DeFi as a solution for banking the unbanked in Africa
The Global Findex shows that ¾ of the world’s population does not have a financial account. Can DeFi help bring banking to the doorstep of the unbanked?
DeFi seems to be the solution for banking the unbanked. The Global Findex shows that ¾ of the world’s population does not have a financial account. This is not because of poverty alone but due to travel costs and the paperwork involved. In subharan Africa, some 350 million adults remain unbanked.
Can DeFi help bring banking to the doorstep of the unbanked? if it will how will it do it and what are the challenges involved? All these are going to shed more light on this article.
Who are the unbanked?
The unbanked refers to people who do not have access to affordable banking services. According to the world bank, roughly 2.5 Billion people do not have a financial account.
Also, about 160 million businesses worldwide suffer because of a lack of financial services.
This is due to many reasons like the cost of going to these financial institutions, the paperwork involved in registration, accessibility to these services, and many others. These people are forced to rely on other risky means of managing money and gaining financial aid. this can lead to stunted economic growth and incremental poverty.
What is DeFi?
DeFi is short for decentralized finance. With decentralized finance, you are your own bank and you don’t need any central figure or authority to keep your money safe for you. you don’t need to walk or drive down to a financial institution to get access to loans, make deposits, and keep your funds safe.
Defi uses smart contracts to work. And with smart contracts, you do not need to trust a centralized third party to keep your funds safe. You just need to trust the code used to run the smart contract. Instead of the financial institutions in the traditional finance sector, DeFi uses smart contract-powered decentralized apps as a replacement for banks. with DeFi, features like saving, investing, Borrowing, lending, and trading are all possible without the need for you to leave your house. DeFi reduces both financial and security risks that financial companies and institutions face.
What problems is Defi solving?
Defi solves problems that the current financial system faces which are;
Traditional financial services and institutions rely on centralized governance. They have a hierarchy of management and they work under strict regulations from the government. They are controlled by a small percent of the banked population.
DeFi is different as it operates with a distributed ledger technology known as the blockchain. Everyone can access their funds at ease and without any third-party permission and no central body can freeze their assets
Defi makes financial services easily accessible to the general public. Most DeFi projects have publicly viewable code that others can build on top of. Also with DeFi, much paperwork and endless verification processes are eliminated because of the smart contract feature of DeFi.
Blockchain technology works with many nodes coming together to verify and validate transactions. If an entity wanted to hack into the blockchain, that entity will have to hack every node in the blockchain, there are thousands or even millions of nodes, and a single entity or group of people hacking millions of modes at the same time is quite impossible.
If one or some of the nodes are found misbehaving and going out of conduct they are punished by slashing or voting out of the blockchain network.
Another problem DeFi solves is the high cost of transaction fees and interest rates.
In traditional finance, sending funds to someone in your country and sending someone funds in another county is quite different in terms of transaction fees. In the blockchain, transaction fees are relatively low compared to traditional finance.
Sending millions of dollars worth of tokens could be done at a transaction fee of a few cents. This is far from the case using traditional finance
Also, banks lend money at high-interest rates, interest rates can be as high as 17%. This can discourage small business owners and interested real estate investors. Interest rates in Defi are relatively low. Some protocols in Defi have loans with interest rates as low as 6%
There is also the problem of privacy. DeFi reduces privacy risk by requiring few identification requirements to access financial services. In a real-world scenario, you will need to provide your country identification number, age, sex, marital status, personal photograph, and a bunch of other private information to get a bank account. There is no room for anonymity and individuals who provide fake credentials will be penalized by the government of that country if caught.
With DeFi apps, there is no need to forge credentials because no credentials are required in the first place. All you need is a little understanding of how DeFi works and you can access financial services for years without even providing an email address
DeFi also solves the problem of transaction speed.
Although Defi projects are still falling behind in terms of transactions per second (TPS), DeFi projects are still fast in terms of delivery. For example in traditional finance, if MR A in Argentina wanted to send funds to MR B in Nigeria, many transaction procedures need to be arranged before the transaction goes through. Sometimes it might take hours or days. In the blockchain, transactions are completed within minutes or seconds, I remember receiving my first Bitcoin from someone on another continent and it took only 20 minutes. So this is some awe-inspiring tech.
In most regions banks close by 4 pm and never open on Sundays. If you had a problem that came up during the weekend you will have to wait till the next week to resolve them. In DeFi, this does not exist because the market never sleeps. People around the world with different time zones operate in decentralized finance and most of the components are run by code so services are available anywhere around the clock.
DeFi; A solution for the unbanked
With all the benefits of Defi mentioned above, DeFi can be an effective solution to banking the unbanked across the world.
No paperwork means less time consumption for registration and more efficiency.
Also, DeFi applications can be accessed with just a mobile phone, a laptop, or a PC. Defi is easily accessible to the internet literate.
The traditional finance system favours the elite and thet have strict requirements high credit scores, steep fees, and high incomes. Defi creates equal opportunities for both the high and low-income population. To borrow some high amounts in traditional finance you will need to put down an asset in return for this loan as collateral, In DeFi putting down an asset is not required before getting a loan.
Small businesses can access loans in a nick of time, which they can use to grow and scale up. This is done with low transaction fees and low-interest rates. And with less time too.
The journey for banking the unbanked using decentralized finance doesn’t come without its challenges
Many users complain about the complicated user interface in DeFi protocols. The swapping of tokens in hardware wallets alone takes time to understand. DeFi protocol features such as farming, lending, and borrowing need some blockchain understanding to fully use these features also, interfaces are not user-friendly.
The Decentralzed finance sector is still new, DeFi gained the most attention in 2020 and at the time of writing the total value locked in Defi 2 years later is roughly $50B.
Most people do not know about the benefits and solutions Defi brings to the population at large. However many educative projects have been coming up to drive massive blockchain adoption in Africa and beyond. Chain Afrik is one of them.
Unaudited smart contracts pose a big risk to Decentralized Finance protocols. Bugs found could lead to exploitation and users’ funds can get stolen.
Many DeFi hacks have been recorded over the years. It is essential that you study a protocol thoroughly before interacting with it.
It’s surprising that in this internet era majority of the population in Africa and the world at large remain unbanked. Financial institutions have some limitations which can hinder banking of the poor population.
Defi already has transparency and security and the barrier to entry is low unlike CeFI Blockchain technology and Defi can help in making the banking of the world’s population a reality.
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