The African Continental Free Trade Agreement, AfCFTA, was created to produce uniform rules to guide trade, dispute settlement, investments, competition and intellectual property rights across the continent for greater inter trade and stronger bargaining positions.
Part of the priorities of AfCFTA is to raise intra Africa trade across the continent. Currently, there is an intra trade deficit across Africa where only 15.4% of trade in within African countries. This is due to a number of reasons:
- Moving money across Africa is expensive and time consuming because; over 48% of payment settlement processes within Africa involve banks outside of Africa.
- There are 42 currencies across Africa and using US Dollar based American banks for settlements means the African currency is converted into USD and then converted back to the second African currency, causing high fees and conversion cost which is passed on the consumer (The use of North American based payment settlement banks is due to the lack of options within the continent)
- There is lot of informal trade on the continent that are not necessarily captured within formal banking systems.
This has meant that for AfCFTA to be effective, the cost of money transfers across the continent must be lowered. The African Union supported by the African Export Import Bank- AfriExim ,(Bank was established in Abuja, Nigeria in October, 1993 by African Governments, African private and institutional investors as well as non-African financial institutions and private investors for the purpose of financing, promoting and expanding intra-African and extra-African trade.) The bank has collaborated on the development of a Pan-African Payments and Settlement System -PAPSS a centralized payment system that will provide the infrastructure for intra Africa trade.
[Payment and settlement system are common rules, procedures, supportive technical, and program facilities for implementation of clearing, transfer of funds and execution of final settlement, which is used to provide a payment to a beneficiary.]
Payment and settlement system are needed so the payer’s bank can get the money to the payee banks account in a coordinated timely fashion. Imagine if a rural bank in Kenya had to figure out on its own how to get an account holder’s payment to Egypt.
How it works
The platform will enable instant intra Africa cross border payment in local currencies, eliminating the dollar conversion aspect and the need for North American settlement processing banks and simplifying the process.
African central banks can effectively plug in the existing payment structures offered by PAPSS and thus lowering their current liquidity requirements.
The platform will provide central banks a single window to all the cross border payments across the continent and provide transparency and greater governance.
It is estimated that PAPSS will save the continent over 5bn USD in payment transactions.
AfriExim, the developer of platform and settlement agent, has committed to a 500million USD investment into the platform and further funds are being raised from African central banks. It is estimated that the platform will need bout 3 -5 billion USD to run.
Prior to its full scale launch, PAPSS was piloted in partnership with the West Africa Monetary Institute, across the West African Monetary Zone (WAMZ), as the region is the only economic bloc that does that not have an intra region payment settlement platform. The pilot also offers complexities for testing, as it is multi-lingual, multi-currency with multiple regulators. It included six countries set up for the pilot scheme, some of which include; Nigeria, Ghana and Sierra Leone.
The Effect on African fintech?
It simply gets cheaper for them to send money across borders and provides infrastructure for faster payments.
uniform payment process across countries enable easier cross border payment
Still, there needs to be a lot of work done to close that gap between the volumes of informal transaction on the continent that happens outside of the banking sector.