I have had so much ease transacting business in the recent days since everything is just a tap away on my mobile phone. Making purchases, receiving tailored solutions, choosing customized products, enjoying delivery of almost any item directly at my front door from different applications has become the norm for both consumer goods and services. I and so many others across the globe are enjoying these digital transformations from our mobile devices. Digital transformation has undoubtedly upended industries from retail to business to business and is now rapidly sweeping the financial services sector. Personalization and immediacy have become a normal phenomenon for both consumer goods and services.
Mobile banking through applications is one clear indication that disruptive innovations and change in value chains are in full throttle in the financial services industry. While the digital transformation provides a good landing base for fintech innovators, the incumbents; finance companies, banks, insurance companies and microfinance institutions are being challenged to better their systems to match with the current times.
Benefitting from these developments for the incumbents will enable them to broaden financial access, introduce new products and services as well as serve customers more efficiently whilst deploying new technologies internally or in partnership with external innovators. “Many African economies are still cash-heavy, and commercial banks still have dinosaur DNA. Banking is however bound to change, with fintech disrupting the incumbent business models. The right infrastructure, skills, capital, and enabling regulatory environment require massive investments for decentralized finance to take off in Africa,” says Salum Awadh , Chief Executive Officer SSC Capital and Chartered Global Investment Analyst
African countries have been partnering with external private crypto currency providers to explore better ways to create and own virtual money inside secure ecosystems called Central Bank Digital Currency (CBDC). Well, CBDC is essentially what we can call electronic cash, it gives its holders direct claim on the central bank and allows individuals and businesses to make electronic payments and transfers while cutting out middlemen such as banks thereby allowing transactions to travel directly from one person to another. While this is expected to eliminate risks to consumers such as the collapse of commercial banks it is creating fears on the weakening of central banks’ grip on the supply of money and economic stability. “The tendency of central banks to launch CBDCs is a part-reflection of central banks in Africa to try catch up and remain relevant to the new digital world of finance,” says Awadh.
The rapid growth in popularity of crypto in the last couple of years has left many central banks in fear of losing control over the supply of money and most especially the payment systems. “When bitcoin was first launched, many people we skeptical, but today, the total market value of the coin is above $800BN.Even though the CBDCs are not necessarily the same as bitcoin and other cryptos, it is a sign that central banks do not want to play catch-up again with decentralized finance (DeFI) revolution,” attributes Awadh.
Nigeria, the largest economy in Africa became the first country in Africa to launch its CBDC dubbed the e-naira in October 2021 which according to the Central Bank of Nigeria recorded 12,500 transactions wallets worth $113,000 and 400,000 new wallets registered in less than two weeks of its launch which brought a ray of optimism for the country. Ghana is also said to be at an advanced stage of launching its e-cedi, a digital currency that will facilitate transactions without the need for power or connectivity.
The Bank of Zambia is the latest to join the bandwagon, where it is now carrying out research on digital currencies however Zambia has been quite cautious and vocal in the recent months, clearly warning its citizens of the importance of having a clear understanding of all risks that come with the use of crypto currency as an investment and payment instrument seeing that it is not a legal tender.
“The results of the research will form part of the input in the policy considerations on whether to introduce a central bank digital currency in Zambia,” Nkatya Kabwe, acting assistant director of communications at the Bank of Zambia.
What now remains in the minds of many is whether the CBDC’s will undermine the growth of domestic currencies and the banking sector or not. “CBDCs will see customers keeping their deposits in their digital wallets, and this will definitely suffocate banks that rely on traditional deposits in a big way. The role of banks as intermediaries will change dramatically, as peer to peer (P2P) will increase and banks will have to self-disrupt their traditional role,” adds Awadh.
