Chapter-10

Payment Systems

10.1 The payment system is a key element of

Table 10.1 Volume and value of cheques cleared through
the financial infrastructure that facilitates Dhaka Clearing House*
efficient functioning of the financial system. Amount Daily average
Number of
Under Article 26 of the Bangladesh Bank Order, Year cheques/ (in million value (in
1972 Bangladesh Bank through its Department instruments Taka) million Taka)
of Currency Management & Payment Systems 2000 6,687,756 1,107,189.16 4,193.90
performs core functions relating to issuance of 2001 7,158,541 1,271,462.27 4,816.14
notes and coins and management of currencies 2002 8,178,496 1,471,313.41 5,091.05
in circulation. Although there is no specific 2003 9,015,798 1,676,847.12 6,013.28
reference in the Bangladesh Bank Order, the 2004 10,055,817 2,090,179.99 7,085.63
BB as all central banks do, accepts the 2005 12,395,130 2,595,833.06 8,710.85
responsibility for payment systems, driven not 2006 12,957,114 2,977,493.11 12,202.84
least by its concerns for the stability of the * Revised data including the same-day clearing.
currency and financial system and the efficiency
of the monetary policy operations. transactions. In 2006, the number of cheques
passing through the normal clearing rose
Modes of Payments slightly, as did the average value of cheques.
Same day cheques, however, increased by 30
10.2 Owing to its intrinsic convenience, cash percent, while the average value per cheque
continues to be the predominantly used medium increased by 2 percent to 5.5 million Taka as
of transactions in Bangladesh. Bangladesh compared to only 165 thousand Taka for a
Bank makes efforts to satisfy transaction cheque in the normal clearing. Thus most of the
demand for currency through a steady flow of increase in the overall value of cheques clearing
currency notes and coins of all denominations. was due to increase in the number and value of
The domestic cheque system is the second the same day clearing.
most important payment medium for national
payments. Cheques and payment orders drawn Payment Settlement Systems
on commercial banks are widely used by the
industrial and commercial sector and to a lesser 10.4 There are four payment and settlement
extent by individuals. Cheques drawn on systems operating in Bangladesh. They are: (a)
Bangladesh Bank are used by commercial Bangladesh Bank's Clearing Houses in Dhaka
banks, mainly for inter-bank transfers and for and its branches in seven other cities; (b) Sonali
government payments, which are considered as Bank's Clearing Houses in 31 towns where
large value transactions. The volume and value there are no BB branches; (c) the BB large
of cheques have grown steadily over the years. value cheque settlement system; and (d) the
Bangladesh Bank Foreign Currency Clearing
10.3 Table 10.1 presents the volume and System in Dhaka which clears and settles
value of cheques cleared and settled in Dhaka foreign currency cheques and pay orders.
city during 2000 - 2006. The figures include
both the normal clearing and from 2003 onward 10.5 There are four clearings each day at the
the same day clearing, which is for large value BB's clearing house in each branch. The first

