COUNTRY LEARNING NOTES Uganda: implementing an Electronic Funds Transfer system to improve efficiency in public payment systems Lawrence Semakula & Robert Muwanga * July 2012 SUMMARY Electronic Funds Transfer (EFT) is a system for transferring money from one bank account to another electronically, minimising the need for human intervention. In July 2007, the Government of Uganda began using EFT to transfers payments to its suppliers of goods and services by crediting their accounts directly through the banking system. EFT has now been extended to the full range of Government financed payments for central ministries and agencies. This shift from the use of physical cheques has achieved three things: it has enhanced security of the Government s payment process as manual interventions have been reduced and loss or forgery of paper payments instruments of cheques has been eliminated; it reduced cost of operations particularly accruing from printing cheques, it improved efficiency in cash management with the elimination of a cheque float as the period it takes to transfer funds to beneficiaries has significantly reduced. A major risk of the current system is the irrevocability of the of an EFT payments once it has been made, even when an error could has occurred in this process. Unlike in countries like South Africa, the current Ugandan system offers no protection against such risks. Careful planning has been a critical factor in the successful implementation of the EFT, as has close collaboration between the Ministry of Finance, the Bank of Uganda and the commercial banks. Using EFT has offered Uganda significant benefits in its payment systems through the elimination of manual process. This briefing note identifies such benefits and explores changes in payment systems prior to EFT, enumerates key issues that were considered and challenges met in implementing the EFT in Uganda. EVOLUTION OF PAYMENT SYSTEM Payment systems constitute a major part of the budget execution process. Performances of payment systems affect the relationship between the Government and its suppliers. The Government traditionally used a mix of cash and cheques for transferring payments to its suppliers. Previously, cheques took over 5 days to clear and were therefore not preferred by many suppliers. As not all Government salaries were paid through * Lawrence Semakula is the Commissioner of Financial Management Services at the Ugandan Ministry of Finance, Planning and Economic Development. Robert Muwanga is an advisor at ODI s Budget Strengthening Initiative.
bank accounts, it was not uncommon to see long queues of staff drawing salaries at many ministries and agencies at the end of each month. This method proved very inefficient: aside from significant leakages through these procedures, long delays in reconciling cash transactions and financial reporting were also common. Lengthy and manual payment procedures were unpredictable and highly prone to corruption. Over the last 20 years, the Government has reformed its payments system. This was intended to curb loss of public funds and increase the efficiency of transactions with its suppliers. The first step was for the Government to abolish cash transactions for handling payments, with the exception of petty cash. Suppliers were all required to have bank accounts and to be paid using cheques printed centrally through the Ministry of Finance. Salaries were also to be paid by direct block transfer through the banking system. The huge build-up of a cheque float subsequently inhibited efficiencies in cash management. Errors in the cheque process and stale cheques were a common occurrence, which affected cash flow forecasting. Salary payments were prone to leakages ghost employees became a major issue, through connivance between Government units and banks. In addition, the manual capture of salary data at the commercial banks was a major overhead. The major change came in July 2007, when the Government introduced EFT, shifting from physical cheques to electronic instructions. The decision to move to EFT was prompted by the Government s desire to further improve efficiency in its payment services system. It was also prompted by the need to comply with the 2006 decision of the East African Community requiring member countries to limit the use of paper cheques in an effort to curb fraud. The transition to EFT was implemented gradually. It was initially limited to ministries and agencies (MALGs ) where financial management processes had been automated using the integrated financial management system (IFMS). EFT was also initially limited to payments above 20 million Ugandan Shillings. Introducing EFT did not require additional equipment for sites already on IFMS except enhancing software at the Ministry of Finance, Bank of Uganda (BoU) and the commercial banks. MALGs that were not on the IFMS and still running manual systems were required to fill in special forms and submit these to the Ministry of Finance for verification and processing. The Ministry of Finance then issued electronic payment instructions to the BoU to credit the various beneficiaries. However, EFT was not fully implemented for salaries at the time. This is because the time table set for updating the payroll for bank information could not be met within the deadline for launching the EFT. From July 2008 the Government extended the EFT to salaries under the Straight Through Processing (STP) scheme. The new method reduced