As The African Continental Free Trade Area (AfCFTA) advances through various negotiation phases, several stakeholders have introduced operational tools to facilitate its implementation. One of these tools is the Pan-African Payment and Settlement System (PAPSS), which aims to play a key role in unlocking trade with AfCFTA. PAPSS, which hopes to achieve full Central Bank participation by year-end, recently welcomed the Central Bank of Kenya, making it the tenth African Central Bank to join the platform.
“PAPSS stands at the forefront of African trade, linking nations and central banks, eliminating barriers with instant payments in local currencies. As it expands its network, it plays a pivotal role in the realisation of The African Continental Free Trade Area (AfCFTA), fostering financial integration and efficiency across the continent.” – Tonye Krukrubo SAN, Partner, Aluko & Oyebode (ALN firm in Nigeria)
Key Features of PAPPS
The Pan-African Payment and Settlement System, a cross-border financial market infrastructure, is the result of collaborative efforts by the African Union and Afreximbank. Officially inaugurated in January 2022 in Accra, Ghana. This innovative system aims to connect African banks, payment service providers, and other financial intermediaries to enable instantaneous and secure transactions between African countries. It operates in conjunction with Africa’s central banks, allowing commercial banks, payment service providers, and fintech companies to participate.
How PAPSS Operates:
PAPSS is meant to enable direct participants to maintain settlement accounts with their national central banks for pre-funding and indirect participants to rely on direct participants to clear account liquidity.
In PAPSS, central banks act as national settlement agents for individual countries under their Central Bank Settlement Membership and as direct participants. As settlement members, central banks oversee, regulate, and enforce compliance among all participants. They also ensure adherence to anti-money laundering, counter-terrorism financing laws, and other local regulations.
PAPSS aims to facilitate cross-border payments in local African currencies through (i) instant payments, eliminating the need for currency conversion and offering real-tie compliance checks; (ii) a pre-funding mechanism, which ensures that funds are available before debiting and crediting the accounts of participants, and which allows participants to connect directly with PAPSS and the real-time gross settlement (RTGS) systems of central banks; and (iii) net settlement of transactions, which occurs simultaneously across all participating central banks, thus streamlining the process.
These processes are meant to collectively empower PAPSS to offer efficient and swift cross-border payments in local currencies.
PAPPS has so far established a network comprising ten central banks, including Ghana, Nigeria, the Republic of Guinea, Liberia, Gambia, Sierra Leone, Djibouti, Zimbabwe, Zambia and Kenya. According to information on the PAPSS website, live banking operations are currently active in Ghana, Nigeria, Liberia, and the Gambia. The Central Banks of the Caribbean Community (CARICOM) also unanimously adopted PAPSS as the preferred system for processing the settlement of intra-regional trade transactions recently.
In March 2023, GCB Bank of Ghana successfully conducted the inaugural PAPSS client transaction involving a Ghanaian-incorporated entity, which initiated a supplier payment in Ghanaian Cedis to a beneficiary in Nigeria, who then received the payment in Naira instantaneously.
The system aims to have all African central banks in the network by the end of 2024 and onboard all commercial banks within the continent by 2025. This ambitious expansion aims to foster financial integration and efficiency across the continent.
Benefits and Opportunities for Businesses
The instant nature of payments in local currency would mark a pivotal shift in how business transactions are conducted within Africa. The objective is that businesses trading in the region will no longer have the cumbersome task of converting their local currencies into foreign currencies, which often involves funds leaving the African continent for conversion and then returning to the beneficiary bank.
“While challenges persist, the transformative power of PAPSS is undeniable. Embracing this innovation positions businesses as leaders in a seamless, cost-effective, and efficient cross-border trade landscape, propelling African economies toward unprecedented growth and prosperity. As PAPSS evolves, supported by robust regulations and cybersecurity measures, it is poised to become the cornerstone of AfCFTA, ushering in a future of financial prosperity and cross-border collaboration previously thought unattainable.” – Luisa Cetina, Director, Anjarwalla & Khanna (ALN firm in Kenya)
One of the most immediate benefits of this shift is the elimination of delays in confirming payments, a persistent obstacle to seamless trade in Africa. Businesses have long grappled with frustrating delays caused by currency conversions, which hinder the timely execution of transactions. With PAPSS streamlining the payment process in local currencies, these delays will be significantly reduced. PAPSS is also poised to deliver substantial cost savings by drastically reducing currency conversion expenses. The estimated annual savings for the continent is projected to reach a remarkable USD 5 billion.
Challenges and Risks
While PAPSS undoubtedly presents a transformative opportunity for the African continent, its full potential is hindered by several challenges and risks that warrant careful consideration. Firstly, the slow adoption by some nations poses a significant hurdle to its seamless implementation. A lack of uniform commitment across all African countries may impede the system’s effectiveness in facilitating cross-border payments and trade. Secondly, the absence of a clear regulatory framework raises concerns about oversight, compliance, and security. A robust regulatory structure ensures that PAPSS operates efficiently, securely, and transparently.
“Addressing cybersecurity, fraud prevention, and data protection is crucial for safeguarding the integrity of PAPSS. User education and collaborative efforts are imperative to harness its potential. As Africa embraces this innovation, it must navigate these challenges to ensure that PAPSS becomes a catalyst for growth, prosperity, and secure cross-border collaboration.” – Arshad Dudhia, Managing Partner, Musa Dudhia & Co. (ALN firm in Zambia)
Cybersecurity, fraud prevention, and data protection issues must be addressed to safeguard the system’s integrity. Further, user education and awareness campaigns are vital to ensure that businesses and individuals fully understand and trust the system. Collaborative efforts from governments, regulatory bodies, financial institutions, and businesses will be imperative to harness the immense potential that PAPSS offers for African economies and businesses.
PAPSS is a game-changing innovation set to transform cross-border trade in Africa, ensuring efficiency, cost-effectiveness, and seamless transactions. By embracing this system, businesses trading in the region can position themselves as leaders in this evolving landscape, harnessing its benefits to drive their growth and prosperity. With the ambitious target of achieving full central bank participation by 2024 and that of all regional commercial banks by 2025, PAPSS promises to foster even greater financial integration and efficiency across the African continent. Moreover, as regulatory frameworks evolve and cybersecurity measures strengthen, PAPSS is set to become a cornerstone of AfCFTA, facilitating seamless trade and economic growth on a previously unattainable scale. In this digital transformation era, PAPSS represents a pivotal step towards a future of financial prosperity and cross-border collaboration for Africa.