E E Ngalande: The importance of financial system modernisation in Africa
Keynote address by Dr E E Ngalande, Governor of the Reserve Bank of Malawi, at the Perago User
Group Conference, Johannesburg, 24-25 April 2003.
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Introduction
Ladies and Gentlemen:
Thank you for the invitation to speak, and thank you all for being here. I have been asked to share
some thoughts on the importance of financial system modernisation, with specific reference to Africa
and in particular the SADC region.
Being a central banker, I am confronted with reaching macroeconomic objectives such as price
stability, economic growth, balance of payments equilibrium and financial stability. A mammoth task
indeed, and living in Africa, one that proves to be extremely challenging at the best of times. Most
countries in Africa are confronted with pressing socio-economic problems such as poverty,
unemployment, lack of education, lack of housing, and famine, to name but a few. One is constantly
tempted to try and address these symptoms, but is faced with the reality that, in the long run, these
problems can only be solved by addressing the causes thereof.
It is widely acknowledged that sound financial infrastructure is a prerequisite for a sound financial
system, which is in turn a key factor in increasing the economic growth potential of a country, and of a
region. Given the rapid rate of globalisation and the dynamic nature thereof, there is tremendous
pressure on a country to modernise its financial system in compliance with global trends, standards
and best practices, and to avoid being left behind in the dynamic drive to faster, better and safer
financial transactions.
Today I hope to affirm the causal link between a sound and modern financial system and
macroeconomic objectives, not only in my country, but also in the whole SADC region. I am going to
focus on the role of the central bank in this regard, both as payment service provider and overseer of
the financial system as a whole. Finally, I would like to use this opportunity to take stock of where the
countries in SADC stand in the whole modernisation process and to share my views on a possible way
forward from here.
From the outset, however, I wish to clarify what I understand under the term 'financial system'. It is
often interpreted as physical infrastructure such as clearing and settlement systems, but is in fact a
much wider concept which encompasses the different financial markets, the legal and regulatory
framework, role players, business processes, systems and technology required to provide, support
and manage the financial system in a country.
Why is it important to build financial infrastructure?
A sound and robust financial system is a key contributing factor to financial stability in a country.
Although a definite causal link exists between real economic stability and financial stability, sound and
robust financial systems play an important role in reducing the risk that distortions in the real economy
will develop into a financial crisis and could even minimise the adverse effects of such a crisis in the
event of it occurring.
A sound and robust financial system is essential for mobilising capital that is necessary for sustainable
economic growth. The major objectives of macroeconomic policy in a country are the level of
employment, price stability, GDP-growth as a measure of economic growth and equilibrium on the
balance of payments, especially in open economies such as those in the SADC region. Domestic
financial system weaknesses have potential repercussions on exchange rate stability and the balance
of payments. An unsound domestic banking system will be less capable of providing an efficient
foreign exchange market and will complicate monetary policy decision making by distorting the link
between interest rates, economic activity and inflation. This will by implication make monetary
targeting more vulnerable to policy errors. Underdeveloped or developing economies are dependant
on investment and uncertainty about the soundness of the national payment system in a country may
trigger capital flight or deter foreign investors, thereby putting pressure on the balance of payments
and deepening economic recessions. This is likely to, in turn, have an adverse knock-on effect on the
level of employment and the general inflation level.
Furthermore, a country that does not conform to international standards and best practices with regard
to its financial system, risks isolation from the international economic community. Globalisation is a
global trend toward the freer flow of trade and investment across borders, resulting in the integration of
the international economy. In a globalised world, no country can afford being isolated, as there is no
room in a globalised world for an economy isolated from world trade and foreign investment.
Globalisation also brings many benefits such as access to foreign capital, global export markets and
advanced technology much needed in underdeveloped and developing countries. These benefits have
positive social and economic consequences such as faster economic growth, which, in turn, alleviates
poverty, leads to higher labour and environmental standards and facilitate democratisation. Countries
that resist globalisation, risk being marginalized. In order to become a role player in regional and
international trade, countries have to ensure that their financial system is stable, as measured by
international standards.
From a regional perspective, problems in a domestic financial system often spill over to neighbouring
countries, especially if the countries in the region are involved in close economic co-operation, which
is one of the primary objectives of the Southern African Development Community. It is therefore
important that the region as a whole should ensure that their financial systems comply with
international best standards, as this would play a large role in facilitating regional integration. Regional
integration, as we know, holds a number of advantages for participating countries. Firstly, the region
benefits from the resultant expansion of trade between member states which will be supported by a
simultaneous integration of the financial sector. Closer trading links between countries in a region also
strengthens their capacity to participate in world trade, allowing countries to become more competitive
outside the trading block. Cross-border payments and settlements will be facilitated by the removal of
unnecessary financial obstructions and constraints. Secondly, the elimination of geographic
constraints will facilitate the extension of services and the movement of people across borders and
finally, optimum use will be made of scarce resources. The co-ordination and sharing of limited
resources such as skills, technological infrastructure and financial systems will contribute to a higher
rate of economic development for the region as a whole. It is also important from an international
perspective, where increasing emphasis is being placed on the financial sector in the global economy,
that SADC economies meet international expectations as far as possible in such areas as payment,
clearing and settlement systems, banking supervision and monetary policy.
The role of the central bank
The central bank's core responsibilities in an economy are the maintenance of monetary stability,
ensuring financial system stability and the promotion of the efficiency and effectiveness of the financial
system.
The maintenance of monetary stability;
This role of the central bank involves the formulation and implementation of monetary policy objectives
with the overall objective of achieving low inflation and protecting the value of a country's currency. A
strong relationship exists between monetary and broader financial stability in that financial stability is a
prerequisite for the effectiveness of monetary policy, and therefore the monetary stability in a country.
The maintenance of financial system stability.
The central bank performs a pivotal role in ensuring the smooth and efficient functioning of markets
and infrastructure such as the payment system in a country. This role of the Bank is multidimensional
and includes the following:
The provision of physical infrastructure, for example real-time gross settlement (RTGS)