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clearing starts at 9:30 a.m. and returns of the recommendations by the CPSS, Bangladesh
first clearing are at 5:30 p.m. The Same Day Bank is moving towards developing a safe and
clearing starts at 11.00 a.m. and returns occur efficient payment system that is core principles
at 2.00 p.m. The instruments cleared through compliant.
the clearing houses are cheques, bank drafts,
pay orders, dividend warrants, etc. drawn on 10.8 Over the past few years, Bangladesh
commercial banks and BB. Except Barisal and Bank has been actively working on the
Rangpur offices, other branch offices of BB development of modern payment systems in
have a computerized settlement process where Bangladesh. Significant effort has been
the commercial banks, in addition to the expanded in the review of existing systems with
physical instruments, present diskettes that focus on the capacity building necessary to
contain each bank's paying obligations and define a long-term strategy for payments in
receivables from other banks. Compared to the Bangladesh. Because of these efforts, two major
volume in Dhaka and Chittagong, the cheques initiatives are underway to advance the scope
cleared in outstation branches are insignificant. and usage of payment systems. The first is the
planned automation of cheque processing and
10.6 Apart from non-cash payment instruments the second is the development of internal
like cheques, drafts etc. card-based payments, capacity and a long-term strategy for payment
which include credit card, debit card and ATM systems in Bangladesh. Both projects come
transactions are gaining popularity gradually. under a programme entitled the "Remittance
The commercial banks and the business and Payments Partnership" (RPP) Project which
community are trying to promote the use of is being funded through a grant from the
credit and debit cards for point of sale Department for International Development
transactions and direct debits. The use of such (DFID), UK.
payment instruments, however, is popular in
the urban areas only and the volume of such 10.9 A Center for Payment Expertise (CPE)
transactions is yet to reach a significant level. has been established for developing expertise
on the core competencies for payment systems
Developments in Payment Systems policy and operations through team-based,
cross-disciplinary intense training programme
10.7 The present payments and settlement on prevailing aspects of payment systems under
system in Bangladesh is not at par with active guidance of internationally experienced
international best practices which emphasizes consultants.
on safe and secured payments and settlements
and the reduction of the gap between payments Bangladesh Automated Clearing House
and settlement. Under the present clearing (BACH)
system, customers can use funds on t+2 or t+3.
The collections of cheques take much longer 10.10 Bangladesh Automated Clearing House
time to clear. However, with these changing and (BACH), the new automated cheque processing
demanding times, more rapid payments need to system, will be responsible for the processing of
be initiated. The current environment has led cheques, credit and debit payment instruments.
commercial banks to maintain idle funds solely The BACH will effect the installation of systems
for settlement purposes and beyond any and processes that support modern automated
economic or business purpose. This liquidity is cheque processing utilizing Magnetic Ink
a burden to the banks. Moreover moving funds Character Recognition (MICR) and Imaging
from one place to another is expensive and Technologies. The system is based on a
results in poor liquidity management. Besides, centralized processing centre located in Dhaka
there are many risks involved in end-of-day and its branches in seven other cities. The
settlements. Based on the Core Principles for system will support both intra-regional and inter-
Systemically Important Payment Systems regional clearings. The proposed processes and

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systems will conform to best practices for MICR (MICR) encoded with information regarding the
and Imaging and will represent the most cost amount, transaction type, account number, bank
effective solution for cheque processing. information and cheque number. In addition, the
information on both the front and the back of the
10.11 The ACH component of the Remittance cheques will be recorded with imaging. The
and Payment Partnership (RPP) Project is standards incorporate international standards
managed and implemented in a "fast-track" and proven designs based on the experiences
manner, as it is expected to be the engine that of various countries.
will drive the remittance and payments process
in promoting pro-poor economic growth. It 10.13 The new cheque processing system will
establishes the infrastructure for a modern be in place by first quarter of 2008 with the roll
payments system, which could be part of a out to begin when the new cheques reach a
future "e-Government Gateway" to provide circulation of approximately 70 percent. It is
services to financial sector using the Internet. anticipated that the system will commence
All activities are closely coordinated with operations in Dhaka soon thereafter with
relevant counterparts in the partnership: operations in Chittagang and the other regional
commercial banks, Bangladesh Bank, DFID, locations to be phased in over the coming
RPP teams for all three outputs (infrastructure, months. The goal is to have the system
challenge fund and information campaign) to operating nationally by end 2008.
ensure an enabling environment. Due diligence
and lessons learned from previous procurement Strategic Planning Initiative for Payment
efforts are applied to ensure transparency and Systems
level playing field. Appraisals are underway for
10.14 The RPP also has a long-term
establishing appropriate legal, regulatory and
component which focuses on the building of
policy framework for ACH. This is a complex
payments expertise within Bangladesh Bank
undertaking with considerable risks, but
and strategies for the deployment of additional
safeguards have been put in place to mitigate
payment systems to support both the retail and
these risks. The selection of vendor is
wholesale needs of the country's financial
completed. Development of detailed
markets. The strategy will include the expansion
implementation plans, business requirements
of card systems both debit and credit, Point of
analysis, base line study of existing
Sale (POS) systems for use by merchants and
infrastructure, gap analysis and finalization of
interbank payment capabilities to support the
ACH operational and technical requirements are
need for fast and secure debt and credit
underway to start BACH in Dhaka within the
transfers. Special focus will be given to the need
first-half of 2008. Project management and
to provide payment mechanisms that support
reporting mechanisms will be established and
high value transactions such as the sale of
coordinated through a Programme
securities or foreign exchange. The
Implementation Unit (PIU); focus groups will be
implementation of a Real Time Gross
established; linkages with key counterparts in
Settlement (RTGS) system will also be
private sector will be established; cross-support
considered as part of this focus on payment
from legal, regulatory and policy subcomponents
systems.
will be received to ensure ACH implementation.
Legal Reform
Implementation Timeline
10.15 Another facet of the payment
10.12 The Cheque Design Standards were modernization process focuses on the need to
released in September 2006 with the support these new systems with the legal and
requirement that banks comply with the new regulatory frameworks necessary to operate
standards by 31 December 2007. The cheques such systems in a transparent manner with high
will be Magnetic Ink Character Recognition standard of governance.

