How Blockchain Technology is Changing Microfinance?
Blockchain technology has the potential to disrupt industries beyond cryptocurrencies and is finding applications across various sectors. In the financial industry, there are several use cases that utilize blockchain and smart contracts. With features like low cost, high speed, transparency, and security, blockchain-based transactions are attracting the attention of many solution providers who are designing payment solutions using this technology.
In the last two decades, achieving financial inclusion for everyone has been a significant priority, leading to revolutionary reforms. With new technologies enabling innovative solutions, affordable financial services are becoming more accessible, fulfilling the social mission of inclusivity. Microfinance, which provides small loans, is an essential part of financial inclusion, empowering underprivileged individuals and small businesses. However, despite improvements, issues such as high-interest rates, multiple intermediaries, slow KYC processes, and a lack of trust in financial service providers still persist. Enterprise Blockchain development offers several possibilities to address these issues and transform the microfinance industry.
Blockchain and Microfinance
The conventional approach to microfinancing involves multiple intermediaries, such as societies or agents, resulting in higher costs for customer acquisition and loan processing. Due to the smaller loan amounts compared to commercial loans, higher interest rates are charged to cover operational costs. However, the use of this technology can eliminate intermediaries, and the decentralized nature of the technology can reduce transaction costs.
Providing identification documents is another challenge faced by microfinance customers, especially for those in remote areas who may not be familiar with the processes involved. Customers often rely on intermediaries for identity verification, which slows down the KYC (know your customer) process and hinders customer onboarding. Blockchain can address this issue by creating a digital identity for customers. Their information can be securely stored and accessed by financial institutions, streamlining the KYC process and reducing the need for manual intervention.
Market Segmentation
The Global Microfinance Market was estimated to be worth USD 261.84 billion in 2022, with a projected increase to USD 288.25 billion in 2023. The market is expected to exhibit a compound annual growth rate (CAGR) of 10.56%, reaching USD 584.83 billion by 2030.
Problems plaguing Microfinance
Microfinance faces several challenges, such as the involvement of societies operating through other financial institutions like NBFCs or corporate banks, leading to high transaction costs and higher interest rates, ultimately borne by the customer.
KYC processes can be time-consuming, particularly for borrowers in remote areas, where insufficient personnel may be available for verification, hindering the process and discouraging customers.
Assessing the creditworthiness of borrowers can also be difficult due to the lack of credit history, making it a significant challenge for banks.
Transparency is another significant issue, with lenders and borrowers often unaware of each other. In many cases, agencies verifying borrower credibility are situated between the lending party and the borrower, and their compliance with the lending party’s requirements may be questionable.
Blockchain as a Solution
Blockchain technology can address several challenges faced by microfinance, such as the lack of credit history, by creating a digital lending identity or ledger that includes borrowers’ economic histories, enabling assessment of their creditworthiness. Trust networks, such as land records and business registration documents, can be used to verify creditworthiness, as implemented by ‘Twiga Foods,’ an agricultural marketplace in Kenya that utilizes this technology to track transactions between local farmers and vendors, creating credit histories for farmers.
By emphasizing transparency, blockchain can reduce interest rates paid by individuals for accessing financial services through decentralization. Creating a digital identity and using smart contracts can also ensure efficient loan repayment. Financial organizations can use smart contracts to create bonds based on specified terms and conditions for repaying debt.
The Strategic Roadmap
The projected value of blockchain technology to exceed 20 billion dollars by 2024 provides a strong incentive for industry experts to leverage this technology in microfinance. Although there are challenges in implementing technology, it has immense potential to disrupt and transform the industry. Financial institutions interested in adopting enterprise blockchain development should be prepared to embrace this new wave of technological advancement.
Seeking guidance from blockchain vendors can help businesses understand the benefits and potential of blockchain technology. A strategic roadmap for integrating blockchain should be developed, including identifying areas where blockchain can improve processes, creating a plan for implementation, and assessing the risks involved. With proper planning and implementation, blockchain can be a powerful tool in revolutionizing microfinance.
Conclusion
Blockchain has the potential to revolutionize the microfinance industry by providing a cost-effective solution through the BaaS model. In addition, it can increase efficiency, minimize operational costs, and improve transparency for all parties involved. Utilizing blockchain can result in faster loan processing times, increased access to financial services, and ultimately, enhanced financial inclusion.
As the value of enterprise blockchain consulting is projected to exceed 20 billion dollars by 2024, financial institutions should prepare to embrace this new wave of technological advancement. Consulting with blockchain vendors can help businesses learn about the benefits and potential of blockchain technology. The future of microfinance is promising, with the potential for significant improvements in the quality and quantity of products and services offered.
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