by:

Individuals - - - -

Corporations - - - -

Public entities - - - - Narrow money supply (M1) 493,868.7 545,517.0 632,571.2 601,231.0Memorandum items: Broad money supply:

M2 760,353.3 844,929.4 972,088.6 956,542.9M3 927,068.9 1,026,984.7 1,217,626.9 1,259,013.9

Postal deposits 3,098.74 3,662.30 5,593.58 4,010.2*Not seasonally adjusted; year end figures; **Demand deposits at deposit money banks; ^As at 30th June Source: Bank of Tanzania - (Commercial Bank's Deposits, Monetary Survey and Tanzania Postal Bank).

Table 3

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Settlement media used by banks

(in millions of TZS).

Years 1997 1998 1999 2000^

Reserve balances held at central bank**

77,062.90

110,935.30

123,826.00 144,057.7

Transferable deposits aother institutions

t 70,912.45

137,582.07

250,980.83

N/A

Memorandum items: Required reserves 77,062.90 110,935.30 123,826.00 144,057.7Banks' borrowing from central bank (TZS millions)

4,611.00

5,358.00

4,160.00 0.0

*Not seasonally adjusted; **Year-end figures, ^As at 30th June; N/A. implies not available. Source: Bank of Tanzania - Assets & Banks and Non banks Financial Institu ions. - t

Table 4

Bank notes and coins in circulation (in millions of TZS).

Years 1997 1998 1999 2000^

Total bank notes and coin incirculation

.

314,495.80

337,289.30

427,508.80

370,031.30

Denomination of bank notes: 10,000 Tzs 153,141.80 173,622.70 234,880.10 201,675.805,000 Tzs 65,829.40 65,996.20 92,848.80 81,204.001,000 Tzs 57,947.30 57,563.00 42,070.00 30,761.00

500 Tzs 24,811.50 24,777.60 40,506.30 39,477.20

200 Tzs 5,121.70 7,461.00 8,374.00 7,689.30100 Tzs 0.00 0.00 0.00 0.0050 Tzs 0.00 0.00 0.00 0.0020 Tzs 498.9 498.7 498.50 498.4010 Tzs 99.8 99.9 99.8 99.80

Coins 7,045.40 7,270.20 8,231.30 8,625.90Total bankno e and coin helt d by public (i.e. outside banks/credit institutions) 287,877.10 307,798.70

384,848.00 339,928.30

^As at 30th June Source: Bank of Tanzania - Various Publications.

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Table 5

Institutional framework

r Number of

institutions Number of b anches/Stations

Number of transferable accounts

Value of transferableaccounts (in million of TZS)

Central Bank

1 5 4,143 252,700.00

Commercial Banks

19 172 1,363,465 707,745.97

Specialised banks

12 11 978,458 41,956.49

Post office

-1 214 -

Total

33 402 2,346,066 1,002,402.46

Memorandum item:

Branches of foreign banks.

9 18 17,196 273,150.98

Source: Banks and Non-bank financial Institu ions.t

Table 6 Cash dispensers, ATMs and EFTPOS

Years

1997 1998 1999 2000* Cash dispensers and ATMs: Number of networks 1 1 1 1

Number of machines 1 4 6 6 Volume of transactions - - 60,000 62,000

Value of transactions (TZSmillions)

- - n.a. n.a

*As at 30th June; n.a. implies not available Source: Commercial banks.

Table 7 Payment instructions handled by selected payment systems: volume of transactions (in

thousands)

Years 1997 1998 1999* 2000

Cheque clearing system 149,274 627,621 746,274 N/A Bank Giro System - - - N/A Interbank funds transfer 14,024 97,953 116,674 N/A Interbank CD/ATM System - - - N/A Bank of Tanzania (BOT) Wire.

- 46 45 N/A

*As at 30th November; N/A. implies not available. Source: Banks and Non banks Financial Institutions -

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Table 8

Payment instructions handled by selected payment systems: value of transactions (in TZS millions).

