Blockchain Lending – Can It Solve The Trillion-Dollar Credit Gaps?br>
Across the globe, there is immense and undeniable need for accessible lending solutions that provide equal opportunity to the informal sector. Access to loans in developing economies could solve trillion-dollar credit gaps and see local economies thrive.
The fact of the matter is that the future of lending, which accounts for 90% of employment and 50% of enterprises in many countries, is in the informal sector. Most businesses in this sector do not borrow from banks because they are limited by their lacking financial and credit history. Without formal lending history and access to loans, these businesses are heavily restricted in their day-to-day operations.
Historically, micro-lending has involved making loans in cash to groups of women mainly in rural areas (like Grameen Bank has done for 40 years). By lending to a group instead of just one person, group-based micro-lending combined small payments for an individual into larger payments for a group — solving the problem of small transaction sizes. And by imposing joint liability among group members (requiring each group member to guarantee the others’ loans) the model passed the task of approving borrowers to group members themselves: group members will automatically weed out borrowers likely to default, since they would be on the hook.
Yet this traditional micro-lending has not scaled to serve the majority of informal and underserved small borrowers and small businesses. Not everyone wants to borrow as part of a group, borrow in cash, and wait days and sometimes weeks when a loan may be urgent.
Digital, blockchain-based micro-lending — instant disbursements into mobile wallets and bank accounts based on telecom and other spending and small business data — can scale traditional microfinance well beyond existing levels. The fact is that everyone has financial history. Whether it’s paying a phone bill or purchasing groceries, we all have a history of transactions that counts towards our credibility as borrowers. In developing countries across the world such as India, Myanmar, Kenya, Colombia and many other markets, small shop owners increasingly rely on digital services to run their businesses and track finances.
Most blockchain-based lending projects aiming to address this issue focus on giving people a credit score or a portable identity. While this is worthwhile, it is only part of what is needed to transform how lending markets work. What’s needed is new plumbing on a systemic level—pipes that connect lenders, borrowers, and data sources and actually mobilize loans.
Blockchain technology can do much more. It can power open, decentralized markets for exchanging data among lenders, data providers, and borrowers. And it can store the transactions in these markets — what loans are made, with what data, to whom — permanently. This creates reputations so that lenders and others in the market know which counterparts are reliable and which are not. Blockchain will take the initial successes of data-driven lending and revolutionize the pipes of lending markets globally, mainstreaming micro-lending beyond its success of the past 30-40 years to become fully-inclusive, instant and affordable.
Recipients of data-driven loans have acknowledged the security and promise of further opportunity offered by digital loans. HappyLoans, which has disbursed over $8 million to over 18,000 micro-enterprises across India, has provided small business owners in India with positive impact on growth, flexibility and reasonable and affordable costs and interest rates lower than regulated microfinance rates.
For example, Syed Abid runs a ladies footwear store called Shoeplanet in Bangalore. The store is a family business that was passed onto Syed in 2014. The shop has built a reputation on reliability and quality. As a result of a small loan through HappyLoans, he was able to improve and grow his business, keep his customers happy, and increase product variety in his store. Furthermore, Syed has more financial independence and security in knowing that he can get easy and prompt access to a loan. With his business thriving, he is also able to manage his family’s savings much easier.
Mohammed Habeeb, a father of three, owns a milk book in Hyderabad. He received a digital loan that allowed him to replenish his stock and expand the booth’s offerings during the aftermath of demonetization. Had he approached a bank for a loan, he would have been held up in a long, drawn-out process. Access to a loan brought about a growth in his business and left him feeling empowered and financially independent. Moreover, his family life was positively impacted as he did not have to dip into family savings.
Finally, Dinesh and his brother co-own a money transfer and payment services enterprise in Chembur, Mumbai – Sewathi Enterprises. In their line of work, Dinesh needs to always be prepared with buffer money, which is not always easy. As someone who works financial services, Dinesh found the loan process easy and advantageous to his business. Receiving a loan assisted Dinesh in building Sewathi’s capacity by helping him maintain a money buffer to be prepared against unexpected service requests. It further provided him with financial independence and protection of his family’s finances.
With increased access to data through open lending markets powered by blockchain, the progress and impact made by HappyLoans can be amplified and scaled globally.
Gautam Ivatury is the Co-Founder and CEO of LendLedger, a decentralized network that connects data providers, lenders, and borrowers for secure, transparent, cost-effective, and innovative interactions. LendLedger unlocks digital credit data on informal and small business borrowers, making it viable for lenders to offer trillions in loans to untapped segments.