LocationsA Practical Guide to Driving Financial Inclusion Through CBDCs
November 7, 2024
Welcome back to our blog series exploring the potential that central bank digital currencies (CBDCs) hold to positively impact individuals that are currently unserved or underserved by financial systems globally. Together with Professor Wang, we first delved into the challenges and opportunities of driving financial inclusion, and how CBDCs could serve as an important mechanism in ensuring that no one is excluded from financial services – or our increasingly digital economies and societies. In our second blog we then examined how CBDCs can be intentionally designed to drive financial inclusion. In this third and final piece, Professor Wang offers a practical guide to driving financial inclusion through CBDCs.
Understanding a Country’s Financial Inclusion Landscape
It is important to note that addressing financial inclusion through CBDCs must be integrated into a broader national development agenda. CBDCs have the potential to reduce poverty by providing marginalized populations with access to formal financial services, including savings, credit, and insurance products. For instance, rural populations, who often lack access to traditional banking, could benefit greatly from CBDCs, particularly in regions where physical bank infrastructure is limited. National strategies should therefore link CBDC implementation to sustainable development goals (SDGs), emphasizing poverty reduction, gender equality, and economic empowerment.
Before implementing a CBDC, a country must first assess where it currently stands on the financial inclusion spectrum. For some, this might mean addressing the needs of the rural unbanked, while for others, it might involve improving access for women, micro-entrepreneurs, or marginalized communities. Identifying context-specific challenges—such as lack of infrastructure, digital literacy, or social and cultural barriers—is essential to ensure the CBDC design aligns with the target groups' unique needs.
Central banks must articulate their goals: Is the objective to provide access to basic banking services, promote savings, or enable small-scale lending? Understanding these goals will help shape the CBDC’s functionality, whether it’s enabling digital wallets for microtransactions or simplifying cross-border remittances at lower costs. Hence the first step in CBDC implementation would be to identify a country’s unique barriers to financial inclusion.
Identifying Barriers to Financial Inclusion
Barriers to financial inclusion often arise from a combination of structural, technological, and policy-related factors. Countries must address several key questions to understand the root causes of exclusion: Is there adequate mobile and internet coverage in remote areas? Are there legal obstacles preventing certain populations from accessing financial services? Are costs of traditional financial services prohibitive for low-income individuals? These barriers will differ by country, and any CBDC implementation must account for these realities. A comprehensive understanding of the barriers will guide central banks in determining whether CBDCs can truly address financial inclusion or if complementary policies are needed, such as investing in digital infrastructure, providing financial education, or revising outdated regulatory frameworks.
From a development perspective, addressing barriers such as digital illiteracy, poor infrastructure, and regulatory gaps should be seen as an opportunity for capacity-building and institutional strengthening. Policies targeting the digital divide, particularly for women and marginalized groups, should be aligned with CBDC rollouts. The deployment of CBDCs could also spur investment in local digital infrastructure, which would benefit other sectors like healthcare and education, further enhancing development outcomes.
The barriers to financial inclusion, as indicated in Table 1, involve “hardware” (e.g. digital connectivity) and “software” (e.g. financial and digital literacy) barriers. Users and decision-makers, particularly central banks, would face barriers that affect access to and usage of financial services at an affordable price, and there is some overlap between these barriers.
Table 1: Barriers to financial inclusion
Based on new technologies, CBDCs create the opportunities to possibly lower access and price barriers faced by financial inclusion. These opportunities include low or no fees regarding CBDC usage, no bank account needed for opening certain CBDC wallets, new functions of CBDCs (e.g. offline use, smart contracts), and possibly simplified identification requirements for low-risk transactions. With users’ consent, CBDCs could offer valuable data like transaction records to promote the access to financial services (e.g. loans), but privacy protection must be handled with care.
Before countries make the decision to explore and issue CBDCs, they need to carefully analyse and identify the specific barriers to be addressed by their CBDCs. This should be reflected in the objectives of CBDC. For example, can CBDCs ensure geographic reach and use in rural areas experiencing low internet connectivity?
