Low Adoption Keeps Africa’s First CBDC In Distress

In April 2021, Nigeria became the first country in Africa, and second in the world after the Bahamas, to roll out a central bank-backed digital currency (CBDC). The country’s government was convinced it would boost financial inclusion, secure digital transactions and promote trade. 

Ever since its rather tricky takeoff, the CBDC has been beset with challenges. Apart from its not-so-impressive roll-out, the eNaira lacked the infrastructure needed for Nigerians to adopt it at scale, from low smartphone penetration to limited internet access. 

Due to the many question marks surrounding the initiative, critics deemed it a vanity project and pointed to Nigeria’s ambition to [only] be the first to do it in the continent. A little over a year later, it has become more evident that those initial concerns were not invalid. 

According to a newly released report by the International Monetary Fund (IMF), the performance of Nigeria’s official digital currency is so far commendable in latency but disappointing in terms of adoption. 

Titled Nigeria’s eNaira, One Year After, the report blames the Central Bank of Nigeria’s phased approach to rolling out the tokenized asset. The IMF faults the CBN for its inability to inspire usership; fewer than 1.15 million Nigerians—roughly 0.5 percent of the country’s populace—had used the eNaira as of October 2022.

Only 1.5 percent of wallets on the platform are active every week. Even during the cash crunch that heralded the nation’s controversial general elections, Nigerians hardly resorted to using the eNaira. According to the CBN, only about 1.4 million transactions have been processed since the currency’s inception. 

Per a (separate) January 2023 IMF report, eNaira uptake among households and retail merchants has been slow. Only 0.8 percent of registered local bank accounts and 10 percent of merchants use the token, while most wallets remain inactive every other week. Being a single-currency design, the eNaira is unable to facilitate direct remittances. 

“Even though the eNaira is a legal tender—its universal acceptance cannot be imposed on the public. And this makes the eNaira a network externality product—whose value increases with the size of the network,’ the IMF says. “Like any network products with similar traits, breaking the initial low adoption equilibrium requires a mix of clever strategies and luck”.

“The eNaira would also need to compete with the far-more established incumbent networks (e.g., mobile money)—which provides broadly the same service at the retail level,” the report adds. 

Though Nigerians are quite curious about digital assets, they are seemingly unwilling to patronize a CBDC orchestrated by a government that explicitly outlawed crypto transactions from the banking system in February 2021. Since then, the ban has remained in place. 

In the Bahamas, the world’s first CBDC has not entirely lived up to expectations either. Though it has been over 2 years since the Sand Dollar was launched to assist the island nation’s unbanked population, the COVID-19 pandemic and the FTX effect brought the initiative to its knees. 

“While most people in the Bahamas weren’t invested in the bankrupt crypto exchange—which moved its headquarters to the island nation last year—the hurricane of bad news following its collapse has made people suspicious of digital currencies,” Mott Kimwood, the project manager for digital currency implementation at the Central Bank of the Bahamas, told Bloomberg. 

The IMF’s paper recommends some steps for the government to increase the eNaira’s adoption, such as addressing the double-digit problem in the parallel market to stable remittances, using the currency for social cash programs, bundling the eNaira with mobile money, and incentivizing the adoption chain.

“However, Nigeria still will need to keep vigilance against risks coming from possible breakthroughs in its public adoption and resulting deposit-to-CBDC shift,” the paper reads. 

“Going forward, CBN should keep modernizing its monetary policy operational framework to effectively deal with possible liquidity and funding shocks caused by the acceleration of eNaira adoption”.

As a supposed answer to crypto, other African countries are still conducting research into potential CBDCs, from South Africa to Ghana, Kenya to Tanzania, and Namibia to Zimbabwe. Others like Uganda, Rwanda, Zambia, Botswana, Mauritius, Morocco, and Sudan have recently indicated interest.

Currently, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC. In May 2020, only 35 countries had such considerations.