5 projects using DeFi to build financial capacity in underbanked communities
Access to financial services varies greatly around the globe. In high income countries, access to a bank account, a credit card, and loans are often taken for granted, but the reality is that billions all over the world don’t have access to these traditional financial instruments and services.
In fact, according to UNICEF, 31% of adults around the world are unbanked. There are many reasons why this could be the case, including a lack of financial infrastructure in rural or developing communities, a lack of access to the documentation needed to open a bank account, or a lack of opportunities to develop credit which would enable individuals to obtain a loan or credit card.
Over the past couple of years, the Decentralized Finance (DeFi) movement has made enormous strides in working towards a world where everyone, regardless of where they were born, has the ability to access financial instruments and services to improve their lives. As internet and mobile penetration continues to grow around the world, the case for DeFi only grows stronger, as more communities have the means to access DeFi services.
As this momentum has grown, there have been a number of blockchain-based projects that have emerged that are making use of DeFi to build the financial capacity of traditionally underserved and unbanked communities. In this blog post, we are excited to highlight five of these projects.
Bloinx (by BX Smart labs)
For billions around the world, access to traditional financial services, such as loans, is not an option. As such, many have implemented community-based methods for saving money and issuing loans for the benefit of those in the community. A common community-based approach is what is referred to as a “saving circle”, or “tandas” in Mexico.
A tanda is a type of “rotating savings and credit association” (ROSCA). In Mexico, almost a third of the population participates in one of these groups which are typically made up of family or friends who the members can trust. In these groups, members get together regularly and contribute a certain amount of money, which is agreed upon by the group, to a pool which is then paid out to one member each time. This enables participants to get interest free loans, such as for large purchases, or forces them to save money while awaiting their turn to receive the payout. The order in which individuals receive the payout can be decided at random or chosen ahead of time.
For an example of this in practice, let’s say that a group of 10 friends from a community in rural Mexico all want to purchase solar panels for the roofs of their home to help provide reliable power to their community. The solar panels cost about $1000, so each person contributes $100 every month for 10 months, and one person is selected each month to receive the total of $1000 collected, which they can then use to purchase the panels for their home. This continues until the 10 months has ended, at which point everyone has received $1000 and purchased the solar panels for their own home.
One issue with tandas is that the administration can be challenging, as it requires follow-up with participants to ensure payments are made on time and in the appropriate amount, and record keeping to ensure disbursements are made appropriately. BX Smart Labs addresses this problem by using a decentralized blockchain based application and smart contracts to automate the process and make it as simple, secure, and trustworthy as possible.
Bloinx uses a decentralized application built on a blockchain to enable ROSCAs to be implemented remotely, securely, and with a high degree of transparency. As it is built on a blockchain, it is also highly scalable and would allow more people to make use of this technology with low fees.
It makes use of smart contracts to automize the payments and withdrawals for each period to ensure all participants receive the funds that they are entitled to. This automation also helps make the process much simpler and addresses the challenges of administration with tandas as highlighted above.
The BX Smart Labs solution helps modernize a practice that is so important in many developing countries, and remains a main method of community financing. Furthermore, the technology is open source which allows the community to contribute to this important project.
With two billion unbanked people worldwide who lack access to loans through traditional financial service providers, and given the fact that savings circles are widely used in the developing world, the opportunity for scaling of this solution is immense. That being said, it will be exciting to see this project roll out, and it’s definitely worth keeping an eye on!
Satchel
The Satchel platform is an open sourced mobile application that allows communities to pool their funds together, which they can then lend out through the platform to earn interest. The interested generated through the loaning of funds can go back to the lender as a form of income, or can be used to make improvements to local communities. Without access to traditional financial services, the ability to earn passive income through interest has long been out of reach for underprivileged communities, but Satchel is looking to change this.
The inspiration for Satchel came from the realization by the team at Blockchain at Berkley that that the salaries of many around the world, especially those in developing countries, were losing value each year due to inflation. After digging a bit deeper, they realized that some individuals were moving their income in to crypto to hedge against inflation, and the idea was born!
The focus of the Satchel platform is on enabling communities to come together and crowdfund improvement in their local communities, by pooling their funds together and gaining interest. The initial focus of Satchel was on raising funds to support schools and the communities surrounding them, but the future use cases go well beyond this.
The Satchel team provides the following example for how Satchel could be used in this context:
Parent of student at a school provides $100 USD to Satchel
Satchel lends out the $100 USD using the DeFi Service to earn between 3% and 5% per year on the principal amount
At the end of the year, the parent receives the earned income (e.g., 4% of $100 USD to provide the parent $4 USD)
The earned amount, $4 USD, is split 50/50 between the parent and the school
In the future, Satchel hopes to continue scaling the platform while focusing on three key growth areas of “enabling communities to organize events to raise more funds through the app, enabling people from around the world to donate funds to communities of their choice, and enabling other users to join the platform and leverage the borrowing and lending capabilities”.
For more information on Satchel, check out their depository on GitHub.
