DECENTRALIZED FINANCE: APPLICATION IN AFRICA

Traditional banking systems in Africa have recently been on the verge of default due to debt and currency crises, making the population wanting better access to banking solutions and customer services.

With decreasing trust in traditional banking institutions, the young and tech-savvy population is in need of digital solutions to problems of accessing banking and controlling their own finances, such as through a Decentralized Financing (DeFi) model. With DeFi, people in Africa without adequate access to banking can finally gain access to financial tools such as being provided liquidity, borrowing, lending, (insure), saving, etc, which will be essential in a growing economic market. It is important to discuss how DeFi will leapfrog traditional banking in Africa as it will be able to provide access to banking to a larger population that traditional banks were not capable of doing so.

The emerging markets in the continent are controlled by a few people who want to maintain a monopolistic market. The traditional banking system has been known to be susceptible to mutability, and alterations, a fundamental flaw leverageable when engaging in under-the-table transactions, money-laundering, diverting funds, or defrauding investors.

This centralized and opaque system makes it easier for concealing illicit transactions, aiding bad actors with the necessary platform for looting funds abroad. With DeFi, every user can monitor the movement of money from the economy through the system; because DeFi is an open network, users can monitor the movement of illegal funds.

Traditional banks require the government’s approval to operate, which makes it easier for them to be influenced by the government, a level of dependency that easily makes them pawns. With DeFi, a lot of problems are addressed because anyone would be able to create their digital bank, which is accessible in Africa.

ZIMBABWE: A Case Study

Zimbabwe is one of the greatest examples of the banking crisis that has been experienced by a country in Africa. The economy crashed, and the country’s central bank looked for a temporary solution to their problem, which is printing money, which escalated the crisis because as the money printing increased, the Zimbabwe dollar devalued to the extent that trillions of their currency couldn’t purchase bread in the market.

The citizens abandoned the currency, and banks were forced to adopt the Chinese yuan and the US dollar as a means of payment for local transactions. The banks issued banknotes not because it was demanded by the public who had already lost faith in it, but because they were instructed by the central government to do so.

The adoption of DeFi in Africa will provide individuals necessary freedom, and tools to help manage their personal finances, with less government restriction encountered. Hedging against inflation and the decentralized system means that you can decide what to do with your money, unlike the central banks, which dictate how your money should be spent.

Accessibility to Loans

Access to loans is one of the most important parts of the economy, loans are important for businesses to grow, and businesses’ growth will help grow countries’ economies. Banks are responsible for giving out loans in Africa, but the problem is that many banks prefer to earn through transfer charges and a substantial amount of money is deducted from their clients rather than making interest from loans.

Many central banks do not have a proper structure for lending, banks are also afraid to take risks with loans, so they set up collateral rules that are almost impossible to meet by small businesses. They can ask for a property worth 5 million for you to obtain a loan of 1 million, which is unrealistic. Many banks in Africa are also afraid of being defrauded. Another challenge with traditional loans is where banks and business owners take advantage of the system.

DeFi can solve loan problems in Africa by creating a decentralized loan system like AAVE or dYdX in which the participants will provide liquidity to earn a profit on interest, and businesses can lend loans to grow.

Community Inclusion Currencies

Community Inclusion Currencies (CICs) are local money used to pay for goods and services. CICs are not meant to replace national currency; they are complementary currencies designed to support local commerce. CICs are backed by the local goods and services of a community. CICs provide a medium for daily spending and trade while allowing individuals to save national currency (which can be volatile or scarce) for interactions with larger businesses and government institutions outside of the immediate community.

While they circulate in communities at unit value 1:1 hard-pegged to the national currency, their total exchangeable value to national currencies can never be greater than the value of their reserve. Through increasing trade by matching unmet local needs with under utilized local resources, community currencies enable sustainable environmental and social development programs. Community Currencies are distinct from the wider field of financial innovations because they are set up with the asset and productive capacity backing of the communities that will ultimately use them.

Community Inclusion Currencies are game-changing. When community groups are given the ability to safely create their own credit with simple to use yet cutting edge open-source technology something amazing is possible.

Community Inclusion Currencies are complementary to the national currency by being countercyclical to the national market. When the value of the national currency goes down due to disasters, international market fluctuation, or other factors, the relative utility of CICs goes up, thereby allowing community members to continue trading basic goods and services amongst themselves. CICs are transformational in vulnerable communities because they provide this resilience

Even in the poorest communities, people have goods and services to offer each other – yet lack the money to trade with. By opening up the door to credit creation communities no longer have to rely on donor aid in order to have a medium of exchange.

CICs are built on scalable blockchain technology that enables anyone in the world to create their own credit systems and link them together into a decentralized economic system. Blockchain technology provides underlying protocols that allow Community Currencies to trade with each other directly and maintain collateral. Local currencies can be traded with one another based on bonding curves - all users need is a mobile phone and a custom wallet application.

CICs can also be used for targeted aid when markets or supply chains deteriorate in the midst of a crisis. Specific health or food-related business may be targeted using blockchain transaction data in order to provide rapid aid to those who need it most.

Currently, the Norwegian Red Cross organization has undertaken a Community Currency Inclusion project in Kenya. The project aims at reinventing cash transfer programs to act as a catalyst for communities to develop and trade their own medium of exchange (CICs). Current pilots in Kenya have shown that CICs enable vulnerable communities to have a long-term multiplier - more than 21 times - effect on cash transfer fund impacts.

The project is in partnership with Kenya Red Cross, IFRC, Grassroot Economics Foundation, and the payment platform provider Sempo. The project is also backed by the Ethereum Foundation.

In conclusion, the opportunities provided by decentralized finance are numerous more so in Africa. The Community Inclusion Currency project highlighted above is just one example. The African economy is undergoing tremendous growth that has not been experienced before. Opportunities offered in terms of transparency are extremely valuable to counter banks supported by untrustworthy governments, which contribute to illicit trades and money laundering, overall not fulfilling their duties towards economic development.

However, it is also important to mention the limitation of Defi in bringing access to finance in the African continent, especially in terms of a lack of concrete governance in emerging economies without a developed financial infrastructure that could result in transparency being an issue. DeFi application is limited to who is using them, and if a corrupt institution uses DeFi technology, they may be able to continue their corrupt behaviors through this technology. This is especially the case in emerging economies, like many in the African continent, that still have a loose legal structure that may not be able to govern fraudulent activities on the DeFi network as of yet.