In many parts of Africa, cash is still king. To address this, central governments on the continent are turning to central bank digital currencies (CBDCs). CBDCs are digital forms of a country’s fiat currency. They enable central banks in Africa, like elsewhere in the world, to foster a cashless economy, cater to the rising interest in privately issued digital assets (like Bitcoin and Ethereum), establish themselves as payment innovators, and gain increased control over global payment systems.

Particularly, CBDCs have gained traction on the continent because of their capability to help combat the challenges associated with cash-based economies, such as financial inclusion and the facilitation of cross-border transactions. CBDCs can also provide greater transparency and traceability in financial transactions, reducing the risk of corruption and money laundering. Although CBDCs, unlike decentralized cryptocurrencies, are governed by centralized authorities.

While CBDC implementation in Africa is in its nascent stages, a considerable number of countries on the continent have expressed interest in exploring this technology. This article will delve into the progress, potential benefits, challenges, and risks associated with CBDC implementation in Africa.

Shaky interest in CBDCs

According to the US-based think-tank Atlantic Council, 25 of 130 countries exploring CBDCs are in Africa. Nigeria is still the only African country to have launched a CBDC while Mauritius is the singular African country at the development stage, according to its CBDC tracker. Ghana, South Africa, and Tunisia are currently piloting CBDCs, Benin Republic’s digital currency status was marked ‘inactive’ and Senegal’s project was canceled.

Two years ago, Nigeria introduced its CBDC called eNaira, but it hasn't gained much traction. According to the IMF, 98.5% of eNaira wallets remain unused. As of November 2021, there were only 800,000 retail eNaira wallets, which is a mere 0.8% of the total number of bank accounts in the country. Additionally, only 100,000 merchants have downloaded the wallet by June 2022, compared to the 1.1 million merchants who have a Point of Sale (POS) terminal for card transactions. The slow adoption of eNaira highlights the challenges it faces in becoming widely accepted.

In June 2021, the Bank of Ghana expressed interest in developing a CBDC, the eCedi. Soon afterward, it engaged Germany’s Giesecke+Devrient (G+D) to commence with the first pilot project. Although the pilot project was pronounced successful, its launch was postponed due to economic volatility. Recently, at the Africa Money and DeFi Summit, the Bank of Ghana announced the launch of a 12-week eCedi hackathon in collaboration with Emtech, a startup company involved in various CBDC projects. This hackathon aims to bring together programmers, designers, engineers, and other financial professionals to identify the potential use cases for the eCedi.

Attractive potential benefits

In Africa, approximately half of the population is unbanked and lacks access to crucial financial services like credit, mortgages, insurance, and relief programs. To address this issue, central banks in Africa are promoting digital financial products with minimal barriers to entry, aiming to onboard as many people as possible into the financial ecosystem. Theoretically, CBDCs are potentially powerful tools for financial inclusion. CBDCs can help reduce the cost of financial transactions, increase access to financial services, and provide a secure and convenient means of payment for the unbanked population. According to a study by the Central of Nigeria (CBN), the country's current financial inclusion rate of 64.1% in 2021 could be boosted to meet an ambitious target of 95.0% by 2024 through the widespread use of eNaira.

Last August, the Central Bank of Nigeria (CBN) introduced an unstructured supplementary service data (USSD) code for the eNaira, aiming to reach Nigeria's population that does not have smartphones, which includes a significant portion of the country's poorest individuals. This initiative forms part of the CBN's broader efforts to promote financial inclusion with the eNaira.

According to McKinsey, the widespread implementation of central bank digital currencies (CBDCs) offers potential benefits including reduced cost for financial-service providers globally, with estimated annual savings of $400 billion by shifting from physical infrastructure to digital finance. This has the potential to make a significant impact in Africa, where the cost of physically extending financial services to rural communities is high. They can also enhance the speed and efficiency of electronic payment systems.

Sending money to and across Africa is slow, expensive, and stressful. In fact, it’s the costliest region in the world to send money to as it costs an 8.9% transaction fee to send to the continent. CBDC offers an opportunity to make cross-border transactions easier, faster, and cheaper.

Additionally, deploying regulated digital currencies can enhance payment security, ensuring finalized and unalterable transactions, even without a formal bank account. Utilizing private-key cryptography can reduce transaction wait times and provide peace of mind to the parties involved.

A cautious outlook

Although the South African Reserve Bank (SARB) is currently piloting its CBDC, it said it is prioritizing finding a practical application before rushing to become a global pioneer in this new form of national currency.

East African countries such as Tanzania, Kenya, and Zimbabwe with a vibrant mobile money economy have announced that they would be approaching CBDCs with caution.

In Nigeria, experts have raised concerns about the potential impact of the widespread adoption of eNaira on commercial banks' liquidity, which could ultimately affect the nation's financial stability. This concern stems from the fact that eNaira wallets cannot be accessed or used by commercial banks, limiting their ability to participate in and benefit from the digital currency ecosystem. As a result, there is a fear that if a significant portion of the population adopts eNaira, it could result in a reduction in deposits held by commercial banks, leading to liquidity challenges and potential disruptions in the banking system.

Despite the potential benefits, there are also challenges and considerations in implementing CBDCs in Africa. However, there are several challenges and risks that need to be considered, such as germane use cases cybersecurity concerns, ensuring user privacy, security threats, financial stability concerns, and the need for robust regulatory frameworks. Despite these challenges, CBDC initiatives in Africa continue to evolve, with many countries conducting pilot projects and research studies to assess their feasibility and potential impact.

While central bank digital currencies (CBDCs) in Africa offer potential benefits such as financial inclusion, reduced cross-border payment costs, and enhanced payment security, there are also significant challenges and considerations to address. These include identifying relevant use cases, addressing cybersecurity concerns, ensuring user privacy, mitigating security threats, managing financial stability risks, and establishing robust regulatory frameworks.

To surmount these challenges, implementing CBDCs in Africa would require careful planning and collaboration between central banks, governments, financial institutions, and private stakeholders to navigate these challenges and unlock the full potential of digital currencies in the continent's economy.