Insights from a Reputation-Based Stablecoin Credit Pilot in Kenya

14 min read6 days ago

Introduction

In Kenya, where access to traditional credit is often out of reach for many, there is a pressing need for alternative methods to assess and manage creditworthiness.

At Haraka, we are addressing this need by leveraging blockchain, local stablecoins, and community trust, with the hope of reinventing how we do microfinance. Launched in June 2024, our first pilot focused on creating a decentralized, community-driven model that uses social reputation — established through peer reviews and on-chain data — as a reliable indicator of creditworthiness.

This pilot engaged over 120 participants from 20 chamas — informal savings and investment groups-, providing them with loans facilitated by Haraka protocol. All transactions were conducted using the local stablecoin cKES, with ClixPesa as the wallet provider.

Our primary objective was to determine if this reputation-based credit system could enhance loan accessibility, improve repayment rates, and increase overall efficiency compared to traditional methods.

We tested several key hypotheses, including whether social attestations would be honest and predictive of repayment, whether individuals with higher social capital would be more reliable borrowers, and whether awareness of credit scores would positively influence peer assessments. The insights gained from this pilot provide a promising outlook on the future of microfinance, particularly in the way creditworthiness is assessed.

Overall results — Highlights

Who was the target audience?

This pilot targeted micro-entrepreneurs organized within chamas — informal savings and investment groups — located in the Nairobi suburbs of Kawangware and Kibera.

The majority of participants were women, who comprised 85% of the group. Research consistently shows women are often more reliable borrowers, demonstrating strong repayment behaviors and financial discipline. This pilot aimed to explore these dynamics further within a reputation-based framework.

Total Participants: 122 borrowers
Gender Distribution: 85% women
Average Age: 32 years old
Average Monthly Income: 20,000 KES (approximately 155 USD)
Chama Membership: All participants had been part of a Chama for over two years, with their savings records playing a key role in the underwriting process.
Business Growth Stage: 87% of the entrepreneurs were in the growth stage, exploring expansion or the hiring of additional staff.
Types of Businesses: Mechanics, grocery stalls, salons, charcoal trading, and beauticians.

Haraka users operating at their business locations in Kenya.

By focusing on these established micro-entrepreneurs, the pilot aimed to develop accurate credit scoring through the combination of social reputation, peer assessments, and on-chain data, demonstrating how decentralized finance can effectively assess creditworthiness in a community-driven environment.

What we needed to test: Addressing Challenges in Microfinance

Access to credit remains a significant hurdle for many micro-entrepreneurs in Kenya, particularly those operating within informal economies, essentially affecting women.

Traditional microfinance institutions often rely on collateral and stringent credit checks to determine borrower eligibility. This approach presents several challenges:

Lack of Credit History: Many micro-entrepreneurs do not have formal credit histories, making it difficult for lenders to assess their creditworthiness using conventional methods.
Insufficient Collateral: The requirement for tangible assets as collateral excludes a large segment of potential borrowers who lack such resources but have viable business ventures.
High Interest Rates and Fees: Traditional lending models often involve high operational costs, which are passed on to borrowers through elevated interest rates and fees, making loans less accessible and sustainable.
Limited Transparency and Efficiency: Conventional lending processes can be slow and opaque, leading to delays and mistrust between lenders and borrowers.

Recognizing these challenges, we set out to explore whether a community-driven, decentralized approach could provide a viable alternative. We hypothesized that social reputation — built on peer reviews, community endorsements, and historical financial behavior within savings circles (chamas) — could serve as a more accurate and accessible predictor of creditworthiness. This approach, combined with on-chain transactions, could form the basis of a unique credit score and reputation assessment system.

Additionally, we hypothesized that by leveraging local stablecoins like cKES, the protocol could enhance transparency and efficiency in the lending process. This would enable lenders to manage their portfolios in real time and reduce operational costs by streamlining the flow of funds from end to end.

