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How Sub-Saharan African countries are exploring digital currency adoption

Several Sub-Saharan African (SSA) central banks are exploring the use of digital currencies to enhance payment systems, following Nigeria’s October introduction of the e-Naira, a recent report on the International Monetary Fund (IMF) blog shows.

South Africa and Ghana are in the pilot phase of a digital currency, while Uganda, Kenya, Rwanda, Mauritius, Madagascar, Zimbabwe, Eswatini, Namibia, and Zambia are researching the process.

The South African Reserve Bank is experimenting with a wholesale Central Bank Digital Currency (CBDC), which can only be used by financial institutions for interbank transfers, as part of the second phase of its Project Khokha.

The country is also participating in a cross-border pilot with the central banks of Australia, Malaysia, and Singapore, reports the IMF.

On its part, the Bank of Ghana is testing a general purpose or retail CBDC, the e-Cedi, which can be used by anyone with either a digital wallet app or a contactless smart card that can be used offline.

A digital currency is a means of payment or money that exists in a purely electronic form. It is designed to promote and facilitate financial inclusion, enable direct welfare disbursements and facilitate diaspora remittances.

Other objectives of a digital currency include cutting the cost of processing cash transactions, improving the availability and usability of Central Bank money, increasing revenue and tax collection, supporting a resilient payment system, and improving the efficiency of cross-border payments.

According to the IMF, sub-Saharan Africa is the most expensive region to send and receive money, with an average cost of just under eight percent of the transfer amount.

Read also: eNaira fast, reliable, supports digital economy

“CBDCs could make sending remittances easier, faster, and cheaper by shortening payment chains and creating more competition among service providers. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world,” the blog said.

Some of the challenges to be considered before issuing a CBDC highlighted in the report involve the ability of governments to improve access to digital infrastructures such as a phone or internet connectivity. While the region has made significant strides, more investment is needed.

Central banks will need to develop the expertise and technical capacity to manage the risks to data privacy, including from potential cyber-attacks, and financial integrity, which will require countries to strengthen their national identification systems so know-your-customer requirements are more easily enforced, the report said.

There is also a risk that citizens pull too much money out of banks to purchase CBDCs, affecting banks’ ability to lend. This is especially a problem for countries with unstable financial systems.

It concluded that central banks will also need to consider how CBDCs affect the private industry for digital payment services, which has made important strides in promoting financial inclusion through mobile money.

At a recent IMF webinar, Kingsley Obiora, deputy governor, Economic Policy Directorate of the Central Bank of Nigeria (CBN) said that having a digital identity, technology, the right laws, clarity, and public awareness of the benefits of having a digital currency are some tips to consider when adopting or intruding digital currencies.

“You cannot stress the importance of having a digital identity for consumers because if you don’t have that, once you introduce a digital currency you might have a problem,” Obiora said.

Obiora also said a lot of countries may need to review their laws to be able to even issue a digital currency.

Nigeria did not enact news to enable its digital currency operation since the CBN was already empowered to issue any form of currency subject to the approval of the president and the bank’s board.

Last year, the CBN launched the e-Naira as a legal tender, making Nigeria the first African country to launch a CBDC. According to President Muhammed Buhari, a properly managed e-Naira could add more than $29 billion to Nigeria’s GDP over the next 10 years.

A recent Global CBDC Index by PricewaterhouseCoopers (PwC) ranked Nigeria, Bahamas, China, Jamaica, Eastern Caribbean, Ukraine, Uruguay, Thailand, Sweden, and the Republic of Korea in the top 10 category of countries leading the race in digital currency

Andrew Nevin, the chief economist at PwC Nigeria noted that CBDCs will transform the payment system, as low value-added transactions become possible in a costless and secure way for everyone.

“The success could also catalyze more complex and transformative CBDC uses, including blockchain identity management, land registry, and supply chain verification. As each of the use cases develops, we can bring more people into the economic and financial system and lift tens of millions out of poverty,” Nevin said.

The report further highlighted that as of December 2021, about 666,000 eNaira speed wallets had been created followed by 700,000 speed wallet App downloads, more than 35, 000 total transactions, 90 percent of transactions are the person to business and business to person and 160 countries downloaded the e-Naira speed wallet App.

“The digital currency is expected to support the country’s target to raise the level of financial inclusion from 64 percent to 95 percent. By making the E- Naira platform part of the financial ecosystem, the CBN hopes to grow new private-sector use cases to support the uptake of the CBDC,” the report states.

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