A group of young people discuss the concept of central bank digital currency. Holographic futuristic screen with the inscription CBDC. 

| Pool

M-Pesa faces digital shilling disruption

Local mobile money service providers face the greatest disruption to their business since the introduction of M-Pesa in 2007 as the Central Bank of Kenya (CBK) mulls over introducing a digital currency.

The proposed Central Bank Digital Currency (CBDC) will be a virtual version of the current physical notes and coins that can be used to make payments for goods and services, similar to the popular M-Pesa, Airtel Money and Telkom Kenya’s T-Kash.

“Assuming the Central Bank charges no fees for CBDC, it would facilitate small-value online transactions, given relatively low (or no) associated fees compared to the current payment charges,” CBK said in a discussion paper released on Thursday detailing its planned digital shilling.

The banking sector regulator said although mobile subscription penetration in Kenya stood at about 132 per cent, many citizens remain locked out of access to financial services by high fees charged on mobile cash transactions.

“There have been proposals that a CBDC would improve access to digital payments for people who are financially excluded. This is a worthwhile goal. However, given the 132 per cent penetration of mobile subscriptions in Kenya, would we rather promote financial inclusion more efficiently by taking steps to ensure the provision of affordable mobile phone financial services is made more available to people for whom the current cost is burdensome” said CBK.

Stakeholders and the general public have until May 20 to submit their views to CBK on the proposed digital shilling. Representatives of Safaricom, which is the dominant player in the digital cash space, did not answer our queries on how they see the proposed currency affecting their business. Airtel and Telkom did not respond to our calls.

“It will be a sovereign currency in an electronic form and it would appear as a liability on CBK’s balance sheet and an asset to users holding it,” reads the CBK discussion paper.

This means that rather than use M-Pesa or other forms of mobile money, Kenyans may favour the CBK currency. But in the discussion paper, CBK wonders whether this will be a blessing or a curse to mobile money. Digital currency is expected to improve interoperability between the digital cash providers that has been a weak point in the industry.

“Existing proposals indicate that the CBDC might hold the potential to achieve much-needed interoperability,” says the paper.

“Interoperability of mobile wallets, implemented in 2018, is limited to only P2P (person-to-person) payments and is yet to be expanded to merchant and agent interoperability. CBDC may offer promise for this interoperability.”

The promise of the virtual currency being free of transaction charges will push mobile money providers back to the drawing board. Safaricom, the country’s biggest telco, banks heavily on M-Pesa.

It saw its M-Pesa revenue jump by 45.8 per cent, or Sh16.4 billion, to Sh52.3 billion in the half-year to September 2021, supported by the return to charging of transactions below Sh1,000 in January and improved business activity contributing to a 16.9 per cent jump in service revenue to Sh138.4 billion.

The potential of the mobile segment is also illustrated by the fact that the overall value of cash transacted by mobile money agents in Kenya jumped 36 per cent to Sh6.2 trillion in the nine months to November.

CBK data shows transactions at the agents rose from Sh4.6 trillion in a similar period a year earlier, indicating their growing use during the Covid crisis.

The mobile money agency business has been booming, especially as banks seek alternatives for brick-and-mortar channels to reach customers.

Market statistics indicate that Kenyans have increased reliance on mobile money agents for transactions from an annual Sh2 trillion six years ago. For four years between 2016 and 2019 Kenyans transacted Sh3 trillion on average as transactions grew modestly below 10 percent.

Should the digital currency enter the market as proposed, it may change those figures dramatically. CBK is aware of this, and in the discussion paper it poses the question of competition that may arise.

However, CBK says the element of cost-reduction, interoperability and cross-border payment may justify rolling out the digital currency to the public.

A CBK insider told the Sunday Nation any roll-out of the digital shilling will be done carefully.

“What is being done is simply putting it out there as an exploratory thing and also to get people’s opinions from whichever side,” said the insider.

Mr Benjamin Arunda, a digital currency expert, said CBDC will have a significant impact on M-Pesa and retail banks.

“It may allow individuals and businesses to interact directly with the Central Bank by having a wallet,” he said.

“That would mean that instead of me depositing my Sh300,000 on M-Pesa, I may probably put it directly in my wallet at the CBK. So, a retail CBDC (digital currency available to the public) would really have a significant impact.”

But former ICT permanent secretary Bitange Ndemo, who has been championing the creation of a digital currency since 2018, thinks mobile money providers like M-Pesa could survive through innovation.

“M-Pesa has gone beyond that. They are lending through Fuliza; that is retail. What would happen probably is more competition in that space,” he told the Nation.

CBK has not indicated whether it will work with an agent system similar to mobile money agents who give Kenyans a chance to swap physical currency with electronic money.

Mr Arunda also thinks the banking industry will face a major disruption.

“If banks don’t get sufficient deposits, the amount of money they can lend will also reduce. So, if people decide to deal directly with the Central Bank, does it mean CBK is going to start the loan business? I don’t think so. So, they also have to mitigate and see how the commercial banks can still be able to receive deposits,” he said.

The step by CBK revealed its desire to keep tabs with money trends from across the globe. Over the past few years, different currencies have emerged, including cryptocurrencies and central bank digital currencies.

The central-bank backed currencies are in operation or in the pipeline for a number of countries. In the paper, CBK mentioned the Bahamas, Singapore, Sweden and Canada as countries that had made steps towards having electronic versions of their sovereign currencies.

“In response to the decline in the usage of cash in Sweden, the Central Bank of Sweden is seeking to implement a retail digital currency,” the paper said as it relayed the scenarios in those countries.

It added: “Bank of England is exploring CBDC due to the decrease in use of banknotes in England and increase in the use of privately issued money and alternative payment methods.”

Prof Ndemo said the CBDC discussion “is a good step that we have made. We have no option. The entire world is headed into digital currency. What they (the public) need to understand is the retail aspect of the CBDC, and of course they are not going to destroy the market structure. It remains the same; its’ the same thing: they will issue money to the banks and the banks will now get into the retail aspect.

“It is convenient and traceable, and you know they are doing this because we are shifting into Web 3.0; so the issue of security which they have raised on the paper is not an issue,” added Prof Ndemo.

CBK is at this stage a listener as it has framed a number of questions for the public to ponder.

Reporting by Elvis Ondieki, Brian Ambani and Faustine Ngila