East African central banks mull digital currency to ease payments

East African central banks are considering adopting a digital currency to hasten cross-border payments and reduce costs as a digital revolution sweeps across Africa’s banking sector.

The region has been pushing for integration to bolster intra-regional trade and investments, which are running into headwinds from tariff and non-tariff barriers (NTBs).

The East African Payment System (EAPS) and the Regional Payments and Settlement System (REPSS) are also facing challenges due to low uptake by member countries, with Kenya and Uganda controlling close to 90 percent of transactions through the systems.

The latest study by the African Banker magazine in collaboration with engagement banking platform Backbase shows that Tanzania, Uganda, Kenya and Rwanda are part of a growing list of African central banks focused on implementing a central bank digital currency (CBDC).

A CBDC is a digital currency issued by a central bank and intended to serve as a legal tender. According to the African Digital Banking Report (2023) released this week, Kenya, Uganda, Tanzania, Rwanda, Madagascar, Zimbabwe, Eswatini, Namibia and Zambia are still researching the operations of a CBDC, while South Africa and Ghana are piloting the concept.

Nigeria became the first country in Africa to launch a CBDC on October 25, 2021, and the second to run a CBDC that is fully open to the public after the Bahamas.

In 2022, the Central Bank of Kenya launched a research paper on the feasibility of a digital currency, arguing that cross-border payments are often slow and expensive and that interoperable CBDCs could lead to efficiency gains.

Going paperless

EAPS was launched in May 2014 and was largely meant to enhance regional currency convertibility by reducing currency conversion costs related to the use of the US dollar to promote intra-regional trade and as part of the preparation for implementing a single currency regime in the East African Community.

However, the payment system is suffering low uptake.

According to the CBK, collaboration with other regional governments is needed to identify how the usage of EAPs can be boosted and to develop solutions to promote regional trade.

REPSS, on the other hand, links participating central banks to execute payments in a cost and time-effective manner.

East African states want to eliminate the use of physical cheques, reduce the handling of cash and shift regional economies to an electronic mode of payment.

The editorial team of the African Banker surveyed 153 African banks in 33 countries, analysing the latest developments in digital banking transformation, tracking the pace of change and how banks are creating mobile and internet banking capabilities.

According to the survey, half of the banks (51 percent) regarded digital transformation as the most important factor in their growth strategy in 2023.

The majority are spending more than $3 million a year on digital transformation and innovation.

However, the banks cited their biggest threats as the rising cost of doing business and the rise of fintech and telecom companies entering the industry to provide financial services.

“Telecom firms have been keen for many years to boost their revenues by moving into financial services because messaging apps have depressed their income from voice calls,” the survey says.

The rise of fintech, digital-first banks, mobile money and agency banking is revolutionising the banking industry.

Rapid technological innovation is ushering in an era of public and private digital currencies – like e-money, cryptocurrency and CBDCs – with the transition to digital payments being accelerated by easy access to mobile devices, as well as the emergence of fintech that constantly innovate new apps.

Disruption

Fintech is disrupting established financial services markets and has become a sector in its own right.

Centres of African fintech innovation have emerged in South Africa, Kenya, Nigeria and Ghana in particular, with fintech now the fastest-growing startup on the continent.

The hundreds of African fintech include an increasing number of unicorns – startups with a valuation of more than $1 billion, such as Flutterwave, Interswitch, Jumia and Fawry.