Central bank digital currency in Sub-Saharan Africa
Technology already has transformed the African financial landscape
Africa's historically underdeveloped physical infrastructure has helped catalyze increased use of new technology over the last decade within the region's financial sector. This is having a major and positive transformational effect, increasing financial reach and inclusion, improving financial sector efficiency, and lowering costs.
- The EY Global Fintech Adoption Index for 2019 ranked South Africa joint-third globally for adopting fintech products, with a fintech adoption score of 82% (only behind mainland China and India, with 87%, versus a global average of 64%).
- Nigeria's fintech sector has grown impressively, with nearly 300 firms now participating in the Fintech Association of Nigeria (FAN). Nigeria's fintech development is not unique, with Kenya also showing impressive fintech buildout. However, its fintech environment offers some unique features, involving a market with a 200 million population, of which 40% were recently unbanked, 95% of transactions are reportedly conducted in cash, where the informal economy may represent over 50% of GDP, and where over 70% of the population is aged under 30, with 50% market penetration (100 million clients) for smartphones. In its 2020 Report, FAN described fintech firms as "the major drivers of financial inclusion", noting the "percentage of financially-excluded adults in Nigeria reducing from 41.6 percent in 2016 to 36.8 percent in 2018" largely due to fintech networks.
- As an example of the dramatic impact of technology, artificial intelligence (AI) and machine learning firm WorkFusion was appointed in 2016 to introduce AI to Standard Bank's procedures. By enabling computers to run credit and judicial checks on new potential clients and teaching them when to refer cases for human review, it has reduced the average time needed to clear a new-account applicant from 23 days to under five minutes, while cutting verification times for vehicle and asset finance by 60%.
Central bank digital currency attracting global focus, particularly to improve cross-border flows
Over 80 central banks worldwide have announced their intention to consider Central Bank Digital Currency. These include the EU, the UK - with mainland China, Hong Kong (SAR), and Russia also prominent - although the USA remains largely absent so far.
Pilot schemes are being progressed within 2021 in Nigeria, Ghana, and South Africa, with Kenya also having studies under way. Within 2021, Rwanda's central bank also started a study into economic, financial and technology aspects and Tanzanian President Samia Suluhu requested its central bank to research CBDC.
There are several multi-national initiatives: the Bank for International Settlements is participating in several pilot schemes designed to address the high cost and slow procedures used for cross-border payments by developing new CBDC systems sharing a common platform spanning several countries. This reflects BIS perspectives that "cross-border payments are inefficient", and "technology could play a role in making them better. The BIS paper accepts that emerging market countries are "poorly served by the existing correspondent banking arrangements".
Its most recent announcement, for "Project Dunbar", directly involves the Reserve Bank of South Africa (SARB), seeking to develop a wholesale "Model 3" single integrated system - a common shared platform for participating countries.
In August 2021, Central Bank of Nigeria (CBN) appointed a Fintech firm (Bitt Inc.) as a technical partner for its pilot scheme "Project Giant" for its CBDC, the "e-Naira", a project ongoing since 2017. The pilot starts in October.
CBN Governor Godwin Emefiele claimed potential benefits include: increased cross-border trade, accelerated financial inclusion, cheaper and faster remittance inflows, easier targeted social interventions, improved monetary policy effectiveness, payment systems efficiency, and tax collection. Deputy Governor Folashodun Shonobi also urged citizens to use e-Naira for remittances and cross-border payments rather than private digital currencies like Bitcoin. He flagged that CBDC will "increase efficiency in national remittances" while "lowering high costs".
On 20 September, Musa Jimoh, CBN Director for Payment System Management stated that e-Naira represents legal tender, flagging that "where e-Naira is presented, it must be accepted... merchants must accept e-Naira as a means of payment". He claimed a leadership role for Nigeria stating it was "blazing the trail" and was "the only country in Africa that is doing it".
In August 2021, Ghana signed an agreement with its chosen technology partner, G+D, for its pilot project. Its statement announced that this forms part of the "Digital Ghana Agenda", seeking to digitize government services in Ghana. It claimed that the "e-Cedi" forms part of an agenda to reduce the use of physical cash while "ensuring a secure and robust payment infrastructure".
Ghana's pilot study will aim to consider user experiences, security, legal aspects, and impacts on monetary policy and existing payment systems. Another priority is likely to be financial inclusion, within Ghana's previously stated aim of an "ambitious infrastructure development program for the ICT Sector", with Ghana's Ministry of Communications having pledged back in 2017 to develop "a national broadband infrastructure and total connectivity for the unserved and underserved".
Overall, Ghana's scheme appears less advanced than Nigeria's. Bank of Ghana's August statement noted that its project will be divided into three phases "design, implementation and pilot". The pilot scheme will test e-Cedi using diverse social and demographic groups while using multiple vehicles including mobile apps and smart cards.
South Africa: Pilot scheme without commitment to proceed
South Africa started its pilot scheme in May 2021, seeking "to investigate if it would be feasible, appropriate and desirable for the SARB to issue a CBDC to be used for retail purposes". Findings will help to determine "whether to pursue the issuance of a South African CBDC". Even if the study suggests that CBDC may be "feasible and/or desirable", it does "not necessarily imply that it will be pursued".
Additionally, "Project Dunbar", an initiative sponsored by BIS Innovation Hub, involves the SARB alongside Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore testing use of CBDC for cross-border payments using a common platform.
Risks and challenges
CBDC aims to meet real needs globally. Policy objectives include lower-cost and faster cross border transfers, greater financial inclusion, easier and more effective payments to and from state bodies. It also seeks to sidestep the legal (e.g. fraud), disclosure and AML/CFT concerns, among others, regarding unregulated digital currencies like Bitcoin.
Despite this, multiple challenges remain unresolved:
Crucially, CBDC schemes are "work in progress" not the "finished article". Nigeria's scheme appears furthest advanced, but CBDC schemes may well take several years before being sufficiently resolute to enjoy full-scale rollout in larger economies.
A key concern will be how CBDC affects existing bank deposits: if it reduces commercial bank deposit bases, this could have the counter-indicative impact of reducing bank lending and banking sector profitability.
If central banks play a greater role within the private banking sector's liabilities, this could encourage direction of lending towards government priorities, risking ineffective allocation of capital.
Where governments act in a fiscally irresponsible way, such as printing money to fund electorally-driven spending, CBDC would suffer the resulting loss of value (from inflation or currency weakness) in the same way as traditional paper currency.
Operational challenges also are important: achieving secure technological systems and avoiding fraud will remain significant challenges, particularly in more remote areas and for poorer and less-well educated groups.
Overall, IHS Markit recognizes the transformational impact of new technologies on the African financial landscape. Given the multiple initiatives and growing focus both globally and in Africa, we see high likelihood that some African CBDC projects be implemented in the next few years.
However, we have doubts whether central bank sponsored digital currency initiatives will prove more effective or cheaper than private initiatives by existing banks and/or relatively new fintech firms. Within Africa, countries like Nigeria and Kenya already show strong capacity for domestic private sector innovation, and it is questionable if governments - even with strong external technical advisors- will be as effective or agile in applying new technologies.
Nevertheless, new technology will generate financial improvements, with the pan-African Pan-African Payment and Settlement System initiative to develop an integrated regional payment system spanning the continent - after a successful pilot in the West African Monetary Zone - one area that could bring significant potential benefits.
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