Financial exclusion remains a challenge in many low-income countries. This is especially true in rural areas, which do not have easy access to banks. Even in areas with bank branches, community members may find themselves excluded because many low-income countries have a small financial sector with few financial institutions. The lack of financial accessibility results in high interest rates and expensive charges for ATM use and other transactions. Central Bank Digital Currencies (CBDCs) are a dynamic tool in providing solutions to improve financial inclusion.

What are Central Bank Digital Currencies?

Central Bank Digital Currencies is digital fiat currency (or national currency, such as the peso or naira) that the central bank regulates. Currently, only nine countries have launched CBDCs. The Bahamas was the first country to do so, in October 2020. However, 16 countries are developing them and 40 countries are researching the possibility of instituting them. The potential of central bank digital currencies in emerging economies is particularly strong.

Why Central Bank Digital Currencies in Emerging Economies?

Central banks across the world are considering launching CBDCs for various reasons. For one, the rising influence of digital currency has created the conditions in which central banks could lose control of currency regulation, as well as increasing preference for digital payments over cash. However, there are several unique reasons why central bank digital currencies in emerging economies are especially relevant because of the ways they can expand financial inclusion.

• Cross-border payments can be faster, more affordable and more secure. Traditional cross-border payments are expensive and inefficient. According to The Economic Times, “The global average cost for sending remittances (0f $200) in Q1 of 2021 stood at 6.38%. There are often time lags for cross-border fund transfers, during which counterparties are exposed to credit and settlement risk.” CBDCs could help expedite cross-border payments and eliminate some of the associated costs. Because many households in emerging economies depend on remittances as a substantial source of income, CBDCs could make making and receiving them much easier on low-income individuals.
• Central Bank Digital Currencies in emerging economies could serve the unbanked population. The digitization of currency has ensured the safe and easy accessibility of accounts and payment services. The rise of digital currencies has also seen a decrease in the number of unbanked people.

Looking Ahead

Financial inclusion is vital to social inclusion and combats poverty and income inequality by offering financial opportunities for low-income people and those involuntarily excluded from the financial market. The World Bank’s goal of ending extreme poverty by 2030 includes the key component of reducing income inequality. CBDC initiatives provide a dynamic tool in addressing income equality.

More countries are updating their financial framework and promoting digital financial literacy. For example, Aadhaar, India is developing a digital ID system that will encourage undocumented people to join the financial sector. This could ultimately provide secure transactions for those typically excluded from the financial market. Strengthening innovative financial frameworks such as CBDCs encourage a more equitable and inclusive global regulatory system.

– Jennifer Hendricks
Photo: Flickr