The International Monetary Fund (IMF) has recommended special safeguards for M-Pesa and banks from unfair competition by the planned digital shilling by the Central Bank of Kenya (CBK).
The proposed Central Bank Digital Currency (CBDC), which is currently under public discussion, is seen as a competitor to mobile money down the road, especially in its ability to lower transaction costs.
It may also pose some relative threat to banks because it will enable customers to bypass lenders, with the CBK taking on a new role of keeping track of holdings, transactions, and settlements.
The CBDC is being eyed mainly to ease cross-border payments and to complement mobile money in the local digital payments space.
With these competition concerns, the IMF is now urging caution as the CBK progressed with preparation for the possible adoption of a digital currency, saying, the CBDC should complement existing private sector digital money.
No ‘right balance’
“The paper could state the intent of potential issuance of CBDC is to complement rather than substitute existing private-sector digital payment solutions, and affirm CBK’s commitment to an open, competitive payment system” the IMF said in a commentary on a policy document published by CBK on the CBDC earlier this year.
“We note in this regard that the balance between central bank money and private sector payment instruments is not fixed over time, and there is no “right” balance” it added.
The Bretton Woods institution also urged the banking sector regulator to deeply review the potential impact its digital shilling would have on banks and other financial service providers.
Transaction activity data
“Given Kenya’s financial sector’s remarkable progress in developing digital solutions, it is important that the paper emphasises CBDC will “do no harm” and does not stifle such welcome digitalisation developments by taking away customers of banks and other digital finance providers, increasing the cost of financing for banks, or depriving banks of valuable information they obtain through establishing customer relations,” the IMF said.
“In the case of a widely adopted retail CBDC, while in principle it might be possible to establish information sharing protocols with banks to use transaction activity data in making their lending decisions, we note that it would be very unusual for a central bank to share such information; and the benefits of doing so would only be significant if usage of CBDC were to lead to large-scale substitution of private-sector payment instruments” it added.