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The bank fears the Central Bank of Kuwait’s plan to issue digital currencies
Tuesday 06 June 2023
Kenyan financial industry players, including banks, have warned that the issuance of a central bank digital currency (CBDC) could lead to the collapse of an unspecified number of banks. file image | Clash
Kenyan financial industry players, including banks, have warned that the issuance of a central bank digital currency (CBDC) could lead to the collapse of an unspecified number of banks as customers rush to transfer their money from the existing form of deposits.
A document from the Central Bank of Kenya (CBK) that includes comments from sources as diverse as individuals, public institutions and commercial banks shows that many are concerned about the potential for digital currency to run the bank.
The regulator agrees with many of the concerns, saying that digital currency offerings should not be a “race to be first” and that this form of currency may not be a priority in Kenya “in the short to medium term.”
The Kenyan version of the CBD, the introduction of which has been the subject of debate for the past few years, prompted the Central Bank of Kuwait to issue a discussion paper in February last year, but the notes point to more threats than opportunities.
Respondents told the CBK that digital currency could become a threat to financial stability in Kenya, especially if the regulator issues the currency directly to customers, making the regulator a direct competitor to the same entities it oversees.
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Stakeholders warned that such a move would see customers abandon their deposits – currently over Sh4.828 trillion – and convert them into digital currency, thus leading to bank failures.
“It has been observed that the CBK may lead to CBK competition with banks, leading to system-wide run-ins for banks,” the CBK says in the paper published last Friday, which solicits public input.
This is because customers will see the central bank currencies as risk free and convert their deposits into the central bank currencies. This, in turn, will put pressure on bank deposits, threaten financial stability, and negatively affect the transmission of monetary policy due to the increase in funds issued by the central bank, and the decrease in deposits held by banks.”
Banks rely on customer deposits for funds to lend to both the private sector and the government as part of their role as financial intermediaries in the economy.
The loss of deposits, especially those accessed at a low cost, would put pressure on bank interest margins, forcing them to raise the cost of loans to mitigate the risk of lower profits.
Kenya has seen a previous wave of bank failures – 12 between 1984 and 1989, 19 between 1993 and 1995, six between 2000 and 2005 and three between mid-2015 and 2016 – leaving a trail of pain among depositors.
The Central Bank of Kuwait says its vision is for a secure, efficient and widely available payments system that works for Kenyans.
“The launch of a CBDC should not be rushed just to be first or ride on trends. For the time being, weaknesses in payments in Kenya can be resolved by fostering innovations around the existing payment system.
The Central Bank of Kuwait says mobile financial services have been a major game-changer in Kenya, dramatically expanding financial inclusion to 83.7 per cent in contrast to a proposed central commercial bank, which respondents said could exclude many people unless designed It is a low-cost technology that supports both online and offline transactions.
The regulator notes that the rise of mobile money in Kenya has positioned the country as a cradle of innovation and the deployment of any technology should be judged on its ability to solve a pressing societal problem and not just because it is unique.
“Therefore, the focus of CBDC innovation evaluation should be on jobs and the problem it solves for people rather than technology,” says the CBK.
Some respondents have asked the Central Bank of Kuwait to mitigate the risk of losing deposits by limiting the amount that can be converted into digital currency or adopting a non-interest-bearing retail CBDC to discourage conversion.
The Central Bank of Kuwait is also being asked to consider banning the conversation of bank deposits into a digital currency and to set up a fund to assist the transition of financial institutions that could be adversely affected if the digital currency is ever introduced.
Other respondents want to drop the idea of digital currency from smart banknotes—a physical banknote with features that can connect to an electronic network—which they believe requires fewer resources.
While the paper highlights many advantages in issuing a digital currency such as facilitating and reducing costs for cross-border payments and enhancing transparency, the Central Bank of Kuwait urges caution so that the disadvantages do not end up outweighing the gains.
Instead, the Central Bank of Kuwait calls for a measured approach that aligns with that of major global central banks, many of which have postponed the decision to launch digital currencies.
Many participants also told the regulator that because digital currency is a technology, it will be vulnerable to system failures and malfunctions, as well as cyberattacks and threats.
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The allure of CBDCs on the global stage has faded, especially with the recent instability in the global crypto-asset market, which has seen the past year punctuated by wild volatility and the collapse of stablecoins and cryptocurrency exchanges.
The market capitalization of crypto assets has been more than halved last year compared to 2021, which has led to investor caution and reduced interest in crypto assets.
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