CBDCs set to boost GCC’s cross-border payments efficiency: IMF – News

Central bank digital currencies can promote financial inclusion

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The Central Bank of the UAE encourages all commercial banks and payment processors in the country to participate in a pilot integration with the CBUAE node for issuing Digital Dirham. – File photo

GCC countries can improve financial inclusion and boost the efficiency of cross-border payment services by adopting central bank digital currencies (CBDCs), according to the International Monetary Fund (IMF).

The Washington-based fund said the adoption of CBDCs appeared to be a key priority for the GCC countries, including the UAE, Saudi Arabia, Bahrain, Kuwait, Oman and Qatar, an IMF blog said, which ‘ A recent departmental paper ‘Central Bank Digital’ cites Currencies in the Middle East and Central Asia.’

At least 19 countries in the Middle East region, as well as Central Asia, are on track to issue CBDCs. While the UAE, Saudi Arabia, Bahrain and Georgia have moved to the more advanced proof-of-concept phase, most other states are currently exploring the option in the research stage.

In January 2024, the UAE sent the first cross-border payment using the UAE’s central bank digital currency, the Digital Dirham. A payment of Dh50 million was made to China using the mBridge cross-border CBDC platform, where both countries along with Hong Kong are participants. Another 23 central banks are observers.

Last year, the UAE and China agreed to promote digital currency payments between the countries.

The Central Bank of the UAE executed the mBridge transaction during the bank’s fiftieth anniversary celebrations, which was also the eve of the first Brics meeting following its expansion from five to 10 member states, including the UAE.

The CBUAE encourages all commercial banks and payment processors in the country to participate in a pilot integration with the CBUAE node for issuing Digital Dirham. The regulator also stipulated the adoption of Digital Dirham by all UAE-licensed financial institutions by 2026.

The IMF blog said that cross-border payments tend to have frictions such as varying data formats and operating rules across regions and complex compliance checks. CBDCs that address these inefficiencies can significantly reduce transaction costs.

The IMF noted that central bank digital currencies can promote financial inclusion by promoting competition in the payments market and allowing transactions to be settled more directly and with less mediation. This, in turn, will lower the cost of financial services and make them more accessible. Central banks can also keep costs down, unlike commercial lenders, as they are not profit oriented.

“Within the transfer space, the cost of transfers can be reduced, and the transfer times can be accelerated. However, the impact may vary from country to country,” it said.

One of the risks is that CBDCs could compete with bank deposits, which make up a large part of bank funding in the region. This could then put pressure on the profits of lenders and have implications for financial stability, although banks in the region generally enjoy adequate capital levels, profit margins and liquidity buffers. Within the GCC, large banks are particularly dominant, the IMF noted.

“For monetary policy, CBDCs can strengthen the pass-through to deposit rates by increasing competition between banks,” the IMF said.

“A CBDC could also strengthen the bank lending channel of monetary policy. However, the impact is likely to be country-specific and is difficult to estimate because CBDC uptake has so far been limited,” the blog said.

The Qatar Central Bank recently said it has developed the infrastructure for the CBDC project, which will enter its first experimental phase by October 2024.