Ethiopia’s digital payment gateway

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(Photo: Anteneh Aklilu)

The first ever three years National Digital Payments Strategy (NDPS) of National Bank of Ethiopia (NBE) hints that it would apply incentives and discouraging instruments like tax incentive and cash handling fee to attain the goal of the NDPS.
The strategy that officially launched on July 15 and will face implementation till 2024 quoted Prime Minister Abiy Ahmed’s message that there are efforts within and beyond the Ethiopian payment ecosystem that have laid the foundations for digital payments in Ethiopia, “however, challenges still remain and a strategic effort to address these is needed; a NDPS.”
“I trust that NDPS will assist Ethiopia in meeting the challenges that currently lie ahead as we transform the payment ecosystem to move toward a cashLite and more financially inclusive economy,” Abiy said on his message on the new strategy.
The NDPS strategy that developed by the support of partners like United Nations’ Better than Cash Alliance amplified the requirements of encouraging and the discouraging tools to obtain the expected dream on the way to transform digitization payments in Ethiopia.
“Incentives are often an important way to support the business case to drive change in different industries and topics. Countering the cost of cash through fees is a critical component of championing the adoption of digital payments,” it said on its strategic pillar 2.
It elaborated the benefit stating it creates a cost incentive for the financial system players to invest in the development and expansion of the digital offer, and over time pass along the incentives to the consumers to opt for digital transactions instead of cash.
Tax credit incentive, cash handling fee or limit cash transaction are the benefits or vice versa.
For instance it said that revenue authorities can incentivize merchants to accept digital payments by offering them tax credits and by the overall reduction in operational costs for the companies, “in other geographies, tax credits are further being used to encourage the creation of digital payment platforms for commercial banks and for innovators. Looking at the global adoption of digital payment systems, incentives can be identified as a key propagator.”
Cash handling fee
Regarding cash handling fee it hinted that instruments that will discourage financial firms to manage cash handlings.
“In Ethiopia’s financial sector, the cost of cash transactions is not formalized. The NBE does not charge financial institutions a fee for cash-handling services like dropping off and picking up banknotes. Financial institutions do not apply differentiated fees for cash transactions to their customers,” the NDPS explained.
“Furthermore, transactions done at bank branches are free, while transactions completed through digital platforms (ATMs) have a cost. The current landscape includes most merchants accepting only cash and encouraging consumers to go to banks to withdraw cash to use for everyday expenditures,” it added what the current status seems.
Due to that it said that introducing fee on cash handling would change the circumstance.
“The implementation of cash-handling fees by central bank for financial institutions can contribute to financial institutions feeling the full cost of cash and reacting by reducing cash acceptance and encouraging customers to use digital instruments,” the strategic document stated.
As outcome it said that over time, financial institutions pass along this cost to users through differentiated pricing structures for different payment channels, making digital transactions a more cost-efficient method of payment, “this also creates an additional revenue stream for central bank and for financial institutions in the long term.”
According to the intention of the strategy document, the establishment of a new charging instrument also expects banks to expand creativity and focus to attain the digital payment scheme.
“Establishing a contextualized cash-handling fee structure for financial institutions will create an important incentive for key players to develop and expand digital payment offerings in Ethiopia. Implementing this action will require a transition plan to facilitate the move from significant cash dependency to a cashLite economy,” it explained.
As a recommendation of implementation it stated that all cash-handling services provided to the banks and other financial institutions be mapped with a defined timeline to gradually introduce fees for cash-handling services for financial institutions, in line with global good practices.
Limits on cash transactions
Imposing limits on cash transactions is also the other instrument which targets core area of boosting digital payment of the country.
The strategic document shows that NBE is conducting internal analysis to impose limits on cash transactions, identifying as key challenges the lack of availability of access points (POS) and the resistance of informal merchants to move to digital due to tax implications. It added that further studies required implying effective instrument to limit the cash transaction.
Coordination with EthSwitch and financial institutions, define a contextualized limit for cash transactions in line with global good practices, and define a timeline to implement limits for cash transactions have stated as recommendation to introduce the scheme.
Tax incentives & e-receipts
The strategic document stated that merchants currently argue that they have little incentive to conduct digital payments, “today, merchants that accept digital payments have multiple POS machines due to the lack of interoperability. Consumers are not incentivized to leverage digital payments, since most merchants do not accept them.”
It said creating incentives will increase the adoption of digital payments, while creation of tax incentives for electronically traceable payments can encourage adoption while decreasing the shadow economy.
As a recommendation it stated in coordination with the Ministry of Revenue (MoR), to determine tax incentives to propose to merchants (including VAT rebates on purchases, tax credit eligibility).
The timeline for implementation of tax incentives, cash handling fee and limited cash transaction would be in the third year of the strategy period.
The other key area that will take place in related with the launching of NDPS is developing a law to make legalize electronic receipts (e-receipts) on the eye of MoR.
In Ethiopia, e-receipts are not accepted as a proof of payment for tax purposes. “There is an initiative currently in place to create legislation that will accept e-receipts to increase the adoption of digital payments,” it said.
In coordination with the MoR, prepare guidelines, processes, and forms to accept e-receipts as a proof of payment will be done in the way to make the country one of the digitize nations.
The legislation to accept e-receipts as proof of payment will be implemented starting from the late first year of the strategy period that means this budget year up to early of next budget year.
Foreign investors
About the opening up of the digital payment sector for foreign investors, the strategy stated that additional studies shall be developed on the stated period of implementation period. But it did not indicate or show time frame when it will be opened.
“The NBE and the Ministry of Finance (MoF) have plans to review the existing directive to define a strategic way forward where partially or fully foreign-owned public or private enterprises may be licensed as payment instrument issuers,” it said.
It added that revising regulations will be considered in the medium term to allow foreignowned companies to participate in these services.
It also stated that in coordination with the MoF and the Ethiopian Communication Authority, adaptation and revision of the directive should be done to meet market requirements, and potential expansion of electronic money services to foreign-owned companies.

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