Woman using her cell phone on subway platform

Low smartphone penetration will hinder CBDC adoption, Kenya central banks says

Low smartphone penetration could be the biggest hindrance to digital shilling, the Central Bank of Kenya (CBK) has claimed. With less than half the population having access to 4G smartphones, the central bank digital currency (CBDC) could further isolate those that lack access to banking services currently, the regulator says.

Kenya has been one of many African countries exploring a CBDC. As CoinGeek reported recently, the CBK called for public feedback in a discussion paper outlining the risks and opportunities that a digital shilling presents and the main sectors it will impact.

However, as the CBK Governor Patrick Njoroge observed this week, it might be the low smartphone penetration that proves to be the biggest hindrance. Currently, 33 million of the 59 million cellphone devices in the East African country, or 56%, are feature phones which can’t access the Internet.

According to Njoroge, launching a CBDC under these conditions could see the central bank further isolate the low-income earners, the same demographic it’s targeting with the CBDC.

“The CBDC will have a minimum viable technology requirement, which may be a sort of fourth-generation (4G) environment. There is an argument to be made that such a development could lead to greater financial exclusion such that some people may fall out of the financial system just because we have adopted a CBDC… This is something we need to be careful about,” he told local TV network NTV. 

The governor believes that it may be wise to shelve the CBDC plans for now or at least until most Kenyans have access to smartphones.

“We may decide therefore that we should wait a little more until everyone catches up because at this moment the lower-level technologies are quite prevalent with us,” he noted.

In Africa, other countries have made greater strides in their CBDC pursuit, none more than Nigeria, which has already launched its eNaira. And while Kenya, with a 44% smartphone penetration, is worrying the central bank, Nigeria launched a CBDC with just 32% penetration. 

There are other challenges as well that the Kenyan central bank has to consider as it develops a digital shilling, such as the disintermediation of banks. CBDCs are held in accounts domiciled directly with central banks, bypassing the traditional commercial bank route. This puts the central bank in direct competition with the very banks it regulates.

If the CBDC accounts are interest-bearing, citizens are further incentivized to shun commercial banks and deal directly with the central bank.

On this, the governor told the outlet that it weighs how best to strike the right balance. 

“It is true that if the central bank issued such an account to every single individual, it would be in competition with the banking sector. So, whatever we do, we want to do with an open mind and with proper advice,” Njoroge said.

For many countries exploring a CBDC, the first benefit they tout is financial inclusion. In Nigeria, for instance, inclusion is about 60%, although it disproportionately disfavors women at about 45%. Kenya, however, already enjoys high financial inclusion, greatly aided by the ubiquitous use of mobile money. 

“In our case, financial inclusion was recently estimated to be about 85 percent, up from 27 percent back in 2006/07. However, we cannot remain where we are. One of the points we have made, for instance, is that we need to improve the issue of cost, efficiency and consumer protection,” the governor commented.

“The current ecosystem works but needs to be improved. Maybe having a CBDC could help in this journey. At the end of the day, the mission is to improve the payments ecosystem,” he concluded.

Watch: CoinGeek Zurich panel, Blockchain & the Future of Africa

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