manual steps in processing salaries. For example, out of three steps, one was retained for verification by ministries and agencies, making it more efficient and predictable. However, while this has been a positive step, it has eliminated the means by which staff absenteeism could be checked particularly for teachers and health workers. Efforts are now being directed at other mechanisms to check this. It is anticipated that the implementation of the integrated personnel and payroll system (IPPS) will further eliminate manual procedures in payroll processing and improve efficiency of the STP. Real Time Gross Settlement (RTGS), a variant of EFT, has also been introduced for revenue payments through the Uganda Revenue Authority. Suppliers payments across central government are all made through EFT. CHARACTERISTICS (KEY ELEMENTS) IN IMPLEMENTING EFT PLANNING, COORDINATION AND COLLABORATION AMONG KEY INSTITUTIONS Extensive planning was critical to ensure smooth implementation of the EFT. Beyond the challenges faced by the Government, the readiness of commercial banks - both in capacity
and infrastructure was an additional challenge. Changing the respective systems to allow interoperability between the Ministry of Finance and the BoU had costs implications. Practices and procedures also differed across different commercial banks. The BoU was tasked with leading the exercise to address these issues. The Ministry of Finance coordinated other activities to implement the EFT. The major elements of this coordination process were: Both the implementation and management of the process were informed by a study that was commissioned by the Ministry of Finance. The study focused on establishing changes to the policy, legal and administrative frameworks, as well as both functional and business processes that needed to be undertaken. The study also provided a roadmap to implementing the EFT. Joint coordination and collaboration between the Ministry of Finance and the BoU was central to the successful implementation of the project. A Technical Committee (comprising of Ministries of Finance, ICT and Local Government, as well as the Bank of Uganda and the Office of the Auditor General) was set up to manage the implementation of the EFT. To ensure a similar collaborative effort in the post implementation period, a Memorandum of Understanding was signed between the Ministry of Finance and the Bank of Uganda. This outlined the principles, standards and indemnities for the EFT. The Bank of Uganda s supervision function over commercial and through the Clearing House Rules and Procedures 2004, ensured established standards of the EFT operations were met. ELECTRONIC TRANSITION BETWEEN THE CENTRAL BANK AND THE GOVERNMENT ELECTRONIC PAYMENT Presently, all Government EFT payment instructions are issued by the Ministry of Finance. An electronic link between the Ministry and the BoU was a vital prerequisite for implementing the EFT. Prior to the implementation of the EFT, this electronic link was used to transfer payment data corresponding to cheques issued from the Ministry of Finance to the BOU, which had proved reliable. The reliability of the link was further reinforced by the interface established between the Government IFMS and the BoU operating over a wide area network. SECURITY OF TRANSACTIONS Once electronic payment instructions are submitted to the central bank clearing house they are irrevocable. A major concern with implementation of the EFT was the security of electronic instructions during transit and on arrival at the BoU. A number of critical steps were implemented to improve the security of transactions. Payments under the IFMS are subjected to an elaborate approval process which is also supported with an audit trail. Access for users is restricted by the use of passwords and encryption of data. This makes it very difficult for a non-user to access the information. A state of the art security system was introduced that uses advanced encryption technology to prevent interception during transmission. Each EFT transaction is assigned a unique tracking number and an audit trail is recorded by both by the transmitting and receiving systems. Advanced authentication technology is used to confirm the identity of the remote computers receiving information. This arrangement has been useful in reducing the risk of unauthorized access to EFT transactions. POLICIES AND LEGISLATION The BoU had already established Clearing House Rules and Procedures to govern the conduct of banks in the clearing house and stipulate penalties for offenders. These rules contained a section on EFT rules and procedures and controls to mitigate several types of risks. These rules are binding on all banks under the Memorandum of Understanding established under the Uganda Bankers Association. In addition, the Minister of Finance issued a statutory instrument in 2007 to amend financial regulations to accept the EFT. The Government
