What East African countries can learn from Nigeria as they move towards regional CBDC

Kenya, Uganda, Tanzania, Rwanda, Madagascar, Mauritius, and Madagascar are currently researching the possibility of a central-backed digital currency. This move intends to reduce cash circulation, embrace electronic transactions, and improve trade relations among one another. The nations also believe having a digital currency will upgrade the speed of cross-border payments and lower certain operational costs. 

If adopted, the region will join a small list of nations that have launched a digital currency. The Bahamas rolled out the Sand Dollar in October 2020 followed by Nigeria’s eNaira in October 2021, and then China by the end of 2021 with E-CNY otherwise called “Digital Yuan”. 

Ghana (E-Cedi) and South Africa have introduced pilot programs for digital currency, signaling hope for increased adoption by more African regions (West and South).

The importance of extensively weighing the pros and cons of digital currency can’t be overemphasized, especially when many industry analysts blame Nigeria’s central bank for being hasty in its implementation of the eNaira. Adesoji Solanke – a director at Renaissance Capital – states “They want to put it out there to get people to use it, but people don’t have enough places to use it.”  

Although the Central Bank of Nigeria claims it’s striving to “put signages and decals at designated merchant locations”, the apex bank recommends that citizens do things the old-fashioned way and “simply ask the merchants if they accept eNaira.” Despite assurances from the CBN that the eNaira will boost financial inclusion, the International Monetary Fund recently tagged the paperless currency’s adoption rate as “disappointingly low.” 

Digital currency is an electronic representation of a nation’s currency. This means they both share the same exchange rate as the physical note and can be used for payments the way cash would. Although digital currency shares many similarities with cryptocurrency, a major difference separates them. While cryptocurrency grants free rein to users, central bank digital currencies (CBDCs) are heavily regulated by the apex bank. 

Read also: 5 important things you need to know about Nigeria’s digital currency, e-Naira

What East African countries can learn from Nigeria’s mistakes

Although Nigeria understood the importance of digital transformation in the finance sector, its failure to record chart-topping e-Naira transactions confirms the fears that surround the adoption of digital currencies. Many consider digital currencies as the answer to countries’ economic hurdles, but some contrary opinions exist.

Last year, Dr. Patrick Njoroge – governor of Kenya’s central bank – said “Let’s not look at CBDCs as the silver bullet for all the problems that we have.” Instead, he advocates that stakeholders focus on infrastructure challenges like gender-based financial exclusion, low smartphone/internet penetration, and of course – financial illiteracy. 

He goes further to mention that failing to tackle the above issues will be detrimental to any innovation including digital currencies. “That problem will still remain. You can’t solve it with a CBDC. And in effect, if you move into that world [of CBDCs], that problem will become much more acute,” he explains. 

In the first few months of 2023, Nigerians experienced untold hardship when their central bank enforced a currency redesign policy that caused a cash scarcity. Although the CBN capitalized on the shortage of cash to say the eNaira was available for transactions alongside popular alternatives like mobile banking (mobile applications and USSD), the adoption rate remained low. 

Why didn’t Nigeria’s CBDC hit the ground running contrary to expectations? Perhaps the CBN should have delayed the eNaira’s launch by a few years just so it could better understand the market. Cash still reigns in the West African country, a fact that exclaimed why protests rocked many cities over the unavailability of the new notes.

Extensive sensitization about eNaira’s importance should have been undertaken in the way election campaigns are advertised. Introducing a new form of payment is a big deal and the CBN should have treated it as such. Radio jingles, television adverts, billboards, eNaira ambassadors, and other means should have been exhausted. 

For East Africa to enjoy the dividends of CBDCs, the region must first deal with infrastructure roadblocks. For instance, it should raise the number of smartphone users. Kenya has revealed plans for local smartphone assembly, a fine trend that other countries in the region can join.

The region should also make the internet accessible for all. Digital currency-based transactions will need stable internet connection for all provinces. As such, in a situation where one city has better connectivity than another, it doesn’t exactly yell “inclusion.” 

Mobile money can make or mar East Africa’s CBDC success 

When M-Pesa kickstarted operations in Kenya in 2007, not many people expected the mobile money service provider to record massive success. Mobile money has undeniably revolutionized the way money is transferred, received, or even how bill payments are made. In 2021, East Africa recorded a whopping US$24 billion in mobile money transaction volume, dominating the other regions. 

Given the incredible impact of mobile money in East Africa, it’s worth exploring how it will shape the adoption of a digital currency. Some may wonder why East Africa needs a digital currency since its mobile money market is doing well. However, mobile money usage comes with various perils including regulatory challenges and fraud. For instance, criminals have leveraged M-Pesa’s vast presence in Kenya to carry out SIM swap scams.

The above challenges don’t mean that the CBDCs – if released – will replace the mobile money system. As mentioned, the wrongful implementation of a digital currency may have devastating consequences. East Africa’s central banks should instead build on the successes of mobile money and use CBDCs to tackle the known deficiencies. 

With CBDCs, the East African Payment System (EAPS) can easily monitor transactions to prevent instances of money laundering or fraud. Governments must also introduce regulations that’ll guide the responsible usage of digital currencies. CBDC and mobile money can co-exist, though with fewer risks if properly implemented. 

As East Africa continues to explore the gains and losses of CBDCs, the region may be months or years from a decision. But maybe the matter shouldn’t be rushed. Nigeria’s struggle with the eNaira adoption should teach neighboring nations about how crucial policies must be extensively considered before enactment.