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The Nigerian Automated (Cheque) Clearing System: Challenges and Opportunities. (Reviewed, 1st July 2002) Tell your friends about this page! Email it to them.

1.0 Introduction

The Nigerian financial market, especially the money market has been under undue pressure and heat in the months gone by, no thanks to rumours, claims and counter claims of distress, misappropriation of fund and shady Forex (foreign exchange) deals in the banking sector of the economy. There are so many fears and uncertainties in the money market and this has necessitated the apex body and watch dog of the sector, Central Bank of Nigeria (CBN) and all stake holders to continue to dissuade the fears of the investing public - personal and corporate bodies - in restoring sanity and confidence in the most vibrant sector of the economy.

No doubt, the Nigerian banking sector remains the major shaker of the Nigerian economy. The sector attracts investment more than all the other sectors despite the negative traits exhibited by the some of the key players. The growth in this sector can be attributed to the introduction of sophisticated and latest Information, Communication and Technology (ICT) equipment to drive their various services and products. The latest being the Automated Cheque Clearing tagged "The Nigerian Automated Clearing System" (NACS).

There is no doubt that the degree of efficiency of the payment system in a country critically influences the effectiveness and outcome of monetary policy, the soundness of financial institutions and the overall performance of the economy. The present standard of payment and settlement system operated in the country is less than desirable and this poses a very serious
concern for efficiency in financial and monetary management. More so, the cash based system operated in Nigeria partly attributed to the low level of confidence of the general public in the cheque processing procedure. The time lag between cheque lodgements and receipt of value for the lodged cheque and fraud perpetrated through cheques and the spate of dishonoured cheques are among the countless reason why the public shun the use of cheque as a means for settling debt and payment for goods and services.

2.0 The Present Cheque Clearing System

The current system of cheque clearing which is predominantly manual based is fraught with several problems and cannot support the fresh introduction of sophisticated new technologies introduced by various banks, Nigeria Inter-Bank Settlement System Plc (NIBSS) and the CBN. It takes about three (3) to nine (9) days to clear cheques. It is completely paper based
and takes a long period of float, which means more reliance on cash for transaction settlement with its attendant cost and risk among other disadvantages. Also, the clearing session is usually rowdy with over 100 representatives per session, late balancing and closing clearing sessions, low level of discipline among representatives and their organisations. The clearing system is prone to many abuses among which are: cheque suppression, drawing on unfunded accounts, swapping of cheque, etc. The other phenomena are late account update and lack of accurate data on payment inflows and outflows for regulatory management that does not permit better planning and treasury management.

In a bid to improve the present payment and clearing system and overcome the challenges above, CBN along with Messrs Komplek Limited in 1982 carried out a comprehensive study on the cheque payment system. The outcome of this study was the introduction of the Magnetic Ink Character Recognition (MICR) cheque clearing system in 1983 whose implementation
began in 1987.

3.0 The Nigerian Automated Cheque Clearing System

The Nigerian Automated Clearing System (NACS) adopts a procedure which facilitates the automated clearing and processing of cheques on-line (via computer) using a combination of MICR and imaging technology. The system enables cheque documents to be captured and processed at high speed with the use of reader/sorter machines and the state-of-the-art computer technology. The journey to this project dates back to 1982 when the MICR scheme was initiated. It is believed that with the automation of our clearing and payment system a gateway for integration of other payment system is assured.

3.1 Objectives/Opportunities

The following are the objectives and opportunities that will accrue from proper implementation of the NACS project:

  • Provide an efficient and cost effective processing of clearing instruments based on electronic data presentations,
  • Reduction in the clearing cycle to two (2) working days to customer account for local clearing and five (5) working days to customer account for up-country/inter state clearing,
  • Conduct more than one clearing session per day, thereby reducing clearing float,
  • Provide a facility for express clearing of high level instruments meeting specific conditions,
  • Maintain and enforce standards for clearing procedures, communication and quality of clearing instruments,
  • To promote effective control through tracking/reconciling of physical instruments with related electronic data,
  • Create and maintain a database of clearing activities and transactions for use by participating banks,
  • Encourage the development and integration of other electronic payment and settlement system such as ValuCard, Smart Pay and other electronic payment systems,
  • Provide an automated clearing system capable of handling all types of paper-based instrument in Nigeria,
  • The Nigerian economy, which is predominantly cash based will give way to the use of cheques and other payment instruments, thus reducing crime associated with this nature of theft,
  • There are opportunities for future cheque truncation, and
  • Potentials for image processing and archival and integration of banking applications which will give room for better planning and treasury management

