NATIONAL INSTITUTE OF FACILITATION TECHNOLOGIES PVT.LTD

TOPIC:

TECHNOLOGICAL ADVANCEMENT IN BANKING SECTORS OF PAKISTAN BY

NIFT

PRESENTED BY:

MARIA SHAFFAQ MALIK

NAUSHEEN MOIN

SADIA TARIQ

SHAFAQ SARWAR

SYED FAIQUE ALI

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DEDICATED TO

Our teacher whose teaching and enlightenment inspired and enabled us to write this report.

&

Our parents who supported us at every stage of our busy schedule during the preparation of this report.

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SPECIAL THANKS

NIFT Pvt. Ltd and its highly professional team of top management for their guidance and support

Dr. A. R. Zaki

Chairman

Karachi University Business School

We were very obliged & honored of his taking responsibility of our presence at NIFT Pvt. Ltd

And entrusting us the reputation and prestige of Karachi University Business School

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ACKNOWLEDGEMENT

Our sincerest appreciation must be extended to MR. SABOOR who has given her comments, corrections and guided us at

every step in preparing this report

AND

We thank each other, Shafaq Sarwar, Maria Shaffaq Malik, Nausheen Khattab, Syed Faique Ali & Sadia Tariq; for our

teamwork and dedicated efforts

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CONTENTS1. NIFT………………………………………………………………………………………………………………………………………..

CEO’s message…………………………………………………………………………………………………………………. Board of Directors……………………………………………………………………………………………………………. Introduction……………………………………………………………………………………………………………………… Mission & Vision………………………………………………………………………………………………………………. Corporate Structure…………………………………………………………………………………………………………. NIFT’s Management……………………………………………………………………………………………………….... Partners……………………………………………………………………………………………………………………………. Certification Authority………………………………………………………………………………………………………. Image System Marketing………………………………………………………………………………………………….. Product & Services……………………………………………………………………………………………………………. Nift-e-Trust……………………………………………………………………………………………………………………….

2. Pakistan’s Banking Sector……………………………………………………………………………………………………….

3. Payment & Settlement Systems……………………………………………………………………………………………. Overview………………………………………………………………………………………………………………………… ACH service……………………………………………………………………………………………………………………. US Dollar Instruments Collection and Settlement System.................................................... Standardization of Government Payment Instruments…………………………………………………… Real Time Gross Settlement……………………………………………………………………………………………. PRISM…………………………………………………………………………………………………………………………….. NIFT’S role in the implementation of RTGS at SBP………………………………………………………….. Remittance Processing……………………………………………………………………………………………………. Enterprise Content Management Services (ECMS)………………………………………………………….. SWIFT……………………………………………………………………………………………………………………………… Key Initiatives by SBP……………………………………………………………………………………………………… Payments System and Electronic Funds Transfers Act 2005…………………………………………….

4. e-Banking in Pakistan……………………………………………………………………………………………………………. Overview………………………………………………………………………………………………………………………… Electronic Banking System……………………………………………………………………………………………… Benefits of banking KIOSKS…………………………………………………………………………………………….. ATM network…………………………………………………………………………………………………………………. Real Time Online Banking (RTOB)……………………………………………………………………………………

5. Information Technology Developments in Pakistan’s Banking Sector……………………………………

Overview……………………………………………………………………………………………………………………….. Globus Banking & Currency Solutions…………………………………………………………………………….. Oracle ERP……………………………………………………………………………………………………………………… Data Warehouse…………………………………………………………………………………………………………….

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Web………………………………………………………………………………………………………………………………. UNIX server hosting………………………………………………………………………………………………………. Window’s infrastructure & applications………………………………………………………………………… Infrastructure………………………………………………………………………………………………………………...

6. Impact of advancement on Risk Profile………………………………………………………………………………..

7. Peer Country Comparisons………………………………………………………………………………………………….

8. References…………………………………………………………………………………………………………………………..

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NATIONAL INSTITUTE OF FACILITATION TECHNOLOGIES PVT.LTD

CEO’S MESSAGE

Welcome, and thank you for your interest in NIFTWe are proud to be catalyst in the modernization of Payment Systems in Pakistan. This process started with the implementation of first Automated Clearing House (ACH) in Karachi in 1996. We have traveled a long way since

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then. We have now established ACH centers in 20 major cities from where ACH services are being extended to over 185 towns and cities. We have introduced new concepts exploiting latest technologies for electronic clearing bringing faster credits for the benefit of banking industry. 

We have set up first Certificate Authority / Public Key Infrastructure to facilitate e-Commerce, e-banking, e-government and e-business in Pakistan. We are facilitating Federal Board of Revenue and Securities & Exchange Commission of Pakistan for e-filing of tax and other returns by tax payers and corporate respectively. Large corporations, insurance companies, Karachi and Lahore stock exchanges and banks are exploiting our Public Key Infrastructure to authenticate and secure their electronic communication and transactions. NIFT has carried out Network Penetration testing for number of important and sensitive institutions in Pakistan.

Our Enterprise Content Management Services (ECMS) are being exploited by banks large corporations as well. We have to our credit completion of one of the largest image archiving project where we processed over 65 million images which enabled NADRA to set up the citizen data base in the country.

The largest oil refinery, two large cellular companies and largest insurance company of Pakistan are using our ECMS facilitation for the image archiving and document management systems. Numbers of banks are using ECMS services for production of statement of Accounts, Credit Card invoicing, etc.

We are helping major utility companies (with an aggregate of over 13 million payments per month) in improving their cash flows by providing them utility payment processing services. 

We have been able to achieve all this in short span of 14 years because of the trust reposed in us by the financial industry, large corporate and Government of Pakistan.Our products and services bring immediate and direct benefit in terms of streamlining systems, saving costs and improving cash flows at our customer base. We focus not only on providing benefits to our customers but also to our customer’s customers. Our experience in business process re-engineering and our products and services have helped our customers in introducing new and exciting products which bring direct benefit to their customers. We have been adding new projects every year in our portfolio of services to extend our reach to our customers and their customers for mutual benefit. At NIFT, it is an ongoing effort to help modernize the systems to bring efficiency and continued cost effectiveness in our customer’s operations.

This concept is our defining and guiding principle. In everything we do, in every manner we operate and every service we offer, our objective is to provide immediate benefit to our customers and their customers.

This is how we have earned the trust of every one of the 40 banks and over 5571 bank branches in 184 cities, major utility companies, cellular companies, insurance companies and government organizations in Pakistan. You have my assurance that we will continue to work hard to maintain your trust by employing exceptional business solutions and services with ethics of highest standards.

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We offer relationships you can rely upon to insure your operational success both today and into the future.Best regardsM.M. KhanCEO

BOARD OF DIRECTORSThe current Board of Directors comprises of:

BANKING SECTOR  

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Mr. Bahauddin Khan Group Executive Ops. & Business Support, United Bank Ltd.

Mr. Zia Ijaz Group Chief of CRBG, Allied Bank Ltd.

Mr. Ayaz Ahmed SEVP / Chief Financial Officer, Habib Bank Ltd.

Mr. Agha Saeed Khan SEVP / Group Head Operations, MCB Bank Ltd.

Mr. Naeem Syed EVP / National Bank of Pakistan.

Mr. Atif Hasan Khan SVP / Group Chief IT Devision, National Bank of Pakistan.

Mrs. Naushaba Shahzad VP / Head of Credit Risk and Policy, FWBP.

PRIVATE SECTOR  

Mr. Wamiq A. Zuberi

Mr. Arshad A. Zuberi

Mr. Asif A. Zuberi

Mr. Anwar Samad

Mr. Arshad Nawab

Mr. Khurram Shaikh

Mr. Fahd Shaikh  

Mr. M.M. Khan (Chief Executive)

INTRODUCTION

NIFT - National Institutional Facilitation Technologies (Pvt.) Ltd. was incorporated in September 1995 as joint venture between a consortium of six banks and entrepreneurs from the private sector. All commercial banks and all of their branches in major cities avail NIFT’s services. As of May 2009, 40 commercial banks and their 5571 branches in 185 major cities, 20 data centers utilize NIFT’s services.

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NIFT has setup elaborate data centers geared to provide automated services for document processing particularly in the payment arena. Modern image based facilities have been established at Karachi, Lahore, Islamabad, Peshawar, Rawalpindi, Hyderabad, Multan, Faisalabad, Quetta, D.I.Khan, Sialkot, Gujranwala, Sukkur, Bahawalpur, Muzaffarabad, Jhelum, Abottabad, Mirpur, Sahiwal and Sargodha. The services include cheques clearing, reconciliation, ‘return’ (unpaid) cheques processing, same day clearing (express – 2 hrs. clearing service), intercity clearing and inter branch & inter-bank settlement. Services are provided at individual branch level to over 5571 branches in 184 major cities and smaller cities.

NIFT has set up a grid of automated clearing which provides efficient and cost effective intercity clearing involving 20 major and over 164 satellite cities in Pakistan. NIFT has facilitated setting up of citizen data base by National Database and Registration Authority (NADRA) by image archiving of 65 million census forms. NIFT has progressed the ACH facilities by providing web based facilities. The clearing results are now accessible by banks and branches through the NIFT's web portal. 

In addition to providing services to the financial industry, NIFT is a trusted service provider to major utility companies for utility payment services. Both gas distribution companies of Pakistan (SSGC and SNGPL), Telecommunication Company (PTCL), Cellular companies (Mobilink and Telenor) exploit NIFT's Services). NIFT also provides exclusive item processing services to large corporations which includes oil refinery, insurance companies and other businesses.

ISM - NIFT has incorporated a wholly owned subsidiary ‘Image Systems Marketing (Pvt.) Ltd.’, to offer Enterprise Content Management Services. ECMS comprises of image archiving/retrieval and document management services, bulk printing of variable and fixed data (in color and black), insertion services and web publishing of enterprise data. It has been a unique experience to bring six large banks and private sector on one platform to help modernize payment systems in Pakistan.

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MISSION

We will draw our potential from the respect we have earned as Trusted Third Party Processor and become a distinctive organization known for innovative use of technology to continually improve products and services for the benefit of our

customers and their customers and keep them abreast with times to compete in the global society.

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VISION

We focus on our customers as active component in our growth process. We continue to offer services that expand their access to excellent and affordable

technologies. Our qualified and experienced workforce must work closely with our customers to continually enhance their confidence and trust in us.

CORPORATE STRUCTURE

NIFT - National Institutional Facilitation Technologies (Pvt.) Limited was incorporated in September 1995 as a joint venture between consortium of six major banks and private entrepreneurs. Six equity holder banks are:

Habib Bank Limited MCB Bank Limited National Bank of Pakistan United Bank Limited Allied Bank Limited First Women Bank Limited

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NIFT’s Board comprises of 14 directors; 7 from banks and 7 from the private sector. The Board elects the Chairman from the nominees of shareholder banks while the CEO is a nominee of the private sector and is approved by the Board. All Scheduled banks operating in Pakistan are members of NIFT's clearing system and the State Bank of Pakistan monitors the clearinghouse operations.NIFT is a licensed clearing house of Pakistan.

NIFT`S MANAGEMENT

NIFT has established state of the art data centers in twenty major cities of Pakistan from where services are being provided to 40 banks, 5571 bank branches, two larger utility companies, and public key infrastructure in more than 184 cities of Pakistan. The organizational structure and managerial staff at NIFT comprises of a talented team of experienced professionals with vast experience in IT, Banking and Finance.

WAUSAU FINANCIAL SYSTEMS, USA: is our major business partner and technology provider for clearing system. They have an excellent performance record and are one of the key players in item processing and image based systems. Their main offerings and solutions include: Check image processing Remittance processing solutionsKnowledge Cards (security systems)Enterprise Archive and WorkflowKnowledge Source (Customer Relationship Management)Associate Resellers of Specialized MICR / OCR hardware, ATMs, Document capture systems etc.

