Low smartphone penetration hits CBK’s digital shilling plan


CBK has warned that lack of access to smartphones by more than half of mobile users in the country will hamper the rollout of its proposed digital currency. FILE PHOTO | NMG

The Central Bank of Kenya (CBK) has warned that lack of access to smartphones by more than half of mobile users in the country will hamper the rollout of its proposed digital currency that requires access to the Internet.

CBK Governor Patrick Njoroge said in an interview that the smartphone hitch might force the bank to delay the rollout of the central bank digital currency (CBDC) -- a virtual version of the shilling which will exchange on a one-to-one basis with physical cash.

Official data show that 33 million or 56 percent of the 59 million cellphone devices are feature phones, making it difficult for half of subscribers to transact using CBDC.

Safaricom #ticker:SCOM in partnership with Google made a sales offer of one million affordable digital sets, with customers paying as little as Sh20 a day over nine months, aiming to switch about four million 2G and 3G phones to 4G.

Dr Njoroge said the use of the digital currency on 4G-enabled phones would hurt Kenya’s financial inclusion and effectively lock out half of the population from transacting in the CBDC -- which is meant to ease payments and cut transaction costs.

“The CBDC will have a minimum viable technology requirement, which may be a sort of fourth-generation (4G) environment. There is an argument to be made that such a development could lead to greater financial exclusion such that some people may fall out of the financial system just because we have adopted a CBDC… This is something we need to be careful about,” said Dr Njoroge.

“We may decide therefore that we should wait a little more until everyone catches up because at this moment the lower-level technologies are quite prevalent with us.”

The CBK last month invited public views on the potential introduction of the digital currency, in a departure from its original opposition to crypto assets. Kenyans have until May 20 to submit comments to the banking regulator.

The virtual shilling would work in the same way as physical hard currency, exchanging freely within wallets and in person-to-person payments.

Kenya pioneered mobile money payments with Safaricom’s M-Pesa in 2007, but the central bank has not issued a digital currency due to concerns about the risks.

The risks include commercial banks being constrained by movement of deposits into the digital currency and financial exclusion of those without access to technological infrastructure or knowledge, the bank said on Thursday.

A digital currency could curb the effectiveness of monetary policy and increase risks of money laundering, the CBK said.

The regulator, however, has highlighted a number of advantages in issuing a digital currency for the economy, including easing and lowering the cost of cross-border payments with other jurisdictions that design similar currencies.

It also views CBDC as a safer alternative to the existing, unregulated digital currencies such as Bitcoin, which it has in the past warned Kenyans against buying.

These cryptocurrencies are not tied to the value of an asset and are therefore highly volatile and speculative, with no recourse in case of loss through hacking or loss of wallet passwords.

Their value is also derived from processes like mining that are meant to maintain scarcity and anonymity —which opens them up to abuse in dirty cash deals.

“CBDC could potentially shield the public from the risk of new forms of private money by providing safer and more trustworthy payment services than new forms of privately issued money-like instruments, such as stable coins,” said the CBK.

In Africa, Ghana and Nigeria have already piloted their CBDCs, while Kenya, South Africa, Rwanda and Tanzania have been conducting research ahead of rolling out their own versions.

In Nigeria, which launched Africa’s first CBDC in October 2021, users are required to download the eNaira Speed application to use the digital currency.

According to the Pew Research Center, only 32.0 percent of Nigeria’s cellphone users are on smart devices.

The Central Bank of Nigeria has expressed concern that the eNaira risks widening financial exclusion, partly echoing the CBK’s views.

“More so, maximising the value and use cases of the eNaira depends largely on devices with Internet capabilities. The eNaira thus risks further alienating sections of the population who are uneducated, lack exposure and access to Internet services or digital devices,” the Central Bank of Nigeria says in its design paper for the eNaira.

In Kenya, the CBK says deepening financial inclusion is not the core selling point for the CBDC.

“Some jurisdictions have pushed the idea that they would want to issue CBDC to improve the level of financial inclusion. Most of them would generally have low formal financial inclusion of 50.0 per cent or below,” said Dr Njoroge.

“For us, our financial inclusion level is estimated at something around 85.0 percent up from 27.0 percent back in 2006/07. So, we have already made substantial inroads in financial inclusion.”

The proportion of Kenya’s population with access to formal financial services has been driven largely by mobile technology, especially M-Pesa -- which captures people without access to the formal banking network.

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