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The Central Bank of Kenya (CBK) has begun a consultation on the issuance of a central bank digital currency (CBDC), but will the mobile payments heavy country actually need one?
The CBK has become the latest central bank to make noise about the opportunities and risks of issuing a CBDC.
“CBDC design and the potential benefits of a Kenyan CBDC remain unclear, similar to many jurisdictions across the world,” the CBK concludes in its discussion paper.
Although a retail CBDC has been considered as a solution to financial inclusion in countries such as Nigeria and the Bahamas, which have both issued a CBDC, Kenya’s authorities have also suggested that “issuing a CBDC could also pose considerable risks”.
The CBK suggests that a CBDC can lead to financial exclusion if the required technological infrastructure and technical literacy is not accessible to all sections of the public.
“For Kenyans to access CBDC, they would require access to the underlying technology and the user know-how, which could be a constraint for some individuals,” the report warns.
Kenya has a reputation for strong financial inclusion, notably since the launch of the renowned M-Pesa in 2007. Developed by mobile giant Vodafone’s Kenyan affiliate Safaricom, by 2010 it was regarded as the most successful mobile payments venture in the developing world.
For a small charge, the service allows users to deposit money into an account stored on their phones, to send balances using PIN-secured SMS text messages to other users, including merchants, and to redeem deposits for regular money.
As well as Kenya, the service has since expanded successfully to Tanzania, Mozambique, the Democratic Republic of Congo, Lesotho, Ghana, Egypt, Afghanistan and South Africa.
The success of M-Pesa can partly be measured by the fact that Kenya has a financial inclusion of 83.7 percent in 2021, up from 26 percent in 2006, according to the consultation document, which is significantly higher than many other parts of Africa.
According to the CBK's 2021 FinAccess report, just under half of the domestic remittances and more than 30 percent of bill payments are made via mobile money, including M-Pesa.
The dominance of mobile payments in Kenya has been further strengthened during the COVID-19 era as consumers flock to remote payment solutions.
As of March 2021, mobile payments accounted for 79.6 percent of total non-cash transactions, up from 55.7 percent the previous year.
Opportunity for a retail CBDC
Despite the success of mobile money in delivering financial inclusion, the central bank believes there is still a space for a retail CBDC in Kenya.
For example, although the industry moved to enable interoperability of mobile wallets in 2018, this is limited to only person-to-person (P2P) payments.
It has yet to be expanded to both merchant and agent interoperability and, according to the CBK, even to work seamlessly for P2P.
For example, as with all electronic systems, it does experience outages. One such incident happened last summer, when the system was down for at least an hour in June, causing agitation among locals on social media.
The central bank considers that a CBDC may offer promise for this interoperability.
“Assuming the Central Bank charges no fees for CBDC, it would facilitate small-value online transactions given relatively low, or no, associated fees compared to the current payment charges,” the report says.
Despite this, the CBK points out that ultimately mobile payment has a huge potential for growth in Kenya.
This limits the opportunities that a CBDC would provide in retail payments. “The key consideration is whether to provide CBDC for financial access or to promote financial inclusion more efficiently by ensuring the availability of cheap, mobile phone financial services.”
Therefore, the CBK asks: “Given the 132 percent penetration of mobile subscriptions in Kenya, would we rather promote financial inclusion more efficiently by taking steps to ensure that the provision of affordable, mobile phone financial services is made more available to people for whom the current cost is burdensome?”
One area that the central bank believes that Kenya could benefit from a CBDC is cross-border payments.
Currently, cross-border remittances cost around 8 percent in Kenya, compared with the UN Sustainable Development goal of less than 3 percent by 2030.
Remittances are important to Kenya, the CBK says, considering that the payment method accounts for more than 3 percent of total GDP in 2021.
Kenya is not alone in investigating a CBDC. According to a 2021 survey of central banks by the Bank for International Settlements, 86 percent of central banks were actively researching the potential for CBDCs, 60 percent were experimenting with the technology and 14 percent were deploying pilot projects.
The CBK has set a deadline of May 20 for stakeholders to provide feedback on whether or not the central bank should move ahead and develop a CBDC.
