Murali Subramanian

Head of Transaction Banking

The Middle East and Africa region is experiencing a rise in the sophistication of its payments systems. Indeed, a large number of countries in the region have moved to implement real-time gross settlement (RTGS) value systems, which function together as the backbone of the region’s payments infrastructure.

A significant part of this transformation has taken place over the last decade, with the World Bank and several other multilateral agencies, such as the African development Bank, as well as a number of foreign consulting companies with clearing and payments system expertise acting as key drivers of this transformation.

South Africa has traditionally been one of the pioneers of advanced payments systems in Africa, while Saudi Arabia has been the forerunner in the Middle East; the UAE has also joined the payments infrastructure vanguard of late. In the Middle East, there remain relatively few countries that have not implemented RTGS systems. These include Syria and Yemen, which has received little foreign direct investment compared with neighbouring countries.

“The development of payments infrastructure goes beyond bulk clearing using RTGS systems, however. There is also increasing use of direct debit transfers, faster payments, and imaging clearing of cheques, which are all in various stages of development across the region,” says Murali Subramanian, Head of Transaction Banking at Abu Dhabi Commercial Bank.

Cash is king

While the speed and ease by which money can be electronically transferred has improved, cash remains the predominant means of payment, and in some countries looks set to remain so for some time to come. “Cash continues to be significantly used in all the economies in the region, even in the countries that are successful RTGS adaptors,” says Subramanian.

In Egypt, for example, cash accounts for around 93% of transactions. In the UAE and Saudi Arabia it represents around 80%. Despite the ongoing popularity of cash, cards are slowly making inroads. “Any future displacement of cash in favour of non-cash transactions will likely be driven by credit and debit cards,” says Subramanian.

The scope for mobile payments to take off in the region is also great, given the enormous penetration of mobile phones in the Middle East and Africa. And mobile payment technology has already started to thrive in countries where the traditional branch banking infrastructure is subject to instability.

“Non-traditional technologies are being used in some countries to supplement deficient clearing system infrastructure. The popularity of M-Pesa in Kenya is a prime example of this,” says Subramanian.

The M-Pesa mobile payments service, through which transactions such as value transfer remittances and domestic payments can be made, was launched in 2007 by mobile phone network operators in Kenya and Tanzania. Now more than half of all payments made in Kenya go through the system. Part of the reason for the service’s success is that users are not required to have a bank account.

Impact on corporates

Subramanian says one effect of this payments evolution on corporates is they are starting to recognise and harness the value of physical cash.

“The ability to handle receipts and deliver cash is important. While corporates in the developed world do not emphasise cash handling capabilities or outsource it completely, this outsourcing capability is being developed differently here,” he says.

For example, security companies like Group 4 have started to take on an entire end-to-end operation from collection to value in an account in the Middle East. In sub-Saharan African countries, where for infrastructural or regulatory reasons this might not be possible, outsourced collections could be the solution.

Subramanian says this payments evolution is also creating scope for the use of new technologies such as image-based cheque clearing. However, he warns that corporates should carefully examine the currency control regulations in a particular country in the region before establishing operations there. “In many countries this is not an issue, but in some – Egypt, for example – this can be a sticking point,” he says.

Choosing a partner

Corporates looking for a banking partner in the region essentially have two choices: a global bank or a local bank. Global banks can offer the advantages of a multi-country presence, consistent standards of operation, a common point of reference, and uniform pricing, among others.

However, the global banks can have limited branch networks in some Middle East or African countries. “One branch per country is typically the model for global banks operating in the region,” explains Subramanian.

The bigger economies in the region often have large banks operating at a standard more or less comparable to Western banks. “What many corporates operating in the region tend to do is keep a global overlay bank for their international cash pooling and basic treasury activities, while using a big local bank to do everything else they wish to do in-country, such as supplier financing, collections, reconciliations, employee services and cash collections,” says Subramanian. “This can be the best of both worlds,” he concludes.