Resolving Financial Inclusion Using Blockchain: The Unlikely Savior for the Unbanked in Africa

The pace at which the Blockchain technology is getting utilized in different industries across the world is fantastic. One particular sector that Blockchain uses is the banking and financial industry; banks are increasingly leveraging it in their day-to-day operations.

For these financial entities, Distributed Shared Ledger, along with its other vital constructs – smart contracts, security and network consensus, is a match made for their operations. It is cheaper to use, comes with an assurance of greater security and transparency and also features a relatively high speed of settlement of transactions.

Right now, the figures depicting Blockchain use across the globe are impressive. Over 24 countries are investing in it with over 90 central banks deeply prospecting on how they could leverage it in their operations.

Further, a consortium of 200 banking and financial institutions, including Goldman Sachs and Barclays, now has R3, a Blockchain startup. They have already pumped over $1.4 billion in it, even as tens of banks initiate projects pegged on this Distributed Shared Ledger in their operations.

Africa’s banking industry is a far cry from that of the more advanced world 

While Blockchain use is taking root in China, Japan, Singapore and Korea and the western world, Africa, where a majority of people are unbanked, is wallowing at a disadvantage. Roughly 1.7 billion people, many of whom coming from sub-Saharan Africa, have no bank accounts.

In this era, it would sound implausible that anyone, anywhere in the world can be walking around, unable to save, borrow and exchange money at a bank. According to a World Bank Global Findex, 66% of the African populace own no bank account and effectively depend on the alternative financial services.

The absence of a more developed banking and financial system in Africa is partly blamed for the continent’s poverty levels. The growth of fintechs and how they have been received vis-à-vis banks also means that banks aren’t the only ones calling the shots.

Seems Sub-Sahara Africa’s future is on Fintech

Considering the loud buzz around financial technology and the “fintech” in general, sub-Sahara Africa looks unwelcome for conventional banks. Led by MPesa, a pioneer mobile payment system born in Kenya, fintech and the promise to democratize financial services is in a boom.

In Kenya and ten other countries, Mpesa is more than just a name. The service, now boasting over 30 million users and an impressive 96% subscribers in Kenya, has transformed Kenya’s economy, slashing poverty levels by huge margins. In fact, by 2017, a decade of its existence, the service had lifted about 194,000 Kenyan households out of abject poverty.

It’s not a secret that more Africans own mobile money accounts compared to the number of those who have bank accounts. For them, sending and receiving money via mobile phones is a lot easier. In fact, with just a few touches of their mobile phones, ordinary Mpesa users pay their insurance, take loans and invest in bonds and securities.

MTN Money and Orange Money are also boosting financial inclusion in Africa in a big way. The three are helping advance financial inclusion while allowing locals to access loans and credit efficiently, straight from their devices. Collectively, Sub-Saharan Africa now leads the world in transactions that contribute to GDP through mobile money at 10%, followed by Asia’s 7%.

Blockchain for Financial Inclusion: Why it’s the Right Fit

But while the fintech sector in Africa is pivotal in ensuring greater financial inclusion, there could be an even more powerful Tsunami in the offing. Many governments are pondering on whether Blockchain could be holding the key to “radically transforming” their country’s economic fortunes.

Sierra Leone’s president Julius Maada Bio has already expressed interest in incorporating Digital Shared Ledger in their credit bureau. The whole concept is pretty new in the continent, but considering the perks, it is associated with, it is no doubt’s what they need the most.

Mobile money has been effective in reaching both the unbanked and the underbanked. But looking at the vast gap Blockchain will potentially bridge, especially in fulfilling the “Know Your Customer” practices, its arrival is highly welcomed. Basically, Blockchain can help the unbanked on two fronts:

  • Identification purposes

One of the most significant reasons why a majority of people in sub-Sahara Africa are unbanked is because of a lack of proper identification measures. Having no IDs effectively stops an individual from opening a bank account or even getting a loan. As the World Bank found out in 2017, over 500 million people worldwide lack proper forms of identification.

The Blockchain technology will, however, grant everyone a unique digital identity regardless of whether one has an ID or not. Data captured and stored in the digital ledger can neither be tampered with nor erased, making the platform credible for a lender to refer to. And because a majority of them own smartphones, this technology has everything it will need to be a success.

Better yet, Blockchain in identification has the potential to come in various forms and still offer better services. It could rely on Biometrics or even use facial and voice recognition, the Humaniq-way, and capture everyone’s distinct data.

  • Credit History

Banks and lending firms extend credit based on the applicant’s credit score. In sub-Sahara Africa, however, the unavailability of credible and reliable data to be used to assess a loan applicant’s credit scoring stops them from issuing credit.

The core principles of the Blockchain technology are: it is transparent, immutable and faster in settling transactions. For banks, fintechs and credit lenders, every individual’s data captured in it can never be altered with and will always be visible to all. That simply means every lender’s credit history will be accessible and easy to assess.

Blockchain also eliminates the essence of intermediaries whose rent-seeking efforts are responsible for the often high costs across the board. Bloom is one of the startups that have already piloted this idea and proved how identity fraud could be stopped.

Will Africa leapfrog the conventional banking system altogether?

MPesa and mobile transfer business, in general, took off quickly, and Blockchain in bridging the banking gap has a lot to achieve. Interestingly, the BBC believes that uptake of cryptocurrencies in Africa is growing terrifically, similar to the country’s growing list of lending and financing startups.

If Sierra Leone’s Kiva-steered initiative becomes a success, Xavier Michon, Deputy Executive Secretary of UNCDF, believes that many countries will want to develop theirs too. Project Kiva Protocol, is highly expected to solve a host of barriers, including being a source of reliable data for its citizens and helping them get funded quickly.

Further, by the end of the proposed 3-year “first stage” of implementation, the DLT protocol in Sierra Leone will ensure absolute and secure ownership of one’s personal data. It remains to be seen whether it will indeed be the most advanced credit bureau in the world.

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