took steps to establish a comprehensive set of cyber laws (Computer Misuse Act 2008, Electronic Signature Act 2010 and Electronic Transactions Act 2010) to further strengthen the framework for regulating crimes associated with electronic transactions. MANAGING CASH WITHDRAWALS UNDER EFT Spending agencies are still able to withdraw cash from banks even after implementing EFT. Accounting Officers 1, as previously, nominate officers who can receive cash from the bank. However, stringent controls, including CCTV monitoring of the cash drawing points in the banks, have been put in place to ensure authentication of drawers and audit trailing of cash transactions. COMMON ERRORS The verification and authorization of EFT payments remains the responsibility of the accounting officer at each spending agency. Inbuilt mechanisms at the Ministry of Finance, Bank of Uganda and the commercial banks have been designed to detect and reject incorrect bank account details. However, care must be taken when processing payments. Common errors often relate to details of the payee: names, account number or bank branch. EFT implements a set of checks to strengthen control and to reduce the risk to the Government. Among them are: Automatic funds check (balances) to disallow overdraw of accounts. The use of a unique transaction ID to track each payment. A copy of the EFT transaction document payment/remittance advice or confirmation from the bank constitutes the receipts. All suppliers and employees are required to have a bank account so that the need for human intervention is minimized. KEY RISKS THAT REMAIN There are still risks associated with the new system, which need to be managed: The irrevocability of a payment, once made, poses a threat to EFT. The existing legislation does not provide sufficient protection once data entry errors are made. This area is the subject of further review by the Government Data on Government suppliers is at the heart of the EFT. Presently, maintaining the data on suppliers is a central function of the Accountant General s Office. Lapses in its integrity threaten the EFT s reliability with the potential for significant fiduciary risks. This data must be kept up-to-date, accurate and reliable. There are also operational risks associated with reliance on technology or human error. The failure of technology infrastructure for example a break in the electronic link between the Ministry of Finance and the central bank, or staff lapses such as sharing of passwords, can lead to disastrous results in the use of EFT. Policies and procedures are necessary to protect the integrity of the EFT in view of these operational risks BENEFITS AND CHALLENGES TO USING EFT The introduction of EFT has yielded significant benefits: Benefits of EFT in comparison to cash or cheque payments - EFT System is faster, safer and generally more efficient than the manual cheque system. EFT processing is automated, so human errors are greatly minimized. Compared to cheques, EFT instructions are safer because a few members of staff handle data entry and processing. Data is secured by passwords and data encryption. The EFT payment system is also reliable because EFT instructions rarely bounce for trivial reasons such as irregular signatures or incomplete endorsement - both common reasons for a cheque to be returned unpaid. EFTs eliminates
the occurrence of a cheque float thus improving cash management for the Government. In general, the introduction of the EFT has improved the risk profile of the national payment system, which has enhanced financial stability. Benefits in Revenue collection - Uganda Revenue Authority will implement a variant of the EFT the Real Time Gross Settlement (RTGS). RTGS system is more efficient for tax collection. Money is immediately transferred from the taxpayer and it is deposited into the Government Consolidated Fund. This enables the Ministry of Finance to monitor its revenue collections in real time, and be able to track both individual and total tax payments on a daily basis. The system will improve operational efficiency of the Ministry of Finance, the Uganda Revenue Authority and the Bank of Uganda. It will also significantly reduce interest paid by the Government on instruments issued for monetary policy purposes. Presently, government pays interest on its own revenue which is collected and remains held with the banks. Automation will also enable faster and greater accuracy in reconciliation of revenues collected through Uganda Revenue Authority. Benefits to employees - Government employees and suppliers in any part of the country will receive salaries and payments much faster (within 24 hours). Benefits to Banking system - The Government is a major user of the banking system, and banks are subject to less fraud cases and have gained substantial improvement in processing efficiencies since the introduction of the EFT ENDNOTES 1. Accounting Officer is an official of a spending agency accountable for all its financial operations to Parliament. The Country Learning Notes series is intended as a tool for policy makers and practitioners to learn from the experiences of other countries. Each note focuses on a specific country and a particular policy area, documenting the challenges faced and decisions taken to overcome them. The series can be freely downloaded from www.budgetstrengthening.org. For more information please contact bsi-research@odi.org.uk. Readers are encouraged to reproduce material from the Country Learning Notes series for their own publications, as long as they are not being sold commercially. As copyright holder, ODI requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on www.budgetstrengthening.org The views presented in this paper are those of the author(s) and do not necessarily represent the views of ODI. Overseas Development Institute 2012 Budget Strengthening Initiative Overseas Development Institute 111 Westminster Bridge Road London, SE1 7JD www.budgetstrengthening.org