Key Hypotheses:

Willingness to Provide Honest Attestations: We believed that members of chamas would be willing to provide honest and accurate peer reviews of their fellow members’ creditworthiness, given the close-knit and communal nature of these groups.
Predictive Value of Attestations: We hypothesized that these peer attestations would strongly correlate with actual repayment behavior, offering a reliable indicator of credit risk.
Impact of Credit Scores on Attestations: We aimed to explore whether individuals with higher credit scores were more reliable in their attestations and whether these scores would reflect their repayment behavior.
Importance of Credit Scores: Finally, we sought to determine whether individuals valued their credit scores and whether this awareness would influence their financial behavior, such as prioritizing loan repayments.

These hypotheses guided the design and implementation of the pilot, influencing the choice of metrics, the development of the reputation system, and the structuring of the loan products offered to participants.

By addressing these challenges, we aimed to create a more inclusive and effective microfinance system that could be scaled beyond the initial pilot.

How did we do it?

The pilot ran from May 29, 2024 to August 25, 2024, across urban and semi-urban areas of Nairobi. We onboarded 20 groups, each consisting of 5 to 15 members, with loans ranging from 40,000 cKES per group to 120,000 cKES and an individual amount between 5,000 to 40,000 KES.

The tech stack included several key components:

Haraka Protocol:

Flow of Funds: Haraka leverages smart contracts to automate peer-to-peer lending, ensuring secure, transparent, and trustless transactions. By automating processes like loan disbursement, repayment, and reputation scoring, we removed the need for intermediaries, reducing friction and operational costs.

Reputation System: Our approach capitalizes on social reputation within communities where members provide peer reviews and attestations regarding each other’s reliability and financial behavior. This social feedback loop enhances trust within the system and creates a more reliable credit assessment model. We combined on-chain transaction data with off-chain social attestations to build comprehensive and dynamic credit profiles. These profiles offer a multi-dimensional view of each borrower’s creditworthiness, integrating both financial behaviors and social capital to form a unique credit score.

Local Stablecoin (cKES): Throughout the pilot, all transactions were conducted using cKES, a stablecoin pegged to the Kenyan Shilling. This choice provided significant advantages for both lenders and borrowers: lenders benefited from enhanced transparency, while borrowers gained the convenience of using a familiar currency, reducing the barrier to entry.
ClixPesa Interface: The ClixPesa wallet, integrating Haraka dApp, acted as the main interface for borrowers, allowing borrowers to request loans, manage repayment schedules, and ensure the group joint liability. The interface was designed with simplicity in mind, ensuring accessibility even for users with limited technological expertise.
KotaniPay On & Off Ramps: KotaniPay provided the critical infrastructure for converting cKES to mobile money and vice versa, making digital currency practical for daily transactions. Additionally, KotaniPay’s USSD integration enabled feature phone users to access and manage their funds, ensuring inclusivity and ease of use for all participants.

Results

What Worked

The Pilot successfully demonstrated that peer reviews and social scoring can be powerful indicators of creditworthiness. By leveraging community-driven assessments, we were able to identify borrowers with strong social capital who consistently repaid their loans on time.

Key Successes:

Community-Driven Credit Assessments: The reliance on peer reviews allowed us to create a credit assessment model that was not only effective but also deeply rooted in the social dynamics of the community. Borrowers with higher social capital and strong reputations within their chamas consistently demonstrated better repayment behaviors.

97 % of loans taken by borrowers with high social capital were repaid on time or earlier.

2. Streamlined Loan Access: The simplicity and ease of accessing loans through Haraka proved to be a significant advantage over traditional methods. Borrowers appreciated the streamlined process, noting that it was much quicker and less intrusive compared to conventional loan applications.

Each loan was disbursed in less than 5 seconds after approval.

3. Comprehensive Reputation System: By integrating on-chain transaction data with off-chain peer attestations, we developed a comprehensive reputation system that accurately reflected both financial behavior and social standing. This dual approach ensured that borrowers who were both financially responsible and socially trusted had better access to credit.

Borrowers with a reputation score in the top 25% saw significant increases in their loan amounts after first loan repayment, with a 50% increase for their second loan and an additional 25% increase by their third loan, demonstrating enhanced trust and financial growth.

