DeFi solutions to Africa’s financial challenges
Up until 2008, not much was heard of blockchain. Then came Satoshi Nakamoto who released the first blockchain model white paper. Fast forward to 2014, blockchain technology was separated from the currency, and with this opened a whole new world of applications and computer programs for use such as smart contracts. Since then, the blockchain industry has grown cutting across travel, finance, and health industries.
How does DeFi work?
We understand Bitcoin as a decentralized digital currency built on blockchain technology. Decentralized Finance( DeFi) on the other hand are financial services built on public blockchains. Most DeFi has been built on the Ethereum network which is the second-largest cryptocurrency after Bitcoin.
For DeFi to work, it uses decentralized applications (dapps) and other protocol programs to execute any transaction such as buying, selling, lending, borrowing, and trading. DeFi eliminates middlemen by working directly with smart contracts and blockchain technology. This makes transactions cheaper, faster, safer, and more convenient than the traditional means. Ethereum is more adaptable and combined with dapps and protocol, it has many uses such as coins, e-wallets, NFTs, stablecoins, tokens, DeFi mining, and saving among other uses. Its open-source nature makes it easier for others to build on.
Financial challenges affecting Africa
Africa is the second-largest continent in the world with over 1.4 billion people and only 32% of the population are financially literate leaving almost half the population illiterate. The basic grasp of money matters and its pillars such as investing, debt, budgeting, and saving is unfamiliar to most. The alarmingly low levels of financial literacy have a ripple effect on the social dimension such as increased crime, abuse, divorce, and development of individuals’ lives all coming from financial insecurity. A poor grasp of financial matters leads to pitfalls such as bankruptcy, poverty, and debt. All these have contributed to the development of African countries.
In order to attain financial literacy, financial inclusion plays an important role. By this we mean, the ability for individuals and businesses to access affordable and useful financial products and services to meet their transactional, payment, credit, saving, and financial needs. Despite noting significant improvement in financial inclusion programs in Africa, 57% of Africans remain unbanked. That means they cannot access financial services that can improve their livelihoods. Most of the unbanked who don’t use financial services state reasons such as high cost, limited access to banking infrastructure, limited and irregular resources, and solutions that are not designed to address the needs of the poor.
Impact of mobile money
Despite the myriad of challenges, mobile money plays a big role in ensuring financial access in Africa. With over 650 million mobile users in Africa, access to mobile phones is higher than access to clean water, electricity, or bank. Globally, Africa is leading in money transfer accounting for 70% of the 1% mobile value. Phones have fast-tracked financial inclusion by banking the majority of the population, especially in remote rural areas. Its flexibility and convenience have contributed to its growth.
The diversification of mobile money beyond the traditional means has played a key role in the industry’s progress. Users can now access loans, faster payment options, saving services, and access to financial services. Mobile money has also facilitated an increase in mobile lending services. The loans are easily accessible and don’t require a long process to obtain, a key contribution to its uptake
A DeFi solution for all
DeFi plays a major role in ensuring financial inclusion by integrating blockchain technology and all its perks with mobile money services. From sending remittances to Universal Basic Income (UBI) to earning gig workers, the process has been eased by eliminating the middlemen involved.
DeFi is offering easier banking services in Africa. Users can now conveniently access banking services with fewer restrictions, no bias, and no intermediaries. Anyone can access financial services regardless of social status without a biased third party involved. The decentralized approach has democratized financial services to be transparent and secure in all transactions.
Lending which is a primary use for DeFi is easier. Anyone can be a lender and anyone can be a borrower. With the help of a smart contract, parties can agree then the smart contract initiates the transaction. Automated lending by using crypto as collateral assets has increased financial transactions, decreased costs, and expanded the availability of lending services. An example of this is the Cinch employer-based lending pilot launched in Nanyuki that saw farmers access more than $200 worth of loans using the Moola Market. The loans were deposited in their mobile money that can be withdrawn using their Kotani Pay wallet.
UBI is provided to vulnerable communities in an effort to alleviate poverty and has contributed to improving the lives of many Africans. A DeFi approach has helped these communities to receive their weekly to daily funds in a fast, affordable and convenient way. Kotani Pay links the decentralized transaction of funds to the beneficiaries’ Kotani Pay wallet and converts the funds to local currencies that can be off-ramped. Mobile money has contributed to this access. With the availability of mobile money agents, these communities can access the funds that sustain and improves their lives
DeFi has given people the power to maintain full control of their funds in their personal wallets. By eliminating the intermediaries, users can decide where their money goes and how to spend their money. Kotani Pay serves the unbanked with no internet access by creating blockchain wallets for users and through the wallet, users can decide to the off-ramp at any moment without access to the internet.