VeriSign, Inc. NIFT is a Global Affiliate of VeriSign, Inc. - The leading provider of digital trust services that enable everyone, everywhere to engage in commerce and communications with confidence. VeriSign's digital trust services create a

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trusted environment through three core offerings – name, security and transaction services – powered by a global infrastructure that manages more than 5 billion network connections and transactions a day. NIFT is licensed by VeriSign in Pakistan as a select provider of digital trust services in Pakistan. As an Affiliate, NIFT is a member of the VeriSign Trust Network platform – the infrastructure of technology and practices that support the global interoperability and usage of digital trust services.

PANINI S.p.A., Turin, Italy: Are the manufacturer and supplier of solutions for document processing comprising of Check Scanners, Desktop Reader Sorters and Panini Vision Tools. NIFT has entered into a Distribution Agreement for selling their product within a defined territory. These products will be exploited in Cheque truncation / electronic clearing which NIFT is planning to introduce in Pakistan in near future.

NIFT's vision and institution of Certification Authority (CA/PKI)While we are focused on our immediate plans pertaining to propagation of automated clearing facilities to all related cities in Pakistan, we are equally resolute in keeping up with contemporary trends and need for harnessing electronic communication technologies for advancement in payment and settlement solutions. We would like to unfold further our vision by creating an infrastructure for secure electronic transaction processing. NIFT has established NIFT-e-TRUST; a service division of NIFT. NIFT-e-TRUST is another of its first initiatives towards modernization of payment systems in Pakistan. Ensuring security and safety of commerce and communications, addressing issues such as authentication, confidentiality/privacy, non-repudiation and data integrity over the Internet is the key objective of NIFT-e-TRUST service division.

Partnership with the best: VeriSign, Inc. NIFT has signed up as a Global Affiliate with VeriSign, Inc. - The leading provider of digital trust services that enable everyone, everywhere to engage in commerce and communications with confidence. VeriSign's digital trust services create a trusted environment through three core offerings—name, security and transaction services—powered by a global infrastructure that manages more than 5 billion network connections and transactions a day. NIFT is licensed by VeriSign as a selected provider of digital trust services in Pakistan. As an Affiliate, NIFT is a member of the VeriSign Trust

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Network platform – the infrastructure of technology and practices that support the global interoperability and usage of digital trust services. Users can be sure that services based on the VeriSign Trust Network platform offer the highest levels of security, reliability and support.NIFT has established a data center conforming to X9.79 and ISO17799 Standards to offer digital certificate services in Pakistan. This processing center is located at AWT Plaza, I.I. Chundrigar Road, and Karachi and has ISO 27001:2005 certifications.VeriSign Trust Network platform Services

Processing Center: NIFT has setup a processing center with round-the-clock operations to guarantee near zero downtime. Part of VeriSign Trust Network platform based on global standards and specifications, the processing center has the capacity to provide certificate services to thousands of enterprises and millions of end users.

Service Center: Service Center allows NIFT to mirror VeriSign's offerings: individual digital certificates, SSL Certificates, and enterprise PKI solutions and provide support leveraging the processing center. Following services are provided under the NIFT-e-TRUST SM service division:

NIFT incorporated ISM (Image Systems Marketing (Pvt.) Limited) as a wholly owned subsidiary in the year 2000; the primary objective behind creation of this new entity was to provide image based document processing services to the non-financial industry. While NIFT is, mainly focused on processing for financial institutions, ISM has a more diversified and open scope of activity and offers complete integrated solutions in selected technologies covering a larger spectrum of application areas with special emphasis on imaging and image based systems.

This approach offers NIFT an ease in focusing all its efforts on payment, settlement and related financial systems.

As the very name, Image systems marketing, suggests we specialize in imaging solutions. Here too, our most identifiable expertise is related to: high volume / multipurpose image capture and image archival / retrieval systems.

ISM has pioneered in the establishment of imaging applications in Pakistan. We have executed a very large project for NADRA (National Authority responsible for managing citizens’ data) involving imaging of 65 million

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forms for the National Database. This specialized activity involved extraction of five snippets of varying resolution (3 colors and 2 gray) from each form. ISM completed this job in nine months and provided clean image archives in ORACLE database format.

ISM is actively involved in transforming paper based archives into electronic archives for organizations like Mobilink, Telenor and Adamjee Insurance Company. Over 30 million documents have been electronically archived in the past 18 months.

ISM has set up Enterprise Content Management Services which includes image archiving and document management, color and black printing of large volumes of fixed and variable data, inline perforation, mechanized insertion and web publishing. For this purpose high speed color printers from Kodak and insertion system from Bowe Systec have been installed.

PRODUCT AND SERVICES

IMAGE ARCHIVING & DOCUMENT MANAGEMENT SYSTEM – ISM has the experience of completing the largest image archiving project in the country where ISM archived 65 million 

NATIONAL CENCUS DOCUMENTS -In this application, 5 images from each document were extracted: the front and rear of the document in gray scale, and three snippets in color which comprised of photograph from front of the document and signature and thumb impression from the rear side of document. Special hardware / software compression technology was employed to reduce image size during scanning. The total task was completed in nine months time frame. The citizen data base of the country is based on the images archived by ISM. ISM has also archived over 50 million documents for two cellular companies, largest refinery and largest insurance company of Pakistan.

SCANNING EQUIPMENT – ISM offers high speed Simplex and Duplex scanners with speeds varying from 2000 to 8000 documents per hour.

  CUSTOMER CARE SUPPORT –ISM provides customer care support for all imaging

products and related hardware on 24x7 basis throughout Pakistan. ISM provides internal maintenance to NIFT on hardware including all brands for MICR Reader / Sorter equipment.

ISM has support capabilities on the following products:

1. NCR 7780 Reader/Sorter (500 dpm)2. NCR 7780 Reader/Sorter (300 dpm) 3. NCR iTRAN 800 Reader/Sorter (600 dpm) 4. Unisys NDP 250 Reader/Sorter (250 dpm)

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5. Unisys Q 6000 Reader/Sorter (600 dpm) 6. Fuji FZ5111 Reader/Sorter (200 dpm) 7. Panini My Visionx Scanners (90 dpm, 60 dpm, 30 dpm) 8. Fuji FZ 1181 MICR Encoders9. Rototype FRS14EA MICR Encoders10. BAPIS HS3000 High Speed Multi Purpose Scanners11. Cannon High Speed DR-6080 multipurpose Scanner12. G & D BPS 200 Bank note processing Machines13. Kodak Versa mark VT 3000 Printing System14. BOWE Systec Enduro Inserting System

Reseller Agreements-  

i) ISM has signed Reseller Agreement with Wausau Financial Systems (WFS) for marketing of their products in South Asia Gulf and Middle East.ii) ISM has signed Reseller Agreement with Panini Corporation of Italy for marketing of their MyVisionX scanners in Pakistan.iii) ISM is reseller for SCAMAX M06, SCAMAX H04, SCAMAX M03 high speed scanners.

NIFT-e-TRUST

NIFT e-Trust is another initiative towards the modernization of payment systems in Pakistan. Ensuring security and safety of commerce and communications, addressing issues such as authentication, confidentiality or privacy, non-repudiation, and data integrity over the internet is its key objective. In line with its vision, it has established the first Certificate Authority (CA) in Pakistan, paving the way for Pakistani organizations to safely and securely operate online businesses under a Global Trust hierarchy. NIFT e-Trust is a global affiliate of VeriSign, Inc., and licensed in Pakistan as a select provider of digital trust services that enable everyone, everywhere, to engage in commerce and communication with confidence.

Personal Digital Ids

In the online world, sending an e-mail message is like sending a postcard: it is easy to intercept and read as it travels across the Internet. A digital ID can safeguard such communications, which is now being provided by NIFT e-Trust. VeriSign MPKI is a fully integrated Public Key Infrastructure (PKI) managed service, which uses digital certificates to authenticate members of a user group and to secure intranet, extranet, Virtual Private Network (VPN), and e-mail applications by providing flexibility and security. MPKI allows issuing digital certificates to identify members of an authenticated user group. This ensures that only authorized employees or customers are able to access the valuable information contained in intranet or extranet.Online purchases have become more convenient on a global basis. However, potential consumers need secure and legitimate means of transactions. A Server Certificate can deliver end-to-end transaction security on communications. It protects communications over the web through the

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industry-standard Secure Sockets Layer (SSL) technology. Each certificate comes with the unique seal of authenticity, Secure Site Seal.Enterprises are relying on cost cutting, timesaving extranets and intranets for exchanging information with customers, partners, and employees through applications such as supply-chain management, and online banking and trading. An efficient and cost-effective solution is the use of Digital Certificates. Based on public key encryption, digital certificates serve as unique online credentials, authenticating the identity of each device or device user and identifying privileges and attributes for authorized access to private online information.Virtual Private Networks (VPNs) allow a company to extend their local network to connect branch offices, remote users, business partners and customers via the Internet. As with all other types of networks, VPNs are also vulnerable to attack by hackers and cyber-criminals. IPSec (Internet Protocol Security), an industry standard, enables these networks to be secured through encryption, providing confidentiality and integrity. Trusted IPSec is a managed digital certification service that takes core PKI solutions and integrates them into VPNs such as intranets and extranets, based on the IPSec industry standards.

Pakistan’s Banking Sector

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Pakistan’s Banking Sector

Current Situation and Critical Issues

Overview

Today, Pakistan offers a promising ground for financial experimentation and innovation. Pakistan’s banking industry has seen brisk growth in banking assets which today stand at over $60 billion. Bank’s profitability is at an all time high and unprecedented, has reached to more than Rs 95 billion. Aside from higher efficiency gains in the industry attributable to benefits arising from significant banking sector restructuring and reforms, high profitability of banks has been achieved because of high interest margins. In the period ahead, the financial industry however has to be positioned for a more competitive environment and has to cater for more diverse and complex requirements of Pakistan’s consumers and infrastructure. Pakistan, like the rest of Asia, is growing fast and the rise in per capita income, emergence of the middle income group and relative wealth increases altogether bring with them new demands for the retail banking industry. Among others, both investors and industry are seeking better investments and financing alternatives and solutions, with demand for private debt, asset based and mortgage based securities, credit derivatives and hedge products etc. now emerging from different segments of the economy and population.

Beside these real sector developments and requirements, financial industry of Pakistan has to catch up fast with the global developments and achieve better financial diversification and strengthen its risk management systems. In Pakistan’s context, it has to be recognized that while large banks will continue to thrive on volumes of business which they have traditionally captured given their reach across the country, it is the foreign banks with their competitive edge in global transaction banking that can offer unique and new financial solutions and lead the way for the rest of the banking industry to provide to customers an integrated solution that caters for emerging consumer and industry requirements.

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Global changes in the financial industry

Compulsions to go this route are mounting. Worldwide, the financial landscape has changed driven by:

Changing macroeconomic factors such as economic growth and demography and institutional development as capital markets have matured and population demands for retirement funding and insurance has grown.

The phenomenal growth in financial markets and cross border flows.

The ability of the financial industry to take advantage of the opportunities provided by the lending and mortgage markets, and development of credit risk transfer instruments which involve structuring and trading of credit derivatives and asset backed securities that allows risk inherent in a loan to be repackaged into two or three tradable components to offer optimal allocation of risks– this is particularly relevant in the context of developing financial markets where the risk profiles of banks are still dominated by credit risk predominantly of the issuance of loans even though there are moves towards corporate bonds or transactions in over-the-counter markets, which involve the risk of a counter party defaulting.

Adoption and adaptation of technological advancements in communication and information technology that has seen the explosion of financial innovation with service providers now offering multiple and diverse solutions that enhance efficiency and reach of products across boundaries and across national jurisdictions.

Need to globally integrate financial systems and encourage end-to-end straight through

processing capabilities and development of payment, clearing and settlement systems to overcome time zone and currency constraints.

With globalization of markets & businesses, there is greater need for global transaction

solutions for effective cash management, trade finance, trust & securities services, and continuous linked settlement.

Finally, there are now mounting regulatory pressures to seeking greater IT solutions to

tracking money laundering as well as adopting the new risk management framework including Basle II.

