Research note: Digital finance and the strengthening of African monetary transmission

For decades the standard complaint about African monetary policy was weak transmission: the central bank moved its rate and the economy barely noticed, because most households held no interest-bearing assets and most firms borrowed informally, if at all.

Research published by central banks, the IMF and academic economists has increasingly examined whether digitisation is changing that. The hypothesis is compositional: when savings migrate from cash under the mattress to interest-sensitive digital balances, and when digital lenders reprice against market benchmarks, the share of the economy that hears the central bank grows. Transmission is not a constant of nature; it is a function of financial structure — and financial structure has changed faster in East Africa than almost anywhere on earth.

The caveats deserve equal billing: identification is hard when mobile-money adoption correlates with everything else that modernised at the same time; informal credit remains large; and pass-through to lending rates is typically asymmetric — faster upward than downward, to borrowers' cost.

For policymakers the direction of the evidence is encouraging: every percentage point of financial inclusion is potentially also a percentage point of policy traction. The inclusion agenda and the stability agenda, long run on separate tracks, are converging on the same rails.

CBAN will continue to track central bank research departments' published work on transmission across the region.