Last week, the Central Bank of Kenya invited the public for comments on a very interesting subject; central bank digital currencies (CBDCs). The assessment will be on whether there’s a potential for their use in the country.
To keep things simple, let’s first define CBDCs. These are digital forms of a country’s fiat currency that are also a claim on the central bank. Instead of printing money, the banking regulator issues electronic coins or accounts backed by the full faith and credit of the government.
That said, central banks exploring CBDC issuance are citing various potential advantages such as lower costs of handling cash (especially cross-border), improving financial inclusion and stability among other reasons.
All told, around 100 countries are exploring CBDCs at one level or another. Some researching, some testing, and a few already distributing CBDC to the public. A key example is the Bahamas where the Sand Dollar—the local CBDC—has been in circulation for more than a year.
The big question is; Is Kenya ready for such a digital evolution? Will the potential upside outweigh the risks?
First, one needs to appreciate that Kenya has a lot going for itself - financial inclusion stands at 84 per cent, mobile money accounts users stand at 81 per cent and digital transactions accounted for 81.5 percent and 38.6 per cent in number and value respectively.
Digital technology still remains the main driver in the uptake of financial accounts. The consideration (as well articulated by the CBK), therefore, may not majorly focus on enhancing access to financial services given the existing and growing penetration of mobile money.
Cost reduction, on the other hand, is a worthy reason. The cost of cross-border remittances stands at eight per cent (as at end of 2020, down from over 15 per cent in the past 10 years).
Secondly, the post-Covid-19 pandemic era has shifted a lot of things to digital. Particularly, the pandemic has made a marked impact on non-cash payments. In the Covid-19 era, mobile transactions in the country, as a share of total transactions, increased from 55.7 per cent to 79.6 per cent.
It is possible that many would continue to make fewer payments in cash even when the coronavirus crisis is over. Nonetheless, more work is still needed here.
According to Financial Sector Deepening (FSD), about 18 per cent of Kenyans still use cash only in transactions.
Lastly, with several African countries (South Africa, Nigeria, Ghana, Mauritius, etc) testing their CBDCs, it’s important Kenya is not left behind, especially in light of the Continental Free Africa Trade agreement.
The advantages of working towards immediate transfer, interoperability, low cost and high convenience will be hard to resist.
Like all things, risks abound. For example, if a CBDC is introduced, it is inevitable that some people will transfer money out of their bank accounts and into CBDC wallets - a risk well captured by the CBK report. This may cause chaos amongst banks.
Anyway, the introduction of CBDCs would indeed have far-reaching consequences for households, businesses, and the monetary system for decades to come. If successful, CBDCs will usher in a new era of money. Nonetheless, it is still early days it is still hard to tell.
Mwanyasi is the managing director at Canaan Capital