Microcredit is known to have a transformative impact on alleviating poverty and empowering entrepreneurs in developing countries.
A seminal example is the Grameen Bank, established by Nobel Laureate Professor Muhammad Yunus. The financial inclusion initiative has gone beyond improving the socioeconomic condition of microentrepreneurs in Bangladesh. Its loan recovery rate is even higher than the traditional financial system.
The scheme allows low-income individuals the chance to access financial services towards self-employment for subsistence.
For microentrepreneurs, microcredit is a vital lifeline in their access to capital. Their access to traditional financial services is significantly constrained without sufficient collateral, curtailing their business growth and sustainability.
Trust plays an essential role in bridging this gap, as the loaner must trust that the borrower is creditworthy and will not default on the loan.
However, given the lack of the borrower’s paperwork in disclosing their identities, the authentication and security process – know your customer (KYC) – remains a significant challenge for traditional financial systems’ due diligence and risk assessment.
A digital identity based on blockchain can overcome such challenges by offering a pseudonymous authentication. Blockchain-based microcredit platforms remove the intermediary and provide peer-to-peer transactions at significantly reduced costs.
According to the World Bank, financial inclusion is improving, but Sub-Saharan African countries continue to lag behind the global average.
Research by Schuetz and Venkatesh suggests one of the impediments to financial inclusion is the lack of financial literacy, primarily due to low education levels, poor awareness of the benefits, and a lack of understanding of financial services and products.
Our recent study, funded by the Ethereum Foundation, examined the use of blockchain-based microcredit systems in Kenya, where access to traditional financial services is often limited.
In this study, we evaluated the extent of financial literacy in utilising it to sustain microentrepreneurs’ businesses.
Our research based on interviews with CEOs and founders of blockchain-based payment enterprises identified the following financial literacy barriers among borrowers:
- Persistence of cash preference due to security concerns.
- Challenges in financial management after receiving the credits.
- Ensuring the credits are used effectively for the intended purpose.
- Limited knowledge of alternative financial products and services.
- Lack of awareness of digital financial services.
- Perceived challenge of technical complexity in DeFi.
However, as they adopt blockchain-based microcredit, we found that the need to understand how the platform works for them and benefits them encourages the borrowers to learn more about it.
Our preliminary findings indicate the following potential solutions to overcome the lack of financial literacy:
- Provide basic knowledge of the transactions over the need to comprehend its mechanism.
- Lead their awareness of inflation towards seeking solutions.
- Guide and educate the processes involved in obtaining microcredit.
- Promote localised education and representation to fit the cultural context.
- Emphasise practical use cases over technical details.
- Enhance continuous engagement with financial literacy education through community-driven initiatives and university partnerships.
Although M-Pesa, an African mobile banking service initially established to repay micro loans, is a common mobile money platform for digital financial inclusion in Kenya, there are challenges such as integrity, privacy and security, resource and infrastructure constraints, and stakeholder benefits.
With its decentralised and secure nature, blockchain technology offers several advantages that address some of M-Pesa’s limitations.
Blockchain transactions do not rely on a single entity, reducing the risk of systemic failures and enhancing the resilience of the financial system.
It offers enhanced security with encrypted, immutable transactions, providing transparency and traceability that reduce fraud risk. Users, however, need to be educated on securely managing private keys and digital wallets to prevent loss or theft.
While M-Pesa continues to be a cornerstone of Kenya’s financial landscape due to its simplicity and accessibility, blockchain technology presents an opportunity to overcome some of M-Pesa’s inherent limitations.
By offering decentralised, secure, and cost-effective solutions, blockchain can complement and enhance the financial ecosystem in Kenya.
Combining the strengths of M-Pesa’s established network with blockchain’s innovative capabilities could pave the way for a more inclusive and resilient financial future in Kenya. However, this requires overcoming financial and digital literacy challenges, regulatory frameworks, and infrastructure.
As PricewaterhouseCoopers highlights, for blockchain-based financial products and services to foster inclusion, they must fulfil several dimensions, including the ability and capability to use them, the extent of reliance, and users’ consumption behaviour.
So, can blockchain-based microcredit transform financial inclusion in Kenya?
Our findings suggest a promising yet conditional yes, dependent on strategic implementation and comprehensive education efforts.