Role of the central bank

Recognizing that Pakistan’s banking industry subsequent to its restructuring is now positioned to move to the next level of development, SBP has been focusing on promoting gradual migration from a predominantly cash and paper-based system to electronic payments. This has involved on one hand development of the Real Time Gross Settlement (RTGS) system, awareness creation and information dissemination about the role, importance and issues of payment systems and protection of consumer interests. On the other hand, it has involved encouraging banks to invest in technology and improve their payment and settlement system infrastructure, internal controls and move to e-banking.

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Pakistan’s banking sector reforms, which were initiated in the early 1990s, have transformed the sector into an efficient, sound and strong banking system. The most recent comprehensive assessment carried out jointly by the World Bank and the IMF in 2004 came to the following conclusion:

“For reaching reforms have resulted in a more efficient and competitive financial system in particular, the predominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector. The legislative framework and the State Bank of Pakistan’s supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks.”

The major changes that have occurred in the banking sector during the last decade or so can be summarized as follows:

(a) 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks have brought about a culture of professionalism and service orientation in place of bureaucracy and apathy.

(b) The banks that were losing money due to inefficiencies, waste and limited product range have become highly profitable business. These profits are, however, being used to strengthen the capital base of the banks rather than paying out to the shareholders. The minimum capital requirements have been raised from Rs. 500 million to Rs. 6 billion over an extended period in a phased manner. The consolidation of the banking sector into fewer but stronger banks will lead to better management of risk.

(c) The banks that were burdened with the non-performing and defaulted loans have cleared up their balance sheets in an open transparent, across-the-board manner. Contrary to the popular myth the main beneficiaries of the write-offs of the old outstanding and unrecoverable loans have been from almost 25 percent to 6.7 percent by Dec. 2005. Small individual borrowers the ratio of non-performing loans of the Commercial Banks to total advances has declined.

(d) The quality of new assets has improved as stringent measures are taken to appraise new loans, and assure the underlying securities. Online Credit Information Bureau reports provide updated information to the banks about the credit history and track record of the borrowers. Loan approvals on political considerations have become passé. Non-performing loans account for less than 3 percent of all new loans disbursed since 1997.

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(e) The human resources base of the banks has been substantially upgraded by the adoption of the principles of merit and performance throughout the industry. Recruitment is done through a highly competitive process and promotions and compensation are linked to training, skills and high performance. The banks now routinely employ MBAs, M.Coms, Chartered Accountants, IT graduates, economists and other highly educated persons rather than Clerical and Non Clerical Workers. The banking industry has become the preferred choice of profession among the young graduates.

(f) Banking Technology that was almost non-existent in Pakistan until a few years ago is revolutionizing the customer services and access on-line banking, Internet banking, ATMs, mobile phone banking and other modes of delivery have made it possible to provide convenience to the customers while reducing the transaction costs to the banks. Credit Cards, Debit Cards, Smart Cards etc. are a thriving and expanding business in Pakistan. Once the RTGS is put in place the payment system in Pakistan. Would enter a new phase of modernization.

(g) Competition among the banks has forced them to move away from the traditional limited product range of credit to the government and the public sector enterprises, trade financing, big name corporate loans, and credit to multinationals to an ever-expanding menu of products and services. The borrower base of the banks has expanded four fold in the last six years as the banks have diversified into agriculture, SMEs, Consumers financing, mortgages, etc. The middle class that could not afford to buy cars or apartments as they did not have the financial strength for cash purchases are the biggest beneficiaries of these new products and services.

(h) Along with strong regulation, supervision and enforcement capacity of the State Bank of Pakistan a number of measures have been taken to put best corporate governance practices in the banking system. ‘Fit and proper’ criteria have been prescribed for the Chief Executives, members of the Boards of Directors, and top management positions. Accounting and audit standards have been brought to the International Accounting Standards (IAS) and the International Audit Codes. External audit firms are rated according to their performance and track record and those falling short of the acceptable standards are debarred from auditing the banks. These practices were put in place in Pakistan long before the scandals of Enercon, World Call and Pramalat had shaken the corporate world.

(i) The foreign exchange market that was highly regulated through a system of direct exchange controls over suppliers and users of foreign exchange has been liberalized and all purchases and sales take place through an active and vibrant inter-bank exchange market. All restrictions have been removed with full current account convertibility and partial capital account convertibility. Foreign investors can now bring in and take back their capital, remit profits, dividends and fees without any prior removal and directly through their banks. Similarly, foreign portfolio investors can also enter and exit the market at their own discretion.

The main lesson learnt from the last decade suggests that financial sector functions effectively and efficiently only if the macroeconomics situation is favorable and stable. The need to maintain macroeconomic stability will thus remain paramount in the years to come.

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The agenda for further reforms in the financial sector is still quite formidable and the challenges to spread the benefits of financial liberalization among the middle and low-income households and small and medium farms and enterprises are still enormous.

There are several areas of dissatisfaction with the banking sector that need to be addressed. The most serious complaint against the banking system in Pakistan today is that the depositors are not getting adequate return on their bank deposits. The difference between the monthly weighted average rates of lending and deposits is taken as an indicator of the spreads earned by the banks. It is true that these spreads have widened in the recent months land this phenomenon has caused resentment among those whose only source of income is their returns from bank deposits. But it is important to examine the facts and their form judgments

The monthly comparisons are meaningless because PLS deposit rates are changed every six months, while the lending rates are continuously adjusting because they are automatically linked to T-bills or KIBOR rates.

During the last eight months the weighted average deposit rate has risen from 1.6 percent in July – Feb, 2005 to 3.9 percent in July – Feb, 2006. This trend reflects that the return on the new deposits mobilized is much higher than what the average rate indicates. The old deposits are earning much lower rate because they were lodged at the time when the overall structure of interest rates had come down significantly. This lag is adjustment between the deposits and lending rates is due to the costs incurred by the depositor in shifting deposits from one bank to the other.

The additional deposits mobilized in the last twelve months amounted to Rs. 382 billion i.e. a growth rate of 16.8 percent. This growth rate took place despite deceleration in the volume of Resident Foreign deposit accounts. So if the deposit rates were unattractive then this high growth rate in deposits mobilized by the banks appears to be puzzling. The reason for this high growth is that the fresh deposits were fetching an average return of 6.2 percent in March 2006 compared to 3.5 percent in July 2005 – rise of 270 basis points in nine months. In the coming months the average rate is likely to move further upwards bringing them to positive real interest rates.

Why have the profits of the banks risen so sharply in the last few years? There are several reasons that need to be understood:

First, the drag of non-performing loans has been eased considerably reducing the need for setting aside the provisions for loan losses. As these provisions were made at the expense of the profits the banks are now reaping the benefits of building up substantial provisions and taking the hit on their profits in the past.

Second, the corporate income tax rate on banks’ profits has gradually come down from 58 percent to 38 percent saving on their tax deductions. These savings not only get translated in to

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higher profits but also act as incentives for better performance because the tax rate no longer acts as a penalty.

Third, the diversification of the banks assets into new and so far underserved segments such as agriculture, mortgage, and auto, SMEs, Consumer and Credit Cards have raised their net interest margins. As competition has become quite tough in the corporate segment the margins on corporate loans have been squeezed considerably. But the spreads earned in these new segments are quite attractive. Thus a large part of the profits originate from lending to these underserved segments of the population. This is a Win- Win situation as small farmers, small businesses and middle class consumers, who had so far been denied access to bank credit, are able to get financing the banks are able to earn higher spreads.

Fourth, there has been a shift in the maturing profile of both the banks’ deposits and banks’ loans. Half of the total deposits are now placed for short term duration earning negligible rates of return compared to the past where the distribution of deposits were concentrated in medium to long duration earning much higher returns.

On the assets side, more of the bank loans are being disbursed for fixed investment purposes. These have long maturity structure and pay higher interest rates in double digits.

This shift in the composition of deposits and advances has helped earn the banks a higher spread boosting their profitability.

As the majority of the banks are operating in the private sector they will remain guided by the bottom line considerations i.e. the profits. Consolidation and market competition will act as a deterrent on abnormal profits but it is the responsibility of the regulator to ensure that these profits are not made by taking excessive risk with the depositors’ money or by banks indulging in collusive practices. The regulator has to ensure that the access to credit is further broadened and small farming households, small and medium businesses and middle classes are able to meet their legitimate credit needs. At the same time the regulator has to take stringent action against those banks found guilty of anti-competitive or collusive practices.

Another popular indictment against the banking sector is that they are financing speculative activities such as stock market trading, real estate, commodities, auto etc. The facts do not support this indictment. Direct and indirect exposure by banks in stock market equities has been limited to 20 percent of their capital i.e. the maximum amount all the banks can collectively provide for this activity is only 40 billion. The outstanding stock of bank advances in March, 2006 stood at Rs. 2063 billion. Thus the bank credit allocated for stock market equity trading is less than 2 percent of the total advances of the banking system. If we further assume that some amounts are diverted from consumer loans or corporate loans also the exposure of the banks may double to as much as 4 percent but the securities and collaterals against the diverted loans May not necessarily be the scripts themselves.

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Real estate financing by banks is restricted to mortgage loans only and the banks cannot finance the purchase of plots. Mortgage loans can be disbursed in installments after physical verification of the various phases of construction. The total disbursements of loans for mortgage amounted to Rs. 11.4 billion in FY 05.

Commodity financing and its prevailing rates are not attractive for the borrowers as there has been net retirement of commodity loans in the first nine months of the current fiscal year.

The regulatory environment for the banks to indulge in lending for speculative purposes is not very propitious. The State Bank of Pakistan supervisors is not only vigilant in their on-site inspection but they monitor the banks on a continuous basis and can detect irregularities and violations fairly quickly. The more deterrent effect of strong oversight by the supervisors is enough to discourage such activities. The penalties imposed by the supervisors on recalcitrant banks are quite severe.

Payment and Settlement Systems

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Payment and Settlement Systems

Overview

The concept of payment systems covers the instruments facilitating exchange of assets and services between economic units, the institutional and organizational structure, the operational procedures and the communication network. The importance of the payment systems mainly stems from their role in the financial sector. Following the financial sector reforms that had targeted reducing financial risks and increasing reliability and speed, the payment systems have changed to a large extent. This in turn caused monetary authorities to work for establishing powerful and effective payment systems, to be used in the decision-making process of monetary policy and for avoiding systemic risks that may arise from the payment systems.

A sound and efficient payment and settlement system is essential for efficient functioning of the modern financial system. Smooth functioning of the payment systems is crucial for maintaining the financial and monetary stability in the economy. The State Bank of Pakistan has played an important role in creating an institutional framework for development of a safe, sound and efficient payment system for the country. In recent years, the pace of developments in technology has helped in improving the efficiency of the payment and settlement systems. Development in computer and electronic technologies has made it possible for the banking system to introduce new financial instruments and open avenues for electronic payments. With a view to promote efficient payment system, the SBP has taken several initiatives to develop and promote electronic payments infrastructure. Towards this end, SBP has arranged automated

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clearing facilities through National Institutional Facilitation Technologies (NIFT) and recently introduced a Real Time Gross Settlement System (RTGS) that would enable banks to settle their large value payments in real time using a computerized network.

While the SBP oversees the payment system, BSC handles operational areas of the system and support SBP in maintaining an efficient and reliable payment and settlement system through a wide network of its sixteen field offices across the country. Field offices of BSC assist SBP in managing clearing services, providing exchange settlement accounts to the financial institutions, implementation of RTGS, and issuance of banknotes, coins etc. All of these activities aimed at promoting and maintaining a sound and efficient payment and settlement system.

