In February, Zambia’s central bank said it was launching a study into the possibility of creating a central bank digital currency (CBDC) — essentially, a government-issued and -controlled means to make electronic payments. Days later, Kenya’s central bank released a discussion paper on the same topic. Nigeria launched its eNaira in October last year, while Ghana started a CBDC pilot in August.
These discussions, pilots, and launches show how governments across Africa are taking an increasingly hands-on role in the continent’s fintech revolution, after a decade of watching from the sidelines. Over the past 10 years, a venture capital-fueled boom has created cash-flush private sector powerhouses in all the continent’s major economies. Analysts estimate that $2.3 billion was invested in fintech startups in Africa in 2021, up from $130 million five years ago.
The few government forays there have been into the digital finance space for consumers have been lackluster. Ghana’s e-Zwich payment system covers less than 10% of the population, and usage has dropped precipitously. Kenya’s Huduma Card has only 12.5% coverage of the population, and more than 40% of the cards that have been issued haven’t been collected. The launches of Tunisia’s e-Dinar in 2015 and Senegal’s eCFA in 2016, precursors to today’s CBDCs, also failed to garner significant traction among citizens. Senegal’s government eventually dropped the eCFA after receiving pressure from West Africa’s regional central bank.
Observing two decades of government-driven fintech innovation leads to one critical insight: governments should stick to creating infrastructure. They should focus on building the backbone of the marketplace, driving competition and cooperation, to lower costs, and leave the consumer-level and retail-oriented innovation to the private sector.
The performance of government-owned enterprise payments systems — such as those that connect banks, ATMs, and point-of-sale terminals with the central bank — have been impressive. For example, the Nigerian Inter-Bank Settlement System (NIBSS) saw electronic fund transfer transaction value increase by 50% in 2020, while volumes grew by 77%. But, by contrast, the launch of the eNaira was so beset with technical glitches that it had to be kicked off Google’s Play store just two days into the blazing fanfare surrounding its entry. It returned after some fixes were made, but it never recovered momentum.
Every time an African government has taken on too much by going beyond switches and market-making connectivity protocols and networks, and attempted to offer digital payment apps or personal wallets, it has faltered. This has been the story of Ghana’s e-Zwich, Kenya’s Huduma Card and Botswana’s Poso card.
Nigeria didn’t have to target eNaira toward the general public. Around the world, a decent majority of CBDCs and similar government-driven fintech platforms operate at the wholesale level, connecting institutions that form the heart of the national financial system. European central bankers generally prefer wholesale rather than retail-end CBDCs. In Africa, only South Africa is following this wholesale paradigm.
Often, this is because governments just want to increase state influence over consumer-facing payments. They tend to justify their investments using the language of the “developmental state,” referring to a duty toward financial inclusion, increasing efficiency at the base of the economic pyramid, bringing more people into the formal economy, and tackling money laundering and terrorism financing. Sometimes they use more-esoteric arguments, such as a need to forestall the privatization of money, the obsolescence of national currencies in the shadow of crypto, or the desire to reduce the cost of printing cash.
But there is no reason why governments need to be directly involved in the retail and consumer payments space to meet these objectives. Where governments have focused on creating the pathways for the private sector to scale up, rather than competing with the private sector, it’s led to remarkable successes.
Take the case of Senegal’s Wave, a payment service provider operating in the country’s mobile money segment. While eCFA, the country’s ill-fated national digital currency project, was struggling to sign up a few thousand users, Wave grew its subscriber base to nearly 5 million, helped in no small part by one of the largest payment ecosystems interoperability projects in Africa, created by the West African Economic and Monetary Union. The regional monetary authority’s multicountry, multilevel payment systems interconnectivity program provided connective tissue and governance mechanisms that allowed Wave to scale up and reach millions of previously underserved people.
Trying to own the consumer payments space isn’t just inefficient, it carries risks. Even if CBDCs could grow to scale, they could end up creating liquidity crunches in the traditional commercial sector, by making it easy to move large amounts of money out of the traditional banking system and into the new digital wallets. (Mobile money and private sector–built digital wallets have to keep their floats in traditional custodian banks). If, on the other hand, commercial banks are brought in as intermediaries, they will add margins and defeat the whole purpose of a low-cost, universal wallet for the bottom of the pyramid.
Furthermore, because the security of the whole system would be embedded in a single software framework — in the Ghanaian and Nigerian cases, in architectures designed by foreign vendors — any security flaw could have dire consequences.
The traditional electronic financial system, on the other hand, is highly resilient, due to a multiplicity of connections, vendors, protocols, and cybersecurity arrangements. Were CBDCs to be limited to more macro operations, any cyberscare would likely be better contained, due to the smaller set of parties that would directly engage with it. The frightening thing about how Ghana and Nigeria have gone about their deployments is that virtually no real protocols are in place for interactions among macro-level participants. In fact, the Ghanaian banking association denied awareness of the initiative as a whole.
Neither Ghana nor Nigeria bothered to subject their CBDC plans to a proper public policy debate prior to launching. Both central banks just went ahead with piloting and, in the case of Nigeria, a full launch. In my experiences as a policy analyst in the region, I find that West African regulators and government agencies rarely engage in open, technical debates about policy. Months after launch, there was still no public information on security specifications and functional requirements. And, at a time when governments are cracking the whip on supposedly noncompliant private fintech firms and doing everything they can to roll back decentralized crypto platforms, the prospect of a referee also becoming a player does not sit too pretty with some observers.
Hopefully, other African governments that are yet to embark on the CBDC adventure will learn from history, take a hard look at their options, open up the process to public scrutiny from day one, and incline more toward becoming a facilitator rather than a contender.