The 2004 Financial System Stability Assessment (FSSA) conducted for Pakistan by the International Monetary Fund notes that an automated retail check clearing system, National Institutional Facilitation Technologies (Pvt.) Limited (NIFT), has been in operation since 1997. Further, the State Bank of Pakistan (SBP), Pakistan's central bank, was in the process of launching a real-time gross settlement (RTGS) system. Owing to the work in progress, Pakistan was not assessed against the Core Principles for Systemically Important Payment Systems promulgated by the Committee on Payment and Settlement Systems. The FSSA, however, did observe certain deficiencies in the legal framework for payment system oversight relating to finality of payment and zero hour rule and recommended amending the State Bank of Pakistan Act with the inclusion of a chapter on payment systems. Also, the SBP's liquidity management facilities needed to be upgraded to accommodate the demands of the anticipated RTGS system and the expanded membership. A 2008 report by the Asian Development Bank provides updates on this information by mentioning that the RTGS system has been established. The 2006-2007 SBP annual report announced that the system would be named Pakistan Real Time Interbank Settlement Mechanism (PRISM). A new law, the Payment Systems and Electronic Fund Transfers Act of 2007, has also been enacted to provide the legal and regulatory framework for payment systems and electronic funds transfers in the country. However, none of the mentioned systems have been designated systemically important by the SBP or by third-party sources.

General Overview

The 2004 Financial System Stability Assessment (FSSA) conducted for Pakistan by the International Monetary Fund does not assess Pakistan's payment systems but does provide an overview of the national payment systems. Per the FSSA, an automated check clearing system (National Institutional Facilitation Technologies (Pvt.) Limited, or NIFT), which was established in collaboration with the private sector, has been in operation since 1997. The State Bank of Pakistan (SBP), Pakistan's central bank, was in the process of launching a real-time gross settlement (RTGS) system to replace the country's then existent "manual book-entry system for the settlement of interbank lending, net settlement of checks, and the settlement of the cash leg of government securities transactions" (p. 22). Owing to the work in progress, the FSSA did not include an assessment of Pakistan against the Core Principles for Systemically Important Payment Systems promulgated by the Committee on Payment and Settlement Systems (CPSS). The FSSA, however, does make certain observations with regard to the legal framework governing payment systems in the country. It notes that "there remain deficiencies in the legal framework for payment system oversight" (p. 22) relating to finality of payment and zero hour rule. Also, the SBP's liquidity management facilities need to be upgraded to accommodate the demands of the anticipated RTGS system and the expanded membership. Further, the FSSA recommends the amendment of the State Bank of Pakistan Act to add a chapter on payment systems.

An important update to this information is provided by a September 2008 report by the Asian Development Bank (ADB), which announces that an RTGS system for wholesale transactions has been established by the SBP marking "a milestone in strengthening payment systems in Pakistan" (p. 23). It further mentions that the country's retail payment system has been modernized with the introduction of a centralized online system, and more reviews of the system are in the pipeline with subsequent subprograms of its program loan to Pakistan addressing issues of privacy and security of transactions and for creating platforms for electronic and cell-phone based transactions. The 2006-2007 annual report of the SBP notes that the new RTGS system is to be named Pakistan Real Time Interbank Settlement Mechanism (PRISM) and will process large-value, low-volume interbank settlements. The real-time feature of settlements will minimize settlement risks for the participants. Elaborating on the progress achieved in the installation process of the PRISM, the annual report states that the SBP's primary and disaster recovery sites have been equipped with the requisite hardware, its back-up site is being prepared, connectivity arrangements are being finalized for imminent testing, the PRISM is being interfaced with the SBP's internal banking application, and the training phase is in the wings once the interface and connectivity features are in place. The PRISM, per the annual report, will use Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) as a primary communication channel for RTGS transactions in Pakistan. To enable this transition, the commercial banks are being trained by the SBP and their systems upgraded to handle RTGS transactions. Despite the above information, the SBP annual report does not explicitly state as to whether PRISM will be designated the country's systemically important payment system.

Under the pre-PRISM system of making payments, the SBP website observes, commercial banks held accounts at the SBP to conduct settlement of transactions and to meet regulatory requirements. The SBP is the final settlement agent for large value interbank payments, government securities settlement, and the retail check system, NIFT. The system was based on manual book-entry procedures and is hence inefficient and risk-prone, adversely affecting the banking system as a whole. The website, therefore, talked about the launch of its RTGS system, which was in the works at the time. The website noted that the new system would have the facility of real-time settlement of large-value interbank transfers, intraday liquidity through intraday repos, collateralized lending, etc., and a queuing mechanism. The system was being implemented by CMA Small System AB of Sweden.

In July 2002, the World Bank approved a loan to implement the Banking Sector Technical Assistance Project in Pakistan with the key objective to enable "the central bank of the country to become fully equipped to play a meaningful role in Pakistan's economic development." One of the components of the project, scheduled to reach completion in December 2008, is to strengthen and streamline the national payments system, the World Bank website discloses.

The Payment Systems Department (PSD) was established within the SBP to "to institutionalize [its focus on payment systems stability," and with the objective to "implement RTGS Project, oversee the existing payment and settlement systems in place and develop a strategy with the banking sector for improvement in the existing systems," states the SBP website. Further, the PSD aims to follow international best practices in managing the national payment systems. It will also implement the latest technology to keep the systems at par with the international financial industry and promote a stable and efficient financial system. Its key functions, per information on the SBP website, will be to "formulate payment systems' policies and facilitate adoption of international best practices; introduce developmental strategies for modern payment systems; operate the real time gross settlement system for fund transfers & securities transactions efficiently and securely; provide oversight to payment systems operated by others i.e. NIFT, ECH etc.; provide SWIFT services to internal departments and SBP BSC (Bank) Offices..." The 2006-2007 annual report of the SBP mentions the enactment of the 2007 Payment Systems and Electronic Fund Transfers Act and states that it provides the regulatory framework governing payment systems and electronic funds transfers and has "laid down solid foundations for development and further strengthening of payment systems in the country" (p. 61).

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

II

There is insufficient information publicly available as to Pakistan's compliance with this principle. The 2006-2007 annual report of the SBP mentions the enactment of the 2007 Payment Systems and Electronic Fund Transfers Act and states that it provides the regulatory framework governing payment systems and electronic funds transfers and has "laid down solid foundations for development and further strengthening of payment systems in the country" (p. 61).

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

II

There is insufficient information publicly available as to Pakistan's compliance with this principle.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

II

There is insufficient information publicly available as to Pakistan's compliance with this principle.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

X. The system's governance arrangements should be effective, accountable and transparent.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

II

There is insufficient information publicly available as to Pakistan's compliance with this principle. The Payment Systems Department (PSD) was established within the SBP "to institutionalize its focus on payment systems stability," and with the objective to "implement RTGS Project, oversee the existing payment and settlement systems in place and develop a strategy with the banking sector for improvement in the existing systems," states the SBP website. Further, the PSD aims to follow international best practices in managing the national payment systems. It will also implement the latest technology to keep the systems at par with the international financial industry and promote a stable and efficient financial system. Its key functions, per information on the SBP website, will be to "formulate payment systems' policies and facilitate adoption of international best practices; introduce developmental strategies for modern payment systems; operate real time gross settlement (RTGS) system for fund transfers & securities transactions efficiently and securely; provide oversight to payment systems operated by others i.e. NIFT, ECH etc.; provide SWIFT services to internal departments and SBP BSC (Bank) Offices ..."

B. The central bank should ensure that the systems it operates comply with the Core Principles.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

II

There is insufficient information publicly available as to Pakistan's compliance with this principle.