Conducting a Multifaceted Assessment
To design an effective CBDC system that drives financial inclusion, and overcomes those barriers identified through the exercise above, countries should conduct a multifaceted assessment. A development-oriented approach to this assessment would include an evaluation of how CBDCs can be designed to support vulnerable populations, such as those living in extreme poverty or areas affected by conflict. Special attention must be paid to the role CBDCs can play in enhancing access to social protection programs, disaster relief payments, and subsidies. By integrating CBDCs with national development programs, governments can ensure that these digital solutions benefit those most in need.
The assessment should evaluate several key factors, ranging from policy environment and legal framework, to technological readiness of stakeholders, and cost factors.
Policy Environment: How supportive is the current policy framework towards digital financial services? Are there protections for consumer rights, privacy, and data security?
Legal Framework: Are there legal constraints that need to be addressed, such as outdated regulations preventing digital identities or accounts?
Technology Readiness: Is the digital infrastructure robust enough to support CBDC adoption, including mobile networks, digital ID systems, and cybersecurity?
Cost Factors: How affordable will CBDC access be for the target population? Are there provisions for reducing the costs of CBDC transactions to make them accessible to low-income individuals?
Complementary Policies: What other policies or reforms need to be in place to support CBDCs, such as financial literacy programs, investments in digital infrastructure, or social safety nets?
Table 2 illustrates in more depth some examples of aspects that will need to be taken into consideration while performing a country assessment vis-à-vis CBDC implementation. First, rule development and policy integration and coordination are crucial to pre-empt risks. Policies and rules in different areas must be aligned and effectively implemented, therefore an assessment of joint efforts of public and private actors is required. Second, technological readiness helps to develop resilient technology and facilitate user access and usage. One example is the design of easily accessible hardware-based and/or software-based wallets, including the distribution and other services (e.g. repair and replacement) of hardware-based wallets. CBDCs also need a monitoring system, a cybersecurity intelligence system, and a disruption (e.g. service outages) response and recovery system. Third, sustainable business models are important to recover costs. Although usage of CBDCs would likely incur low or no fees for users to encourage widespread adoption, investment is still needed. Such investments could include hardware and software upgrades, education of users regarding key issues such as cyber risks and fraud mitigation, merchant training, and communication to raise public awareness.
Table 2: Multifaceted assessment: key aspects to consider
Unpacking the CBDC Value Proposition
At the heart of CBDC design for financial inclusion is the value proposition. Countries must weigh the pros and cons of CBDCs compared to other financial inclusion tools. CBDCs should offer clear advantages—whether in cost efficiency, ease of use, accessibility, or security—over existing financial solutions.
The value proposition of CBDCs extends beyond just financial inclusion—it can act as a vehicle for broader economic resilience. For instance, CBDCs can facilitate quicker and more transparent government-to-person (G2P) payments, which is critical for delivering aid and social benefits in times of crisis. This capability can strengthen social safety nets and contribute to building long-term economic stability in low-income and vulnerable communities.
In conclusion, to build a strong value proposition, central banks should engage with a wide range of stakeholders, including local communities, private sector partners, and international organizations. Understanding what features matter most to the unbanked or underbanked, such as low fees, interoperability with existing systems, or offline capabilities, will be key to ensuring uptake.
Thank you for reading this third piece concluding our blog series on “CBDCs for Financial Inclusion”. As we’ve explored throughout this series, CBDCs hold significant potential to transform financial inclusion by providing secure, accessible, and cost-effective financial services to underserved populations. However, designing these systems with intentionality is key to ensuring they fulfil their promise. Professor Wang and UNDP remain deeply committed to this mission, and we invite you to stay tuned as we continue our work in this space. In the coming months, we’ll also be releasing a toolkit to support governments in creating CBDC frameworks that prioritize inclusion, security, and accessibility – follow us and don’t miss it!