systems;
 The operation of such infrastructure;
Mitigating systemic risk by providing the liquidity needed to oil the wheels of the financial

system;
Oversight of infrastructures such as the national payment system as well as financial

markets in order to ensure the smooth and efficient functioning thereof; and
 Supervising the financial system on an ongoing basis. The central bank acts as the guardian
of financial stability, which is necessary to efficiently allocate resources and absorb liquidity
shocks. The Bank has to continuously and comprehensively monitor potential threats to
financial stability. This is necessary for prevention of crises, but in the event that they do
occur, also for swift crisis resolution. The central bank should consider regulatory and/or
operational intervention in cases where financial stability is threatened.
The promotion of the efficiency and effectiveness of the financial system.
The central bank is concerned with the robustness of the financial system both on a national and
global level as disruptions in settlement in securities markets have the potential to spread to payment
systems and to the financial sector in general. The central bank has to ensure compliance with
international best practices and standards as laid down by institutions such as the Bank for
International Settlements and the International Monetary Fund. Standards such as the BIS Core
principles for Systemically Important Payment Systems and the Group of Thirty Recommendations
Regarding Securities Clearance and Settlement are the result of collaboration and shared experiences
between the major financial institutions in the world and provide a blueprint that a country should
consider to become a global player and be internationally competitive.
The role of the central bank in this regard can thus be summarised as:
Ensuring that policies relating to the efficiency and safety of payment systems are designed

to comply with the aforementioned international standards, bearing in mind that the
implementation of such standards should be done with the appropriate degree of flexibility to
adequately cater for the individual circumstances of each country;
 Monitoring, but also participating actively in the development of standards relating to
payment systems and cooperating with stakeholders in improving such standards; and
Fostering and developing public policy that supports the financial system in a country. This

would include addressing legal and regulatory impediments to the effective and efficient
functioning of the financial system.
Key features of a sound and robust financial system1
A sound financial system is one that remains stable and efficient in the wake of shocks such as
interest rate hikes, severe exchange rate fluctuations, financial crises in other systems, but also
noneconomic events such as terrorist attacks. Robust financial systems are characterised by three basic
characteristics: flexibility, resilience and internal stability.
A financial system is flexible in that it continues to function efficiently under a full range of economic
circumstances. This implies that the system is adaptable to market developments and the dynamic
forces of demand and supply and is able to adequately perform its role in mobilising savings,
diversifying risks and allocating resources. The system is also not rigid and can adapt to support the
functioning of financial markets.
The system is resilient in that it remains capable of allocating resources efficiently, timeously and with
certainty, even in times of financial crises or external shocks. Technological and infrastructure
vulnerabilities in the financial system have also been adequately addressed. The system therefore
possesses the necessary redundancy, recovery and resumption capabilities required to prevent,
mitigate and manage disasters.
The financial system is also internally stable in the sense that the system itself is not a source of
economic shocks. The system has a high degree of predictability and integrity, and has sufficient
internal controls in place to mitigate operational risk.
From a macroeconomic point of view, central banks should focus on policies that promote financial
stability, that is those that are aimed at containing fluctuations in aggregate economic activity as far as
possible, promote sustainable growth and avoid economic uncertainty.
From a structural point of view, policies should ensure that relative prices are in line with economic
fundamentals and that structural conditions promote the efficient and sustainable allocation of real and
financial resources. Such policies include tax policies and policies pertaining to the allocation of
productive factors.
The key elements of a sound and robust financial system can be divided into three categories, namely
the infrastructure building blocks that support effective market functioning, institutional governance and
regulation and supervision.
Infrastructure building blocks that support effective market functioning include the following:
A legal and judicial framework which provides legal certainty in financial matters;