Evolution of Payment Systems

A payment system comprises of a set of payment instruments, banking procedures, standards, funds transfer systems and the technical means to facilitate funds transfer among economic agents for both financial and real transactions. In recognition of the crucial role of financial infrastructure in maintaining financial stability, the Committee of Payments and SettlementSystem (CPSS) of the Bank for International Settlement (BIS) issued the Core Principles for Systematically Important Payment Systems (SIPS) in January 2001, with the intention of promoting internationally accepted standards and practices for the design and operation of safe and efficient payment systems.1 Under these principles, central banks are required to:

(1) clearly define the scope and objectives of their payment system and publicly disclose their role and policies in its oversight;

(2) ensure compliance with the Core Principles; and(3) Co-operate with other central banks, and any other domestic or foreign authorities, to

improve the safety and efficiency of the payment system.

Over the years, SBP has also strived to modernize the payment infrastructure in the country. In doing so, it facilitated the establishment of the National Institutional Facilitation Technologies (Pvt) Limited (NIFT) for automated conventional clearing services (for instance, overnight clearing, same‐day high value clearing, inter‐city clearing etc.). More importantly, the launch of the Pakistan Real‐Time Inter-bank Settlement System (PRISM) on July 1 2008, which is owned and operated by the SBP, is a major achievement on this front. PRISM is a systemically important payment system and is designed to settle all large‐value payments in the country.

Technologically advanced Payment and Settlement Systems at NIFT mainly includes:

Automated Clearing House (ACH) Service Pakistan Real Time Inter Bank Settlement Mechanism (PRISM) US Dollar Instruments Collection and Settlement System Standardization of Government Payment Instruments Remittance clearing and settlement system Enterprise content management system (ECMS)

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Automated Clearing House (ACH) ServiceIn order to streamline payments through the financial system, the BSC has been providing effective and efficient clearing and settlement services to commercial banks to ensure a safe and prompt transferring of funds between banks and reducing risks in the transactions. It manages the operations of clearing houses through which interbank fund transfers are affected. However, recently National Institutional Facilitation Technologies (Pvt.) Ltd. (NIFT) has been allowed to undertake automated clearing function at most of the cities and adjacent commercial and industrial towns. Besides NIFT, National Bank of Pakistan (NBP) is also providing clearing and settlement services at all those places where the SBP offices do not exist i.e. in other financial centers, BSC supervises all the functions of the clearinghouse. The clearing of transactions is one of the major functions of payment system and BSC has actively contributed in the development of automated clearing services in the country. For this purpose, an agreement was executed with NIFT, which provides a nation-wide mechanism to process and settle the transactions between the commercial banks with the extensive coordination of BSC field offices. The automation of clearing operations that commenced with the establishment of first center at Karachi (in 1996) has now been extended to all major cities of Pakistan. The automated clearing operations which were previously available at 15 cities where BSC offices are located covering 80 satellite cities have now been extended to 107 satellite cities providing services to 751 satellite branches of commercial banks located in these cities. This has resulted in an overall coverage of over 4,500 branches of commercial banks countrywide. Further, NIFT is in the process of extending its services to Mirpur, Jehlum, Sargodha, Abbotabad, Sahiwal, Bahawalnagar, Sadiqabad, Larkana and Nawabshah to undertake automated clearing of financial instruments. Almost entire country is now on NIFT Automated Clearing House Grid. At such places where BSC offices are not

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located and the area is also not covered by NIFT the clearing and settlement services are provided by National Bank of Pakistan.

The NIFT clearing system is now supported by a Public Key Infrastructure (PKI), which is a secured web, based reporting service. This facility, which was primarily created to support countrywide multilateral netting, has a number of business advantages for the user. This system is active for all bank branches serviced by NIFT. In addition, NIFT is also offering the value added services through Internet access of scanned copy of the payment instruments and clearing details as an additional facility to member banks.

As manual processing of Cheque has been discontinued in above mentioned cities, same are processed through automated clearing houses run by NIFT, instruments are required to be standardized and made “Machine Readable” by using Magnetic Ink Character Recognition Code Line (MICR) as per practice adopted by the developed countries. In this perspective, BSC initiated the project relating to standardization of financial instruments a few years back and due to its extensive efforts, all the payment instruments issued by the BSC field offices, commercial banks and other financial institutions have since been standardized and made machine readable. Meanwhile, the government departments are being actively pursued and coordinated for standardizing their payment instruments as well.

Nationwide Clearing Grid (NIFT) Source; www.nift.com.pk

Presently the NIFT is processing six clearing cycles namely; Normal, Intercity and Same Day clearing cycles and their respective returns. The remaining three cycles pertaining to clearing returns that are currently settled directly are expected to be settled soon through the RTGS

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system. In this connection, BSC field offices have assumed the responsibility that all the participating banks and members including themselves will adhere to the timeline fixed to send the cheques to NIFT for clearing and that any additional Cheque will not be sent after finalization of composite net. NIFT has also started to provide RTGS specific settlement messages to the RTGS project office. For this purpose, special business window as per the following schedule has been introduced to settle first three main clearing cycles with the agreed aspect that there will be two countrywide netting procedures:

Basically nets from all cities will be consolidated by product:(1) Main Clearing,(2) Same-day High-value clearing and(3) Inter-city clearing.

Same-day high-value clearing and intercity will also be netted out further so that the position provided will be inward less return.

The rationale for this approach is based upon the following:

Main Clearing – inward nets for the main clearing and returns will not be merged because of the fact that the time gap between inward presentation (9.00 am) and returns processing (early to late afternoon) are quite significant.

Same-day High-value clearing – time gap between inward net (12.00 am) and returns net (around 1.30 pm) for same day is too small and separate inward / returns netting for same day may actually cause delays.

Inter-city clearing – This is a product with comparatively very low transaction amounts and the actual clearing dates may have to be synchronized through partial electronic processing.

The number of instruments cleared through automated clearinghouses operated by NIFT during the last three years (Table 3.2) clearly indicates a significant increase in the volume of instruments cleared through the system. The total number of instruments cleared during 2007-08 stood at 74,264,349 as compared to 66,347,664 instruments in 2006-07 showing an increase of 11.9 percent. The volume of instrument cleared during 2007-08 registered a substantial increase of 26.4 percent when compared to 58,747,655 instruments cleared in 2005-06.

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The main functions performed by the NIFT are as under:

Functional Highlights

Inter-bank clearing and settlement Intra-bank clearing and settlement Timely pick-up and drop services through recognized couriers Advices / vouchers for intra-bank accounting Direct posting support on media for returns and inward Query systems - Software and data enabling large member banks to organize internal call

centers Call center services Reports and statistics to member banks on a regular basis Turnkey support for preparation of clearing involving payment of utility bills by Cheque

(in drop boxes)

Clearing Services Offered

Overnight clearing (24 hour clearing service) Same Day / High Value clearing (3 hour clearing service) Inter city clearing (48 hour clearing service) Countrywide Local US Dollar Clearing (5 day clearing service) Same day returned cheques processing

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High value clearing No transfer delivery NIFT provides service up to branch level. It also provides a net settlement position to

BSC and settlement advice to branches. The role of the main branch in clearing has been abolished and banks do not exchange

document. Image based processing of all documents can offer image and data on CD’s; images

effectively pave the way for electronic clearing, enabling data communication.

Image based facilities have been established at Karachi, Lahore, Islamabad, Peshawar, Rawalpindi, Hyderabad, Multan and Faisalabad, for automated Cheque clearing. Accounts Department of the BSC has close coordination with key players of the payment system in respect of clearing and settlement activities in retail payment system such as NIFT, NBP, and field offices of the BSC. The BSC Karachi Office is working with NIFT to settle all the clearing.

US Dollar Instruments Collection and Settlement System

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In the absence of a settlement system for US$ denominated instruments, the clearing process was to be routed through New York, which used to take a long time in settlement. Further, the cost of the transfer was quite high for the account holders who wished to make US$ transactions between accounts maintained in Pakistan. To facilitate customers in this regard and achieve customer satisfaction through effective banking services, The SBP has introduced a “Local US Dollar Instruments Collection and Settlement System” in Pakistan in March 2004 with the help of wide network of BSC field offices throughout the country The objectives of the system are: -

Quick Settlement. Cost Effectiveness. To facilitate, the Market Settlement system.

All financial instruments (cheques, drafts etc) denominated in US Dollar drawn on bank branches in eleven big cities of Pakistan are acceptable for this settlement system. Branches in Karachi, Lahore, Islamabad, Rawalpindi, Faisalabad, Multan, Sialkot, Peshawar, Quetta, Mirpur and Hyderabad can participate in the Local US Dollar Instruments Collection and Settlement System. Accordingly, it is mandatory for banks operating in Pakistan of which Head Office or branch offices are located in Karachi:

To be an authorized member of this system. To open US Dollar settlement account with a minimum balance of US$10,000 for

settlement with BSC Karachi and thereafter to maintain sufficient balance to cater to the requirements

keeping in View their business volume. The said account is remunerated on the same interest rate as

is applicable To SCRR for FE-25. To settle payment of US$ instruments drawn on them through this system or to return

unpaid Instruments on settlement date.

NIFT has been associated with the BSC as facilitator of inter-bank and intra-bank clearing and settlement services to all banks and branches in 11 major cities of the country. NIFT is also providing clearing services for US $ instruments. This service is provided only for instruments issued and deposited in US dollar accounts maintained with commercial banks in Pakistan. Introduction of Local US Dollar Clearing has brought about a profound efficiency in the dollar clearing system. By avoiding routing through New York, the new settlement system will facilitate the foreign currency account holders in terms of processing time and cost. The new system has reduced the clearing time of US Dollar cheques from three weeks to only four days and has reduced the cost to the account holders.

Processing Cycle

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Settlement in Case of Insufficient BalancesAt any point in time when the net debit (inward & outward) cannot be paid out of a bank’s US Dollar clearing account (due to insufficient balance) held with the SBP BSC, Karachi, and the State Bank reserves the right to adopt a suitable alternate, primarily, taking the shape of payment through an appropriate overnight SWAP from the Pak Rupees clearing account balance of the bank with the SBP to the extent of such shortfall in the US Dollar account.

Standardization of Government Payment Instruments

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The BSC has been facing problems in processing government payment instruments. Keeping in view the processing problems and future trends, it has become imperative to standardize the Government Payment Instruments. To resolve this issue, BSC has initiated the job of Standardization of Government Payment Instruments in line with the commercial market. The methodology of standardization of financial instruments encompassing the area of finalization of colors, shades, and standard sizes of different Government Instruments with the proposed SBP MICR Code Line was invariably discussed with PSPC, NIFT, PIFRA and other stakeholders. Based on their suggestions/ proposals, it has been decided that: -

Cheques bearing serial numbers with alphanumeric characters of different dimensions will be discontinued.

Instruments of different light colors for the Federal and Provincial Governments will be used to avoid chances of wrong payment.

Machines readable MICR will now be used so that electronic processing of payment instruments is managed by NIFT.

With the introduction of standardized instruments, no internal accounting procedure or internal control of any department will be changed rather the new system shall provide more controls over the payment process. In an integrated environment, vital data concerning the payment instruments can be exchanged electronically thereby minimizing the chances of fraud. It will bring efficiency, accuracy and ensure best internal control / coverage of risk and also reduce the turn around time for the stakeholders. The objective of this modernization is to move towards electronic clearing house and the use of the future technology of “Cheque Truncation System” for clearing and settlement purpose. For further identification of payment instruments, BSC is actively coordinating with AGPR, PIFRA and other Government agencies. In the light of consultations with these agencies, the system of MICR Code will be finalized.

Payment Systems Law

An effective legal framework is vital for smooth operation of Payment Systems. In this connection the SBP has prepared a draft law called Payment Systems and Electronic Funds Transfer Act and sent to the Federal Government for enactment. Once the law is passed it will lay down solid foundation for development and further strengthening of the payment systems in the country.

