Regional instant-payment systems are expanding across Africa, but fragmented currencies, settlement costs and regulatory differences could limit how far interoperability can go.

Africa is building the infrastructure needed to make cross-border payments faster and cheaper, but the continent's fragmented currency system remains one of the biggest obstacles to seamless transactions.

With more than 40 currencies across African countries, many of which are not directly convertible, banks and payment providers often rely on correspondent banks, settlement arrangements and pre-funded accounts to move money between markets.

The result is that a payment can appear almost instant to the customer while a more complicated process of currency conversion and settlement takes place behind the scenes.

According to Sabine Mensah, Deputy CEO of AfricaNenda, the solution does not necessarily require a single African currency. Instead, the continent could connect the regional payment systems already being developed across different economic blocs.

Payment systems are already emerging across regions

Africa's payment infrastructure is becoming increasingly interconnected.

In East Africa, the East African Community (EAC) is working towards a regional instant-payment system.

In West Africa, the West African Economic and Monetary Union (WAEMU) has launched a regional instant-payment system designed to connect its eight member countries.

Central Africa has GIMAC Pay, which connects six countries within the Central African Economic and Monetary Community.

Meanwhile, the Southern African Development Community (SADC) is developing the Transactions Cleared on an Immediate Basis (TCIB) ecosystem for cross-border payments across the region's 16 countries.

Connecting these regional systems could potentially bring instant-payment interoperability to more than 60% of African countries, according to AfricaNenda.

But connecting payment rails is only one piece of the puzzle.

The currency problem remains

Different currencies do not prevent cross-border payments from happening. Kenya and Tanzania, for example, already facilitate transactions between customers despite using different currencies.

The challenge is settlement.

A payment provider sending Kenyan shillings to Tanzania may need a settlement bank or another intermediary to convert the funds into Tanzanian shillings.

Payment providers can also maintain pre-funded accounts in different currencies to facilitate transactions.

These arrangements work, but they add complexity and cost.

The problem becomes even greater when currencies cannot be directly converted and transactions have to pass through a hard currency such as the US dollar.

This means that faster payment messaging does not automatically translate into cheaper cross-border payments.

Regulation could be just as important as technology

AfricaNenda argues that regulators need to address the rules surrounding cross-border payments alongside the technology.

That includes harmonising regulations covering:

  • Payment systems
  • Licensing
  • Interoperability
  • Settlement
  • Consumer protection
  • Cross-border operations

One proposed solution is licence passporting, which could allow a financial service provider licensed in one African market to operate more easily in another without repeating the entire licensing process.

Greater regulatory harmonisation could make it easier for payment providers to connect multiple markets and reduce the friction businesses face when operating across borders.

The potential economic impact is significant.

The African Continental Free Trade Area (AfCFTA) aims to dramatically increase trade between African countries. Making it easier and cheaper to move money between those countries could support that ambition.

Africa is already experimenting with regional settlement currencies

The continent is not starting from zero.

In West Africa, countries within WAEMU share the CFA franc, while Central African countries within their monetary union also use the CFA franc.

In Southern Africa, the South African rand is being used as a settlement currency within the TCIB system for countries already participating in the network.

East Africa has also maintained ambitions for deeper monetary integration, including the long-discussed goal of a common currency.

These examples demonstrate that regional settlement arrangements can exist even without a single continental currency.

The bigger question is how these systems can eventually work together.

Could better payment rails reduce dependence on the dollar?

Africa's fragmented currencies can make cross-border payments expensive, particularly when transactions require multiple currency conversions.

According to the World Bank figure cited by AfricaNenda, sending $200 in remittances within Africa costs an average of about 8.78%.

That means a $200 transfer could cost approximately $17.

The global Sustainable Development Goals target is to reduce remittance costs to 3%.

Reducing the need to route transactions through hard currencies could therefore play an important role in lowering costs.

But achieving this will require more than simply connecting payment systems.

Africa will need better mechanisms for multi-currency settlement.

Nigeria offers a model for what mature instant payments can look like

Nigeria is one of the continent's strongest examples of the evolution of an instant-payment ecosystem.

According to AfricaNenda's assessment, Nigeria's system has progressed from a basic stage to a mature stage over several years.

The country's payment ecosystem now supports:

  • Person-to-person payments
  • Person-to-business payments
  • Business-to-business payments
  • Government-to-person payments
  • Cross-border transactions
  • Bank and non-bank participation

Nigeria's Nigeria Inter-Bank Settlement System (NIBSS) infrastructure, including the Nigeria Instant Payment System, has also benefited from the country's digital identity infrastructure.

The Bank Verification Number (BVN) has helped connect payments with digital identity and electronic KYC processes.

The country has also worked to reduce payment costs, improve transparency and strengthen consumer protection.

Fraud monitoring and consumer recourse mechanisms have become increasingly important as digital payments have expanded.

The next stage is continental interoperability

Africa's payment transformation is therefore moving beyond individual countries.

The immediate goal is not necessarily to create a single African currency. It is to create systems that allow someone in one African country to send money to someone in another country without navigating a complicated chain of banks, currencies and intermediaries.

The long-term vision is simple: one digital payment tool that can work across multiple African markets.

But achieving that vision will require regional payment systems to connect, regulators to harmonise their rules and financial institutions to develop more efficient settlement mechanisms.

The continent has already made significant progress on the technology.

The next challenge is ensuring that currencies, regulations and settlement infrastructure can keep up.

If Africa succeeds, cheaper and faster cross-border payments could become an important piece of the infrastructure supporting intra-African trade and the wider digital economy.