Central Bank Digital Currency and Financial Inclusion

IMF Working Papers, March 17, 2023

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The paper develops a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC).
The model captures two key channels:
- CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked).
- Data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending.

CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion, which can increase overall lending and reduce bank disintermediation risks.
The paper finds that CBDC can increase overall lending if:
- (1) bank deposit liquidity risk is low,
- (2) the size and relative wealth of the previously unbanked population is large, and
- (3) CBDC is valuable to households as a means of payment or for credit-building.
CBDC can still be optimal for household welfare even when overall lending decreases because:
- households benefit from the value of using CBDC for payments,
- CBDC provides an alternative "safe" savings vehicle, and
- CBDC generates greater surplus in lending by reducing credit-risk information asymmetry.

Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers.
If non-bank payment system providers can distribute CBDC:
- fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC.
If CBDC data is shareable with banks:
- those without bank accounts can still build credit and access lower interest rate loans.
The two-tier vs. open-distribution trade-off:
- The design that allows non-bank distribution but also enables CBDC data sharing with banks is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.

Relevance to developing countries: CBDC has stronger potential to expand financial inclusion in developing countries compared with advanced countries.
Key policy levers include:
- the choice of distribution architecture (two-tier vs. allowing non-bank payment system providers),
- rules and mechanisms for CBDC data sharing with banks,
- measures to manage bank deposit liquidity risk to preserve lending benefits from increased deposits by the previously unbanked.

Source: Brandon Joel Tan, "Central Bank Digital Currency and Financial Inclusion", IMF Working Paper No. 2023/069, March 17, 2023.