Impact of Decentralized Finance on developing countries.

Access to financial services is critical to achieving the Sustainable Development Goals (SDGs) before 2030. The most vulnerable groups such as the poor, women, youth, and less educated people in developing countries tend to be more excluded from accessing these crucial services that can improve their lives. Consequently, this widens the inequality bridge between developed and developing countries.

DeFi enabling financial inclusion

Financial inclusion is described as the ability for individuals and businesses to access valuable and affordable financial products and services that meet their needs and are delivered responsibly and sustainably. These services include savings, transactions, credit, insurance, and payments. This access is so critical in the global policy agenda that it facilitates achieving 7 of the 17 SDGs.

The biggest barriers to financial inclusion are lack of income, distance in accessing financial services, the cost of accessing financial services, lack of trust, high transaction costs, and gender discrimination among others. In response to these challenges, especially in rural areas, policymakers and the fintech industry need to provide an alternative banking system that offers convenient, accessible, affordable, and sustainable financial services.

Decentralized Finance (DeFi) provides financial services using blockchain technology. This fintech removes intermediaries and uses smart contracts as an arbiter for transactions. By using digital assets such as cryptocurrencies, it creates a parallel financial ecosystem that addresses the barriers to finance imposed by conventional financial institutions.

What makes DeFi unique from conventional banking systems?

For one, its convenience ensures that anyone can access its services wherever they are, and using Kotani Pay, they don’t need an internet connection for that. Transactions are also transparent and the users have full autonomy over their digital assets. Its anonymity makes these financial services available to anyone regardless of their age or gender. Beyond that, users can tap into a global liquidity pool for credit as long as they can post collateral without the need for background information.

More people and micro-finance are tapping into these financial systems and empowering the unprivileged such as farmers as seen in the Cinch employer-based lending and small and medium enterprises as seen with the ongoing Tukule kwanza Buy Now Pay Later pilot program.

What’s the economic and social impact of DeFi on developing countries?

1. Financial independence

DeFi provides disposable income through its credit services and investment options among other financial services which in turn gives its beneficiaries financial independence. For the government of the developing country, this means relief from the economic burden of supporting those living in poverty and in turn redistributing these funds to the development of the country. For the beneficiaries, it gives them the confidence and dignity to know that they can provide their own basic needs without assistance.

2. Economic growth

Economic growth is influenced by land, labor, capital, and entrepreneurship. By increasing the quality and quantity of these factors, a country increases the production of its goods and services. Poverty affects the capacity for entrepreneurship, getting capital, purchasing land, and getting labor for its citizens as they lack disposable income.

DeFi services such as its credit provide its beneficiaries with more disposable income. This means an increased capacity to access capital, get labor, and increased entrepreneurship. By accessing these factors of production, there is more purchasing power and consequently an increase in money circulation in the Country. The government collects more revenue that is redistributed to developing the country and increases economic growth. For the beneficiaries, it means an increased capacity to improve their living and economic conditions.

3. Saving and investing

The majority of the vulnerable group that has no access to financial services do not have the flexibility to save or invest. This is attributed to the fact that they don’t have disposable income to venture into such financial options. DeFi offers affordable and available global liquidity for use. DeFi users can earn as they save and access credit for investing in activities that can in turn generate income. What makes it lucrative for the marginalized and unprivileged is its transparency and low entry barrier.

This can be seen in the Cinch employer-based lending system, where most beneficiaries receiving the DeFi credit would use the income to stock their business, invest in farming materials, and increase their livestock. These activities boost their business and supplement their income.

4. Reduced inequality

DeFi offers decentralized access to financial services with no bias. Anyone can access its services regardless of their income level, gender, or credit history. They can access DeFi loans if they are able to post collateral. Micro-finances can easily access these loans and have a larger liquidity pool, increasing their capacity to offer credit.

As a result of this, when more people can access an alternative disposable income, more empowered they are to change and improve their lives and come out of poverty. They have the ability to invest more, access better services, access education, and be economically empowered to pursue better standards of living. This in turn enables the government to earn enough revenue to build infrastructures and provide better services which bridge the inequality gap.

5. Reduced poverty

Poverty is caused by unemployment, inequality, and lack of income among others but the majority of these causes stem from lack of money. Financial services such as lending provide disposable income that can be used to invest and improve standards of living.

By addressing the barriers to financial inclusion such as lack of trust and credit score, DeFi offers simple, affordable, and unbiased credit. The more people access these credit services, the more disposable income they have, and in turn, the lower the poverty levels. Users have the ability to provide for themselves with basic needs and have extra income to invest in income-generating activities.

DeFi is undergoing extraordinary growth as it evolves and changes our interaction with money. Despite its infancy, through pilots, we see the socio-economic impact DeFi has on the unbanked in developing countries. This modern approach to accessing financial services is providing an alternative banking service for the over 1.7 billion people across the world who live without access to financial services. For Kotani Pay, financial inclusion means providing 57% of Africans with no access to the internet, a familiar way to access DeFi services without the internet. In doing so, we are on a journey to ensure that Africa can reap the benefits and opportunities that come with DeFi.

At Kotani Pay, we are committed to ensuring financial inclusion for all by linking your clients to accessible DeFi services. Let’s talk more.