Despite the initial hype surrounding the possible benefits of CBDCs in Africa, adoption has not proceeded at the pace seen in other regions globally.
- The low uptake of CBDCs in Africa, which hinders the policy objectives of central banks across Africa, remains a significant concern.
- Last year’s hype seemed like demonstrative progress for adopting CBDCs in Africa.
- Central banks must find a clear value proposition to make the use of CBDCs in Africa attractive.
The Central Bank Digital Currencies (CBDCs) debate has recently proven to be a hot topic in economics and finance. Globally, many countries, including those in Africa, have explored the possibility of issuing centralized digital currencies to keep pace with the highly evolving decentralized finance.
With the disruptive technologies gathering pace, African central banks hoped to achieve greater payment system efficiency through CBDCs. In addition, a higher proportion sees potential benefits of CBDCs for their monetary policy. This represents an important consideration for a region with a weak transmission mechanism is weak.
Last year’s hype seemed like demonstrative progress for adopting CBDCs in Africa. Nigeria’s eNaira reached tens of thousands of transactions, and Ghana’s e-Cedi was on its way to a full launch. However, 2023 has created new headwinds for CBDCs. And despite the IMF conducting workshops focused on CBDCs in Africa to address issues posed by the central bank-governed virtual assets, adoption rates remain sluggish thus far. The debate on CBDCs appears to have waned.
The slowdown in the adoption of CBDCs in Africa
Despite the initial hype surrounding the possible benefits of CBDCs in Africa, adoption has not proceeded at the pace seen in other regions globally. As such, only a few CBDCs projects have reached advanced stages (pilot or live). Similar to the mainstream crypto adoption in Africa, various challenges and concerns remain regarding CBDCs.
Limited adoption and use cases
Many African economies remain cash-based, with a significant portion of the continent’s population unbanked. This means alongside cryptocurrencies, CBDCs have limited use cases and penetration in many parts of the continent. Thus, the low uptake of CBDCs in Africa, which hinders the policy objectives of central banks across Africa, remains a significant concern.
Success in adopting a particular currency emanates from its usefulness to private agents. In particular, CBDCs would need to satisfy unmet user needs for broad adoption. This would depend on country-specific conditions. In contrast to fiat currencies, where central banks maintain a monopoly, CBDCs face competition from private faster payment systems (FPS) that could undermine their adoption. Moreover, mobile money has achieved widespread adoption and usage making it further complicated for CBDCs to gain traction.
Operational and regulatory challenges
A system for the proper rollout of CBDCs in Africa must prove safety, stability, robustness, and ability to recover from possible operational disruptions. Such disruptions could also come with reputational challenges, just like in any other payment system, including FPS.
Cyber risk remains the most significant operational challenge as regards the rollout of CBDCs. Successful cyber attacks, as happened in some instances with the crypto sector, would result in serious and widespread damage to the reputation of the issuing authorities and central banks. Possible hacks into card systems and databases containing consumer financial profiles and central banks offer a glimpse of the potential risks.
Such attacks could prove challenging, given the diversity of linkages with the broader financial and digital ecosystem. The lack of regulatory frameworks to guide the implementation of digital currencies further complicates the matter. Although the quest to properly regulate digital currencies, including crypto, remains in the works, no significant results have materialized. This has created hesitation and uncertainty among policymakers, who lack a proper direction on proceeding with the appropriate rollout of CBDCs in Africa.
Another significant challenge comes from the operational burden of maintaining a CBDC. In this instance, African central banks highlight network resilience, the cost, interoperability, and availability of technologies, and their functionalities and scalability. The operational cost of such a complex system remains high. A two-tier architecture would reduce the burden on the central bank.
Lack of Infrastructure for CBDCs in Africa
The development of technological and financial infrastructure is currently underway in Africa. Indeed, the region remains one of the fastest growing globally. However, at the current levels, it still appears that much more growth remains necessary to fully support the adoption of CBDCs.
In many African countries, a significant proportion of the population lacks access to the internet, a crucial requirement for the use of CBDCs in Africa. Moreover, the existing financial infrastructure in Africa remains highly paper-based. This further complicates the transition to digital currencies.
Low levels of financial literacy
Current developments in digitizing financial services and products have shown that financial literacy is a crucial tool for survival. While some economic and human development disparities exist between African countries, most populations have relatively low financial literacy. Therefore, a proper discussion regarding the adoption of CBDCs in Africa proves difficult for a continent whose people lack the requisite knowledge.
Stakeholders have touted financial inclusion as one of the significant objectives of CBDCs adoption. But the way forward remains unclear. The value proposition for low-income people beyond the existing financial services in the market has also not been clarified. Thus, CBDC programs may need to rethink technical connections to expand access and create corresponding financial literacy programs.
Financial institutions have a crucial role in promoting financial literacy in Africa. Thus, African central banks and other financial institutions should incorporate financial literacy development as one of their strategic goals or as a component of their corporate social responsibility. The ensuing financial education and knowledge should help develop and increase the adoption of CBDCs in Africa.
When CBDCs first came to the fore, many touted such a move as a game-changer in digital finance. Many had thought that the adoption of CBDCs in Africa would take the shape of the adoption of cryptocurrencies, where the region leads in many aspects. However, challenges remain. Lack of the requisite infrastructure, low levels of financial literacy, and operational and regulatory challenges have combined to contribute to low penetration and adoption rates for CBDCs.
The lack of adoption is a current failure point for many launched CBDCs. Nigeria’s eNaira had a million customers one year into its launch, a smattering of its 221 million population. The real challenge of CBDCs lies in developing a clear sense of purpose. African central banks must answer to the kind of role that CBDCs will play in the economy and financial systems.
Therefore, central banks must find a clear value proposition to make the use of CBDCs in Africa attractive. The technology can change a lot and almost nothing at the same time. While CBDCs can make fiat currency safer, simpler, and faster, the role of the government-backed currency remains the same: a unit of account, store of value, and medium of exchange.