 Accounting systems capable of providing accurate, relevant, transparent and comprehensive
information timeously;
Other mechanisms and institutions for the application of codes of conduct, conventions and

best practices to limit price manipulation, fraudulent behaviour and other detrimental
practices;
 Sound payment and settlement systems, as these provide mechanisms through which
payments can be made in risk-free money and as such are essential to the smooth operation
of market economies; and
Market diversity and depth. Financial systems need to have a broad array of instruments and

markets and to provide a sufficient range of services if they are to be efficient and flexible
and resilient enough to continue to function effectively in the face of major economic
changes.
On the topic of institutional governance, deficiencies in management and control have been common
elements in banking and other financial crises. The quality of the institutional governance of financial
businesses is crucial to reducing the likelihood that crises will emerge, as well as to limiting the
severity of the crises when they do occur.
Finally, financial regulation and supervision play an essential role in fostering financial robustness.
Official oversight of the financial system encompasses financial regulation, including the formulation
and enforcement of rules and standards governing financial behaviour as well as the ongoing
supervision of individual institutions. Regulators should seek to support and enhance market
functioning, rather than to displace it, by establishing basic rules of the game and seeing that they are
observed. Regulatory/supervisory authorities should promote the reliability, effectiveness and integrity
of the market infrastructure, in particular payments and transactions systems.
The Malawian experience in payment system reform
At this juncture let me briefly share with you our own experiences in Malawi our efforts in modernising
the payment system.
The transformation of the payment system in Malawi has been influenced to a great extent by the
structural reforms that have been implemented in the financial sector since the early 1980s. These
reforms were initiated by the Malawi Government as part of the overall Structural Adjustment
Programmes (SAPs) that the country has implemented since 1981 with the assistance of the
International Monetary Fund and the World Bank. The reforms were specifically aimed at making the
whole financial system more responsive and efficient so that it can adequately support the
development requirements of the country by providing the required financial resources.
There are also other factors that influenced payment systems reforms in Malawi. These include: the
need to attract foreign investors into the country, the effects of liberalised economic policies adopted in
the 1990s and the introduction of the Southern African Development Cooperation (SADC) Regional
Payment Systems Modernisation Project by the Committee of SADC Central Bank Governors. The
introduction of the SADC Payment Systems Regional Modernisation Project added impetus to the
reform process that was initiated under SAPs.
The financial system in Malawi, like in many developing countries, is relatively small, underdeveloped
and dominated by a few financial players who offer a limited range of services. The economy is
predominantly rural-based and cash is the dominant mode of payment. Against this backgroung our
efforts have been geared towards promoting the use of cash-less payment instruments in line with our
vision and strategy.
In order to effectively coordinate the reform process we formed a mother body - the National
Payments Council (NPC) which is chaired by the Reserve Bank of Malawi. Membership of the Council
includes all financial institutions and service providers like telecommunications company and power
supply company. Thus all major stakeholders have been actively involved in payment systems reform
initiatives in Malawi. We have found this to be of critical importance because in our view we consider
that the task of forging the country's payment system vision and strategy is a shared responsibility.
Through this collaborative effort we have today made tremendous progress in modernising our
