Demand for cash in Rwanda: Developments and prospects

Abstract

Payment systems worldwide have undergone significant mutations, characterized by substantial uptake in digital payments, which are expected to decrease the demand for cash. The use of digital payment means has equally increased in Rwanda amid ongoing developments in digital payment technologies and various policy initiatives to promote the use of cashless means of payment. Nevertheless, cash in circulation continued to grow and play a significant role in consumer payments. This study aimed to analyze the drivers of cash demand in Rwanda and, specifically, the impact of digital payments. Results from different ARDL models suggest that using cashless means of payment, notably mobile payment, negatively affects cash in circulation in Rwanda. Nevertheless, the increase in economic transactions put upward pressure on cash circulation in Rwanda. At the same time, the interest rate proxied by the T-bills rate represents an opportunity cost as its increase reduces cash in circulation. Regarding other payment innovations, while banking agents’ transactions negatively affect cash in circulation, there is no evidence of any effect from mobile banking, internet banking, POS, ATMs and mobile money cash transactions on cash in circulation in the long run. Therefore, policy initiatives to (i) foster financial access and inclusion, (ii) use of digital means of payments, (iii) reduce the size of the informal economy will help in reducing the cash in circulation and promote the use of cashless means of payment.