Role and function of CBK Interbank Payment System

Since November 2000, the Banking and Payments Authority of Kosovo (BPK) (now Central Bank of the Republic of Kosovo) began drafting a development plan to establish an Interbank Payment System. This effort was supported initially by the technical assistance provided at that time by IMF (through professional payment consultants). Their recommendations helped in creating the current work procedures. After the establishment of Interbank Payments Advisory Committee (IPAC), with participation of all commercial banks, work continued on the concretization of rules and procedures, standards and all other operational and development policies in this regard.

Interbank Payment System has passed through three main development phases.

First Phase

Interbank Clearing System (ICS) officially started its operation on May 7, 2001. This period has been defined with the manual way of payment orders exchange at the CBK, whereas it makes the settlements on NET basis (the difference between debit and credit) at the end of the day for all payment transactions. It was a simple clearing and settlement system and has exchange (clearing) of payment orders in paper and settle at the end of day. It was the way of crediting the receiving bank account and debiting ordering bank account. In the beginning, due to the small payment number, registrations in account were done on individual bases. It was an agreement reached between ICS (CBK) and participant banks that entered in this agreement.

Except daily operative used principally to exchange the payment order, the other characteristic regarding this phase was the activity of the interbank payments advisory committee (known as “IPAC”). This committee that still meets regularly, has initially been composed of representative banks that were ICS members, Pro Credit Bank (ex MEB), NLB (ex BRK) dhe BPB, and was subsequently joined in June of the same year by the Economic Bank (BE) and at the end of 2001 year by the Raiffeissen Bank (ex ABK), BKP and KSB. The Interbank Clearing System manager chairs the committees work. This committee was established to set the operational rules, procedures and standards for ICS. The committee continues to be engaged in the important development processes in all further phases. The first phase was the period where the first step was undertaken towards Electronic Interbank Clearing System (EICS) what means electronic data exchange through diskettes or file transfers (that commenced at the end of 2001 up to April 2002).

Second Phase

Manual and semi manual exchange of data was a strong base, which preceded the other development and modernization phase of the interbank payment system and the transition on the so-called Electronic Interbank Clearing System (EICS).

The implementation of the second phase, the transition to the EICS, was finished on time, according to the prepared plan of CBK through the professional and advisory recommendations of IMF technical assistance and at the same time the technical support of the KPMG –USAID (providing of software and hardware) and also through their special advisor nominated at that time at CBK. Initially the data transmission relation Bank1 – ICS – CBK and vice versa, was technically carried out through the telephone lines (modem).  The entire on-goings were successfully realized in accordance to the preliminary agreements with the banks.  In the beginning of April 2002, there was a full transition to the Electronic Interbank Clearing System.  Carrying out the necessary IT and consulting work, in accordance with the procedures and through KPMG – USAID, was trusted to the local company “PRONET”. The company finished the work successfully and on time.

The second development phase was also characterized with another great achievement, the transition to the Standard Numbering System of the Kosovo Banking Accounts, in accordance to the CBK Rule nr. XIX on the standard system number accounts.  Thanks to the commitment of member banks and under the leadership and activities of Interbank Payment Advisory Committee, this standard was implemented and applied to all bank payment accounts. The implementation of this standard increased the efficiency of payment systems and also opened the doors for new reforms.

An event to be highlighted was that of September 7, 2004 when the chief of the American Office in Prishtina and the director of USAID, at a formal public ceremony, officially recognized the CBK as the owner of the Electronic Interbank Clearing System.

Another achievement in this phase is undoubtedly the implementation of the “Kos-Giro” scheme (in December, 2004), which was technically implemented and developed within the Electronic Interbank Clearing System (EICS). Kos-Giro transactions represent a particular type of transactions that provide a standardized and automated way for payment collection for large billing institutions and utility companies. This payment scheme has seen a huge increase in recent years, as a result of the Customs Service and insurance companies joining the scheme.

Third Phase

In May 2007, the EICS system was installed at the Treasury, which further facilitated the delivery of all payments by the central and local government institutions. The installation of the system at the Treasury was only the first step, which was followed by standardization and automation of government payments. In this context, the internal systems of all banks were interconnected and the unique reference number for incoming payments was applied (UNIREF through EICS). These steps increased the efficiency, security and transparency of government revenue collection.

During this phase of development, a new scheme and payment instrument was developed, Direct Debit. After the approval of the CBK Rule nr XXXI in January 2009, the direct debit software was installed as a separate component in the Electronic Interbank Clearing System (EICS), which provides the basis for the transfer of these payments. In June 2009, the system moved into a test phase. After the test phase, in November 2009, the Direct Debit scheme was released live for the general public. The public informational campaign for the new payment method started with the publication of an informative brochure and a press release from the CBK. Currently members of the Direct Debit Scheme are these banks: ProCredit Bank, Raiffeissen Bank, NLB Prishtina, Bank for Business, Economic Bank, TEB and National Commercial Bank, and these companies, the Kosovo Energy Corporation, Post and Telecommunications of Kosovo, KUR “Prishtina” and Private Enterprise “GYM.”