Real Time Gross Settlement

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Quality of payment and settlement system is the litmus test of the efficiency of financial infrastructure of an economy. Thus one of the functions of central bank is to oversee that the country’s payment system is safe, efficient and risk free. Well-designed and managed payment system helps to maintain financial stability and reduce the cost, time and uncertainty of settlement and facilitates efficient use of financial resources. In this connection, the SBP has focused on implementation of Real Time Gross Settlement System (RTGS). For effective management of the system the SBP maintains close liaison with the BSC. While performing banking functions on behalf of the SBP, the BSC implements SBP policies designed to improve efficiency and smooth functioning of the payment and settlement system through wide network of its field offices. Real-Time Gross Settlement (RTGS) is a concept designed to achieve sound risk management in the settlement of inter-bank payments. In RTGS system, transactions are settled across accounts held at the central bank on a continuous gross basis where settlement is immediate, final and irrevocable. The RTGS system in Pakistan has been named as Pakistan Real-time Inter-bank Settlement Mechanism (PRISM). Using this system, the banks maintaining their accounts with SBP-BSC field offices would be able to operate their accounts in real time from their own premises via computerized network between SBP and the participating banks. This system will enable the banks to settle with finality their large value transactions affecting their accounts at BSC field offices (e.g. inter-bank lending/ borrowing) immediately, provided sufficient balance is available in their accounts. At times, banks may face temporary shortage of funds in their accounts during the day. This shortage would be catered for in the system through the availability of intra-day repurchase agreements, a form of collateralized lending). Alternatively, the transaction can also be queued in the system until the required liquidity becomes available. The system will offer a powerful mechanism for limiting settlement and systemic risks in the inter-bank settlement process, because they can effect final settlement of individual funds transfers on a continuous basis during the processing day. It will also contribute to the reduction of settlement risk in securities and foreign exchange transactions by providing a basis for Delivery Versus Payment (DVP) or Payment Versus Payment (PVP) mechanisms

PRISM

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(RTGS in Pakistan) – Features & Implementation

The RTGS System, named as “Pakistan Real Time Inter Bank Settlement Mechanism (PRISM)”, will automate the current end of day inter-bank settlement systems for large value payments at SBP and BSC. At present, counter parties face risks like credit risk, liquidity risk and settlement risk due to time lag in the end of the day settlement. The gross settlement (transaction by transaction settlement) in real time will minimize these risks. The first and second phases of the PRISM via settlement of inter-bank clean transactions and settlement of NIFT’s retail clearing were started with effect from 1st July and 14th July 2008 respectively. The officers of BSC field offices particularly of Karachi office have played a proactive role in timely implementation of the system; trouble shooting, removing teething problems and coordinating amongst the participants. The system has features that would benefit the market participants by enabling them to effectively utilize their liquidity and reduce payment related risk. Some broad features of the system are as under:

The PRISM plans to automate the inter-bank funds transfer and facilitate the settlement of government securities transactions in primary and secondary markets,

Payee banks and their customers receive funds with certainty without exposing themselves to any risk in real time.

PRISM will also bring more efficiency in inter city and intra city clearing between banks as the NIFT will be doing clearing on multilateral basis and these clearing results will be settled on Real Time Basis in PRISM.

Following implementation of RTGS, RTGS Service Bureaus will be established at the BSC offices.

Standard messaging format could be used, by using the SWIFT message format. Around forty (40) commercial banks and DFIs would be the initial direct participant

members of PRISM. Some other account holders with SBP-BSC would be the indirect members of the RTGS system.

Intra-day Liquidity Facility (ILF) would be offered to banks collateralized against government securities so that the payments may be cleared immediately.

The system also has queue management features and mechanisms for Grid Lock resolution.

The system will also hold government securities portfolios and will enable securities trade matching for DVP and intra-day liquidity management

The security component of the system will provide Public Key Infrastructure (PKI) and transactional and link encryptions for data security.

Centralized multilateral netting of retail clearing was a mandatory pre-launch requirement for smooth functioning of the PRISM system. Previously the countrywide retail clearing operations were done in the sixteen field offices of BSC across the country. Now with the help of NIFT, SBP has started countrywide multilateral netting and centralized settlement of cheques.

Impact of PRISM

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Banks will be able to receive/ pay funds on real-time basis, trade government securities on DVP basis whereby securities will be transferred to buyer’s account only against the simultaneous payment of funds to the seller of securities, thus eliminating the settlement risk.

Banks will be able to monitor their payments in real-time and change their payment priority (if queued) giving them more control over their funds.

Centralized multilateral net settlement in the system will enable banks to efficiently use their liquidity, which previously they had to maintain in different current accounts with the BSC field offices for retail clearing.

Corporate customers of the banks will also be able to use the system for their time critical payments.

RTGS implementation provides the capability of connecting with various other regional/ international payment systems for foreign exchange, government bonds, and private equity settlements.

RTGS system will also provide enhanced capability to SBP to monitor the inter bank transactions and to conduct OMO thus affecting the monetary policy.

BSC has played a significant role in the progress of RTGS since start of the system. The BSC coordinated with RTGS Project Management Team and facilitated its feedback on Current Accounts and Other Deposit Accounts of stakeholders, which are being maintained in DAD at its field offices. All clearing settlements are done in the books of DAD, Government Receipts and Payments are being settled in PAD.

NIFT’S role in the implementation of RTGS at

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The State Bank of Pakistan

INTRODUCTION:

The State Bank of Pakistan has implemented RTGS as one of key elements of change that will impact the clearing system is the centralized netting methodology. NIFT has prepared for this change. While the current approach involves decentralized netting at all cities; the new approach, as planned by the Payment Systems Department of the State Bank of Pakistan, envisages netting on countrywide basis. Currently NIFT’S systems create separate nets by city and submit the same to State Bank of Pakistan in each city and the relevant net position is debited / credited to banks’ current accounts in that city. The new system require NIFT to collect nets from all automated centers and provide a consolidated net to the State Bank of Pakistan for entry into the RTGS system, hence, the countrywide net position will subsequently be debited / credited to banks’ current accounts in Karachi. (It may be relevant to mention that this will not effect other operations in the local current accounts of banks in any city).

NETTING DETAILS:

There will be two aspects of the countrywide netting procedure: As per the basic concept nets from all cities will be consolidated by product (Main

Clearing, Same-day High-value clearing and Inter-city Clearing). Same-day high-value clearing and intercity will also be netted out further so that the

position provided will be inward less return.

As is obvious the inward nets for the main clearing and return will not be merged because of the high risk or exposure involving very large values and also due to the fact that the time gap between inward presentation and returns processing is quite significant. The entire consolidation process is manage by NIFT; data from all NIFT centers is sent to NIFT, Karachi employing secure communication, consolidated by NIFT in Karachi and pass on to the State Bank of Pakistan. These changes are transparent to the branches and they continue to receive reports and instruments in the existing format, there is absolutely no change in the clearing procedure. A slight change is necessitate in the time cycle of Inter-city Clearing: previously the accounting process of Inter-city clearing was spread over two days (debit in paying city on day one and credit at lodging / originating city on day two). This is streamline to provide consolidated nets. The debit coincides with electronic intimation to lodging city on same day. Banks also benefit by advance electronic intimation. (The returned cheques, if any, will be provided on the next day)

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Main branches and treasury units at banks are involve in some additional reconciliation efforts in order to exercise control over the consolidation process. NIFT endeavor to assist banks in the reconciliation process by providing detailed statements. Furthermore, they optionally provide advance information of banks’ position to treasury departments by employing PKI security. All banks need PKI security and NIFT is equipped to offer this facilitation.

PROCESS SUMMARY - - - CENTRALIZATION OF NET

There will be no change in the clearing procedure, reporting and functions. The change will have no effect at branch level. The existing cycle and accounting approach for Intercity Clearing will be altered to create

a composite net for this product. NIFT will furnish composite nets of all automated centers at Karachi on a product-wise

basis to State Bank of Pakistan at Karachi. Local SBP offices and main branches in different cities may make arrangements for

obtaining copies of reports in existing format for control and management of reconciliation.

NIFT to provide comprehensive details of NET position to member banks Operations / Treasury offices in Karachi by secured email (Optional Service). NIFT may provide advance information to treasury departments (by secured email) so

that they are assisted in fund management (Optional Service).

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REMITTANCE PROCESSINGThe existing facilities for payment of utility bills, payment of taxes and various other payments pertaining to government and service agencies, is an area, which suffers from a number of inherent drawbacks and creates problems for the general public. These issues merit immediate addressing on a national scale. NIFT provides solutions to support cash collection, payment by cheque, establishment of payment kiosks and payment through internet and payment through direct debit to customer’s account.

They have already automated utility payment system of five large utility companies in the country at Karachi, Lahore, Islamabad and Gujranwala servicing over ten million utility consumers. We have created facilities for processing cash payments made at branches of banks and post offices; remittance of consolidated funds in the utility’s main bank account within 24 hours of payment by consumer with total reconciliation and updating consumer record at utility’s data base for production of correct bills. All the stubs are processed on OCR technology with high speed document processing and remittance processing systems.

We are now actively planning to establish an internet facility for supporting bill payment through internet. Besides supporting credit cards this facility would involve payment from consumer's bank accounts, this direct debit will be implemented through NIFT's clearing services.

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ENTERPRISE CONTENT MANAGEMENT SERVICES (ECMS)

In the year 2008, NIFT strengthened its services with the establishment of Enterprise Content Management Services (ECMS) in Karachi, with a new 300 million purpose built faculty. ECMS are built on new ideas & solutions that grow with the increasing demands of the ever changing business environment. With state-of-the-art devices ,it offer the quality & professionalism that provides our customers with a superior experience. No matter what the nature & size of the industry, gaining control of all documents is critical to every organization. Ever-expanding government regulations require effective & auditable control systems for all documents & communications - both paper & electronic. Competitive pressure require that organizations become more efficient and thrive, this can be achieved by controlling information effectively ; be it on paper or electronic.

NIFT has offered ISM to set up Enterprise Content Management System. ECMS comprises of expertise related to high volume multipurpose image capture, image archival & retrieval systems, as well as, document management services, bulk printing of variable & fixed data (in color & black), mechanized insertion services, inline perforation & web publishing of enterprise data. Banks are using ECMS for production of statement of accounts, credit card invoicing, MICR reading & sorting etc. For this purpose high speed color printers from Kodak & insertion system from Bowe Systec have been installed.

ECM SERVICES

Transactional printing services & Direct mail:

We offer transactional Printing Services as well as Transpromo Printing ( Transactional printing combined with Promotional Marketing), & are ideally equipped to handle any Translational printing, mailing & fulfillment project - from large-scale, multi-client, daily mailings to smaller or even one-off projects. Our cost-effective & efficient service guarantees that files which reach for mailing to the target client can be produced & posted on the same day.

Latest Technology:

NIFT has invested heavily in the latest up-to-the-minute technology. This includes the Kodak VT 3000 with several other equipments which simultaneously prints & finishes. This is coupled with the latest Bowe Eduro inserting & folding technology that allows the direct mail fold & inserts over 12,000 units per hour.

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Solving Client Paper Problem:

They specialize in customized service that allows our clients to outsource their paper problems, converting their paper-based data into valuable digital information - saving time, money, effort & storage space. Throughout, their approach is flexible. They employ a 'can do' attitude that focus on the needs of their clients, adding real value to their operations. Their clients demands the highest levels of service & sensitivity as they handle significant volumes of documents for government agencies & the financial sector. They guarantee absolute confidentiality.

24-hour, high Volume Operation:

Their high volume, 24-hour operation allows them to process millions of documents per day. They offer a rapid work turnaround time, whilst ensuring very high standards of data quality throughout. The checking, verification & validation processes mean they can guarantee accuracy for all those data capture processes.This digital information can then be returned to clients in any specified format such as CSV, PDF, TIFF or TXT files, using any chosen media such as CD-ROM, DVD, e-mail & DAT tape. Files can also be made available securely through the web.

Customized, Bundled Service:

Our core services of document scanning, data capture (also known as data processing, data keying or data entry), mailing & fulfillment are available as either a standalone service or as part of a customized, bundled service, where different services can be mixed & matched, as required.

