The world is moving quickly towards a fully digitized financial economy where governments issue Central Bank Digital Currencies (CBDCs). Anyone who has been following the trend will know that countries like China and Japan are making quick work of this trend and are now in advanced testing stages.
It is expected that this trend will mostly favor developed markets like China and the others. However, some African nations aren’t letting this trend pass them by. Over the past month, several top African economies - including Nigeria, South Africa, and Ghana - have announced that they will be issuing digital currencies and allowing their citizens to make use of them.
This development is more than impressive. Africa has a track record of lagging when it comes to economic and technological development - it’s a tale that has repeated itself for centuries. But, this is perhaps the most important financial revolution in lifetimes. They can’t afford to lag behind now.
With all the talk of African countries and CBDCs, it is worth examining whether this is the right time for the move and what these countries stand to benefit from these assets.
An Opportunity for Financial Inclusion
Financial inclusion is one of the economic goals of any serious-minded government. In truth, it is rare to find a country on the Earth where financial inclusion is at 100 percent. However, levels in Africa are simply terrible for a 21st-century society.
Several African countries continue to suffer from infrastructural inefficiencies, resulting in their citizens being unable to access banking services. They can’t go physically to banks because none are located in their area. At the same time, poor internet infrastructure means that they cannot access mobile and internet banking.
CBDCs provide a means to break free of the hold and get something better for Africans. No longer will they struggle with inadequate banking facilities and a financial system that seems dead-set on excluding them from operating.
With a CBDC, people will also benefit from merging the best of both crypto and traditional finance. They get speedy transactions - thanks to the crypto aspect - and they also enjoy the stability of their money’s value. CBDCss will be pegged to the value of national fiat currencies, so everyone eventually benefits.
CBDCs also provide an opportunity for Africans to send and receive money via a much more efficient framework.
Today, making remittance payments to and from the African continent is as challenging as they come. Payment processors like PayPal have restrictions on several African countries, preventing them from receiving money from abroad. When money is sent via traditional banks, the process takes days, and exchange rates are usually unfavorable for citizens.
CBDCs can also solve this. Most CCBDC systems will be interoperable with traditional crypto, making it easy to convert money into a CBDC and send it to someone in Africa. The process will be quick and seamless, and users will not have to jump through the many hoops to get their money.
An Opportunity to Improve Economies
Improved transaction speeds and ease of remittance are sure to have a positive effect on African countries and their economies. This is pretty simple.
As payment infrastructure improves, businesses and individuals will find it much easier to handle transactions. They will also be more encouraged to hold their local currencies since the currencies are more functional and have greater value.
With all of these, African economies are set to improve and grow. While CBDC development can't be the only catalyst for economic growth, it is undoubtedly a step in the right direction.
The Challenges Ahead
These benefits definitely make CBDCs look like the future of financial development in Africa - and, make no mistake, they are the future. However, as it is with any development going forward, some challenges lie ahead.
Most prominent is the fact that many people across the African continent still don’t know much about crypto and CBDCs, to begin with. Knowledge is mainly restricted to people in urban areas across some of the biggest African economies. So, before any CBDC infrastructure can be built, those who stand to benefit the most from it will have to even know what it is.
There is also a lack of proper infrastructure. An effective CBDC system will need good internet facilities to run, which is still a challenge for Africa. According to data, the African country with the highest internet penetration levels is Kenya, with 85.2 percent. In fact, only 10 countries on the continent have internet penetration levels higher than 60 percent. Put that into context, and you’ll find that this is just too low.
Lastly, government reluctance can also stifle development. Crypto policy in Africa is at a virtual standstill - and this year, the Nigerian government restricted all commercial banks from interacting with cryptocurrencies. Governments will need to be at the forefront of CBDC development, and their reluctance could set things back by years. If government policies don’t support crypto, then CBDC development won’t go anywhere.