3.2 Challenges

To attain the full benefits of automated clearing system, the following operational issues need to be addressed:

  1. Banks must interconnect their branches nationwide,
  2. There will be need for an adequate supply of MICR equipment that would support interface to automated clearing system,
  3. There will be need for standardisation of MICR cheque quality to reduce MICR rejection rate which may be too high for NACS's smooth operations, thus banks must improve on their MICR cheque quality,
  4. The present clearing house rules need to be updated and fashioned in a way to meet NACS standard,
  5. There is a need to enact enabling laws, review existing laws relating to cheque abuse and mandate penalties for offenders,
  6. Banks must redesign their clearing processes and clearing department to be in line with NACS,
  7. Enlightening the banking public that there is no superior advantage that Participating Bank Clearing Centre (PBCC) or direct participants have over the indirect participants so that the direct participants do not take undue advantage
    of this,
  8. Constant staff training and re-training to equip them with the technicalities and skills involved in NACS operation, to guide against any vacuum that might be created through high human resource turn over experienced by banks I.T
    department with the advent of more telecommunication company,
  9. Back office processing of Electronic Clearing Files to facilitate electronic posting (either post before or after reconciliation), remote capture of cheques at branches, centralised posting etc, and
  10. There must be in place a secure and effective communication link with a regular audit to ensure quality assurance specification by participants.

3.3 Participants In The NACS

The participants at NACS are in the following category:

1. The Zonal Clearing House or Centre (ZCC): The Nigerian Inter Bank Settlement System Plc (NIBSS), the coordinating body of NACS project will serve as the Zonal Clearing Centre or House. It will be mandated to clear financial instruments for the other participants in the NACS.
2. Central Bank of Nigeria (CBN): They will serve as the regulatory and supervisory body in the NACS. CBN will also coordinate the activities of other participants.
3. The Participating Banks: These are banks that will clear their instruments either as a direct bank or indirect banks.

a. Direct Banks or Participating Bank Clearing Centre (PBCC): These are banks selected by NIBSS for direct on line clearing of financial instruments who will have direct access to the Zonal Clearing Centre (ZCC). They would establish local clearing centres equipped with secured communication link to the ZCC via the Virtual Private Network (VPN) and also process and clear instruments on behalf of indirect banks and themselves.
b. Indirect Banks: Banks not having a direct access to the ZCC are in this category. Their instruments will be cleared through the PBCC they will be attached to. Indirect banks are free to choose from any of the existing PBCC and may opt out from the relationship at any given time.

Conversely, it is important to note that the PBCC do not have any undue clearing or other advantages over the Indirect Banks as all financial instrument will be accorded same value date and treatment irrespective of whether it is presented by a PBCC or Indirect Bank. However, banks are allowed to choose the type of participation they want so long as they can meet the
requirements for such.

3.4 Requirements Of Indirect Banks And PBCC

To qualify either as a Direct Participant or Indirect Participant, banks will be subjected to two measuring yard sticks, the commercial and the technical requirements:

i. Commercial requirements:

a. Direct Banks or PBCC: For a bank to qualify as a PBCC it is required that such a bank will pay a sum of five million Naira (N5 Million) one time entry fee and also buy one Billion Naira (N1 billion) CBN Treasury Bills Clearing Collateral.
b. Indirect Banks: An Indirect Bank is required to buy 250 Million
Naira (N250 Million) CBN Treasury Bills Clearing Collateral.

ii. Technical requirements

The technical requirements are for the PBCC only. They include the
following.
1. Live PBCC server,
2. Back up PBCC server,
3. Reader/Sorter equipments,
4. Back up Reader/Sorter equipment,
5. NACS interface applications and softwares,
6. Virtual Private Network equipment that will connect to NACS
network.

4.0 Conclusion

With the expected introduction of the On-line Clearing/Automated Cheque Clearing (NACS) in July this year, the Nigerian banking industry will be ushered into a new phase. Today the application of ICT in banking operations has immensely reduced the stress and problems associated with banking operations and transactions at the level of the staff and the entire
banking public. It is our noble opinion that NACS will undoubtedly improve our payment and settlement system thereby improving the liquidity of the financial system. The opportunities of NACS in this age of globalisation is enormous, thus, it is imperative that all parties concerned must work together to achieve a smooth implementation and take-off of the project.

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