During 2009, EICS was redeveloped to be fully web-based, which has considerably improved its usability and functionality. Now every day the participants of the interbank payment system send more safely and efficiently about 15 thousand payments worth over 15 million Euros.

Another achievement in this phase is undoubtedly the increase of the efficiency of the system, which contributed to the increase of the value and volume of interbank payments. During this period the EICS started the application of four clearing sessions (8:00, 10:30, 13:30, 15:00) and the development of the reporting module for real time account balance and liquidity positions of participants in the system. The real time electronic reporting helps the banks to better administer and manage their liquidity.

Besides the operational developments, this phase was characterized with the consolidation of Payment Systems Oversight function. This was reflected with the amendment of CBK Rule nr XI – “Reporting of banks and subsidiaries of foreign banks in Kosovo”, and the adoption of the document on the reporting methodology of payment instruments. This document is based on the reporting methodology of European Central Bank (Blue Book), and is in accordance with the terminology of the international standards set by BIS.

These developments helped to develop the database of statistical and non-statistical data on the use of payment instruments, and they also helped to improve the analysis of trends on the use of payment instruments and terminals in the country.

A long term development strategy for the financial sector in Kosovo, was undertaken in 2009. In coordination with the commercial banks and in particular with the World Bank, the development strategy for the national payments system was outlined. The Vision of the Future National Payments System (the Vision) and the Action Plan for Implementation of the National Payment System Vision (the Action Plan), which together articulate the strategy for the development of the NPS in the Republic of Kosovo, were approved by the Governing Board of CBK on September 11, 2009. Interbank Payment Systems Directorate (IPSD) within CBK has the role the carrier and the coordinator for the implementation of the strategy.

The development strategy for NPS has 9 pillars: I. Legal framework, II. Large-value and time-critical payments, III. Retail payment systems, IV. Government transactions, V. Securities depository, clearance and settlement, VI. Money market, VII. International remittances, VIII. Oversight, IX. Co-operation (National Payments Council).

Of all these individual projects envisaged under the NPS strategy, the most important project is the implementation of the real time gross settlement system (RTGS). This system will be the backbone of the NPS in Kosovo.

Payment System has an important role and function in maintaining stability and efficiency of the financial sector and the overall economy. Payment Systems Department (PSD) is responsible for operating the interbank payment system owned by the CBK, coordinating new developments, and conducting oversight in the area of payment systems. Currently, in Kosovo there is only one interbank payment system – Interbank Payment System (IPS), which provides clearing and settlement on a net basis automatically according to clearing sessions, and also on gross basis for all transactions.
Payment Systems Department (PSD) has four main tasks:
1) Operations: PSD administers and operates CBK payment systems, offers interbank payment services, maintains safety and efficiency of the Interbank Payment System (ATS/RTGS+ACH) and also the Registry of Bank Accounts.
More specifically, the operations unit within Payment Systems Department performs the following tasks:
a. Operates, manages and controls the clearing and final settlement operations for all interbank payments.
b. Ensures smooth functioning of the payment system, allowing participants access to the system in accordance to the relevant regulations in place.
c. Ensures integrity of transactions, user account connections, coordination of clearing sessions and final settlement to the accounts of all participants.
d. Monitors and administers the required reserve of the participating banks, liquidity of the banking system, and the safety of the payment system.
2) Development: Primary purpose is to analyze and to contribute in the development of new projects within the payments system and to coordinate the implementation and application of new systems.
IPS takes initiatives for amending and changing the rules and procedures in compliance with new methods of payment and advances in technology. It also initiates and promotes new ways of payments, which help to reduce cash payments.
3) Oversight: Primary purpose is to promote the safety and efficiency of the payment systems by monitoring existing and planned systems, assessing them against these objectives and where necessary initiating and taking adequate measures for regulation and to help change.
Oversight unit within PSD provides regular or ad-hoc reports and analysis on payment systems oversight activities. These reports will provide a brief summary of the oversight activity of PSD over the previous year, in particular commenting on any changes in the payment systems and on the CBK’s assessment of the consequences for risk. From time to time, PSD may also publish detailed analyses of structural and risk issues related to payment and settlement systems. In regular monthly and quarterly periods, PSD publishes statistical reports on payment instruments in use and makes detailed analysis on structural issues and risks associated with payment and settlement systems, including operational, systemic, settlement and liquidity risks.
4) Cooperation: Interbank Payment Advisory Committee (IPAC) has an important role in interbank payment system. IPAC was established to set the operating rules, procedures and standards for IPS. The committee continues to meet regularly to consider operational issues and new developments. Representatives of commercial banks and MF/Treasury are members of Interbank Payment Advisory Committee (IPAC), and other relevant parties participate in the IPAC meetings. Payment Systems Department is responsible for organizing and chairing IPAC meetings.