Despite the significant progress made in recent years to provide banking services to unbanked individuals, more than 1.7 billion adults around the world have no access to a bank account in any form.
As can be expected, citizens in emerging nations are more likely to be unbanked than those in developed countries, with the World Bank finding that around 850 million unbanked people live in just seven nations: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan.
An acute lack of banking infrastructure and issues around financial literacy means that people in these regions do not have access to day-to-day financial services. But the advent of decentralised finance (DeFi) is seen as a powerful contender to deliver accessible services at a low-cost to even hard to reach communities.
Positioned as a decentralised alternative to traditional banking, DeFi offers financial products and solutions through smart blockchain-based contracts, without the need for traditional banks, exchangers or brokers.
Services as broad as remittances, loans, savings and investments can be accessed through DeFi. According to DeFi Pulse, the total value of assets locked in the DeFi ecosystem in May 2020 reached $56 billion, illustrating the strong growth in this innovative financial ecosystem. Thanks to DeFi, anyone with an Internet connection is able to access these unique products and manage their assets without having to pay conventional fees.
If embraced, DeFi has the potential to open up access to financial services and accelerate the growth of emerging markets. The benefits DeFi offers specifically to individuals and enterprises in developing markets include the ability to store money in non-volatile so-called ‘stable coins’ that are pegged to currencies such as the US dollar and British Pound, instead of holding assets in poorly performing national currencies.
One of the most innovative players in the DeFi space is decentralised credit platform platform Goldfinch. The aim of this start-up is to expand the pool of potential lenders to beyond banks through providing an open marketplace for loans without collateral in emerging markets.
Kenyan asset-financing Fintech firm Tugende gained access to a $5 million borrower pool to fund the growth of its operations, with credit even being offered to low-income people in India for cookstoves.
DeFi is powered by blockchain or distributed ledger technology (DLT). Genevieve Leveille is the Principle Founder and CEO of Agriledger. Agriledger utilisess blockchain technology to build better trust, transparency and traceability in the agricultural supply chain with projects currently focused on Haiti.
Genevieve highlights the benefits of blockchain-powered platforms, which, “enable aggregation and storage of data that can be relied upon to develop new products and services such as loans, investment packages and pension plans, bespoke for a customer’s financial status. Hence, Blockchain technology lends itself to be very appealing for open banking as it only allows access to pre-approved data in a secure, auditable, and non-intrusive manner. Understandably, this improves trust and enables banks to only share the requisite information without compromising user privacy and data security.”
Blockchain-powered platforms allow a new digital financial ecosystem by layering distributed ledger technology on top of what were originally analogue, paper-based legacy banking APIs, whereby enabling third parties to interact securely with banks and their data without directly accessing the core banking systems. Furthermore, by hashing data (i.e., by encoding the information) it prevents unauthorised users from reading data that is stored in this unreadable format.”
Inclusive creditworthy decisions
Genevieve looks to the potential of the technology and REST (representational state transfer) APIs across various financial instruments including Loan Risk Assessment. “It would enable the creation of credit rating models which will determine affordability and eligibility assessment and will also calculate the credit margin taking the producer and/or other participants’ credit worthiness, bank’s cost of capital and other return on capital requirements.
The banks could collapse the loan portfolio into an SPV structure and structure the tranches of notes with different credit ratings which can be sold to investors. These notes could be tokenised along with the details of “art of farming” assurance or guarantees creating passive income and capital liquidity for stakeholders along the value chain.”
There is clearly a lot of potential for DeFi and blockchain technology to disrupt present financial models in emerging markets, providing new financial products and opportunities for individuals and businesses.
Even with the solid benefits embracing DeFi products can bring, several factors are hampering the widespread usage of these solutions in emerging markets. While some start-ups are working to build user friendly DeFi applications, the vast majority of current services have not prioritised the user experience, with technical barriers existing to access these solutions.
Regulators around the world have also been hesitant to engage with the cryptocurrency space, including the DeFi ecosystem. Without any form of regulation, individuals and businesses will find it very difficult to safely engage with DeFi applications.
Clear barriers will need to be overcome if DeFi can reach its full potential in emerging markets, but if regulatory frameworks are established and the user experience is improved, more people will be able to access these much-needed financial innovations.
Want to hear more about how decentralised finance is reforming financial services and infrastructure in emerging markets? Join us at FTT DeFi on 12th July where we discuss the key opportunities and challenges of DeFi in financial services, as well as how new products will challenge the established thinking.