Kenya’s Central Bank Governor, Patrick Njoroge, has indicated that it is important to do the right thing, rather than to be first, when it comes to the launching of Central Bank Digital Currencies (CBDCs).
According to Njoroge, the Central Bank of Kenya was considering the launch of a CBDC, but it is taking its time as it looks to cooperate with other Central Banks on the introduction of CBDCs.
Njoroge confirmed the bank’s plans for a central bank digital currency (CBDC) after months of little information if Kenya was going to follow in the footsteps of Nigeria, Ghana and South Africa who have unveiled plans for retaill CBDCs in the recent past.
The chief use case identified for the CBDC, according to the governor, is to facilitate cross-border activities.
The governor has indicated that CBDCs can enhance the efficiency of cross-border payments, but he insists that countries need to work together for those benefits to be enjoyed.
Indeed, international financial institutions such as IMF, World Bank, and the Bank for International Settlements (BIS) have identified that the impact of CBDCs will mainly arise from collaboration, while identifying the problem of several intermediaries in international trade.
This causes key inefficiencies:
- Costly transactions
- Time consuming
According to the governor, however, CBDCs can offer 2 key benefits for cross border trade:
- Slashing the time needed for cross-border payments
- Significantly cutting costs of cross-border payments
Such issues affect Africans and Kenyans more than their global counterparts.
To illustrate, the global average cost for sending remittances (of $200) in Q1, 2021 stood at 6.38%. On the other hand, the average cost of sending remittances to Kenya is 8.5% of the amount being sent, according to the latest World Bank data.
Furthermore, time lags during cross-border fund transfers expose counter-parties to credit and settlement risk.
Cross border trade, particularly, the sending of remittances, was one of the targets behind the first CBDC in Africa to go into operation, the e-Naira.
The populous West-African nation is among the key remittance destinations in Sub-Saharan Africa, with remittance receipts amounting to $24 billion in 2019.
The e-Naira is expected to lower remittance transfer costs, making it easier for the Nigerian diaspora to remit funds to Nigeria by obtaining e-Naira from international money transfer operators and transferring them to recipients in Nigeria by wallet-to-wallet transfers free of charge.
However, the move by countries such as Nigeria and China to move out quickly over the CBDCs leaves questions as to how they will be integrated with foreign currencies, even CBDCs given they are all linked to fiat.