Years 1997 1998 1999* 2000

Cheque clearing system 1,135,799.14 3,552,292.80 3,353,873.66 N/A Bank Giro System - - - N/A Interbank funds transfer 111,438.66 798,583.38 495,845.28 N/A Interbank CD/ATM System - - - N/A BOT-Wire - 863.21 575.40 N/A *As at 30th November; N/A implies not available. Source: Banks and Non-banks Financial Institutions

Years

Table 9 Transfer instructions handled by securities settlement systems: volume of transactions (in

hundreds)

1997 1998 1999 2000 Bank of Tanzania: - - - - Government securities 2 7 5 N/A

of which:

Treasury bills - - 0.10 N/A

Government bonds 2 7 4.90 N/A

N/A. implies not available. Source: Bank of Tanzania

Table 10

Transfer instructions handled by securities settlement systems: value of transactions (in TZS

millions)

Years 1997 1998 1999 2000

Bank of Tanzania: - - - - Government securities 24,820.00 74,911.40 49,219.40 N/A of which: Treasury bills - - 1,069.40 N/A Government bonds 24,820.00 74,911.40 48,150.00 N/A N/A. implies not available Source: Bank of Tanzania

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Table 11 Participation in SWIFT by domestic institutions

Years 1997 1998 1999 2000

Members 4 4 0 N/A of which: live 4 4 0 N/A Sub-members 0 1 2 N/A of which: live 0 1 2 N/A Participants* 1 1 5 N/A of which: live 0 1 5 N/A Total users 5 6 7 N/A of which: live 4 6 7 N/A Memorandum items: 6,165 6,557 6,797 N/A Total S.W.I.F.T. Members 2,969 2,980 2,214 N/A Sub-members 2,590 2,720 2,763 N/A Participants 606 857 1,820 N/A *Participants are not shareholders in S.W.I.F.T. and their message traffic over the network is restricted; N/A. implies not available. Source: Bank of Tanzania.

Table 12

Participation in SWIFT by domestic institutions

Years 1997 1998 1999 2000

Total message set 45,030 55,295 91,603 N/A of which: category I* 20,355 29,524 50,193 N/A category II** 8,296 7,741 15,518 N/A of which: sent/received to/from domestic users

683

4,125

26,615

N/A

Total messages received 93,033 102,398 143,618 of which: category I* 36,247 43,036 65,833 N/A category II** 2,275 2,927 7,813 N/AMemorandum item: Global S.W.I F.T. traffic

.*Category I: customer (funds) transfer; **Category II: bank (funds) transfers; N A. implies not available

/.

Source: Bank of Tanzania

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23

References:

Bank of Tanzania, Bank of Tanzania Act 1995, Dar Es Salaam, 1995.

Bank of Tanzania, Economic and Operations Report for the year ended 30th June 1997, 1998, and

1999, Dar Es Salaam.

tBank of Tanzania, Its functions and monetary policy instrumen s, Dar Es Salaam, May 1997.

Bank of Tanzania, Economic Bulletins for various quarters 1997-1999, Dar Es Salaam.

Bank of Tanzania, Monetary Policy Statement 1997/1998, Dar Es Salaam, June 1997.

Bank of Tanzania, Monetary Policy Statement 2000/2001, Dar Es Salaam, June 2000.

The Committee on Payment and Set lement Systems of the central banks of the group of ten

countries,

t

Payment Systems in the Group of Ten Countries, Basle, December 1993.

Committee of Central Bank Governors of the Southern African Development Community and

Committee on Payment and Settlement Systems of the central banks of the group of ten countries,

Payment Systems in the Southern African Development Community, Basle, June 1999.

East African National Payment Systems Harmonization Committee, East African Payment Systems

Statistics, May 2000.

Linda Allen, Capital Markets and Institutional: A global View

MAE Operational Paper April 1997 (MAE OP/97/3) Repurchase Agreements: Advantages and

Implementation Issues, 1997

Ndissi, J.K (Mrs), Government Securities Operations; Tanzania Bankers Journal, Issue No 10 Dec

.1997.

Prospectus for Government Securities (Treasury bills and bonds).

Robin McConnachie (1996), Primary Dealers in Government Securities Markets; Hand book in Central

Banking, Issue No 6. 1996.

The Procedural Manual for Book Entry System for Government Securities.