Central Bank Digital Currencies Can Boost Middle East's Financial Inclusion, Payment Efficiency
IMF Blog, June 18, 2024
Source details
- Canonical URL
- Central Bank Digital Currencies Can Boost Middle East's Financial Inclusion, Payment Efficiency
Other formats
Bibliographic details
- Authors: Serpil Bouza, Marcello Miccoli, Borislava Mircherva
- Published: June 18, 2024
Regional uptake and stages of development
- Almost two-thirds of countries in the Middle East and Central Asia are exploring adopting a central bank digital currency (CBDC).
- 19 countries in the Middle East and Central Asia are exploring issuing a CBDC.
- Many of the 19 countries currently exploring a CBDC are at the research stage.
- Advanced proof-of-concept stage countries: Bahrain, Georgia, Saudi Arabia, and the United Arab Emirates.
- Most advanced: Kazakhstan, after two pilot programs for the digital tenge.
Potential benefits and priorities
- Financial inclusion:
- CBDCs can advance financial inclusion by fostering competition in the payments market and allowing for transactions to be settled more directly and with less intermediation.
- Lower intermediation could lower the cost of financial services and make them more accessible.
- Central banks, unlike commercial banks, are not concerned with making a profit and can help keep costs lower.
- Increased competition could encourage upgrading technology platforms and the efficiency of payment services, helping financial services reach more people.
- Countries especially interested in financial inclusion benefits: countries in the Caucasus and Central Asia, Middle East and North Africa oil importers, and low-income countries.
- Cross-border payment efficiency:
- CBDCs can potentially help improve the efficiency of cross-border payment services and significantly cut transaction costs if they address frictions such as varying data formats, operating rules across regions, and complex compliance checks.
- Cross-border efficiency is an important priority for oil exporters and the Gulf Cooperation Council countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
- Example of an existing cross-border platform: the Buna cross-border payment system, created by the Arab Monetary Fund in 2020.
Risks and constraints
- Uptake constraints:
- Without remedying barriers—low digital and financial literacy, lack of identification, distrust of financial institutions, and low wealth—CBDC uptake may only have marginal benefits.
- Financial stability and banking sector implications:
- Deposits make up a large share of bank funding in the region, about 83 percent.
- A CBDC may compete with bank deposits, potentially weighing on bank profits and lending and having implications for financial stability.
- Lenders in the region generally have adequate capital levels, profit margins, and liquidity buffers; relatively high concentration may limit strains on deposits. Large banks are especially dominant in Gulf Cooperation Council countries.
- Monetary policy effects:
- CBDCs could strengthen the pass-through into deposit rates by increasing competition among banks.
- A CBDC could also strengthen the bank lending channel of monetary policy.
- Impacts are likely country-specific and difficult to estimate because CBDC uptake is limited so far.
- Operational and design risks:
- Introducing digital currencies will be a long and complicated process with operational risks for the central bank.
- Policymakers must determine whether the expected benefits outweigh potential costs and risks for the financial system.
Design considerations and mitigation options
- Prerequisites and institutional capacity:
- While there are no clear prerequisites to adopting CBDCs, a healthy banking system, a sound legal system, and strong supervisory and regulatory capacity are the most important for reducing risks.
- Design features to limit risks:
- Use carefully calibrated restrictions on CBDC balances and transactions to limit competition with bank deposits.
- Design CBDCs to work offline to promote financial inclusion in areas with spotty mobile service (relevant for low-income countries and fragile and conflict-affected states).
- Use CBDCs for cross-border transfers to help lower the cost of sending remittances and speed up transfer times.
- Alternatives to CBDC adoption:
- Adoption may not be essential to achieving intended policy goals; addressing underlying constraints or adopting/improving other digital payment systems could be more practical alternatives.
IMF support and next steps
- The IMF is helping countries explore CBDCs through capacity development and surveillance:
- Support for policymakers evaluating the need to issue a CBDC and crafting strong policies and regulatory frameworks to minimize monetary and financial stability risks.
- Publishing new chapters of the IMF CBDC handbook, guided by country capacity development questions on evaluating the need and risks, and developing concrete plans to issue a CBDC.
This summary is based on the IMF blog "Central Bank Digital Currencies Can Boost Middle East's Financial Inclusion, Payment Efficiency" (June 18, 2024).