4. Affordable Interest Rates: Our borrowers have very few affordable loan options in the market. Many had previously tried to get loans from other MFIs but faced interest rates of 30–50% per month. By using blockchain technology, we were able to offer interest rates of 7.5% per month, making our loans much more accessible and manageable. This lower cost allowed participants to invest more effectively in their businesses without the burden of high interest.

On a 10,000 KES loan, the interest paid with Haraka was 75% lower than with traditional financial institutions.

These initial findings highlight the promise of a technology-driven approach that leverages blockchain and social reputation to redefine creditworthiness and enhance access to affordable loans.

What Didn’t Work

We encountered several challenges during the pilot. One of the primary issues was the lack of a proper off-ramp at the beginning of the pilot, which led to delays in loan disbursement and repayment. This created frustration among borrowers as they struggled to convert their stablecoins into usable cash, complicating their ability to manage finances effectively.

>The lack of an initial off-ramp delayed loan disbursement by an average of 14 days, affecting 45% of participants.

Even after the off-ramp infrastructure was established, the high transaction costs, including fees for converting between cKES and mobile money, remained a significant hurdle. As many borrowers relied on daily revenues, the ability to make daily repayments was ideal. However, high fees made this impractical, impacting timely repayments and the protocol offering.

Transaction fees, particularly for converting mobile money to cKES for onramps, were as high as 2.4%, which discouraged small, frequent repayments.

These challenges highlight the broader issue of adopting cryptocurrency solutions in everyday financial contexts, particularly in environments where users are not highly technologically inclined. The barriers to smooth, cost-effective transactions underscore the need for a more streamlined, user-friendly approach to integrating local stablecoins into the daily lives of users.

“The fees were too high, especially for small repayments. It made us think twice before making each payment. “ — Fairline, Pilot Participant

Impact

The Pilot delivered significant and measurable benefits to the micro-entrepreneurs who participated, leading to enhanced business operations and improved financial outcomes.

88% of Participants Increased Revenue: Every borrower in the program reported an increase in business revenue, with an average growth of 18% across all participants. This increase allowed businesses to reinvest in their operations, buy in bulk, expand their offerings, and strengthen their market position.

Reduction in Financial Volatility: Participants reported a 25% reduction in month-to-month revenue volatility, which they attributed to their ability to maintain consistent inventory levels and meet customer demand without disruption. This stability not only improved their financial resilience but also their capacity to plan for future growth.

85% Women Participation: The majority of borrowers were women, who not only maintained but grew their businesses through the pilot. Women-led businesses saw an average revenue increase of 20%, slightly higher than their male counterparts. This outcome underscores the critical role of female entrepreneurs in driving local economic grow and highlights the effectiveness of targeted financial support for women.

Increased Financial Inclusion: All participants, many of whom had previously limited access to formal financial services, now have a reliable credit history and a growing reputation score. This development will enable them to access larger amounts of capital in the future, further expanding their economic opportunities.

These impacts not only benefited individual participants but also contributed to broader community growth. By enabling micro-entrepreneurs to stabilize and expand their businesses, the pilot fostered a more vibrant local economy, with potential long-term effects such as job creation and increased economic activity.

Learnings

Our Pilot provided valuable insights into the potential of decentralized finance solutions in a community-driven setting. Through our exploration of social reputation, peer assessments, and stablecoins, we identified several key factors that contributed to the success of the pilot and revealed areas for further refinement.

Trust and Social Reputation as Core Indicators of Creditworthiness: Our pilot underscored the deep connection between trust within the community and a borrower’s social reputation, both of which are predominantly shaped by business performance. Social reputation, in this context, extends beyond social standing to reflect the tangible outcomes of a borrower’s business activities. Community members, through regular interactions, gain a nuanced understanding of who is financially reliable based on business success. This trust-based reputation system proved to be a powerful predictor of repayment behavior, reinforcing the importance of integrating social reputation into our credit assessment framework.

Honest and Predictive Peer Attestations: We found that individuals were willing to provide honest and accurate peer assessments of their fellow members’ creditworthiness, particularly when these evaluations impacted their own credit standing. These peer attestations, rooted in daily interactions and informed by observed business performance, showed a strong correlation with actual repayment behavior. This finding highlights the value of community-driven insights as reliable predictors of credit risk. As confidence in the Haraka platform grows, we anticipate an increase in the prevalence of honest attestations, further supporting the joint liability model.

