Micro finance has been touted as one of the vital ways in which banking and credit services can be provided to the unbanked. It has been designed in different ways in many regions across the globe. Large scale implementations of micro finance can be seen in the Indian subcontinent and Africa.
Micro finance includes micro-credit, micro-insurance and other basic banking products. Generally, it is provided to small entrepreneurs, farmers, self-employed individuals or for informal business needs. It has been instrumental in creating ground level opportunities but has failed to cater to the overall needs and demand for finance.
Over 2 billion people around the world are deprived of basic banking and credit products. Some of the micro finance programs implemented by government agencies are being stifled under the bureaucratic procedures while in some other regions banks and credit providers take advantage of the financial illiteracy of people and don’t offer them loans even when they qualify with the minimum micro finance loan requirements.
Many of the micro finance programs in developing economies are biased and are unregulated which lead to low development, embezzlement, corruption, and widening gap between the rich and poor. The centralized approach towards micro finance is proving to be lethargic and restrictive.
These weaknesses in the traditional system bring up the following questions:
- How do you make the systems efficient and reliant?
- How do you provide better solutions in a decentralized manner where everyone, whether you are a micro finance lender, or a borrower are the stakeholder of the system?
- How can we ensure proper checks and balance?
- And most importantly, how do we increase the reach of funds and credits amongst the general public of a particular region, state or country? And whether there is a possibility to create an income source out of micro finance?
The answer to these questions is quite simple and has been touted as one of the most disruptive technologies of the coming age – blockchain technology.
Overview of What Blockchain Is
As we are going to discuss in more details, blockchain is data immutable, has append only data structure, and is built upon the distributed ledger technology.
Data immutability – In a blockchain network, each block has the hash code (imagine a digital signature) of the previous block and the blocks are distributed to all the participating nodes (computers). To manipulate the data, a hacker would have to change the data in all other participating nodes otherwise the change is easily traceable. Hackers require enormous amount of computing power and more so require time coordination of hacking all the nodes at the same time which it makes it almost impossible.
Append only data structure – The blocks are added to the longest auditable and traceable chain in the network. A new block cannot be added in between two existing blocks. If someone tries to create a new chain, the network will reject the chain as it checks for the time stamping and hash codes of the blocks previously added.
Distributed ledger technology – In a traditional database, we usually copy files from one node or system to another or transfer data from one node to another. The copied or transferred data is still a copied version of the original data set. But in blockchain data structure, as soon as the block is added to the chain, all the participating nodes are notified in the backend and the data is original in all the nodes. Even if one node shuts down, the other nodes will still have all the data, unaltered and in sync.
With these three stellar pillars, blockchain is capable of harnessing true benefits of micro finance.
How Blockchain Can Redefine The Micro Finance Sector
The following examples of blockchain companies entering the micro finance sector will help illustrate the benefits of blockchain technology.
WeTrust has created We Lending circles where a person can create a group, invite his friends or know contacts, set up the rules of the group for distribution of funds (smart contract technology is leveraged in the background) and use the system to fund their informal business or personal needs. You can gain better understanding at – https://tlc.wetrust.io/
Other Blockchain companies like Humaniq and Everex have facilitated the transfer and lending of money and have future plans to venture into credit services on blockchain.
But again, these solutions or applications have a very limited reach and their credit availability is not enough to serve the large population looking for alternative and affordable financing .
Here is what we think could be a viable solution:
- Create target regions and concentrate the efforts in only these markets to completely penetrate them.
- Understand the software and technology use cases the region currently has.
- Determine whether the micro finance decentralized application (Dapp) or a blockchain network created can be an all-inclusive set up which is easy to understand and use
- Initiate two types of funding – project based for entrepreneurs and personal funding.
Project based funding would include a phased approach. The idea or business should be first evaluated and a 30/40% funding be released to initiate the business. The Next funding would be released based on the progress being made and so forth till the last stage of the business setup is built. The progress of the business can be tracked using AI and IoT (e.g. by measuring in real-time the the volume of grains purchased by a farmer) and data can be used to execute the smart contract. As soon as the respective stage of the business setup is completed, the smart contract can be executed, and funds would flow to the entrepreneur. After the completion of the project, the interest receipt schedule (which shall form part of the smart contract) will be executed and interest on the amount lent will be calculated and received by the platform.
Personal funding can be done using either the lending circles approach or the method mentioned above but in a more lenient fashion.
Both these approaches give the people with money a chance to earn interest income on the money that they lent. Considering that the money flow from developed countries to the underdeveloped ones (general example), individual lenders can invest small amounts of money in multiple small businesses which will reduce their risks and on the other hand the borrowers will benefit from the increased amount of funding – everything based on the exchange rate of fiat currencies in both countries against the cryptocurrency token.
- After the introduction of the product, a training and awareness seminar can help execute the program of micro finance on blockchain in a better fashion.
- As far as authentication and verification are concerned, digital identities of the lender and the borrower will be managed on the chain and they will not remain anonymous to each other but to the network. That way with blockchain, we can ensure that additional trust factors are in place. Face/voice/fingerprint recognition should be enough to register on the network.
- Once the system works in one region, it should be maintained in the same and simultaneously be introduced in the other target region.
Example of How a Blockchain Micro Finance System Would Work
- A farmer can register himself on the platform through the validation techniques mentioned above.
- He shall specify the reason behind his funding requirement – Whether to buy grains and other agricultural tools, equipment, etc.
- Based on the reason presented, the network validators can divide the business need in stages.
- Each stage will be given weight based on the funding requirements.
- The requirements will be listed, and global investors can view the listing, open the project, and invest the required amount of money or less.
- Funds will be accumulated in a funding pool for that project.
- Based on the stage of completion of the business need, funds shall be released. By the end of the business milestones, all the funds allocated to the pool will have been invested into the business.
- After the business has started or project milestones have been completed, the interest receiving mechanism will begin based on the smart contract. And all the investors will receive the interest amounts in tokens which they would be able to convert into fiat.
These blockchain micro finance examples would bring a higher level of inclusiveness to micro finance. The above-mentioned methodology can be altered to introduce micro insurance and money remittance along the sidelines of credit.
A decentralized global network of micro finance can become a step forward in bridging the gap between the rich and the poor, the developed and the under developed.