payment system. The Reserve Bank of Malawi spearheaded and fully financed the establishment of a
proprietary Wide Area Network (WAN) infrastructure and a transaction switch - called the Malawi
Switch Centre (Malswitch). The switch centre, which was a dream three years ago, is now a reality
and this has been our major achievement. Under the Malswitch Model, Malawi has managed to link up
all the commercial banks and other major players in the financial system in a single network
infrastructure providing a number of products including the following:
Smart Card
The smart card is intended to reduce cash usage. Some of the commercial banks operating in Malawi
have entered into an agreement with Malswitch to become issuers of the smart card. In addition, some
private companies and Government Departments have started paying salaries to their employees
through the smart card scheme. Retailers and merchants are also actively using the smart card.
Virtual Private Network (VPN)
This is part of the Malswitch system that offers a national online system linking all small commercial
banks (a corporate Wide Area Network) to transact with each other while maintaining complete
security and confidentiality of their data. This facility could also be used by government departments
and large retailers who have branch networks across the country.
The Electronic Bidding System
This enables the Financial Market Operations Department of the Reserve Bank of Malawi to accept
bids for Treasury Bills and Reserve Bank of Malawi Bills electronically. Capturing, cancellation and
notification of bid results is also done electronically.
Real Time Gross Settlement (RTGS) System
As you are all aware Malawi was the first country to implement an RTGS system using Perago's
Central Real Time Inter-bank Settlement Processor (CRISP) software. The CRISP System in Malawi
became live on 19th March 2002. We initially started with nine participants including the Reserve Bank
of Malawi, but within the one year period the number of participants has increased to eleven. The
system is working well and meeting our requirements.
Government Credit Ceiling Authority System (CCAS) Project
The project to automate Government funding arrangement is aimed at replacing the current manual
process which involves physical movement of Government officers and paper between Treasury on
one hand and the Reserve Bank of Malawi and the commercial banks on the other. All funding
processes and reimbursements to commercial banks will be done electronically.
Electronic Cheque Clearing House (ECCH) Project
The ECCH is expected to be operational by the end of this year and will be running on Malswitch
infrastructure. The project is spearheaded by commercial banks.
Since this is an RTGS gathering I thought I should also briefly share with you the benefits we have
derived from the CRISP System during the one year period it has been operational. The CRISP
System provides the Reserve Bank of Malawi with up to the minute liquidity position of the financial
market which is essential for proper decision making in as far as risk management is concerned. In
addition commercial banks are able to determine their treasury positions and make informed
investment decisions. The fast transmission of funds through the CRISP System has also enabled
economic agents outside the banking system to make cost effective investment plans since funds are
no longer unnecessarily tied up in the payment system as was the case before.
The CRISP System has also enabled us to retrieve in a timely manner statistics on liquidity of money
market players. The statistics are invaluable for the formulation and conduct of monetary policy. You
will agree with me that in the absence of an RTGS system which does not have a comprehensive
statistics module, data on liquidity might be difficult as well as time consuming to acquire. This
obviously leads to misdiagnosis and its resultant wrong monetary policy prescription.
Before I conclude the Malawian experience I would like to request participants to discuss and share
experiences on the following RTGS related issues.
Provision of intra-day liquidity is one of the most important aspects of an efficient RTGS