Gender and Credit Reliability: Female participants emerged as particularly reliable borrowers, consistently demonstrating strong financial discipline and regular repayment patterns. Within women-only groups, this reliability was enhanced by mutual support, leading to high repayment rates and frequent, timely payments. Additionally, peer assessments within these groups were more accurate, reflecting the close-knit dynamics and trust among members. This underscores the critical role of women in fostering reliable credit environments and highlights the benefits of targeted financial support for female entrepreneurs.

Stablecoins as a Catalyst for Accessibility: The use of local stablecoins, specifically cKES, was crucial in enhancing user-friendliness and lowering barriers to entry for borrowers. Compared to global stablecoins, cKES offered a familiar and stable financial tool that made the technology more accessible and understandable, especially for users new to cryptocurrency. By the end of the pilot, 99% of our borrowers believed they had never used cryptocurrency before, underscoring the effectiveness of using digital currency that resonates with users’ existing financial practices. The adoption of stablecoins not only facilitated smoother onboarding but also empowered borrowers to engage confidently with the platform, bridging the gap between traditional finance and decentralized technology.

Refined Market Focus for Optimal Impact: Our pilot has enabled us to refine our market focus, allowing us to identify the types of businesses that are most successful within our framework. Specifically, businesses that have been operating for more than two years, particularly those seeking loans for stock or inventory, have shown strong potential. These businesses typically deal in consumable goods such as groceries and fresh vegetables — items that are essential for daily consumption and thus provide a steady stream of daily revenue. These enterprises are primarily located in semi-urban areas, where they benefit from a stable customer base and lower competition compared to more urban settings. They often require loans to purchase inventory in bulk, enabling them to reduce costs and increase profit margins. By focusing on these businesses, we can ensure that our financial support is directed towards ventures that are both sustainable and capable of achieving growth.

Insights from Default Cases: Results revealed that defaults were limited to men juggling two jobs — running a small business and working as mechanics — who had taken out larger loans (20,000 to 40,000 cKES). These participants requested loan extensions, showing a need for more time to turn their loans into profit. This highlights the importance of aligning loan amounts and terms with the realities of borrowers’ business cycles, especially for those with higher risk profiles.

Next Steps

As we conclude this pilot and reflect on the valuable insights gained, we are now ready to advance into Phase 2. Guided by the extensive user research and feedback we’ve gathered, Phase 2 will start in September with a refined product that addresses the challenges identified while building on the successes of the first phase.

In this next phase, our focus will be on several key areas:

Refining Market Focus: Building on the insights from Phase 1, we will concentrate on the specific types of businesses that have shown the most potential. These include micro-entrepreneurs with over two years of operation, particularly those in semi-urban areas who deal in consumable goods such as groceries, fresh vegetables, and other daily essentials. By directing our resources towards these businesses — who require loans primarily for stock and inventory and operate with daily revenue streams — we aim to enhance loan performance and support sustainable growth.
Technical Enhancements: We will streamline user flows, automate group creation, and simplify wallet management to make our solution more user-friendly. Smart contract improvements will allow for more flexible repayment schedules and enable individual loan requests supported by guarantors, giving users greater independence and flexibility.
Expansion and Testing: Operationally, we will expand to new urban and semi-rural areas, testing the robustness of our reputation system in diverse settings. We will also introduce a referral program to support organic growth while maintaining a secure and trusted network.
Targeted Support for Women Entrepreneurs: Building on the success of female borrowers in the pilot, Phase 2 will include targeted support for women entrepreneurs, with products tailored to meet their specific needs. This focus will ensure that women continue to be empowered through access to capital, driving broader community growth.

By addressing the challenges faced in Phase 1 and implementing these strategic enhancements, we are confident that this next phase will bring us closer to achieving a more inclusive, accessible, and sustainable lending system. Our ultimate goal remains to empower communities through innovative, user-friendly technology that is deeply aligned to the real-world needs of its users.

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