Is Central Bank Digital Currency the best tool to increase financial inclusion?

Despite improvements over the past decade, financial integration in the Middle East & North Africa (MENA) region still needs to be higher. Global Findex shows that 53% of adults living in MENA had an account (including mobile money) by 2021. This is up from 38% in 2011. The same indicator for Sub-Saharan Africa was 55% in 2021, 68% in South Asia and 74% in Latin America, 74% in the Caribbean, and 83% in East Asia. While the World average was 76%, it was 90% in Europe and Central Asia. Some policymakers, including those from MENA, are looking at ways to increase financial inclusion.

CBDC is a digital currency denominated at the national unit account. It is a liability of Central Banks. CBDC, like cash, is central bank money. This makes it fundamentally different than private money, such as bank deposits or e-money, which are liabilities to private financial institutions. There are two types:

• Financial institutions can only obtain wholesale CBDC. In this sense, it resembles central bank deposits.
• General purpose (retail) CBDC is available to both households and businesses. It is also more relevant for financial inclusion. Physical cash and retail CBDC are the only forms of money that are not central bank liabilities. They are accessible to all economic agents (individuals, businesses, and government agencies). Retail CBDC is, therefore, a digital version of “cash.”

This blog focuses on retail CBDC and its potential impact on financial inclusion.

Although CBDCs may be beneficial, further testing is needed across time and jurisdictions to determine their effectiveness in practice. Only three jurisdictions have launched CBDCs in retail (Bahamas and Jamaica); others have started pilots (e.g., Eastern Caribbean Central Bank China, Ghana). Other countries are still evaluating the feasibility of CBDC.

The CBDC benefits and drivers depend on country contexts. The first set of drivers is focused on protecting the public’s role while protecting financial stability and monetary sovereignty. This is in the context of rapid digital payments and the rise of private money forms (e.g., crypto-assets and stablecoins). The second set addresses perceived shortcomings or failures in traditional digital payments to address public policy objectives such as financial inclusion, competition, and interoperability. Other benefits and drivers include financial stability, efficient charges to the government, and implementation of monetary policy.

It is crucial to consider CBDC as a tool for financial inclusion. The Payment Aspects Of Financial Inclusion guidelines highlight the importance of ensuring the essential enablers are in place. CBDC will face the same challenges as other approaches to reaching and serving unbanked customers. Digital payments, such as mobile money, are possible. A successful deployment of CBDC requires design features that foster financial inclusion. These include offline capability, essential feature phone support, and the ability to exchange between CBDC cash and physical cash. This is done by leveraging widespread agent networks, simplified due diligence procedures, and a two-tier distribution network that would allow for more innovation from the private sector. Interoperability with the existing payment system and acceptance by merchants is also essential. (See World Bank paper CBDC from a payments standpoint). Combining the above features will enhance CBDC’s unique value proposition in the context of financial integration. Establishing a strong legal and regulatory framework that allows for cooperation between the private and public sectors and creates an environment where both banks and non-bank payment service providers can compete and serve end customers.

If a central bank wants to take advantage of the benefits of a CBDC, it must first evaluate its potential implications and then devise a plan to mitigate or prevent them. CBDCs could lead to disintermediation for commercial banks, disruptions in the level playing field with other digital payment instruments or plans and reputational risks for the central bank in the event of security and privacy breaches. Alternative approaches to CBDC could be explored, such as implementing quick payment systems and opening up payment systems to nonbank entrants. This will allow for a smoother introduction at a later stage.

Understanding the landscape of each jurisdiction and key stakeholders is a crucial first step in assessing whether a CBDC could be an effective solution to financial exclusion. The assessment should also consider other policy innovations and tools that might be more suitable, depending on the capabilities of the central bank implementing the CBDC. There will be lessons to be learned from jurisdictions that have implemented CBDCs in the months and years ahead, as many are motivated by financial exclusion issues. See the paper about CBDCs and financial inclusion for more information.