
Bank of Uganda establishment. PHOTO BY MICHAEL KAKUMIRIZI
Imagine paying for groceries or sending money across the country in seconds, without middlemen or hefty fees. This is the promise of Central Bank Digital Currencies (CBDCs)—a digital revolution brewing in Uganda’s financial space.
The digital currency world is moving at breakneck speed, and it’s no longer just about Bitcoin. While Bitcoin and its crypto cousins opened the floodgates, their wild volatility and regulatory headaches make them unsuitable for mainstream finance—just ask Uganda, where Bitcoin is far from legal tender. Only El Salvador and the Central African Republic have dared to crown Bitcoin as an official currency.
Enter stablecoins: crypto’s calmer, more predictable relatives, pegged to assets like the US dollar or gold. But their rise has central banks feeling the heat.
Keen to harness the perks without the chaos, they’ve introduced their trump card—CBDCs. CBD Cs are like a digital version of cash—legal tender, government-backed, and stable. Unlike Bitcoin, which thrives on decentralisation, CBDCs are tightly controlled by central banks.
Picture it as the Uganda Shilling, only digital and much cooler, built to work seamlessly in a world of mobile wallets and instant payments.
For Uganda, a CBDC could revolutionise the financial landscape, promising smoother, cheaper transactions and the muscle to tackle financial crimes. Think of it as the government’s answer to mobile money—without the need for private apps or middlemen.
What are they?
CBDCs come in two types: Wholesale CBDCs are for the banking big leagues, streamlining interbank transactions and slashing risks; Retail CBDCs are for the rest of us—everyday users storing value and making payments, with the central bank holding the reins instead of commercial intermediaries.
Imagine sending money through your phone, but instead of relying on mobile money operators or banks, the central bank directly handles your digital shilling. No middlemen, no extra hoops—just straightforward transactions backed by the Bank of Uganda (BoU).
The challenge? Designing a CBDC that’s secure, inclusive, and stable without tripping over cybersecurity risks or financial imbalances. It’s a tech-heavy balancing act, but if Uganda gets it right, this could be a game-changer for its financial future.
Right now, the public holds central bank money as cash, while commercial banks can access it electronically. A CBDC would f lip the script—offering digital money, one-to-one with cash, directly from the central bank. Think of it as holding a physical shilling but on your phone or computer.
Not mobile money
But here’s the twist: CBDCs aren’t just mobile money with a fancy title. Mobile money is essentially an ‘I owe you’ from a commercial bank or telecom operator—your balance is a promise, not a guarantee.
A CBDC, however, is a direct liability of the central bank, making it safer and fully integrated into a country’s monetary system. This shift raises big questions: Could giving the public direct access to central bank money disrupt financial stability? What would it mean for commercial banks' roles?
For a CBDC to succeed in Uganda, a trio of economists consulted for this article mention that it must outperform mobile money on critical fronts: cost, efficiency, reliability, and accessibility because if it’s just “cash in a digital outfit” without tangible benefits, why bother?
As the BoU rightly notes, “Increased access to central bank money through a CBDC could create opportunities but also new challenges for payments, monetary policy, and financial stability.”
To get it right, Uganda’s central bank is doing its homework. In September, it issued a consultative paper to economists, telecoms, fintechs, and financial operators to weigh the risks and rewards.
“Bank of Uganda is conducting stakeholder consultations on the viability of issuing a Central Bank Digital Currency in Uganda. The process is at very initial stakeholder consultations,” BoU said in an email response to Monitor.
Rolling out a CBDC is no small feat. It requires a robust infrastructure mirroring traditional payment systems. At the core of this ecosystem are three key players: the central bank, banks and payment providers, and rules for managing money and risks. Supporting this are end-users, tech infrastructure, legal frameworks, and oversight mechanisms to keep everything running smoothly.
The architecture
Uganda’s payment system is a web of banks, businesses, and service providers overseen by the central bank. Infrastructures like the Uganda National Interbank Settlement System (UNISS), the Automated Clearing House System (ACH), and the Central Securities Depository (CSD) play a vital role in keeping it all connected.
That’s where BoU comes in to ensure financial stability, efficiency, and safety. The big question remains: Can a CBDC complement, or even outshine, Uganda’s well-entrenched mobile money systems? The answer could reshape the future of finance in the country.
Mobile money currently dominates Uganda’s digital financial landscape, with 43 million registered accounts as of December 2023, BoU data shows.
This transformative platform has driven financial inclusion, especially in rural areas, processing transactions worth Shs228 trillion—exceeding Uganda’s GDP of Shs202 trillion for the 2023/2024 fiscal year.