BENEFITS OF ECMS TO CLIENTS

Quality, speed & accuracy Security & confidentiality Proven track record Return on investment Fast, efficient, 24-hour service Highly cost-effective solutions that helps large savings in storage, retrieval, mailing &

printing cost Solves 'paper problem' of client- allowing files to be stored far more efficiently &

securely. Data can be stored on any specified media & can even be made available for secure upload on the web.

Deliver projects on time to agreed standards: incident-free, service level agreements to KPI, close working partnerships & on-going collaborative development of innovative solutions.

Another technological step; the detailed financial statements to be received at KSE

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To provide shareholders the detailed financial statements of companies listed at the Karachi Stock Exchange (KSE), the Exchange entered in to an agreement with Institutional Facilitation Technologies (Pvt) Ltd (NIFT).NIFT installed technology at listed companies would ensure that the detailed financial statements to be received at KSE via email are authentic and not fake. Moreover, the same would be available to shareholders and others who visit the Exchange website in real time.Companies were dispatching their short accounts to KSE to date due to non-availability of required technology. The technology would cost KSE nothing, but each listed company, which would opt for the facility would have to pay $77 per annum to NIFT.

SWIFT

In 1973, central banks of 10 industrialized countries established a secure communication system, i.e. the Society for worldwide Inter-bank Financial Telecommunication (SWIFT) in Belgium to facilitate cross border transactions by financial institutions. The system operates a secure worldwide financial messaging network. As of June 2008, SWIFT connects over 8,000 financial institutions spread across 208 countries. The number of messages exchanged by this system is more than 15 million on a given day.

Historically, domestic banks in Pakistan used the Telex System to execute cross border transactions. The first Pakistani bank joined SWIFT in 1998, followed by SBP in the year 2000. SWIFT is one of the most secured channels to execute cross border transaction and used by the financial institutions around the world. SWIFT is also used for executing high value local currency transactions such as RTGS. It will also be the primary communication channel for RTGS transactions in Pakistan. In order to ensure banks readiness, SBP is closely coordinating with commercial banks to upgrade their systems to handle RTGS transactions. Swift hardware and software are being upgraded to provide interfaces with RTGS and GLOBUS as well as setting up of DR/Back up site for business continuity is in progress. At present, all banks in Pakistan use SWIFT facilities for their cross border transactions. SWIFT is also used for large value transactions and is the primary communication channel for cross border transactions in Pakistan. The implementation of PRISM not only provides a low cost interface for SWIFT connectivity to Pakistani banks, but also helps in minimizing risks in executing large value cross border transactions.

Key Initiatives by SBP:The SBP with the close coordination and interaction with BSC has taken following measures to further improve the payment and settlement system:

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1. In order to institutionalize its focus on payment system stability, SBP has established Payment Systems Department. The Chief Manager BSC Karachi Office is a member of Payment Settlement Group and provides necessary feedback to Payment System Department. The main objective of this department is to oversee the existing payment and settlement systems in place and develop a strategy with the coordination and interaction of BSC and banking sector for improvement in the existing system.

2. The framework for the oversight of the payment system is being developed. Statistics on various payment instruments such as the number of ATMs, number of online branches as on date and the number and value of ATM transactions, both paper based and electronic, are being collected on a quarterly basis and uploaded on the website.

3. In order to facilitate e-Commerce in Pakistan, the Electronic Transactions Ordinance was promulgated in 2002. This ordinance provides the legal coverage to electronic transactions against paper-based transactions. The Public-Key Infrastructure (PKI) is the combination of software encryption technologies and services that enables enterprises to protect the security of their communications and business transactions on the Internet.

4. Further automation of Cheque clearing, through implementation of Image Based Cheque Truncation model in Pakistan is being planned. This will help to reduce the risk of fraud in paper-based systems.

5. Increase in membership of banks in RTGS is gradually increasing the coverage.

Payments System and Electronic Funds Transfers Act 2005

To facilitate nation-wide RTGS and electronic funds transfer, Pakistan has now drafted the “Payments System and Electronic Funds Transfers Act 2005” that ensures conformance with industry demands and the Bank for International Settlements Core Principals for Systemically Important Payment Systems. The proposed Act addresses issues like operation of payment systems, including the clearing and settlement obligations of the parties involved, supervisory role of SBP, documentation requirements by the participants, liabilities of parties in payment systems and legal proceedings in case of any conflict, finality and irrevocability of settled transactions etc. The Act also gives necessary legal coverage to PRISM. SBP is also framing the requisite rules and regulations for the smooth operations and participation in PRISM.

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e-Banking in Pakistan

e-Banking in Pakistan

Overview

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A declining share of paper-based transactions in the total number of transactions is an indication of the increasing number of electronic transactions over the same period. This view is supported by the data on the quarterly volume of transactions which indicates that the number of electronic transactions has increased from 11.5 million in Q1CY05 to 33.9 million by Q2CY08: an increase of almost 3 times in just three and half years. Disaggregated data on electronic transactions reveals that all modes of electronic transactions have seen a significant rise in recent years; however the increase in ATM related transactions has outpaced the growth in the other modes. Specifically, ATM related transactions constitute over 50.0 percent of total electronic transactions.

Challenges Tapping into increasing credit demand Limited secure and high yield investment outlets Low interest rates and thinner spreads Diminishing returns from conventional lending schemes Surplus liquidity

Response Identifying internal and external consumer base and their needs Diversify into innovative consumer credit products Expand consumer credit footprint Striving for an early market delivery and capture Brand recognition, product awareness and image building Building alternate and cost effective distribution channels Market domination through innovative schemes and promotional activities

E-banking in Pakistan continued to grow remarkably during FY05. Cumulative data for the period under review showed that the commercial banks have installed 166* new ATMs during FY05 bringing the total number of ATMs to 842*. The number of transactions on ATMs were increased to 21.15* million during FY05 as compared to 18.98 million in the corresponding period last year. During current fiscal year the value of ATM transactions increased to Rs.109.92 billion* as against Rs.89.42 billion in FY04. Similarly commercial banks have added 401 new branches into online network during FY05 bringing the total online branch network to 2,582*. The growing trend indicates the confidence of consumers on electronic banking. In order to meet the growing demand of fresh bank notes for ATM network, the BSC has advised Chief Managers of all field offices to make a separate allocation of fresh currency notes specifically for the ATMs network.

A sharp increase in electronic transactions in recent years has been accompanied with an ongoing improvement in the e-banking infrastructure, and an increase in customer awareness. Trends in e-banking activities are briefly reviewed in the following discussion.

Electronic Banking SystemDuring FY07, SBP continued its focus on promoting electronic banking system in the country. SBP has encouraged the commercial banks to expand their e-banking infrastructure. Consequently the number of ATM machines has increased significantly, apart from other

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channels of e banking, during the period under review. The facilities being provided by the commercial banks through their ATMs have also increased during FY07. These mainly included the expansion of card systems, Point of Sale (POS) system used by merchants and facility of accepting payment of utility bills via ATMs etc.

Electronic Banking Infrastructure The trend of linking bank branches to an online network is on the rise. During H1-CY05, 422 more bank branches have been linked to an online network, increasing the total to 2,897 online branches, out of 7,019 branches. Banks have also installed 242 new ATMs across the country during this period, bringing the total number of ATMs to 1,028. It is important to note that both ATM switch providers serve all ATM cards. With this interconnectivity between the two ATM switch providers, the number of ATMs available for ATM cardholders has effectively increased. This encourages the increased usage of debit, credit and ATM cards, which are reflected in the rapidly growing number of cardholders, which increased from 1.8 million at end-CY04 to 4.17 million by end-June CY05. During FY07, the on-line branches of the commercial banks and the ATM network both have shown a consistent growth. The current year has witnessed an addition of 1,164 new on-line branches bringing the total number of such branches to 4,719 as compared to 3,555 branches at the end of FY06. Similarly, during FY07 the commercial banks have added 681 new ATMs in their network, bringing the total ATMs to 2,293 as compared to 1,612 ATMs at the end of FY06.

Another important development is the interchangeability of different cards, i.e. a credit card can be used as an ATM card or an ATM card can be used interchangeably as a debit card. New ones are now replacing the old cards, which served only one purpose, in order to accommodate all such transactions. Moreover, the introduction of chip-based smart cards is a sign of advancement in e-based transactions.

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Benefits of banking KIOSKS

FOR BANKSEffectively manage space at branches

Migrate customers to alternate channels for routine transaction (like Cheque/cash deposits, loan processing) Meet the challenges of competition and increase customer base

Fulfill the promise of true anytime, anywhere and anyplace banking

Increased selling opportunities for financial products

FOR CUSTOMERS24 x 7 customer self-service

Increased customer satisfaction

Personalized banking experience

No frustrating queues or human interaction

Superior service experience

Automatically generates receipts

SERVICES / CONFIGURABLE OPTIONS

Cheque Deposit Automation (Ready for cheque truncation) I-Serve (SBT) can automate the entire cheque deposit process. It accepts the cheque, endorses the cheque and serially stacks it in a specially designed box. The customer is then presented with a printed acknowledgement of the cheque. The image of the cheque is also available on that acknowledgment receipt. An Intelligent back office software enables the bank to apply various sort methods for speedy reconciliation.

Teller Enquiries All routine teller transactions such as balance enquiry, detailed/mini account statement, fund transfer, cheque-book request or stop cheque requests available at customer's convenience.

Internet banking i-Serve (SBT) enables customers to carry out transactions through e-banking such as account details, fund transfer, etc.

Customer Tool Support Help desk agents can be reached via video conferencing to answer service related queries.

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Marketing Tool I-Serve (SBT) fully automates the three steps: product information, product research and transaction providing opportunities to up sell and cross sell products.

Revenue Generation Additional revenues by offering bill payment and e-top up services for utilities and cell phone companies.

ATM Network

Introduction of Automated Teller Machines (ATMs) during the late 1990s in Pakistan emerged as the most progressive development in e‐banking. Due to the advancement in information technology, ATMs offer round the clock retail banking facilities including cash withdrawals, bill payments, mobile phone top-ups, Cheque book requests, mini account statements etc.Since inception, ATM services have recorded tremendous growth in terms of both the number and value of transactions. As of end June CY08, the number of ATMs has reached 3,121 compared to only 206 as of end December CY00. As all ATMs are linked through a centralized ATM Switch network, this helps customers in accessing their accounts through any ATM in the country. These facilities have led to a tremendous growth in ATM transactions which increased to 19.0 million during H1‐CY08 compared to only 8.6 million during the corresponding period 3 three years ago: an increase of 2.2 times in just three years. The average size of ATM transactions, which is limited by the cap on single day withdrawals imposed by banks, suggests that this mode of e-banking is primarily used for low value transactions including cash withdrawals, payment of utility bills etc.

Transactions through ATMs, Debit and Credit Cards

As a result of these developments, e-based transactions are growing at a rapid pace. The usage of ATM cards for cash withdrawals is the largest among all e-based transactions, followed by point of sales transactions. The number of ATM transactions was 14.7 million during Jan-June CY05, showing a 61 percent rise in the first half of CY05, in comparison with CY04 transactions.12 In terms of volume, there has been an increase of 63 percent; reaching Rs 76.1 billion during the same period of CY04. The volume of point of sales transactions13 reached Rs 22.9 billion during Jan-June CY05, reflecting a 65 percent growth in just two quarters of CY05. The number of transactions was nearly 7 million during Jan-June CY05 compared to 10.3 million transactions during CY04 the number of ATM transactions stood at 51.5 million during FY07 as compared to 35 million during the preceding year showing an increase of 47.1 percent over the year. The value of transaction stood at Rs.352.4 billion during FY07 as compared to Rs.211.0 billion in

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FY06 reflecting an increase of 67 percent. ATMs were largely used for cash withdrawals and field offices of SBP-BSC provided ample quantity of fresh currency notes to the online branches of commercial banks to conveniently perform electronic transactions through ATMs.ATM cards are also used for funds transfers. Though the volume and number of such transactions are not significant in terms of their share in e-based transactions, their rising pace is encouraging nonetheless. Similar is the case of online banking where the number and volume is still small, however, the growth momentum of online transactions indicates the increasing awareness of its utility, both in terms of cost and time savings.

