The low adoption of CBDCs in Africa, which would hinder the policy objectives central banks hope to achieve, remains a significant concern for African central banks.
- 90 per cent of central banks were involved in CBDC analysis or projects in 2021. The percentage of central banks undertaking pilot projects reached 26 per cent
- Access to digital cash as an alternative payment mode is a critical factor driving the adoption of CBDCs in Africa.
- Providing access to those without internet or smartphones is a significant challenge for adopting CBDCs in Africa.
What is a CBDC
A central bank digital currency (CBDC) is a digital currency valued in the national unit of account that serves as a central bank liability. Initially, central banks globally were cautious about CBDCs, but their interest has grown recently. According to a recent Bank of International Settlements (BIS) poll, 90 per cent of central banks were involved in CBDC analysis or projects in 2021. The percentage of central banks undertaking pilot projects reached 26 per cent.
Monetary systems evolve in tandem with technological advancements. Digital finance technologies and new private forms of digital currency can potentially improve the monetary system. However, structural weaknesses render cryptocurrencies inappropriate as the basis of the monetary system.
In this context, central banks have taken a more aggressive approach to CBDCs. Experts view CBDCs as having the potential to enhance the good public nature of the monetary structure, with the central bank at its core, by facilitating secure, low-cost, and inclusive transactions while encouraging innovation.
African central banks are also part of the global trend. While African countries are working on CBDCs, most are still in the early stages of analysis and research. Only Nigeria has officially issued a retail CBDC, the e-Naira, with test initiatives in South Africa and Ghana.
Potential benefits from the adoption of CBDCs in Africa
Transition to digital currency
Access digital cash as an alternative payment mode is a factor driving the adoption of CBDCs in Africa. The digital revolution has transformed Africa’s payment landscape, eroding commercial banks’ dominance and the usage of physical currency.
The transition began with mobile money at the turn of the century, with African nations such as Kenya taking the lead. Sub-Saharan Africa currently accounts for two-thirds of global mobile money transactions and more than half of global active users.
Subsequently, banks, then huge tech and fintech organisations, stepped in with new payment methods. Consequently, digital assets such as stablecoins and cryptocurrencies emerged. In this context, a CBDC, similar to fiat currency today, might function as a primary form of reliable currency.
CBDCs might also strengthen central banks’ position as the issuer of the unit of account and the foundation of the monetary system.
Financial inclusion
Central banks generally perceive CBDC as an essential and complementary tool for promoting financial inclusion. Financial inclusion in Africa has recently improved but is still low, with half of the African adults unbanked as of 2021, a more significant proportion than in any other region globally.
Indeed, promoting financial inclusion is among the top three priorities for most African central banks. Financial market dynamics and larger structural factors explain financial exclusion. Among Africa’s essential market features are high pricing, a lack of access points, and poor ICT infrastructure.
Financial or digital illiteracy in Africa is the main structural factor impeding financial inclusion. Related digital inequalities across income, education, and age groups result from limited access to or variations in consumers’ preferences for digital products.
CBDCs can mitigate some of the market imperfections inhibiting inclusion. For instance, CBDC issuance can provide an open infrastructure that sets the rules of the game for payment service providers (PSPs). This could enhance interoperability and promote effective competition, thereby delivering consumer benefits. Moreover, CBDCs could help cut payment services costs by lowering or eliminating fees.
Read: Ghana, Nigeria digital currencies sabotaging West Africa’s Franc
Efficiency in payment services
Several African central banks are motivated by the potential of CBDCs to promote efficiency and competition in digital payment systems. Due to network effects, payment service markets are often monopolistic, with a few PSPs gaining and retaining substantial market shares.
Concentrated market power has several negative consequences. One is the high cost of services; even if costs are initially reasonable to win market share, oligopolistic PSPs may later demand rents. Another issue to be concerned about is informational rents in an increasingly digitalised environment where only a few participants can access comprehensive consumer transaction data.
By offering a fair playing field via open standards, adopting a CBDC as an alternative payment method might impact the competitive nature of the payment system.
