Loan securing and repayment on the Blockchain
He had been making the usual monthly deposits for seven extra months from his government salary after his loan had been completely repaid. He took a loan of $500 and paid it back over a period of 12 months, seven months ago and has been upgrading his lendable amount ever since. His wife is expected to deliver a set of twins in two months and he also planned to sell his car and with a little financial addition, change it to an SUV as his family was getting bigger. His plan was just to pay five extra months till his loan application gets approved. But then, the loan was delayed and he decided to keep upgrading his account.
It’s second week in the third month and yet his loan application hasn’t been approved. He’s starting to get worried. So is everyone else, some of whom applied for five months or more. They get the same excuses of some people avoiding repayment, so many pending loan applications are recently getting disbursed among others each time to ask questions. In summary, just the words of the executives and nothing more is all they get.
Mathew, a very good old friend of his was among the executives, so Samuel confided in him with heartfelt bitterness. He explained what he was passing through and what he hoped to achieve before his wife put to bed. Mathew out of empathy couldn’t hide the truth of what was really going on. The contributed funds have been privatized as loans are given to individuals not part of the co-operative society. All for some extra gains in loan interest and so on. Samuel couldn’t contain the rage anymore and decided to opt out of the group asking for his contributed funds to be refunded. But then, even that couldn’t be reimbursed. Available funds weren’t just enough.
I am an African and come from a country where the above scenario is the most interest rate friendly and most available loan scheme. But most times, happens to be the worst loan system experience. We have all suffered one way or the other for having a centralized and non-transparent governance. This is no new development as far as eyes can see. It’s been in existence to make life easy for the less fortunate to meet some monetary targets. Loans are our means of survival, a source of inspiration by compulsion to strive towards achieving a dream of financial freedom. The one who gets the loan either strive, or get into trouble for not being able to realize the goals. There are two scenarios that awaits ones the loan is granted. Get shackled or get free.
The processes don’t look easy yet, it’s even more difficult than stated. Our dreams aren’t the same. The goal of the financial institution that grants the loan is to regain the loaned amount with interest; the goal of the one who loans is to make more profit, return the loan and to be financially stable. But the final goal which wasn’t always there is the goal of the middleman that hands over the money. His is a selfish goal before releasing the funds. The goal of getting rewarded or bribed from where he’s made no effort. That’s the power granted to him by the centralized nature of the system we practice.
“The goal of getting rewarded or bribed… the power granted to him by the centralized nature of the system we practice”
In my previous articles, I successfully stated the advantages of the decentralized ledger. What I didn’t say is that it is the savior of Africa and Africans. The African land is rich in minerals and above it, people with bright minds but not enough to brighten our corrupted minds. Blockchain may not be the savior or the hero of other continents, but deserving or not, it is the redeemer Africa needs to get back on her feet. Corruption has eaten deep into not only the heart of the political leaders but all other elected and non-elected officials in their little jurisdictions and sectors both private and public. To make it worse, we practice centralization which gives them all the power they need to deny others of their rights.
Without further ado, taking the introductory real — life event as a sample, lets discuss how the digital centralized system can be harnessed to protect the interest of all. First we need to identify the due protocols to be followed from when applications are received and when loans are given out. Loan applications in some instance usually require a full KYC each time a loan is to be applied for. This can only mean a lack of proper documentation. And of course, what can’t be ignored are the many conditions that surrounds the application to ensure the loan repayment by the borrower. Some of the conditions can however be removed since the smart contracts are equipped with the means to automatically enforce the verdict upon any breach of the contract.
“…decentralized ledger… the savior of Africa and Africans.”
Below are parts of the policies followed when loans are the applied for and granted:
- A borrower can only apply for a loan which equates to twice the amount he has in his cooperative savings account. The savings account can be seen as a unique escrow account for the cooperative members where they deposit monthly either to repay a loan or to upgrade their account.
- A borrower needs to be backed by at least two guarantors with significant amount in the escrow account who will in some cases be prevented to take a large amount of loan during the term of the borrower’s pending loan. This is considered an insurance policy.
- In some cases he borrower will submit and surrender privileged access to his/her salary account which allows the society to apply for direct deduction from the account into the escrow account to right off the debt as included in the monthly loan repayment structure.
- In the case sited above; the borrower has the right to revoke the cooperative’s right to monthly deduction from his salary account once the loan has been completely repaid or adjust the deduction to another plan only to upgrade his escrow account monetary value.
There are some factors that are used to determine which loan application will be prioritized over the other. These factors include but not limited to:
- Membership: This is a grade attained due to how long the borrower has been a member.
- Loan repayment rating: This condition is a measure of how fast is the loan repaid each time borrowed.
- Amount applied for: Little amounts are granted easily.
- Overall credibility: A free rating of each person by all the member of the society based on general assessments.
The purpose of these articles of course is to clarify what is achievable on the Blockchain and the required information with little or no technical discussion. The idea is to simplify it for all to be informed. So, we will not be going into any coding and technical aspect which is on a need-to-know basis. In this case, there will also be a need for an Oracle source in order to efficiently utilize the lightweight contract. Having it at the back of our minds that the idea of integrating Blockchain into the scheme is to:
a. Make loan disbursement fair and equitably available to all based on the mutually agreed policy guiding the activities.
b. Create a transparent scenario for all to see the amount available in the account and who gets the loan.
c. Accountability becomes accurate, important and not debated.
d. Cut out the selfish middle man in the process.
e. Curb the hands of the elected centralized authorities disbursing the money at their will and for selfish interests.
What will the Oracle source contain? As explained in the previous write-ups, is a process that retrieves information from an external resource and registers it on the ledger. They are trusted data sources that provide the required information for the self-automated contracts to perform without the need for the Blockchain to access more information outside their network. These Oracles are supplied by either third parties or the company and authorized for use.
“Oracles…are trusted data sources that provide the required information for the self-automated contracts to perform”
Contained in the Oracle (an online data source, i.e. Software oracle) for this purpose will include all the information on the factors to determine loan disbursement stated in the earlier paragraphs, Also included in the properties or description of an Oracle is the fact that it finds and verifies real-world occurrences and submits this information to a Blockchain to be used by smart contracts. This means that all these information required by the conditions of the contract to execute needs to be made available and updated regularly and timed perfectly.
The success of this however depends on the accuracy in the Oracle information provided. So, the oracle needs to be trusted which presents a certain challenge. Once this has been clearly developed and accepted, deployment of the contract can then be flawless. I don’t know about you, but this will give me a peace of mind and full assurance knowing that my loan will be approved in a system that works without much hindrances. But of course, it needs to be deployed on a trusted platform. Out of all the existing platforms, I would advice choosing Ardor Blockchain platform. Maintenance can’t get cheaper than enhancing the free energy of the sun to power and secure the Blockchain. This makes it the best Africa pocket and weather friendly.
“Ardor Blockchain platform… the best Africa pocket and weather friendly… enhancing the free energy of the sun to power and secure the Blockchain…”