African banks warm to blockchain

By Mark Anderson

Posted on November 22, 2016 12:47

Financial institutions are looking for ways to use the accounting system behind the virtual currency bitcoin to reduce the cost of banking transactions

African banks are beginning to see the potential of blockchain, an innovative system of shared and decentralised databases that got its start with the digital currency bitcoin.

Proponents point out that the lack of a centralised ledger for transactions allows for greater transparency and lower costs in all sorts of trades and other activities.

South Africa’s third-biggest bank by assets, Barclays Africa Group, announced in July that it joined R3, a New York-based coalition of 45 firms developing blockchain for use in the global financial system.

African banks are new to the blockchain space, which has already had some support from the world’s biggest banks. In August, UBS, Deutsche Bank, Santander and BNY Mellon announced they would partner with Clearmatics, a blockchain developer, to launch a new digital currency aimed at central banks.

Blockchain backers say the system can drastically reduce transaction costs, and each year banks and other institutions spend as much as $80bn on conducting trades, according to research by Oliver Wyman, a financial consulting firm.

If blockchain is to take off anywhere in Africa, it is likely that Kenya or South Africa will be first, although there are many regulatory and other hurdles in the way. Several bitcoin exchanges are active on the continent, including Singapore-based BitX – which operates in Kenya, Nigeria and South Africa – and South Africa’s ice³x.

According to, traders exchanged more than KSh7.5m ($74,000) in bitcoin in Kenya in the last week of September. BitPesa, a Kenya-based remittance firm, conducts transfers using the digital currency in four African countries.

Many in Kenya’s vibrant tech scene, which is home to mobile money and other fintech innovations, are excited about the technology. “Bitcoin can allow the transfer of funds nearly instantaneously and costs less than traditional means,” Josiah Mugambi, executive director of Nairobi’s iHub, told the UK newspaper The Guardian.

In Africa, blockchain innovations could also be used in other domains. “There is huge potential beyond the financial sector, like in other sectors that could benefit from streamlining of supply-­chain processes such as agriculture and energy,” John Karanja, the founder of BitHub Africa – a consultancy that works on projects related to bitcoin and blockchain – tells The Africa Report.

Many of South Africa’s financial technologists are also interested in blockchain. “There are many possible uses for blockchain technology in a variety of industries. We have only seen the tip of the iceberg,” says Nerushka Bowan, a senior associate at legal firm Norton Rose Fulbright in Johannesburg.

“It is encouraging to see the financial services sector, including banks in Africa, leading the way in developing proto­types and possible financial uses,” Bowan adds. “It is likely to be the first industry with widespread adoption of blockchain technology.”

Testing ground

The sheer scale of technological innovation taking place across the continent is cause for optimism. “Look at other e-money concepts on the continent, such as M-Pesa in Kenya. If there is a place for e-money to thrive, it will be on this continent,” says Bowan.

Part of the reason African banks are a fertile testing ground for new financial technology is that they have a relatively low customer base and smaller assets, according to Brett King, co-founder of US-based banking app Moven.

“The opportunity is to produce new constructs that sort of bring together unique opportunities and competencies – things like the blockchain and mobile-money movement on the phone, and mesh networking. It’s a matter of using Africa’s unique potential right now to come up with things that defy Western ­logic in many terms or just don’t fit that classical model,” he says.

Dollar replacement

Volatile local currencies could make innovations like bitcoin seem attractive to some African central bankers. “Instead of US dollars, perhaps in the future we will see the rise of an African cryptocurrency which will have a higher value and stability than local currencies, is widely accessible and possibly not subject to forex regulations,” Bowan says.

“Bitcoin itself has seen massive growth in value since its inception as adoption and trust has risen.” The absence of a central authority regulating bitcoin has been a major stumbling block for the technology.

In early October, Kenya’s central bank governor Patrick Njoroge told reporters: “You’d be out of your mind to allow bitcoin.” There are few signs that huge barriers preventing blockchain from taking off across the continent will be removed any time soon.

Most concerning is a lack of security, says BitHub Africa’s Karanja: “It will be very difficult to secure [blockchain platforms] from both internal and external threats – mainly hack attacks.”

Much more testing and development are needed before African central banks will use blockchain for financial transactions, according to Karanja. “Banks could streamline their credit-scoring processes using blockchain technology to make lending more efficient by providing more transparency to borrowers and regulators,” he explains.

From the November 2016 print edition

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