Yesterday, Kenya published a discussion paper about a central bank digital currency (CBDC) potential, calling for a response by May 20. Some of Kenya’s motivations for a government-backed Kenyan Shilling have a lot in common with China’s digital yuan. Both China and Kenya have high rates of mobile payments. And both countries have cited interoperability of private payments as a key motivation. Additionally, Kenya is keen on reducing the cost of cross border remittances.
Interoperability of mobile payments
M-Pesa, the mobile payment service launched by Vodafone in 2007, is widely cited as a case study for advancing financial inclusion. The service originally targeted P2P payments with a network of agents who cash out the money locally. It has since evolved into a merchant payment service as well.
In 2006, the year before the M-Pesa launch, Kenya’s financial inclusion stood at 26%, compared to 83% currently. The number of adults with a mobile money account (79%) is almost double the number with a bank account (40%).
While mobile money was referenced numerous times in the CBDC paper, M-Pesa was mentioned just once. Although M-Pesa has competition from Airtel Cash and T-Cash, their combined market share is just 1.5% compared to a 98.5% market share for M-Pesa.
Hence it’s not surprising that interoperability ranks high on the motivation list for a Kenyan CBDC. In 2018, the country introduced interoperability for P2P payments, but it doesn’t yet exist for merchant payments.
However, the digital currency paper notes a key challenge in introducing a CBDC: “Mobile payments have a huge potential for growth in Kenya, thereby limiting the opportunities that a CBDC would provide in retail payments.” If it introduced a retail CBDC it could have lower fees compared to current charges. It may also target marginalized areas which are unappealing to private payment providers.
On the flip side, it appears to be considering smartphones for a CBDC because it has concerns that it might exclude those who don’t have access to the right technology or known-how. However, it did not elaborate on the specific reasons for these tech concerns.
We found that Kenya’s phone penetration is very high – there are more mobile phone SIMS than there are people – but many of these are not smartphones. Feature phone penetration is 67.9%, whereas 53.4% have smartphones. And it’s not just about hardware. It’s also about data. Likely because of the difference in penetration of feature phones versus smartphones, the country has a high rate of mobile data subscriptions, but not nearly as high for mobile broadband.
Cross border remittances
Kenya’s remittance income rose to $3.7 billion in 2021, up by more than 20% versus 2020. The country participates in two major regional payments systems, but the overall costs of remittances remain high at 8 percent. Apparently, that’s a big improvement over the 15% cost experienced ten years ago.
Hence, unsurprisingly, this is seen as a potential avenue for CBDC. The paper referenced the two cross border CBCD payment initiatives being overseen by the BIS, the MBridge Project, and Project Dunbar.
Kenya’s population at 47.6 million is a fraction of Nigeria’s (220 million), which launched a CBDC pilot late last year. For its eNaira technology partner, Nigeria chose startup Bitt, which is also working on the Eastern Caribbean CBDC initiative. Meanwhile, Ghana selected central bank provider G+D as its CBDC pilot partner.
