Microfinance, simplified, is the practice of lending very small loans to the ones who are in need of them. However, no matter how good the intentions were with this idea, the venture has not been successful to deliver what it was meant to do for financial institutions or to its potential clients. Its failure could be attributed to numerous reasons. What comes to mind right away is the unfortunate existence of middlemen and the complications that come with it – something that a few startups have begun to believe could be eliminated with the usage of blockchain.
Ashish Gadnis, CEO of BanQu, maintains that the issue with microfinance is that the people who actually want to lend through it are not directly available to communicate with the people who are to avail the microfinance.
Gadnis has a startup that is seeking to build an economic identity platform through the blockchain of Ethereum.
He shares the story of a farmer in East Africa who had availed numerous microloans. The microloans, instead of helping her get stable with her financial situation, had seemingly made it worse by causing her to be trapped in an indefinite debt repayment loop.
Gadnis stated that the farmer in question had 3 different loans from different microfinance institutions, but she was not able to benefit from them because she was dealing with 15 percent to 40 percent interest rates on each of her loans.
BLOCKCHAIN AS A SOLUTION FOR MICROFINANCE
According to the people who proposed the notion of using blockchain for microfinance, the technology’s very natural benefit to connect people directly to each other is the very first step in devising microfinance methodologies from scratch.
Taynaah Reis, co-founder of Moeda, the lending platform, started turning to blockchain earlier this year due to the aforementioned feature.
Reis mentioned that her motivation for the award-winning project was that one-third of the 200 million citizens in her native Brazil have minimal access to banking services, and have to take out credit lines with an annual interest that is as high as 4,000 percent.
Reis’ firm collaborates with local credit companies that have pre-existing relationships with customers in rural areas, but who aren’t always able to extend their own services at affordable rates, if at all. Moeda officials maintain that since blockchain provides one with an easier operating process, the cost of lending could definitely be decreased as compared to local lenders if this method starts getting utilized properly.
As a solution to the connectivity problem between lender and borrower, Moeda reviews and ultimately decides which projects can be featured on the site to receive loans. Once those projects are perused by lenders, they can send money directly to the borrowers.
A $50,000 loan in September was processed to rural Brazil from Moeda using its own Moeda tokens. The loan was granted to a farm. It made it very possibly the first-ever investment of its kind that was transacted in a cryptocurrency.
How do you identify who are you processing the loan to?
Scott Nelson, CEO of Sweetbridge, stated that blockchain’s unique benefit in this situation is the ability to use existing affinity networks in order to help build and verify borrower identities.
He suggested that the methodologies for blockchain can be utilized to extend trust networks which already exist in the culture. This would allow them to use those trust networks to extend direct credit.
It was further suggested that these digital identities that are powered by blockchain, would allow borrowers to build their own economic histories and credit profiles, even if they are invisible to the legacy banking system.
“Identity is really the core of what the Moeda system is. We’re not just providing financial services, we’re providing an identity that is linked to everything that a person is doing,” said a Moeda official, adding: “It’s not your traditional credit score, it’s what your reputation to your community is.”
BanQu has rolled out a related system in 5 countries.
Its economic passport combines a variety of data points, (financial history, land records, trust networks, business registrations) so the people seeking loans could more readily demonstrate their qualifications to potential lenders.
Gadnis defines it as a lender knowing exactly who the person is to whom the lender is providing with the loan. He states that by having all of the information about the borrower available beforehand, there’s no room to provide false information.
He further explains it as being a cost-effective method as well, stating that since there’s no need to ask for any additional information, and no interviews: there are no middlemen.
Gadnis then explained that since there’s no additional staff involved, as a microfinance institution, he would be able to reduce the cost of borrowing.
How much time will be required for this to be implemented?
While such advances may carry tremendous promise, the path to their widespread and complete adoption is paved with hurdles.
These projects will require feedback and approval not only from consumers, but the regions’ governments and traditional financial institutions during a time when global banks are de-risking.
Andi Dervishi, global head of the FinTech Investment Group at the International Finance Corporation, stated that educating specific consumers on how to securely use such new technology will not be an easy feat to achieve.
He went on to mention that there are situations in Africa where the consumers could still write their PIN on their own debit card. He suggested that if we think of cryptocurrencies in the context of financial inclusion, we will not be taking away the layers of complexity from the process, but rather adding it.
A finance specialist from the World Bank also agreed with the notion, explaining that blockchain’s ultimate usefulness in improving financial products such as microfinance has a long way to go.
As the specialist from World Bank stated, the idea of using blockchain for the method of microfinance is more of a niche product used in certain contexts and in certain settings.