Kotani Pay
In their mission to educate communities in Africa about blockchain and cryptocurrencies, the developers of Kotani Pay came to the realization that many of these communities were unable to access financial instruments as the technology for these instruments was built for smartphone users, and simply wasn’t designed to support them. As a result, these communities were missing out on the benefits that came with this technology. This is the inspiration that drove the development of Kotani Pay.
According to the Kotani Pay team:
Whereas most mobile financial apps require a smartphone with access to data or Wi-Fi, Kotani Pay makes use of Unstructured Supplementary Service Data (USSD), the primary mobile interface in the developing world, to provide users access to their blockchain-based platform. USSD can be used with basic feature phones and does not require access to the internet. Furthermore, as this technology is already widely used in the developing world, it is very easy for users to learn how to use the Kotani Pay platform, whereas other more complex platforms may require greater training and education efforts.
Essentially, by dialling a short code in their phone, users will be given access to a menu through which they can easily convert crypto to fiat, and vice-versa. Users can use this to move funds between their blockchain and mobile wallet, without the need for public or private keys, simplifying the process for transacting with cryptocurrency.
Kotani Pay makes use of Celo dollars (cUSD), a stablecoin pegged to the U.S. dollar, which is located on the Celo Platform, to protect users against the volatility of traditionally cryptocurrencies. Users can change their cUSD for mobile money in local currencies using Kotani Pay’s digital wallet.
Due to the nature of the blockchain technology behind this platform, the fees to use this platform are low, and users can avoid typical challenges such as long processing times for transactions. One area that has particularly high fees is cross-border transactions, which Kotani Pay also helps address. This is especially useful for individuals in the region who need to transfer funds across borders to family, or for displaced individuals who may be crossing borders while fleeing for safety. The typically benefits of blockchain such as transparency, security, and auditability, also come with this exciting platform.
Etherisc
As the world’s climate continues to warm, we will inevitably see more volatile weather including heat waves, floods, droughts, and extreme weather events. These weather events can have large impacts on farmers, especially smallholder farmers in developing countries who may not have access to adequate protections. Poor weather conditions can drastically impact yields, thus resulting in food shortages and revenue shortfalls for farmers.
One way to mitigate the impacts of unpredictable weather events is through the use of agricultural insurance. Agricultural insurance helps protect farmers by insuring them against losses due to environmental causes. Despite the value of agricultural insurance as a risk management tool, only 3% of smallholder farmers in Sub-Saharan Africa use it.
There are many reasons why this number is as low as it is including expensive premiums, issues with trust, and a lack of transparency among insurance providers. It is clear that traditional insurance isn’t working for this population, and that an alternative is needed. This is where Etherisc comes in.
Etherisc is an “innovative parametric crop insurance built on top of our “Generic Insurance Framework” (GIF) on Ethereum and indexed to local weather parameters.” Etherisc makes use of Chainlink’s oracle network which provides a reliable connection to external weather data sources. In the event of an extreme weather event, insurance policies are triggered automatically and payout the insurance to the policy holder.
Simply put, the blockchain, which is built on the Ethereum network, uses smart contracts to automatically make insurance payouts during extreme weather events that are tied in to the blockchain via Chainlink’s oracle network. The end result is a fair, transparent, and tamper proof process, where payouts are made in a timely manner.
In addition to the obvious benefits that come with an objective, tamper-proof payout system, this project could also save farmers a substantial amount of money in insurance premiums. In fact, one study found that the use of this technology will reduce the costs required to issue a policy by a massive 41%, bringing down premium costs for the farmers. The end result is insurance premiums in small installments as low as 50 cents, ensuring access to those who previously couldn’t afford insurance.
Leaf Global FinTech
Leaf Global FinTech was launched in Rwanda and currently operates in Rwanda, Uganda, and Kenya, who are collectively home to roughly two million refugees. East Africa has struggled greatly with the refugee crisis, and several East African countries including South Sudan, Somalia, Sudan, and Eritrea are key source countries for individuals fleeing violence.
Leaf is accessible to anyone with a basic phone and allows you to store money and send it to friends and family safely and without banking fees, while allowing users to cash in and out using mobile money. It also enables individuals to send money in one currency, and to be received in another. This is key, as family and friends may be separated when fleeing and could end up in different countries using different currencies.
Users are able to create an account on any mobile phone, and can deposit cash at a local money agent, which includes all major mobile money providers in the countries they’ve launched in. Once the mobile money is in a user’s Leaf wallet, it is easily accessible abroad, and family and friends can even contribute to it. This allows for a much simpler way of storing, sending, receiving, and accessing cash than has traditionally been available.
Unlike most virtual banking platforms, which need users to have a smartphone, Leaf only requires you to have a basic phone, and is the only cross-border wallet currently available on USSD. This is key as, according to Leaf, there are currently 2.4 billion people around the world still using basic phones. This demonstrates the case for Leaf beyond only displaced individuals, but for anyone who doesn’t have access to legacy financial services in the countries in which they live.
What are some other projects using DeFi to build financial inclusion in underserved communities? Tweet us at @Crypto_Altruism, we’d love to hear from you!
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