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10.16 CPE's Legal and Strategy Working recommendations for each completed
Groups are working together to provide policy Assignment. The remaining Assignments are in
assistance to the National Payments Systems the process of completion.
Council (NPSC) through its Working Groups
with analytical and research assistance from the 10.19 In addition, it will assist Regulatory
CPE. Legal Working Group has drafted a Working Group (RWG) as it evaluates how and
proposed Consumer Protection Act for Migrant in what form regulation for payments systems
Workers Remittances based on best practices will be reflected. This will be accomplished in
established by the BIS and World Bank as part concert with Legal Working Group (LWG) and
of its contribution to Output 3 of the RPP. This is will address strategic questions such as: What
a groundbreaking piece of legislation that will form will the new payments system law take?
assist in bringing migrant workers and What additional authority, if any, does BB need
remittances under the legal protection of formal to regulate the systems? Where should BB's
channels. It is completing a comprehensive regulatory responsibilities begin and end? What
report identifying legal reforms based on new regulations will likely be needed to oversee
International Best Practices for Large Value retail payments and a rudimentary inter-bank
Payments, Best Practices for Small Value and clearing and settlements system?
Retail Payments and Best Practices for Informal
Systems. This report is being prepared in 10.20 The Regulatory Component will also
conjunction with a baseline assessment of the focus the regulatory framework to support
current payments related legal infrastructure in introduction of the ACH. This will not require an
Bangladesh. extensive amount of new regulation but will
require that the cornerstones of payments
10.17 Legal Working Group also provides legal system regulation be structured and developed
assistance to Output 2 - the Challenge Fund. in respect to regulatory authority, consumer
Most recently that assistance came in the form protection, and oversight of payment systems
of advising the Challenge Fund's assessment operations. Throughout the CPE training
panel on issues related to the concept notes exercises reference to best practices has been
submitted in accordance with the Challenge and will continue to be an integral part of our
Fund's grant requirements. In addition, the CPE daily work.
legal working group is now undergoing legal
training in payment systems law. This training 10.21 Finally, as the regulatory development
will continue throughout the project period. process proceeds, industry consultation will be
approached in two phases: (1) the first phase
Regulatory Reform will involve strategic outreach with financial
sector leaders shortly after the formation of
10.18 CPE's Regulatory Component has RWG. The outreach will include banks and MTO
designed a specific team oriented regulatory (Money Transfer Operators) representatives,
training methodology for the strategic and other NBFI representatives; (2) the second
development of CPE's regulatory component. A phase will involve solicitation of market
number of Regulatory Training Assignments feedback on proposed laws and regulation. This
have been structured focusing on a broad array outreach and feedback will be most helpful to
of regulatory topics covering payments systems, RWG as BB further strengthens its working
remittances, governance and risk management, relationship with the financial sector and moves
AML, Foreign Exchange, Islamic Banking, Bank the regulatory process forward.
Licensing, and assistance to the Challenge
Fund on regulatory issues related to the Remittances and Payments Challenge Fund
development of concept notes submitted for (RPCF)
grant funding. CPE has completed and
produced 15 comprehensive regulatory papers 10.22 The Remittances and Payments
outlining the issues and suggested Challenge Fund (RPCF) is a £2.1 million (Taka