Guidelines for Standardization of Automated Teller Machine (ATM) Operations

ATM is one of the most important delivery channels of e-banking. In order to enhance service level to international standards, SBP has issued guidelines for commercial banks and switch operators using this channel. The main features of these guidelines are:

Pro-active resolution of suspect transactions by the ATM branches of banks Automatic refund of un-disbursed cash by ATM Time-lines for refund of un-disbursed cash Automatic settlement by the Switches/Banks Confirmation of customer for refund.

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Real Time Online Banking (RTOB)Since the late 1990s, commercial banks in Pakistan have been in the process of deploying automated financial services in the form of real‐time online banking to customers, and have made substantial investments for introducing modern core banking solutions. These developments serve to improve the operational efficiency of the banking system.

At present, over 60.0 percent online branches of the banking system are offering RTOB including cash withdrawals, deposits and fund transfers. RTOB also facilitates the corporate sector in managing centralized accounts. Recent trends in the numbers and values of RTOB transactions depict significant growth in these activities. Specifically, quarterly data on RTOB transactions shows that the number and value of such transactions at end‐June CY08 has increased by 49.2 percent and 68.4 percent respectively over the past two years. Moreover, the average size of RTOB transactions is around Rs 400,000 at end‐June CY08. The relatively large size of the average transaction suggests that this mode of electronic transactions is primarily used to transfer funds by the small and medium sized businesses.

Point of Sale (POS) Transactions

e-banking also facilitates customers to execute their payments through credit or debit cards. This is the third major source of electronic transactions in Pakistan with a share of around 15.0 percent in the total number of electronic transactions. As of end‐June CY08, 55,853 point of sale terminals/machines are installed throughout the country.

Other Modes of e-banking

A number of banks in Pakistan also offer Internet and Mobile banking. Although the share of such types of transactions in overall e‐banking transactions is quite limited at less than 2.0 percent, it is expected to increase in the near future due to increasing customer awareness.

Figure 12.1 is an indication of the increasing number of electronic transactions

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Information Technology Developments In Pakistan’s

Banking Sector

Information Technology Developments56

Overview

Information Technology has proved instrumental in transforming SBP into a dynamic institution by introducing best IT practices, minimizing manual work, providing information timely online, having centralized data repository to help make informed decisions and offering advanced analytics & visualizations for analysis and forecasting. The information management technology advancement pioneered by SBP has been a trendsetter for domestic financial market and government institutions. Rapid infrastructure improvements have been witnessed in the banking industry improving services for the end consumer.

Information Technology Up-gradation

The automation of banking transactions’ module of BSC field offices and its real time linkage with BSC HOK was completed successfully during the year which has enabled the BSC field offices to capture banking and currency operations’ transactions on real time basis and obtain system generated reports on daily basis for submission to BSC HOK. It also enabled the BSC to extract daily financial statements, balance sheet and profit and loss account as well as the consolidated weekly statement of affairs from the system. Using the on-line network, the BSC field offices have also started reporting daily updates on tax collection to Federal Board of Revenue. As a next step towards full automation of BSC operations, the Oracle Budget, Oracle Cash Management (Auto Inter-company Solution) and Auto Reconciliation of Globus transactions will be installed during FY08.During the year 2007-08, Information Systems & Technology Department (ISTD) devised a strategy to align information technology with business objectives of the bank. We established Information Technology Security Framework for ensuring protection of information assets of SBP. Active role of ISTD in IT and Security components of Branchless Banking Guidelines resulted in timely issuance of this important document for the outreach of financial services to rural areas. Specific developments during the year under review are given here:

Globus Banking & Currency Solutions

This was the third successive year of annual closing of accounts at SBP and BSC through the Globus Banking application. This not only shows that SBP business processes rely on IT, but also reflect the trust of business users on automated systems.The most significant development in the outgoing financial year was the starting of live operations of RTGS that has real time interface with Globus. This interface was a joint effort by Temenos, CMA, RTGS and Globus team. Globus team also walked an extra mile to rollout the currency issue system to 16 BSC offices after incorporation of new denominations with their limited technical resources. This was third enhancement in currency issue system since its live operations started in year 2005. FX back office testing is completed and its live operations are starting up. This functionality will enable our front and back office to manage their Foreign Exchange reserves in most efficient manner and will have most reliable and efficient MIS through Globus.Globus upgrade assessment was carried out during this period and upgrading is planned during financial year 2008-09. Enhancing Globus functionality, printing of all types of instruments like

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Payment Order, Bank Draft and Government Draft are now carried out through Globus. This has minimized the risk of duplicate Drafts, as Globus will not allow printing the duplicate draft. Risk of human errors in writing these drafts has also been addressed. The Long Term Export Oriented scheme issued by SBP to provide subsidized loans was also automated on Globus and system was rolled out successfully to BSC offices. Implementation of Globus in BSC Head office is in progress that will consolidate all BSC offices functions eliminating the laborious work of compiling the data of all BSC offices at Head office currently being done manually.The Globus team has developed a number of reports for Finance Department resulting in reliable and accurate MIS through Globus. In addition to large rollouts and functionalities, various new reports and customization were done during the year 2007-08 to keep enhancing the utility of Globus System for users of the system throughout the country.

Oracle ERP

Enterprise Resources Planning (ERP) of ISTD has also completed several tasks during the year starting with rollout of Oracle Cash Management in 15 BSC offices; this system was implemented in SBP, BSC HOK and BSC Karachi office last year to automate the process of reconciliation of Inter-company Accounts. The much sought after Capital Budgeting system was implemented for Finance Department, this year reliving them from the mental stress and saving their precious time performing unerringly. Another important milestone was achieved through implementation of transaction calendar in ERP to prevent backdated entries, which ensured and enhanced integrity of the financial systems. ERP team also installed and tested the latest R12 of Oracle for research and development purposes. The system at SBP will be upgraded to R12 in due course. A big challenge for ERP team of ISTD was the not so efficient performance of Medical Services System. ERP team in association with infrastructure teams improved the system to the required level.The Oracle roll out has been successfully completed in all the offices of SBP (BSC)-Bank. The following is a brief introduction of various ERP Modules introduced at SBP:

General Ledger (GL) Module: It records, classifies, consolidates and reports all the entries posted in to the books of accounts

Accounts Payable (AP) Module: It records all the due payments to vendors, suppliers and employees

Fixed Assets (FA) Module: It gives updates to management for additions, transfers, retirements and other unrecorded changes to ensure that asset inventory remains accurate at any point in time.

Purchase Order (PO) Module: It automates the procurement activities of the bank. Inventory Module: It automates the management of Asset inventory of the bank Human Resource Management System (HRMS): It consists of Recruitment, Employee

Information Management, Leave Administration, Compensation and Benefits, Work Structure and Performance Evaluation Report that cover the entire recruitment cycle, position and career management, succession planning, leaves, benefits plans and head counts budgeting

Performance Management System (PMS): It fully automates the traditional performance appraisal paradigm of the Bank to ensure easy administration and control of the performance management.

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Oracle Self Service Human Resources (SSHR): It enables employees to update their records, leaves, trainings, personal and other relevant information.

Training Administration Module: This module has automated the training management processes and hence provides comprehensive planning and management control over training related matters.

In addition to above-mentioned modules, the State Bank of Pakistan has also automated the entire Payroll function of the institution. The Payroll modules, which have been implemented and are functional include:

Monthly Salary: This module has automated all the processes related to monthly salary preparation for the bank employees.

Advances Module: This module has automated the staff loans and personal loans granted to employees.

Funds Module: This module has automated the provident fund, insurance and benevolent fund areas

Pension Module: This module has automated the retirement benefits offered to Bank employees.

Given below is status summary of ERP implementation

In addition, Online Branch Management System for BPRD that automates the whole licensing Processes for branch opening, Litigation Cases Information System for General Counsel Office that automates tracking of cases including, hearings, follow ups, and details, Asset Tagging and

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Capitalization system, for Asset Management, Enforcement Support System for OSED, Complaint Management System for BPRD and Agriculture Credit Department, for online data acquisition an Export Overdue System for FEOD is developed, phase-1 of automation of Employees Welfare Trust and rollout of Letter Management System in 23 entities and offices of SBP and SBP BSC are some of the major automation endeavors that ERP took up this year. Another milestone towards self-services approach, online leave status information is provided to all officers of SBP. Another important front was FBR Tax Collection system’s up-gradation in all BSC offices; ERP team successfully completed this task in time. To strengthen the security measures to access the systems, new password policy has been deployed in this year

Data Warehouse

Apart from its development routine, Data Warehouse team completed development of new reporting system for Payment Systems Department, which generates a quarterly report. A Price Trends Upgrade for Research Cluster and Implementation of RCOA Annexure A-05 (Deposit Distribution by Deposit-Holders) upgrade for Statistics & DW were also completed this year. The Data Warehouse team developed the server application of International Transaction Reporting System for Statistics & Data Warehouse Department whereas its client application was also upgraded. For Agricultural Credit Department, an Agricultural Credit Reporting system has been implemented. This system generates monthly, half yearly and yearly reports. MFSM-SBP sectoral balance sheet was also upgraded.The information supply chain in State Bank of Pakistan is more or less a closed loop as mentioned:

The State Bank of Pakistan acquires a snapshot of the financial sector by gathering huge data from both inside and outside sources, such as different departments of SBP, SBP-BSC (Bank) and NIBAF, local and foreign banks (operating within the country), Development Finance Institutions (DFIs),Exchange Companies, Government Agencies (e.g. Central Board Revenue, Federal Bureau of Statistics Economic Affairs Division - Ministry of Finance, etc.) and other organizations such as airlines, freight forwarders, etc. The snapshot of the economy is then built from the information

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supplied by these disparate sources. The acquired information is captured by SBP at departmental level utilizing desktop software such as excel and word processor, which are usually not meant to analyze data. To better manage this information supply chain, a Data Warehouse was envisioned as a part of Technology Up gradation Project (TUP).A data warehouse is designed to support ad hoc data analysis, inquiry and reporting by end users on a real time basis. The data warehouses are supposed to provide storage, functionality and responsiveness to queries. In addition, they are set to improve the data access performance of databases. At State Bank of Pakistan; the data warehouse has been organized into ten subject areas:

DW Subject Areas Supporting Core SBP Functions Banking and Money (BAM) Agricultural Credit (AC) Balance of Payments and Exchange Rates (BOP)

DW Subject Areas Supporting Auxiliary SBP Functions Price Trends (PT) External Debt (ED) Domestic Debt (DD) Capital Markets (CPM) Socio-Economics (SE) Public Finance (PF) Economic Growth, Savings and Investment (EGSI)

The focus of Data Warehouse team for the FY 2006-07 is to complete the remaining work and speed up the user sign-off process for completion, while ensuring that all the legacy systems and legacy processes have been replaced so as to add maximum value to the return on investment in SBP Data Warehouse.

Web

While SBP website continued to serve as a source of information for public, SBP web team remained on toes to upgrade SBP website. To streamline the SBP website update operations, web team successfully completed phase 2 of the website dynamic update system. This system will speed up the content update process and serve the website visitors with latest contents in minimum possible time. Following the tradition of introducing modern concepts for SBP website, Google custom search engine has been successfully incorporated in SBP website. The new search facility is expected to substantially enhance and speed up the accessibility of information available on the SBP website. To further facilitate visitors of SBP website and Electronic Notice Board (ENB), real time updates facility i.e. RSS News Feed engine has been introduced at the SBP website & ENB.Moreover, web team in association with HRD, has developed a section at ENB for listing of HRD circulars and circular letters. For convenience of its users, the references are also placed adjacent to the circulars/letters. In addition to this a web based TNA survey was developed for SBP and BSC to facilitate the TDD to analyze and fulfill the training requirements of SBP and BSC officers.

