CBDCs can improve cross-border payments, financial inclusion in the Middle East: IMF

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The Middle East and Central Asia can advance financial inclusion and improve cross-border payments through CBDCs, but they must address associated risks, says the International Monetary Fund (IMF).

In a statement, the IMF noted that two-thirds of the 19 countries in the two regions are exploring CBDCs. Some, including the UAE and Saudi Arabia, are at the proof-of-concept stage; Kazakhstan is the most advanced after conducting two pilot programs for its digital tenge.

19 countries in the Middle East and Central Asia are exploring issuing a central bank digital currency. Learn more about how this could enhance financial inclusion and payment efficiency in our latest blog. https://t.co/Be3LLZd8d5 pic.twitter.com/lKP2ISJiR8

— IMF (@IMFNews) June 19, 2024

Cross-border payments are one of the key areas CBDCs can improve, the Washington-based lender of last resort says. Oil exporters in the region have been grappling with cross-border inefficiencies for decades. Existing solutions like Buna, a multi-currency cross-border payment system, have failed to make the expected impact.

“CBDCs that address these inefficiencies could significantly cut transaction costs,” the IMF said.

The most advanced cross-border CBDC project in the Middle East is mBridge, which includes the UAE and, as of this month, Saudi Arabia. mBridge, which also includes China, Hong Kong, and Thailand, entered the MVP stage recently.

CBDCs can also significantly impact financial inclusion, the IMF says. By eliminating some intermediaries and fostering more direct settlement, they can lower the cost of financial services and make them more accessible to the marginalized.

In some CBDC models, digital currencies are directly offered by central banks, which, unlike commercial banks, are not after profits. This allows them to provide services and products that other lenders can’t, and in turn, they increase competition in the payments space.

The IMF cautioned that for Middle Eastern and Central Asian nations to maximize the benefits of CBDCs, they must address the risks. This includes potential bank disintermediation, which could impact deposits and, consequently, the ability of commercial banks to lend to their clients.

However, the Middle East is less prone to this risk as most of its banks have “adequate capital levels, profit margins, and liquidity buffers.”

Some central banks, such as the Bank of Israel, view this competition differently with commercial lenders. BOI has proposed an interest-bearing CBDC, which it believes would chip away at bank deposits. However, it views this as healthy competition that would challenge the banks to improve their services.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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