Tolani Senior Professor of Trade Policy and Professor of Economics at Cornell University, and Senior Fellow & New Century Chair in International Economics at the Brookings Institution.
Even before the COVID-19 crisis, digitization was helping several emerging economies reach development objectives; post-pandemic, the impact of new technologies on financial inclusion could be further enhanced.
Advances in financial technology could have a tremendous impact on societies all over the world by supporting the democratization of banking and finance. The lives of poorer households could be improved by enhancing their access to savings, credit and insurance products, while simultaneously alleviating liquidity constraints and the cost of trade in developing countries where access to hard currency has been a major obstacle to growth. Domestic and international payments will become cheaper and more efficient, benefiting consumers, businesses and economic migrants who send remittances to their home countries
Mobile money and other digital payments systems have already taken hold in many nations. New models of – mostly online – banking offer greater financial access to low-income and urban households. Cross-border remittance flows and
payments, which are important for many African economies, are becoming cheaper and faster. The
Pan-African Payment and Settlement System (PAPSS), developed by the African Export-Import Bank, will play a key role in promoting cross-border trade during the implementation of the African Continental Free Trade Area (AfCFTA) and save the continent billions of dollars in transfer charges.
However, new technologies are of course not necessarily risk-free. If poorly managed, these technologies could induce a degree of financial or
macroeconomic instability. Such risks, were they to materialise, could end up being especially harmful to the economically underprivileged.
Regulators may struggle to keep up with rapid changes in financial markets as novel technology based platforms grow, threatening banks and other existing financial institutions. It falls to policymakers to choose how best to strike the balance between the potential benefits of financial innovation and the risks that such innovation may engender, while also bearing in mind the risks of stagnation and over-regulation.
African governments must make some crucial policy decisions. The first is to increase the availability of ‘soft’ infrastructure, especially access to the internet. While mobile phones provide an easy and cheap gateway, broader access to the internet gives users access to a much wider range of capabilities in managing their finances and strengthens institutional capacities in digital payments and settlements.
The second priority is to emphasise financial literacy and risk management in the digital era. While new products and services can offer many benefits, they can also be precarious when their modalities and details are not well understood by users. The advantages of improved access to formal finance will be limited unless households and businesses understand fully how they might benefit from that access. Equally, consumers must not be allowed to be
beguiled by sophisticated but possibly very risky products that they neither understand nor need. The third priority is to improve the quality of regulatory oversight and public governance while also harmonizing countries’ regulatory frameworks to facilitate pan-African payments and settlements. A nimble framework that can adapt to evolving
structures in financial markets and institutions is essential to mitigate risks that can arise from regulatory gaps and arbitrage by new entrants.
Likewise, a stifling regulatory environment that stymies innovation is also undesirable.
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Even central banks could play a direct role in adopting new financial technologies by considering the issuance of central bank digital
currencies (CBDCs) in parallel with cash. Certain forms of CBDC are relatively easy to implement, as has been demonstrated in developing economies such as Uruguay and The Bahamas. CBDCs can help expand financial inclusion, bring more economic activity out of the shadows, broaden the tax base and reduce corruption intermediated through cash.
Even so, financial technologies are not always benign. Private ‘stablecoins’, such as Facebook’s Libra, which are backed by reserves of hard currency assets, could ultimately displace central bank money in countries whose monetary authorities have limited credibility. This could accentuate the process of ‘dollarisation’ that many emerging economies are already subject to, precipitating the loss of monetary sovereignty. Moreover, new channels for cross-border capital flows could exacerbate the exchange rate and capital flow volatility with which many developing countries are already contending.
Coordination at the regional level could be helpful in sharing knowledge and developing a co operative approach to these issues. This might help tie in broader objectives, such as financial market development and financial integration, at both the national and regional levels to support the deepening of economic integration and trade under the AfCFTA. Regional institutions that are familiar with local economic and financial market
circumstances could be valuable catalysts in synthesizing the small but growing body of research on these topics, as well as in incorporating lessons from experiences of other
countries that are farther along in these areas.
African policymakers must develop a proactive strategy to harness the benefits of new financial
technologies. Such a strategy should include measures to improve financial literacy, among both households and small businesses. Some caution is warranted in opening up to new financial technologies, in light of the economic and political constraints that many governments face. Still, an active, hands-on approach could help
improve the benefit-risk trade-offs; passivity could only increase longerterm risks and delay the potential benefits that African economies stand to enjoy
African policymakers must develop a proactive strategy to harness the benefits of new financial technologies.