Peruvian economist Hernando de Soto is known for his work on the informal economy and the importance of business and property rights. When he published his classic The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, he couldn’t possibly know of the emerging technologies that would seek to solve the issues he wrote about.
“Imagine a country where nobody can identify who owns what, addresses cannot be verified, people cannot be made to pay their debts, resources cannot be conveniently turned into money ownership cannot be divided into shares, descriptions of assets are not standardised and cannot be easily compared, and the rules that govern property vary from neighbourhood to neighbourhood or even from street to street.”
The issue of the lack of address verification data and how it could contribute to poverty can now be tackled by using the power of blockchain technology.
Blockchain has the answer
Blockchain, sometimes referred to as a distributed ledger is a type of structure that can facilitate the identification and tracking of digital transactions whilst sharing the information across a distributed network of nodes, or computers. This sharing of information in real time leads to a totally seamless distributed network of trust.
One example of this network in action is in the financial and agricultural sector. A Kenya-based startup called Twiga Foods has partnered with IBM to use blockchain technology to determine credit scores and to distribute non-collateralised micro-finance loans for small food stands in Nairobi. First of all, an eight-week pilot was set up where an average token credit of $30 was given to 400 SMEs across the city, to understand how the data could be used to develop a method of credit scoring. The loan led to an increase in order size of 30% including increased profits for the retailer of around 6%.
Scaling up small businesses
The technology addressed a fundamental challenge in the region which is how small businesses gain access to microloans to scale up their business when they don’t have a credit rating.
This concept would have been unthinkable just a few years ago, back when Soto was grappling with identity and the ability of the poor to repay debts. But today, technology has given us the tools to create new credit modes and better financial profiling that has, in turn, provided opportunities for the poor to access other services such as insurance, credit letters, and the ability to build on their financial history.
A new chapter
This is the beginning of a new chapter where those with less access to funds are able to compete for lucrative government contracts that have previously had discriminative requirements.
Twiga Foods and IBM have now announced that they are aiming to solve issues faced by SMEs in Africa where most are faced with difficulties in accessing credit due to the red tape and complexities of financing processes as well as the high cost of loans and collateral requirements. This can make it impossible for these businesses to scale their companies or to implement new technologies and processes.
This latest development comes in addition to the Kenyan ICT Ministry announcing the formation of a task force that will look at the possibility of blockchain technology at a governmental level. From digital identity management and smart contracts to enabling micro-payments- blockchain based solutions have the ability to eclipse traditional of non-existent infrastructures in Africa and drive forward a new era of growth. Another area where blockchain technology can be used to significantly improve the lives of people in these developing nations is if it is used to create immutable land records.
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