But there are challenges with this. Rural areas face limited mobile network and Internet access, while high transfer fees for bank-to-wallet and wallet-to-bank transactions hinder affordability. Merchant interoperability is absent, increasing costs for micro, small, and
medium-sized enterprises (MSMEs), same with card payments, which face similar fragmentation, with unreliable infrastructure leading to low ATM/point of sale (POS) usage and high fees.
BoU acknowledges this, explaining that a well-designed CBDC could stabilise and integrate Uganda’s digital payments system. Steps are already underway.
BoU is developing a national switch to improve interoperability across mobile money systems, POS terminals, ATMs, card schemes, and e-commerce platforms. This initiative aims to reduce transaction costs and foster digital innovation.
Financial inclusion
Despite progress, a significant portion of Ugandans remains financially excluded. By 2023, BoU data shows that 68 percent of adults accessed formal financial services, up from 58 percent in 2018, largely driven by mobile money adoption.
However, barriers such as low smartphone penetration (16 percent) and limited Internet access (29.1 percent) constrain rural adoption. Added to this is the fact that mobile money agents face liquidity shortages, fraud, and theft, while high transaction fees disproportionately burden low-income users.
Cross-border payments are another sticking point. Sending $200 (Shs726,000) to Uganda costs an average of 5.43 percent from the UK, 11.64 percent from Kenya, and a staggering 33.18 percent from Tanzania, reflecting fragmented systems, slow settlements, and high currency conversion costs.
It’s these challenges that have fueled the rise of private digital currencies and crypto assets underscoring demand for cheaper, more efficient payments. However, these unregulated currencies lack central backing, exposing users to credit risks.
Uganda’s central bank views a CBDC as a safer alternative, offering stability while enabling a digital financial ecosystem because it has potential to expand financial inclusion by lowering costs and reaching underserved populations.
Its offline peer-to-peer transaction capabilities might enable those without smartphones or reliable Internet to engage in digital finance. Fintechs could also leverage CBDC infrastructure to create affordable services for excluded groups.
However, the potential downside is real. If not designed for accessibility, a CBDC could deepen financial exclusion. The question is whether Uganda can design a CBDC that delivers these benefits without destabilising the financial system—a challenge that could define the next chapter of the country’s financial evolution.
Sizing up CBDCs
BoU in its new consultative paper believes CBDCs must be evaluated alongside fast payment systems (FPS), which already offer real-time, low-cost transaction processing.
“Just like any other emerging technology, CBDCs pose some risks, including general operational risk on account of failure in the systems and processes. There could be financial stability concerns arising from financial dis-intermediation or substitution of bank deposits for CBDC, among others,” BoU said.
From a monetary policy perspective, CBDCs could improve transparency and strengthen policy transmission mechanisms. They would allow central banks to have greater control over monetary aggregates and alleviate constraints such as the zero lower bound. For example, negative interest rates on CBDCs could eliminate this constraint and improve policy pass-through to market and deposit rates.
CBDCs could also address systemic issues like tax evasion, money laundering, and illicit financing. Their traceability ensures compliance with prudential standards and allows tracking of illegal funds.
In a cash-reliant economy like Uganda, this transparency could significantly curtail corruption and promote accountability. However, as long as cash remains available for illicit activities, the impact of CBDCs may be limited and the central bank has clarified that a CBDC would complement, not replace, physical cash.
CBDC Scorecard
A transition to a CBDC could reduce cash management costs, including printing, transportation, and storage, while enhancing efficiency within the banking sector. The cost of printing money, according to BoU’s annual reports, averages Shs147 billion per financial year.
However, implementing a CBDC comes with challenges, particularly the substantial infrastructure investment required. “No trials have been conducted as yet. Bank of Uganda, like other central banks in many jurisdictions, is still at the stakeholder consultation stage and undertaking preliminary research focusing on the general policy objectives that a CBDC would address if it were to be adopted in Uganda’s context and other pertinent considerations such as the risks and potential implementation challenges,” BoU told Monitor.
Economists like Fred Muhumuza believe “the previous rollout of mobile money services that depend on digital wallets has levelled the ground for a future digital currency and that means less resistance from the local population.”
The biggest risk posed by digital currencies in developing economies, Dr Muhumuza said, “lies in high frequency transactions by market players with little scrutiny and are not backed by physical cash.”
As Uganda weighs the risks and rewards, the question remains: Can the digital Shilling bridge gaps in financial inclusion while reshaping the future of money?