Central Bank Digital Currencies (CBDCs) have the potential to improve financial inclusion in the Middle East and enhance cross-border payments, according to a survey conducted by the International Monetary Fund (IMF).

The IMF highlighted that nearly two-thirds of Middle Eastern countries are exploring CBDCs, with 19 countries still in the research phase. Some countries, such as Bahrain, Georgia, Saudi Arabia, and the United Arab Emirates, have progressed to the proof-of-concept stage, while Kazakhstan has already conducted two pilot programs for its digital currency.

Key Benefits

The IMF underscored the importance of a streamlined cross-border payment system, particularly in a region dominated by oil exporters. Current cross-border payments in the Middle East face challenges like differing data formats and varying operational and compliance rules. CBDCs have the potential to address these issues and reduce transaction costs associated with traditional financial systems.

Additionally, CBDCs are expected to advance financial inclusion within the region by promoting competition in the payments market. They enable transactions to be settled more directly and with fewer intermediaries, thereby lowering the costs of financial services and improving their accessibility.

The IMF noted that central banks, operating CBDCs without profit motives, could further reduce transaction costs and encourage the upgrading of technology platforms and efficiency in payment services, thereby expanding financial services to a broader population.

Challenges

However, the IMF cautioned that several challenges could hinder the realization of these benefits. These include low levels of digital and financial literacy, inadequate identification systems, low trust in financial institutions, and disparities in wealth distribution.

Moreover, the IMF highlighted concerns about the potential impact of CBDCs on the financial stability of issuing countries. Given that a significant portion (83%) of bank funding in the region comes from deposits, CBDCs could compete directly with bank deposits, potentially impacting bank profitability, lending activities, and overall financial stability.

In summary, while CBDCs hold promise for enhancing financial inclusion and cross-border payments in the Middle East, addressing these challenges will be crucial to realizing their full potential and ensuring sustainable economic benefits.