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Arab states plan regional payment and settlement system

ABU DHABI, July 6 (Reuters) - Arab countries are finalising plans to create a regional cross-border payments and settlements system as an alternative to the current arrangement, which has been hit by a rise in compliance costs and downsizing by some banks.

Currently, many cross-border payments and settlements in the Gulf are carried out by correspondent banks - banks in one country acting as agents to foreign financial institutions that do not have a local presence.

However, a tightening of anti-money laundering rules by U.S. and European banks since the financial crisis has added to the cost of this arrangement, while downsizing by some banks has seen them quit the market.

The Arab Regional Payments System (ARPS) will act as a correspondent for its participants such as banks and financial institutions, through a single, centralised platform for cross-border payments, the Arab Monetary Fund (AMF) said on Thursday.

It will also aim to boost the use of local currencies in cross-border money flows. Many transactions in the Arab world have long been done in U.S dollars.

The AMF invited central banks and banks of all member countries, including Qatar, which is facing a diplomatic and economic boycott by four Arab states led by Saudi Arabia, although there was no confirmation whether representatives of Qatari banks were present.

"The ARPS aims at establishing a mechanism for use of Arab currencies for settlement, it saves time and cost of transactions and will help boost inter-Arab trade and investments," said AMF director-general Abdulrahman al Hamidy.

"The final touches are being given to the new system before we submit it for approval of the central banks who are supporting this project," he told a forum of bankers and money exchange companies.

The AMF expects the ARPS to be in operation by 2020.

The AMF is in talks with the U.S. Federal Reserve and the European Central Bank over the ARPS, and also over whether it could cover the U.S. dollar and euro.

A study by consultants Booz Allen Hamilton, which is advising the AMF on the ARPS, showed cross-border transactions in the Gulf currently cost around $33 on average, with a compliance investigation costing around $22. It said both of these costs should probably be around $10 each.

"ARPS will provide an alternative to high costs, lengthy correspondent banking and reduce liquidity requirements of commercial banks," Lazaro Campos, a senior executive adviser at Booz Allen Hamilton, told Reuters.

The ARPS will fully comply with international standards and regional compliance requirements, Campos said, adding participants would be liable for compliance. (Reporting by Stanley Carvalho; Editing by Mark Potter)