What is the relationship between digital money and financial inclusion?

Nader Mohamed, Jan Bismi, Andrej Popović*

Despite improvement over the past decade, financial inclusion in the Middle East and North Africa region remains relatively low. According to the Global Financial Inclusion Index, only 53% of adults in the Middle East and North Africa region had a financial account (including the use of mobile money) by 2021, up from 38% in 2011.
In comparison, the same headline indicator in sub-Saharan Africa reached 55% in 2021, 68% in South Asia, 74% in Latin America and the Caribbean, 83% in East Asia and the Pacific, and 90% in Europe and Central Asia. While the global average was 76%. As policymakers grapple with how to expand financial inclusion, some, including in the Middle East and North Africa region, are considering the creation of a digital currency issued by central banks.
Digital currency issued by a central bank is a form of digital money, denominated in a national unit of account, and is the direct responsibility of central banks. Similar to cash, central bank digital currency is money issued by a central bank, making it fundamentally different from private money such as bank deposits and electronic money that are liabilities of private financial institutions. There are two types of digital currency issued by central banks: This currency may only be available for wholesale to financial institutions and in this sense is similar to central bank deposits. They can be sold to households and businesses and are therefore more suitable for financial inclusion. Retail digital currency issued by central banks and physical cash are the only two forms of money for which the central bank is responsible and can be acquired by all those involved in economic activity (ie individuals, businesses and companies, government agencies, and financial institutions ). Therefore, digital currency issued by central banks can be described as a digital form of cash.
The focus of this blog is on retail central bank digital currency (CBDC) due to its potential impact on financial inclusion (hence simply referred to as CBDC).
Despite the advantages of using this currency, it is necessary to conduct more tests, over time and in different countries and regions, in order to draw reliable conclusions regarding its impact in practice. To date, only 3 countries have fully launched retail currency (Bahamas, Jamaica and Nigeria). There are many countries and regions that are conducting similar experiments (eg the Central Bank of the Eastern Caribbean, China and Ghana). Other countries are in various stages of evaluating the feasibility of this currency.
The drivers of inclusion and the intended benefits of this currency depend on the specific country context and specific design characteristics. A number of drivers are focused on preserving the role of public money while preserving financial stability and monetary sovereignty in the context of the rapid transition to digital payments and the emergence of some private forms of money (such as crypto-assets, stablecoins). Another set of drivers relates to the perceived shortcomings or failures of traditional digital payments in achieving public policy goals such as financial inclusion, competition, interoperability and cross-border payments. Other potential factors and benefits include financial stability, the efficiency of government payments and the implementation of monetary policy.
When looking at a central bank digital currency as a tool to facilitate financial inclusion, it is crucial to ensure that the underlying drivers are in place (highlighted in the guidance that addressed the payment aspects of financial inclusion); This currency will challenge many of the methods previously used to reach and serve unbanked customers (for example, mobile digital payments). Thus, the successful popularization of this currency requires design features that promote financial inclusion in the first place, such as the possibility of offline transactions, easy mobile technical support, the ability to easily exchange this currency and physical cash, benefit from widespread networks of agents, and simplify due diligence procedures and a two-tier distribution system that allows for more private sector innovation. It is also important to ensure interoperability with existing payment systems and widespread acceptance by merchants.
The combination of the above features and characteristics will increase the unique value of this currency in the context of financial inclusion. Moreover, there is a need to establish a strong legal and regulatory framework that facilitates cooperation between the public and private sectors and provides a level playing field for bank and non-bank payment service providers to compete and serve end users.
A central bank that intends to take advantage of this currency must carefully assess in advance all its effects and adopt a plan to prevent and mitigate its risks and/or consider the existence of alternatives to it. Possible negative aspects of this currency include the lack of intermediary activities by commercial banks, distortions that prevent a level playing field with other existing or planned digital payment tools, and reputational risks for the central bank in case of security and privacy breaches. Alternative approaches to this currency, including the implementation of a fast payment system and the expansion of access to payment systems for non-bank market participants, could be considered in the transitional phase to allow easier use of this currency at a later stage.
In conclusion, understanding the landscape in each country or region, as well as understanding the nature of key stakeholders is an important first step in assessing whether this currency is an effective option for addressing financial exclusion. This assessment should take into account innovations and other policy instruments that may be more appropriate given the implementing capacity of the central bank. In the coming months and years, lessons can be learned from countries and regions that have introduced this currency as many of them are motivated to address the challenge of financial exclusion.

Nader Mohamed is the Regional Director for Sustainable Growth, Finance and Institutions (EFI) at the World Bank. Jan Bismi is the director of the Financial Markets Integrity Services Unit. Andrej Popović, Chief Financial Officer of the World Bank.

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