Pan-African Payment and Settlement System drives Africa’s banking integration

Hopes of greatly boosting intra-African trade rest on the implementation of the African Continental Free Trade Area (AfCFTA). It is hoped that the initiative will reduce both tariff and non-tariff barriers to African cross-border trade, encourage the construction of much-needed logistics infrastructure and above all, create a new mindset, that potentially huge untapped markets lie on the doorsteps of every African business. 

The role of the banking sector in this process is often overlooked but it will be a central driver of this change and simultaneously be heavily impacted by it.

The AfCFTA is a hugely ambitious undertaking. It seems an obviously attractive concept, given that 54 out of 55 African states have thus far signed the AfCFTA treaty, with only Eritrea yet to put pen to paper. 

The population of the zone currently stands at 1.27bn but is rapidly heading towards 2bn. The 54 states had a combined GDP of $3.6trn last year, a relatively modest amount by global standards and equivalent to just the GDP of Germany, but it is hoped that the benefits of the AfCFTA will help drive this figure upwards.

The AfCFTA came into force in January 2021 but it is important to note that its creation is a process not an event, with national trade and investment policies gradually being harmonised. Universal banking regulations are ultimately envisaged but this will be a long process and governments will be understandably keen to promote and defend the interests of their own domestic banks.

PAPSS provides continent-wide payments system

Perhaps the biggest effect of the AfCFTA on the African banking sector is the Pan-African Payment and Settlement System (PAPSS), a centralised payment and settlement system that was launched by Afreximbank with the support of the AfCFTA Secretariat last September. 

As a continent-wide platform for processing, clearing and settling intra-African payments, it is designed to enable individuals, businesses and governments to make instant cross-border payments in the more than 40 different African currencies, thereby reducing the need for US dollars and other hard currencies and so, simplifying cross-border trade. Acquiring hard currency can be a particular challenge for small and medium-sized enterprises (SMEs).

There are fewer than 55 African currencies because of the two CFA franc zones in Central and West Africa, which themselves demonstrate that while common currencies are useful, barriers to trade also need to be eroded if trade volumes are to grow. Speaking in Lagos in June, PAPSS CEO Mike Ogbalu said that the hunger for non-African hard currency was destroying African currencies.

PAPSS provides greater transparency and control

All payment channels, whether banks or fintech operators, will be able to utilise PAPSS on behalf of their customers. Instant transactions should increase trust and confidence between trade partners, reducing liquidity requirements for settlements and freeing up more money for other uses. 

Godwin Emefiele, the Governor of the Central Bank of Nigeria, said that the creation of a single window for all cross-border transactions made across the continent would provide central banks with greater transparency and control.

The President of Afreximbank and Chairperson of the PAPSS Management Board, Prof. Benedict Oramah, said: “With the implementation of PAPSS, Africa can expect to begin to reap the fruits of the African Continental Free Trade Agreement.

“PAPSS is not positioned to replace existing regional and national payment systems but to collaborate and work with them in better integrating African economies for the benefit of all.”

West African PAPSS trial proves a success

A PAPSS pilot project held in the West African Monetary Zone was deemed a success. Ogbalu said that the region was chosen for the pilot because it “has the same complexity that we expect to see in the African continent”, with different languages, currencies and regulatory structures. 

Indeed, it has proven particularly difficult to erode trade barriers between Anglophone and Francophone economies in the region.

Afreximbank approved $500m to back the West African trial and expects to offer another $3bn to finance the continental rollout. Wamkele Mene, the AfCFTA’s Secretary-General, commented: “The introduction of PAPSS provides Africa with greater capacity to conduct cross-border transactions and expand the scale of both active and latent opportunities for enhanced intra-African trade.”

Many national African central banks are already using PAPSS, with Afreximbank acting as the main settlement agent and providing settlement guarantees. It is working with regional organisations, such as the West African Monetary Institute, and is in talks with other regional and national bodies to expand its use.

Just nine months after the AfCFTA was created, 28 banks had joined the system and another 24 had applied. The ambition is to bring all 500-600 banks operating in Africa into the system. 

PAPSS will connect commercial banks and fintech providers to a common structure, making it easier for payments to be made between different financial ecosystems and also speeding up the digitisation process, which is already well underway, in the process. 

AfCFTA will generate greater transaction volumes for banks

The AfCFTA could generate a great deal more work for African banks in terms of transaction volumes and trade finance. In 2020, the World Bank found that the implementation of the zone could boost African exports by $560bn and generate $450bn more in income by 2035. 

Out of the $450bn, $292bn would come from easier trade facilitation, including reduced red tape, the simplification of customs procedures and greater integration into global supply chains.

The system could also help regulate trade by assisting in tracing informal small-scale cross-border trade, which is often overlooked by banks, governments and regulators. This means that the full scale of existing cross-border trade is unknown but reducing the cost of cross-border bank transactions could move more traders from the informal into the formal sectors.

Banking sector must be at heart of AfCFTA

Afreximbank chief economist Hippolyte Fofack has called on African banks to support the creation of the AfCFTA in other ways, including by providing long-term loans to African manufacturers, such as in the automotive, steel and rail industries. 

He said it was important that African companies took advantage of the emerging single market rather than relying on non-African imports and foreign direct investment, as this would ensure that more of the economic benefits of trade stayed within the continent. 

The AfCFTA should help banks to access savings from multiple markets, making capital work more efficiently in the process. At the same time, banks should improve their transaction data collection, helping them to reduce the risks associated with both onboarding and specific transactions. 

Other benefits include spreading insurance products to markets that would otherwise not benefit because of their limited size. Paul-Harry Aithnard, MD and Regional Head for the WAEMU region at Ecobank, said: “The AfCFTA is set to bring about a growing number of supply chain finance opportunities in the coming years.”

The banking sector has to be at the heart of the AfCFTA’s attempt to create a single continental market for goods and services that will hopefully optimise the use and allocation of resources. 

The industry is perhaps the most important cog in the machinery that will make the trade area a success but also stands to benefit massively from rising trade volumes. Moreover, by integrating the operations of traditional banks and fintech, PAPSS can make the entire financial services sector more effective at supporting African economic development.