system. In Malawi the Reserve Bank provides intra-day liquidity at a cost. Some participants,
especially discount houses, suggest that intra-day liquidity should be free. These players do
not hold liquidity reserve requirement (LRR) balances with the central bank. The question is,
should these participants be given preferential treatment?
 After establishing an RTGS system, what is an appropriate cost recovery policy the central
bank should adopt to sustain the operations of the system while at the same time ensuring
that the system is affordable. Malawi, in particular would like to learn how others have
approached this issue within their own countries.
Through the use of the RTGS the float the banks used to enjoy is totally reduced. This used

to be one of the sources of profits for banks. After the introduction of the RTGS what are the
alternative sources of revenue which our banks should now rely on?
Ladies and gentlemen, I also wish to urge you to seriously debate on the issues relating to the role of
this CRISP User Group and how often should its members meet. The issues to be tackled by the user
group should also be discussed and agreed. This is particularly important at this stage to avoid this
group simply being a social club. We need to derive some benefit from it and assist each other to
ensure that our systems are efficiently managed.
What is the status of financial system modernisation in SADC and what are the next steps?
Various steps can be taken to help strengthen financial systems. On a macro-economic level, sound,
market-orientated banking and financial systems should be promoted by undertaking structural
reforms necessary to remove distortions in the economy that weaken the financial system and
undermine effective supervision. Stronger supervisory regimes and the institutional strengthening of
the supervisory agency in a country should be undertaken. Countries should acquire high-quality
payment and settlement systems and other market infrastructures such as effective clearing and
bookentry systems, and ensure that such reforms are supported by the necessary legal reforms. More
generally, countries should ensure that the general financial business practices and processes are in
line with international best practices. In taking these steps to modernise or strengthen the financial
system in a country, the help of international institutions such as the International Monetary Fund, the
World Bank and the Bank for International Settlements, or companies that specialise in financial sector
reform can also be employed.
Most countries in the SADC region have already taken an important first step in developing a sound
and robust domestic payment system, which is to define a payment system strategy and development
plan. Many countries already have the legal framework required to support such a payment system in
place, while five countries in SADC have gone further and have already acquired a real-time gross
settlement system. Seven others are set to move in this direction within the foreseeable future.
Regular consultation with other countries and market participants is important, especially on a regional
level, to ensure coordination of policies and strategies, but also to share views and possibly learn from
one another. In order to share these views with and get input from a wider audience, and to
communicate their achievements to the rest of the world, countries may consider publishing their
experiences in payment system reform by, for example, publishing a so-called 'Red Book' in
consultation with the Bank for International Settlements with the objective of providing a clear and
reasonably comprehensive description of that country's payment systems. I would like to challenge the
SADC countries that have already undertaken comprehensive payment system reform programs since
the completion of the 'Green Book' on SADC payment systems, to update these by now outdated
descriptions by publishing a 'Red Book' that reflects the current status of the payment system in that
country. And of course, conferences such as this Perago User Group Conference also provide a
platform for sharing experiences, keeping abreast of new financial system developments and
international best standards and practices.
Total exports to Total imports from
Exports to other Imports from other
1998 other SADC other SADC
SADC countries as SADC countries as
Annual figures countries countries
% of total exports % of total imports
(USD million) (USD million)
Angola 3.26 0.09 222.35 9.96
DRC 5.33 0.51 230.43 25.91
Malawi 101.16 21.14 375.60 66.38
Mauritius 25.44 1.49 248.19 11.36
Mozambique 106.50 43.52 354.00 43.31
Seychelles 1.33 1.47 57.62 15.04
South Africa 2,607.51 9.70 407.49 1.39
Tanzania 32.86 5.58 181.79 11.57
Zambia 201.94 19.78 564.13 51.88
Zimbabwe 494.34 28.58 1,058.84 40.40
Source: Direction of Trade Statistics Yearbook. 2002. International Monetary Fund, Washington. Comparable figures were not
available for Namibia, Botswana, Lesotho and Swaziland.
This slide shows import and export statistics of selected countries in the SADC region and is based on
the 1998 Direction of Trade Statistics published by the International Monetary Fund. These statistics
show that a significant portion of the foreign trade of many SADC countries is with other countries in
the SADC region. It therefore makes sense to start thinking of closer co-operation among countries
within the Community with the aim of eventually having a shared regional infrastructure in line with
international trends in regional groupings such as the European Community. A prerequisite for
participating in such a regional infrastructure will be for countries to ensure that their domestic
payment systems are sound and robust, which has been the main focus of the SADC Payment
System Project. Perhaps we need to start thinking of linking our RTGS-systems in some way as to
take the first steps towards regional settlement and interbank clearing systems.
Conclusion
In conclusion, I wish to once again stress the importance of the financial sector in a regional economic
strategy. There is a need throughout SADC to improve existing financial systems in order to
encourage both domestic and foreign savings, which can then be channelled into productive
investments. SADC payment system initiatives can play a role in this process by promoting
cooperation between role players in the financial sector. Financial co-operation is expected to result in
greater economies of scale, a pooling of expertise, and the enhanced credibility of the reform process.
It can also lay the groundwork for financial integration initiatives further down the line. These initiatives
should be undertaken as part of a more holistic integration process, which also takes into account both
the political and economic realities faced by the countries of Southern Africa. Central banks should
work together to establish a sound basis for full economic integration in the region. Attention should be
focussed on the building of a compatible financial infrastructure in the region. The challenge is a
mighty one, but it is time for SADC, as well as every other country and region, to meet it.
Lastly, I would like to commend Perago for taking this initiative of forming a User Group for the CRISP
System. I believe this group will prove to be valuable to all of us as members since we will be able to
share views and experiences to ensure efficient utilisation of the CRISP system. I only hope that this
forum will continue for the benefit of all its members.
Once again I thank you very much.