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of a pipeline is generally measured by the ease with which the liquid flows within the pipelines as well as by the integrity of the system to function without leaks, contamination or breakdowns.”
Thus, the payment systems have to allow money to be transferred from hand to hand with ease, while protecting the money so transferred from being stolen, misplaced or misdelivered. As the sub title of the book says, it is an essential requirement for ensuring the proper functioning of a banking system without undesirable ups and downs.
Though the author says that it is “principally a policy and operational book” for use by those who might embark on payment system reforms, the book is much more than that. It has provided a wealth of information relating to most modern payment systems based on the author’s rich and wide experiences in the field.
Ranee Jayamaha: A central banker with wide experience
The author, Ranee Jayamaha, has been a career central banker who has wide experience in almost all key areas of central banking. She started her career in the Central Bank as an economist and over the years got elevated to the number two position in the Economic Research Department. From there, she moved into banking developmen
t as its Director with a mission to accomplish. That was to promote development banking in the country, especially in remote unbanked regions.
Recognising her vast knowledge in money, banking and banking development, she was handpicked by the Central Bank to function as the Secretary to the Presidential Commission on Banking and Finance, also known as Salgado Commission. She coordinated the work of the Commission effectively to facilitate the Commission to release a dozen of interim reports covering all areas of the country’s banking and finance and a final report incorporating all the recommendations in interim reports.
After this, she had a brief stint at the Ministry of Finance as an advisor and later she joined the Commonwealth Secretariat in London as an economic advisor on financial and payments matters. On return to the Central Bank in 2001, she was elevated to the post of Assistant Governor and then to the post of Deputy Governor of the Bank. While being the Assistant Governor, she headed the special team that introduced the state-of-the-art payment and settlement system to Sri Lanka, the first of such venture in South Asia. Hence, there is no other person who is more qualified than Jayamaha to write a book on payment systems in a global context.
The coverage of the book
Jayamaha has covered four important aspects relating to payments systems in ‘The Money Pipeline’: The global payments setup, Sri Lanka’s payments history, the story of introducing a modern payments system in Sri Lanka under the Central Bank’s modernisation project and new developments in payments in a global context.
She has tackled these issues extensively and intensively in 11 chapters and nine appendices. The language used by her is somewhat technical and not easy for a layman to comprehend. Yet, it has been written in a readable manner, a gift she has come to possess through her long experience as a researcher both at the Central Bank and the Commonwealth Secretariat.
The importance of a payments system
How does a payments system become so important to the good health of an economy? If it does not function well, what kinds of losses will be borne by societies? Jayamaha has answered these questions in the Preface to the book. She says: “If payment systems are robust and resilient, value transfers tend to be smooth, speedy and safe.” What she means is that if payment systems are strong and not like to fail and can withstand any beneficial or adverse shocks they might get, people will be able to make and receive payments for various businesses they conduct with each other without facing problems. Hence, it implies that the presence of this essential ground condition encourages them to engage in more businesses.
She has identified three essential features which such a payment system should have. When her technical language is translated into laymen’s language, it reads as follows: First, it should ensure swiftness in payments while minimising the costs. Second, people should be able to trust the working of the payment system allowing them to conclude business transactions. Third, the payment system should not favour or prejudice anyone and treat everyone involved equally. No one should be able to gain an undue advantage out of the payment systems.
The primitive payments system in Sri Lanka
The payment system which Sri Lanka had prior to the introduction of the modern payments and settlement system by the Central Bank in early 2000s was in fact devoid of these essential features. Jayamaha has documented the main ingredients of such a primitive payment system in the first three chapters of ‘The Money Pipeline’.
Initially, people used currency issued by governments to make payments. They have the problem of delivery on time, transportation from place to place, ensuring security and safekeeping once the money has been received. The transportation of money from place to place encouraged highwaymen to waylay such transportation caravans and run away with the loots. The fictional character Robin Hood of the Sherwood Forests in England and the real character of Saradiel of Uthuwankande in Ceylon are some noted highwaymen.
Society as a safety measure then created the cheque leaf as a sure way of making payments. However, the payment liability of a cheque rests on a bank and it could honour its obligations only when the cheque is presented to it for payment. That took time, money and tedious human involvements. To facilitate this, central banks created a mechanism called a clearing house at which banks would exchange the cheques drawn on each other and get the central bank to settle the net amounts due to them by adjusting their accounts in the central bank. This manual clearing was not only cumbersome but also costly.
Sri Lanka had this manual clearing system prior to the introduction of the automated clearing house in Colombo in 1988. This was only a marginal improvement in the clearing system since it only speeded up the clearing work but the delay involved in the clearing was the same. What the automated clearing house did was only machine-processing of cheques instead of manual-processing.
