Digital fiat currency, the ultimate instrument of financial inclusion

Ranjo Denbow, SVP External Affairs, eCurrency



Tanzania is highly dependent on the use of cash for executing its transactions, as noted in Finscope 2017, which is the fourth in a series of reports that share results of extensive research conducted by a steering committee with representatives from the Bank of Tanzania, various ministries and service providers. A large percentage of people are unbanked or far worse have no physical access to banks or financial institutions of any kind. The problem banks face is to provide financial services to these people profitably, starting with basic services and using alternative channels. E-money services using mobile phones as access points provides commercial banks the basic framework to tackle this problem. E-money adoption, however, has its own problems, including agent acquisition and retention costs, merchant acquisition costs, fraud, and user confidence. A Digital Fiat Currency (DFC) issued by the Central Bank will address these e-money challenges more effectively.

Financial inclusion framework

Financial inclusion has been an important theme for central banks in recent years and has driven core policy discussions. Many governments and central banks have established a financial inclusion framework to achieve this objective. The Prime Minister of Tanzania, Kassim Majaliwa, launched a second National Financial Inclusion Framework (NFIF) on December 21, 2017. This framework is to be in effect from 2018 to 2022, in which period he has declared that all public and private stakeholders shall work together to raise financial inclusion in Tanzania from 65%, in 2017 to 75%. He has assured government support in accomplishing this goal.

This is a second phase to the National Financial Inclusion Framework that was introduced in 2014 which was a 3-year plan to improve financial access to the Tanzanian people. Its success was marked by the achievement of significant growth observed during that period. It was recorded that 65% of the population had access to formal financial services in 2017, increased from 58% in 2013. The other significant metric was that during the same period of time, use of informal financial services decreased from 16% to 7%.1

The meeting of the goals at the end of the set period of the first phase was even more remarkable as there was a decline in the use of mobile money in 2016 due to the government deactivating counterfeit phones and unregistered SIM cards.

Former Central Bank of Tanzania governor, Professor Ndulu recognized the importance of improved digital payment platforms and interoperability among service providers as factors in increasing financial inclusion.

The positive effect of digital fiat currency on financial inclusion

The adoption of digital fiat currency could have a dramatic effect on financial access as suggested by some research.2 A digital fiat currency is a legal tender issued by the central bank under the existing currency laws with inherent characteristics identified by Professor Ndulu as key factors to financial inclusion. Digital fiat currency is the same as paper currency in every way except for its form. It extends the trust and confidence that people have on paper currency to digital form. A secure digital legal tender infuses trust in all digital transactions and leads to an interoperable digital financial services environment. Like paper currency, digital fiat currency affords universal access for all citizens regardless of their age and gender, hence, supports financial inclusion especially of the youth and women.

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