In February this year the Central Bank of Kenya (CBK) invited comments from the public and financial sector stakeholders over the proposal to introduce a digital currency.
In its discussion paper, CBK said a central bank digital currency (CBDC) could facilitate the processing of large and retail payments and ease cross-border money transfers, thus enhancing financial stability.
Kenyans have less than three weeks left to submit their views on how the government should set up the first digital currency in the East African region that will significantly disrupt the financial services sector.
In the first place, a digital currency backed by the regulator could improve stability in the financial system by allowing individuals and institutions to settle directly in central bank money as opposed to bank deposits.
According to the CBK, this would reduce the concentration of liquidity and credit risk in payment systems, helping to reduce the market concentration by large banks and payment service providers.
This appears to be the next phase of growth in Kenya's dynamic fintech sector and it is commendable on the part of the CBK as the key industry regulator to take the initiative and publish the guiding policy.
The CBK has since followed up the publishing the discussion paper on CBDC by licensing two new payment service providers as a show of commitment to opening up the fintech sector to more players.
New market entrants means more competition among service providers that are now pushed to improve their product and service offering.
In addition to benefits in innovation of new products and services across the board, this competition is also healthy as it brings down prices that are often cited as too high for low-income earners and undermine the principal goal of fintech; to enable financial inclusion.
For these benefits to be realised, however, financial sector regulators need to ensure there is a sustainable and seamless infrastructure that allows for interoperability between the existing fintech service providers and platforms.
Earlier this month the three leading mobile network operators (MNOs) announced the launch of merchant-interoperability in their networks on their mobile money wallets.
This means customers from any mobile money network can make payments to any of mobile money till without having to go through the previous cumbersome process of making cross-network transfers or requesting transaction codes.
According to the latest data from the Communications Authority of Kenya, Kenyans made Sh43 billion in mobile money payments daily in the three months between October to December 2021.
Introducing merchant interoperability tackles a key pain-point for both consumers and merchants that often operate more than one mobile money wallet and is likely to increase transaction values and volumes.
Similar gains, if not more, can be achieved if regulators and service providers work together to ensure that the future digital payments system allows interoperability between MNOs and commercial banks.
For all the talk about digital payments replacing traditional banking models, the bulk of transactions — more than 90 percent — still happen in cash. Increasing the share of digital transactions and payments widens the pie and is thus a win-win for banks, fintechs and consumers.
Fintechs have the digital infrastructure and agility to experiment on new products and services while on their part, commercial lenders have the expertise, market insight and liquidity to develop new solutions at scale.
Together, these service providers can build ecosystems that are compatible with one another and provide a dynamic user experience that is cost-effective and thus inclusive.
Commercial banks are on their part investing billions of shillings in new mobile payment systems as more and more consumers conduct their banking online.
Equity Group last year reported an 86 percent growth in customer activity on third party banking channels. The lender reported a 57 percent growth in its Eazzy Banking App to 779.8 million transactions year on year and a value of Sh637 billion.
These numbers can grow significantly if the lender and leading mobile network operators work together to ensure transactions between consumers, merchants and agents are seamless.
As financial sector regulators push for the introduction of a digital currency in the Kenyan economy, it is crucial to ensure the goal of interoperability within the existing systems is not abandoned.
Only then can the CBK hope to achieve the benefits of product innovation and true financial inclusion underlying the national payments strategy.
Magu is CEO Maudhui House, a public affairs consultancy