The real breakthrough in clearing of cheques came only in 2006 when Sri Lanka moved into the use of cheque imaging for payment of value instead of the verification of the physical cheque issued by a customer. Under this system, known as Cheque Imaging and Truncation System or CITS, only a cheque image would be transferred to the clearing house through electronic means for payments.
This cut down the number of days that took for a cheque to clear from earlier seven to nine days in the case of outstation cheques to practically two days – a significant time saving for recipients of cheque payments. Earlier, the payer of the cheque could make use of the funds for his personal use until the cheque value is actually debited to his account in the bank, an undue advantage enjoyed by him.
From ‘brownfield’ to ‘greenfield’ improvement
These changes effected to the clearing system were important but they were just ‘brownfield improvements’ since they caused only a marginal improvement to the existing system. They did not overhaul the country’s payments and settlement system which was the necessity.
Jayamaha says that the real ‘greenfield improvement’ – the creation of a completely new environment – came when Sri Lanka went for a comprehensive payments and settlement system in 2003 by introducing a completely new payment mechanism based on the modern information and communication technology, abbreviated as ICT. This was done under the Central Bank Modernisation Project initiated in 2000 with support from the government and the World Bank.
The project had three components: improving the professional standards and the competency of the employees in the Bank, making the Central Bank an efficient organisation capable of meeting its objectives and introducing new technology to internal operations of the Bank, payments system and the management of public debt.
The gigantic task of introducing new technology
In the last component, the three sub-components involved the automation of the accounting system of the Bank, introduction of a real time gross settlement or RTGS payments mechanism and moving into a scripless – that is, no physical Treasury bill and bond certificates – debt management supported by a Central Depository of Treasury bills and bonds, respectively. This was a massive operation involving almost all in the Central Bank, all commercial banks, primary dealers, computer software companies and World Bank officials. It also required comprehensive amendment to the existing legal structure in Sri Lanka relating to payments.
Jayamaha headed the exclusively-selected team that planned, executed and delivered the final product to Sri Lanka on time. That was not a simple task since it involved many government agencies which could not be moved at the speed which the Central Bank desired them to move. Computer software companies could not deliver the needed customised software on time. Commercial banks and primary dealers did not have the same enthusiasm on the project as the Central Bank. They all had to be pushed at times with a stern stick but in most times with carrots.
It also required a massive training of officers at the Central Bank, commercial banks and primary dealer companies. Thus, the implementation of a project of that nature was not a simple task. Yet, Sri Lanka was able to finish the job well in time, due mainly to the indefatigable efforts of Jayamaha who took its implementation as a personal challenge and her duty to the nation.
Critics have not been kind to technology improvement
Jayamaha has not described the problems she had faced and how she had solved those problems when she was charged with the task of delivering a modern payments system to the country. As she had mentioned, it was a real ‘greenfield’ operation. There were no precedents or experiences of others to learn from. Everything had to be visualised in the mind and planned accordingly. If a wrong step was made, its costs would have been enormous.
There were attempts by people outside to brand it as a ‘white elephant’ that would be an immense burden to the fledgling financial system of the country. Many felt that its need was many decades away and Sri Lanka was making the mistake of importing the distant future to the present. There was also a charge that the Central Bank had been captured by interested World Bank officials who were desirous of planting a project that was not needed by Sri Lanka at that stage of financial development. Their interest, according to the charge, was to ensure their career advancement in the World Bank.
The worst of all was that even mighty India had not attempted to modernise its payments system. Since India is usually used as a benchmark by its neighbours, Sri Lanka’s attempt at going over India was not considered as a viable option. If India with its GDP of about 30 times of Sri Lanka’s does not feel the necessity, why should Sri Lanka attempt it? It is only the team of dedicated people who worked with Jayamaha and her superiors in the bank who knew of the real agony which she and her team had to go through in implementing the project.
However, once it was successfully delivered on time, the World Bank categorised it as a unique success story and recommended to other countries in the region that they should follow Sri Lanka’s footstep. It took many years for South Asian countries to modernise their payment systems. Some countries are still struggling to finish the job which they had started many years ago.
‘The Money Pipeline’: a must read
‘The Money Pipeline’ is a guideline for any country desirous of modernising the payment system. It has documented the ingredients, issues, risks and solutions involved in such an initiative. The book is a comprehensive handbook for anyone to follow. The language is technical, but a book of this nature cannot be written without using technical language. But for the benefit of the general readers, Jayamaha would have added an explanatory glossary to the book instead of just listing out the acronyms at the end. Further, the book badly requires a comprehensive index for easy reference. It is hoped that Jayamaha will see to these shortcomings when a new edition of the book is released.
Nevertheless, ‘The Money Pipeline’ by the experienced Central Banker, Ranee Jayamaha, is a must read by all.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)
