Digital currency lessons CBK can learn from M-Pesa

Central Bank of Kenya Governor Patrick Ngugi Njoroge [Courtesy]

The release of the discussion paper on Central Bank Digital Currency (CBDC) came as a welcome surprise to many economists who believe in the power of technology as a force for economic transformation.

The prime motivation behind this initiative appears to be the desire to keep up with emerging global trends.

Starting with the Executive Summary of the discussion paper, reference is made to a 2021 survey of central banks by the Banks of International Settlements (BIS) that showed 86 per cent of central banks are researching the potential for CBDC, 60 per cent were experimenting with the technology and 14 per cent were deploying pilot projects.

Furthermore, the discussion paper points to case studies that include Bahamas, Singapore and Sweden. This is remarkably different from the motivating force that inspired M-Pesa, which drew from a microeconomics research study that revealed how people were spontaneously using airtime as an alternative for money transfer.

In many ways, it confirms the many avenues in which innovation is encountered and applied in our society. Pundits have been quick to provide a lucid account of the initial benefits of a central bank digital currency.

Some of these include the possibilities of lowering transaction costs, making it more accessible to the average Kenyan to conduct smaller and more frequent transactions. It has also been said that the banking regulator stands to gain significant cost savings from the expensive logistics associated with printing and distributing physical cash.

However, these are transitory benefits that will mostly be felt in the short run. Unlike in Nigeria where mobile money was launched only last year and is considered a novel technology, Kenyans have been happily using M-Pesa for nearly 14 years and it has permeated every aspect of our economic and cultural fabric.

It therefore is crystal clear that for the CBDC to make a lasting impact on the Kenyan economy, a truly innovative implementation strategy will be necessary.

A good place to start would be on a deep reflection on the original research study that inspired the rise of M-Pesa. It had been documented that in Uganda, Botswana and Ghana, people were actively using airtime as a currency – possibly because of the shortage of the official currency.

This was a stunning example of how a study in the behavioural economics of a people can deliver critical insights that drive innovation that transforms the economy.

In a sense, perennial scarcity of the official currency in Kenya and across Africa has been the singular factor leading to high unemployment and poverty.

The private sector has found an interesting cure for this monetary problem through loyalty points programmes which have recently cropped up in the retail segment.

A shining example of this has been Carrefour’s points programme, which according to many Kenyans is useful as they could redeem points for goods particularly during the notoriously cash-tight month of January.

Policymakers should consider this points phenomenon happening in the private sector and apply the learning at a much larger scale such as at a county level. This is where the digital currency could be a potential game changer.

Supposing in its implementation, users of the CBDC would be able to earn county points in the counties in which they are conducting their transactions.

These points could later be redeemed for goods and services within the respective counties thereby leading to the creation of an authentic local county economy.

Consider a businessman who is having a cup of coffee at a restaurant in Naivasha. If he chooses to pay Sh100 for that coffee in digital currency, the system can be set up in such a manner that he is awarded 100 county points that can be redeemed for goods and services anywhere within the county of Nakuru. He could go to Gilgil and purchase milk with the points or to Molo and redeem the points for some beef.

By ensuring that the county points can only work within a specific county, it will ensure there is adequate circulation of goods and services within the county, eventually making the county economy become the hub of trade and commerce.

This move alone will unleash the power of 47 county economies, creating employment opportunities across the country. The technology that would be required to map digital currency transactions to geographic boundaries already exists.

A good example is Safaricom which has deployed technology that ensures customers are physically in the same area with the agents that they are using to deposit and withdraw cash. CBDC presents a new opportunity for Kenya to achieve broad-based economic prosperity.

But rather than trying to focus on how it is being implemented in other countries such Nigeria or Bahamas, some of which have no strong tradition in digital currency, Kenyan policy-makers should instead be more inward looking and consider the rich history and legacy of platforms such as M-Pesa and then come up with an innovative implementation that works for all Kenyans.