Cash they say is king, but the cash we have come to cherish may no longer be the printed paper and embossed coins decorated with the faces of dead statesmen. Cash will become a string of codes recognised by highly sophisticated computer algorithms, which we can either store in our mobile phone or download onto USB pen-drives and other offline cards. These changes will significantly affect how we think and run our businesses in the long term. While the wide adoption of electronic payments like mobile money, e-zwich, visa, etc., have improved business efficiency, challenges such as transaction costs, poor network connections, and limited electricity supply threaten the confidence of electronic payments in Africa. Hence, there is a need for a new approach.
Central Bank Digital Currency (CBDC)
Inspired by the impact of Satoshi Nakamoto’s blockchain revolution of decentralising money, central banks across the world (83%) are experimenting with the idea of creating money directly onto our phones. This new money is called the Central Bank Digital Currency. The Bank for International Settlements (BIS) forecasts that 20% of the world will live in a country with CBDC in just three years. China has already rolled it out in trials, while the Bank of Ghana and five other central banks across Africa are equally lacing their boots for this ‘stimulating voyage’.
The Status Quo
For over 250 years, the banking system revolved around the model where commercial banks put deposits in accounts and create new money as loans in a process called fractional reserve banking. This enabled governments to quickly respond to economic indicators (e.g. inflation, unemployment) by controlling interests rates and money supply through their central banks. CBDC will revolutionize the ancient banking model, which will have the following implications for businesses;
Reduced Transaction Costs
Under the current model, banks charge businesses (between 2-5%) for processing transactions on electronic platforms. Since central banks have a public policy objective and not a profit objective, CBDC fees will be virtually free because the central bank owns the platform. As a result, SMEs who were reluctant to integrate electronic payments due to high transaction costs can now have access to them for free. A huge boost for financial inclusion.
Access to Better Credit
If CBDC were effective today across Africa, SMEs in Nigeria could pay a loan interest rate of less than 10% , whiles businesses in Ghana pay about 14% interest rate for loans. Unfortunately, we currently pay 25% to commercial banks in Ghana. With CBDCs in full swing, SMEs can grow with cheaper loans, create more jobs and generate more taxes. Loans will also likely be cheaper because, with the instant and free cost of a CBDC cash transfer, business owners will be able to shop around for the best deal without the fear of additional fees or costs to transfer funds to a different bank. CBDCs will make loan shopping much more effective.
Instant Settlement and Flexibility
Unlike cheques, and SWIFT payments, CBDC settlements are instantly executed, this is even possible without an internet connection on systems like China’s. The currency can be transferred unto cards or USB drives and stored away in safe places for use in the future. This offline usage of CBDC is particularly important in Africa because of the limited access to internet connections. Instant settlements will improve the liquidity of SMEs because we no longer need to wait for long processing days (2 days for Visa & Mastercard) before receiving the cash.
International Trade Made Easier
International payments for goods and services by local businesses largely require SWIFT transfer between banks in Africa and their counterparts globally. These transfers are expensive and take several days to settle. However, with CBDC, companies can instantly transfer their local digital cash for cross border transactions. Currently, some leading central banks (European Central Bank, UK, Canada, Japan, Sweden, Switzerland), in collaboration with BIS, are comparing notes to ensure easy convertibility of their respective currencies. This means easier payment, a quicker turnaround time for imports and exports. Read also: Cashless economies – Fact or Fiction?
Cyber-Warfare is just warming up
With our growing daily dependence on technology, cybercrime is estimated to cost $10.5 trillion annually by 2025, a whopping 10% of world GDP. Ceteris-paribus, this could cost Africa about $300bn and Ghana close to $10bn. Some SMEs are likely to be caught in this crossfire. Entrepreneurs should begin to take issues like cybersecurity more seriously. Fortunately, we don’t need to own expensive IT infrastructure anymore. Instead, the cloud is the way to go; providers like Amazon Web Services (AWS) and Vodafone Business have made it affordable to SMEs across the globe to securely host and process data.
If you have ever driven at midnight through the city in search of a working ATM, then the mere thought of a future without physical cash sounds petrifying. This means a faulty server could trigger anxiety. Certain businesses strive based on the discrete nature of their operations, and the possibility that payments received can be used to trace back their customers is unpleasant. Businesses purported to be opposition-friendly and discerning voices with genuine causes could surfer some horrifying consequences in the hands of some African political actors who have little regard for the rule of law.
Even though CBDC implementation in some form is inevitable in the long-term, its rollout will likely only complement existing banking systems because the design is likely to be supportive of local banks as well as financial stability, privacy and culture. In addition, CBDCs offer potentially big gains for our collective security i.e. Anti-Money Laundering, terrorism financing, etc. In all, the CBDC means better financial inclusion in Africa, and the potential for decreased transaction costs, improve the ease-of-doing-business, and cheaper loans for more sustainable growth and job creation.
Kormi Courage (KC) Amese
The writer is a serial entrepreneur, a consultant and a philanthropist. His passion is for the development of Africa through aggressive entrepreneurial initiatives. He runs a blog and video series called Consider. www.kcamese.com/consider [email protected]