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28 crore) risk-sharing grant facility which will project concepts to take to the full application
stimulate and catalyze the innovation of new stage, which closed on 12 August 2007. All of
remittance and transfer products, improvements the selected projects build partnerships between
to existing remittance infrastructure, and use of remittance industry participants and can be
remittances. Grants are awarded to part-fund expected to significantly improve the processing
commercial projects in the private and NGO of international and domestic remittances. It is
sectors. The Challenge Fund grant award intended that a major proportion of available
mechanism is a two-stage process whereby challenge funding will be awarded in the first
short concept notes are prepared by grant Challenge Fund Round, with plans to disburse
applicants and, following evaluation, applicants the grants in the latter part of 2007 and early
with concepts that are deemed meritworthy part of 2008. The next Challenge Fund Round
prepare a full grant application. The process will close on 11 November 2007, and will be
revolves around Challenge Fund Rounds, targeted at the concepts which will improve the
where all concepts received in a six month use of remittances and migrant country
period are evaluated in competition with remittance process.
each other.
ational Payment Systems Council (N
N PSC)
10.23 RPCF has a three tier governance
structure: the RPP Project Oversight Board 10.25 One major motivation for change, for
(POB), an independent Assessment Panel (AP), improvement in payment systems in
and the RPCF managers. The POB, under the Bangladesh is the need to keep up with the rest
guidance of the Governor of Bangladesh Bank, of the world, to meet international standards and
provides strategic direction for RPCF and is to have a national infrastructure that will support
responsible for the selection of the members of competition with the rest of the world. To
the AP. The AP, under the Chairmanship of improve the payment systems in Bangladesh, in
Bangladesh Bank, assesses concept notes particular the interbank payment system, will
prepared by grant applicants, selects projects require the cooperation and coordination of
that meet set criteria, reviews full grant many stakeholders, the banks, the private
applications and approves grants. The RPCF sector, relevant government ministries, the
managers are responsible for the day to day regulators, central bank, and Government as
management of the challenge fund, including overseer. The National Payment Systems
awareness raising with potential grant Council (NPSC), an essential central institution,
recipients; and project cycle management, was established this year for the improvements
including helping applicants in the finalization of and promotion of payment systems for the
their project concepts, due diligence, grant national and public interests.
contracting, grant payment management, grant
project monitoring and assessment. The RPCF 10.26 The NPSC is made up of representatives
managers are assisted by other RPP experts from selected number of banks and other
who provide their observations on project significant stakeholders such as Ministry of
concept notes and full grant applications. Finance (MOF), Ministry of Commerce (MOC),
Controller General of Accounts (CGA),
10.24 The RPCF was formally launched in Bangladesh Telecommunication Regulatory
Dhaka on 28 March 2007, and the first Commission (BTRC) and is chaired by the
Challenge Fund Round, focusing on current and Deputy Governor in charge of the Department of
potential remittance industry participants located Currency Management and Payment Systems,
in Bangladesh, was closed on 13 May 2007. 39 Bangladesh Bank. The NPSC will be the central
concept notes were received before the closing vehicle for the transfer of information, on policy
deadline and the AP selected 7 innovative and practice, and of technology for payment

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systems in Bangladesh. It will also be the of Legal, Regulatory, Automated Clearing

vehicle for mobilizing resources, human, House, and Payment System Strategy, taking
financial and physical, for undertaking payment representatives from Commercial Banks and
system improvements. NPSC will workout the Bangladesh Bank.
long-term strategy and implementation priorities
for payment systems in Bangladesh. This will 10.27 Immediate initiation of these projects
include all forms of payments from cheque with the results to be implemented over the
processing to retail payments including card next three years will have a significant impact
payments and ATMs to interbank payments. on the financial sector in Bangladesh. At the
Provision will also be made for the settlement of end of that time, Bangladesh will be well on its
securities and foreign exchange payments. The way to establishing a sound payment system
NPSC will establish working groups to consistent with its neighbours and
undertake these tasks, in particular in the areas international standards.

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