CBDCs can increase competition and lower prices while also eliminating informational rents. The issuance of CBDCs in Africa might also promote emerging digital technologies and their incorporation into the broader African economy, such as the distribution of fiscal transfers and tax collection, consequently promoting economic standardisation.
Concerns about the adoption of CBDCs in Africa
Operational challenges
CBDC systems must be robust, stable and safe and can recover from operational disruptions. Such disruptions could also have reputational costs. These risks are common to any payment system, including fast payment systems (FPS).
Cyber security is the most significant operational challenge with CBDCs in Africa. Cyber risks rank among the top concerns for African central banks. A successful cyber-attack on CBDCs could lead to widespread and far-reaching damage and erode the reputation of central banks.
Attacks such as hacks into credit card systems, databases containing consumer credit profiles and central banks offer a glimpse of the threats involved. Defending against such attacks is difficult, given the diversity of linkages with the broader financial and digital ecosystem.
Another critical challenge is the operational burden of maintaining a CBDC. African central banks could struggle with network cost, resilience, availability and compatibility of technologies, and their functionalities and scalability. The operational cost of such a complex system is high.
Low adoption rates
The low adoption of CBDCs in Africa, which would hinder the policy objectives central banks hope to achieve, remains a significant concern for African central banks. In North Africa, where digital payment penetration remains limited, low adoption rates could particularly prove a significant issue.
Success in currency adoption is driven by its usefulness to private agents. In particular, CBDCs in Africa would need to satisfy unmet user needs for broad adoption; this would depend on country-specific conditions.
CBDCs face competition from private FPS, which might impede their acceptance, unlike fiat money, where central banks have a monopoly. Fewer frictions and incentives customised to the intended customers may lead to the successful installation and widespread acceptance of new payment systems.
For instance, Kenya’s mobile money (M-Pesa) has given the country’s unbanked populace access to essential banking-like services through SMS services and has widespread adoption and usage. CBDCs might benefit merchants and banks impacted by disintermediation, who may be hesitant to adopt, by allowing for more effective domestic payments.
Interoperability concerns
Privately issued digital tokens, unregulated by central banks, are gradually being utilised for local and international transactions. One key reason is that digital tokens make it easier for merchants and consumers to do business globally.
If each African nation implements its own CBDC, it must guarantee that it does not create artificial hurdles to cross-border economic activity. The Dunbar Project, bringing together central banks from South Africa, Malaysia, Singapore and Australia to create platforms for cross-border transfer, is an excellent attempt to address this issue. This is designed to remove the need for intermediaries and cut transaction costs and time.
The threat of stablecoins
Stablecoins constitute a significant threat to CBDCs. Stablecoins, including Binance USD (BUSD), USD Coin (USDC) and Tether (USDT), are a form of cryptocurrency pegged to a fiat currency like the US dollar or a real-world asset like gold.
A country like the US may not be concerned about its currency’s value when weighing the threat of stablecoins, but African countries must. According to the US Federal Reserve chair, Jerome Powell, one does not need stablecoin [or] cryptocurrencies when they have a digital US currency.
This indicates that the use case for cryptocurrencies is no longer relevant, given the US dollar value. The only drawback is that individuals may want anonymity while purchasing privately-issued stablecoins with the same value. But Africans lack that flex. Africa’s weak currencies, converted into digital currency, do not stand a chance against a dollar-backed stablecoin.
Technological hurdle
Providing access to those without internet connectivity or smartphones on the continent is a significant challenge for adopting CBDCs in Africa. In sub-Saharan Africa, only 46 per cent of people have access to mobile phones. A little more than 28 per cent of them can access the internet.
Nigeria had roughly 104 million active internet users as of January 2021, with a penetration rate of 38 per cent; Ghana had 16 million active internet users and a penetration rate of 50 per cent; South Africa had 38 million active internet users and a penetration rate of 60 per cent. About half of the population remains offline despite these nations having some of the largest internet penetration rates on the continent.
There are significant questions and problems raised about the adoption of CBDCs in Africa. For CBDCs to attain mass adoption and become useful to the larger African population, central banks and other policymakers must address these concerns.
Read: A common Africa currency and CBDC’s unlikely future