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UNIX Server Hosting

In order to avoid disruption and ensure the continuity of the core banking, allied and e-CIB applications, the State Bank of Pakistan maintains two data centers each one is located in the Main Building (sixth floor) and other in the Annexe Building (Ground Floor), which have Hewlett Packard -UNIX based entry level, mid-range servers and two HP A-Class and four titanium base servers for e-CIB application.

Windows Infrastructure and Applications

The UNIX servers are inherently safer and secure; therefore all the core applications at State Bank of Pakistan are hosted on UNIX operating systems. However, the desktops applications, email, Internet and shared file services are deployed on Windows based servers. Following core services are provided to Desktop users in SBP and BSC offices:

Enterprise Active Directory for centralized logon and security management County-wide setup of E-mail Servers for intranet, Internet and emails Centralized and automated management of Internet Protocol address throughout the

network Secure Web Mail Access from Internet Automated management of antivirus and windows security updates Internet Proxy Centralized File Sharing services, in BSC Karachi and Lahore.

Windows team is geared to upgrade the software and hardware of windows infrastructure to provide the users with up-to-date services that add speed to their work paradigm.

Infrastructure

On the data communication side, ISTD completed the SWIFT hardware upgrade and Application Migration projects. To strengthen the uninterrupted electrical supply to entire IT setup UPS cluster and alternate power backbone project Phase-I has been completed in which one cluster at Ground Floor has been established and now is in operations. The 2nd UPS cluster at 6th floor is currently under way. Similar setup for both Data Centers will be built in Phase-III of this project next year. Intranet Bandwidths between 5 SBP BSC offices to Main Data center have been doubled to eradicate the slowness of access speed. Network Operation Center project that will provide a central Management and Monitoring platform for the entire IT setup is in finalization of procurement stage. Similarly Private VSAT based network project for all countrywide SBP offices is also in the final stage of procurement. Several LAN requirements coming from different SBP departments and BSC offices have also been fulfilled. Video Conferencing setup has also been completed in LRC. Countrywide LAN & WAN connectivity operations for Globus, ERP and Intranet based email and related services, e-CIB, Data Acquisition Gateway setup for submission of periodic reports by the Banks and financial institutions through Reporting Chart Accounts, Corporate Internet connectivity and RTGS implementation are also supported by a dedicated team of Infrastructure & Telecom Division of ISTD.Keeping in view the importance of information security, Windows Administration team carried out upgrade of Antivirus system. This new End Point Protection system will provide additional

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security features on top of virus protection functionality. Windows team redesigned the SBP Internet Proxy Server infrastructure to provide better performance and availability to the Internet users in SBP. Another significant achievement was the pilot project for Proof of Concept of Outlook Access on Windows Mobile devices. In this regard ISTD is now technically ready to meet any business needs for accessing SBP official emails on mobile devices. Upgrade to System Center Configuration Manager is another major milestone achieved during this year. This has improved the reliability and monitoring of Windows Software updates on all computers of SBP and SBP BSC in addition to hardware and software inventory of those systems.Similarly, many Security enhancements and Audit compliance were implemented i.e. Email Disclaimer for outgoing emails, Logon Warning Notice, Hiding Username when user is prompted to logon and Password protected screen saver.

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Impact of advancement on Risk Profile

Impact of advancement on Risk Profile

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These various developments clearly indicate that the Payment and Settlement System in Pakistan is still in the process of evolving in response to advancement in information technology and developments at the international and domestic front. While its capacity and efficiency has seen visible improvements in recent years, these changes have also impacted the associated nature of risks. This section gives a brief review of such risks.In terms of benefits, e‐banking facilitates customers by providing a wider range of options, more information and awareness, and faster and more competitive services. At the same time, it entails the risk of information overload, as customers at times do not fully comprehend the terms of reference of the facilities they subscribe for.

Operational Risk

e-banking generally tends to increase the complexity of banking activities, especially if banks offer creative and innovative products as opposed to the more traditional services. One of the key operational risks is related to the outsourcing of business functions for cost reduction due to lack of in‐house expertise. This outsourcing may potentially lead to the partial loss of bank’s control over that function. Similarly, e-banking brings more challenges to the forecast of business volumes.

Security Risk

It is generally believed that e-banking increases the security risks as banks’ system are exposed to a more risky operating environment. The major types of security risks include: breaches with criminal intent; breaches by casual hackers; and loopholes in system design. All these breaches can have serious financial and legal implications.

Strategic Risk

Lack of a clear understanding of risks associated with e-banking activities among senior management may entail a strategic risk. Being relatively new, with a higher startup cost, with different implications for early and late starters, e-banking activities can increase the institutions’ strategic risks.

Reputational Risk

The decision to offer e-banking services can potentially increase reputational risk, as issues such as the failure to deliver promised services, difficulty in using e‐banking services, frequency of service disruptions, theft of confidential customer information; fraud etc. can affect the confidence of customers. Moreover, rapid flow of information also entails reputational risk, especially if it serves to propagate an adverse development.

ConclusionWith the successful implementation of these technological advancements, SBP is now working in cooperation with all payment service providers and financial institutions to develop and

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promote standardization of relevant procedures, while also engaging in educational and awareness programs so that customers are better informed of the availability of new payment instruments and services. Some of these efforts have already been implemented with the introduction of detailed guidelines bySBP for:

Cardholders Standardization of ATM Operations Operational guidelines for ATMs.

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Peer Country Comparisons

Peer Country Comparisons

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By virtue of growing technological advancements in recent times, numerous financial products have been introduced in various countries. The usage of such instruments has facilitated the transactions and payments process across geographical borders. Since these developments have important implications for the regulatory framework of central banks, the Bank for International Settlements (BIS) recently conducted a survey of some countries in March 2004. Some of the results for selected countries are discussed here.

Pakistan:

E-money products currently do not exist in Pakistan. However, single purpose prepaid cards are already being marketed by retailers in the telecommunications and oil marketing companies. Banks in Pakistan use franchised credit cards such as Visa, Master Card, Maestro and American Express. Besides ATMs and debit cards, some of the banks in Pakistan have also introduced Internet banking, funds transfer and acceptance of utility bills through ATMs. Two banks have also introduced chip-based cards. The State Bank has also published the proposed e-money Act in 2005 in order to frame a relevant legal structure.

Indonesia:

Indonesia does not have any card-based products at the moment; however there has been some development in the area of card-based prepaid products. An Indonesian bank in cooperation introduced e-wallet in October 2001 with Visa International. This is a prepaid and multi-purpose product, which can be used at any merchant outlet both within and outside the country. Moreover, at present there are about seven banks providing Internet banking services with informational and transactional services. Bank Indonesia monitors the development of electronic means of payment, and has the authority to determine the usage of payment instruments.

Malaysia:

The banking industry’s MEPS Cash (e-money scheme) was initially launched on a commercial pilot basis in September 1999 in Kuala Lumpur, which can be used for retail purchases of goods and services and is re-loadable at most of the participating banks’ ATMs. A payment consortium owned by 12 domestic operates the MEPS Cash scheme banking institutions. The MEPS is a payment multipurpose card (PMPC), which contains three applications, namely ATM, debit e-POS and MEPS Cash. At present, more than 9,000 terminals are able to accept MEPS Cash transactions. In addition to MEPS Cash, a non-bank operator has introduced a limited purpose e-money scheme, the Touch n Go card, mainly for payments at highway toll plazas. Network-based e-money schemes are still in the early stages of development. Internet payments are mainly driven through the banking channel. The Central Bank of Malaysia has taken the approach of allowing banking institutions to provide transactional Internet banking facilities in phases. Effective from January 1, 2002, all banking institutions, including locally incorporated foreign banks, and were allowed to provide a transactional Internet banking service. The Central Bank of Malaysia issued the Guidelines on Internet Banking in June 2000, outlining several minimum requirements, such as security arrangements, the involvement of banks’ senior management in internet banking, and clear terms and conditions of service. There were 1.3

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million (5.4 percent of the total population of Malaysia) individual internet banking subscribers by the second quarter of 2003. In response to the growth in e-commerce, theCentral Bank of Malaysia is working with MEPS to develop a national multi-bank payment infrastructure known as the Financial Process Exchange (FPX) to facilitate online payments for e-commerce transactions. The legal framework for regulating the issue of card-based e-money or multipurpose stored value cards is contained in the Payment Systems Act 2003 (PSA)

Philippines :

The Central Bank of Philippines defines e banking as a system, which enables bank customers to have access to banking products and services through a personal computer (using direct modem dial-in, internet access, or both) or a mobile/non-mobile phone. E-money products are intended to be used as a general, multipurpose means of payment. Some banks have started to introduce card-based e-money products that are aimed at facilitating retail payments and tapping the enormous commercial potential of the Internet. Presently, there are five stored value cash cards in the market, issued by Four Philippine banks. Non-banking institutions issue two multipurpose cash cards. Stored value cards compete directly with notes and coins for making retail payments and can, therefore, reduce currency in circulation. Although at present there is no specific law for e-money, the E-commerce Law serves as the basic legal framework for the recognition and use of electronic commercial and non-commercial transactions. Subsequently, the existing regulations were refined in order to fast track the procedure for processing electronic banking applications. While there are regulations governing the delivery of electronic banking services, there is at present no specific regulation governing the issuance of electronic money. It may be necessary to revisit the provisions of existing laws to determine whether they adequately address major issues regarding the treatment of e-money and supervision of the issuers of e-money. The real-time gross settlementPhilippine Payment System (PhilPaSS) was fully implemented on December 5, 2003 and covers Mega link (Network) transactions.

Sri Lanka :

In 1998, one of the leading domestic banks launched the SMARTCASH scheme (electronic purse) to enable cardholders to make payments at retail outlets where card readers had been installed. This scheme experienced a setback due to various reasons, and arrangements are now being made to reactivate it. Currently there is no network-/software based schemes. Eight banks have implemented Internet and phone/mobile banking schemes, while one bank has introduced phone banking without Internet banking. These schemes provide a range of banking services such as transfer of funds, settling of utility and credit card bills, account balance enquiries, Cheque books requests, and availability of financial information through phone /mobile/ tele-banking facilities. At the end of September 2003, banks provided phone and Internet banking services to 0.5 million customers. There is no specific law governing electronic transactions. Contract law covers transactions in e-money/internet/mobile banking schemes until the proposed Payment Act and Electronic Transaction Act are passed by parliament.

India:

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The Reserve Bank of India (RBI) has partnered a multi-application smart card project under the aegis of the Ministry of Communications and Information Technology to run another pilot project on the use of multi-application smart cards in the country. The RBI to issue prepaid multipurpose cards has given three banks. A few banks allow withdrawal of cash from ATMs using the prepaid card. Currently, there are no network- or software-based e-money schemes in existence. Some banks in India have started providing services via the Internet. Guidelines on Internet banking have been issued to banks, which they are required to observe when providing internet-based banking services to their customers. The Internet channel is also being used for various banking and other services including railway reservations, retail purchases, etc where the instruction is given electronically and, based on the instructions, the account of the customer is debited and credit passed on to the service/goods provider. Banks are in the process of integrating the Internet banking services being offered into the RBI Electronic Funds Transfer (RBI-EFT) system, facilitating transfers of funds across accounts with other banks. The Negotiable Instruments Act has been amended to provide recognition of e-cheques. At present four banks in India are issuing smart cards. As a result of the promulgation of the Information Technology Act (2000) and subsequent amendments, electronic modes of payment now receive explicit recognition. Amendments to the Negotiable Instruments Act were passed in November 2002, giving legal recognition to Cheque truncation and e-cheques. PKI is the most favored technology.

References

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(1) www.nift.com.pk

(2) www.niftetrust.com

(3) www.sbp.org.pk

(4) www.bis.org

(5) Banking System Review (BSR)

(6) Annual Performance Review, SBP, 2007-2008

(7) Pakistan: Financial Sector Assessment 2008, SBP

(8) Key issues in Pakistan’s economy (Dr. Ishrat Hussain’s speeches)

(9) Survey of developments in electronic money & internet payments, conducted by CPSS,

BIS

(10) NiFT news, first issue

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