Can CBDCs Increase Financial Inclusion?

Peterson Ozili 1 has written a paper looking at the possible benefits of bringing the unbanked into the formal financial sector. In addition to listing the arguments for and against, he also includes a literature search outlining their key conclusions. Although he explicitly does not reach a conclusion on whether Central Bank Digital Currencies (CBDCs) will increase financial inclusion, he outlines some of the dilemmas facing central banks in the design of CBDCs balancing off achieving financial inclusion relative to other policy objectives.

Arguments for

In terms of financial inclusion, the argument for CBDCs is that they should;

  • Increase access to digital financial services which should improve welfare

  • Enhance the efficiency of digital payments

  • Digitise the value chain by enabling businesses to access wholesale CBDCs bringing them into the digital financial system 

  • Enlarge the digital economy, for example allow sectors such as real estate, energy and health to develop APIs to offer services on a real time basis

  • Lower transaction costs

  • Be able to be used offline when there is no internet coverage

  • Reduce cash management costs

Additional benefits for society from bringing the unbanked into the formal financial sector include;

  • Improved financial stability. An increase in the number and value of deposits held in financial institutions should help improve the stability of banks, particularly in troubled times

  • Greater access, depth and efficiency of financial institutions should have a significant positive impact on economic growth

  • Help central banks support unconventional monetary policy

  • Increase the contestability of payments

  • Inhibit criminal activity

Determinants of financial inclusion

There are a number of underlying factors that influence the levels of financial inclusion in an economy. Some are straightforward – poverty levels, the state of the economy, financial literacy, financial stability – while others are less so, for example, financial innovation regulation.

Interestingly, in the literature search Ozili refers to a 2017 Engert and Fung paper that suggests financial inclusion is not a problem in advanced economies. Given the findings of the UK’s Access to Cash report that found a significant part of the population dependent on cash, perhaps this conclusion is more complex than this simple statement.

Arguments against

In terms of financial inclusion, the arguments against CBDCs delivering this were;

  • Central banks may not prioritise financial inclusion in the design of their CBDCs

  • High costs to purchase digital devices for holding CBDCs

  • Without full digital inclusion, perhaps CBDCs won’t increase financial inclusion

  • Digital illiteracy is a real challenge

  • If CBDCs are non-interest bearing, where is the incentive to hold them for those who are currently financially excluded?

  • There remains a strong preference for cash over digital currency

  • Burdensome identity and regulatory requirements to own CBDCs. Added to this is the question that if CBDCs are delivered through the existing traditional financial intermediaries that have not delivered financial inclusion to date, what will be different about CBDCs?

  • Imposition of transaction costs

General observations from the literature search

To succeed, CBDCs must be attractive as an alternative from of money in their own right.

Demand may be low if there is a low aversion to using the formal financial system.

If CBDCs are designed to maximise financial inclusion, they may be less effective at fulfilling other goals. It may help, therefore, if CBDCs are designed to complement cash, not seek to replace it.

Interest bearing CBDCs may reduce the demand for cash and encourage financial inclusion.

If CBDCs are designed to encourage people to hold amounts of CBDCs without needing an account, this can increase their attractiveness and, therefore, financial inclusion.

There is a need to avoid high costs charged by banks and mobile money providers.

Final word

The paper ends with the comment that the author would not want to have to address the question whether the benefits of CBDCs will outweigh the costs of operating CBDC infrastructure. He leaves that for another day.

The paper is a useful summary of the arguments and the literature search gives some interesting pointers for those designing CBDCs to consider. 

1 - Munich Personal RePEc Archive: