Small business, big ideas — DeFi lending in the real world
How Jia and BlueJay are expanding financial access in emerging markets
By Amber Liu, Sherry , Geoff Richards , Ara Kyi, Zach Marks. Published in collaboration with Jia Finance
Every small business needs some funding to get off the ground. It can be hard for entrepreneurs everywhere to access that funding, but nowhere is it harder than in emerging markets. This is true from the Philippines, where three out of four small businesses are unable to secure sufficient funding, to India, where there is a $240B credit gap for micro, small, and medium-size enterprises (MSMEs), to Sub-Saharan Africa, where more than half of small businesses require more funding they receive. All told, the credit gap for MSMEs across emerging markets has been estimated at anywhere from $2 trillion to a whopping $5 trillion of missed opportunities for investors to make returns and for entrepreneurs to live out their dreams and provide for their families and communities.
Sofia’s Story
Let’s take a trip to the Philippines and put ourselves in the shoes of Sofia*, who owns a sari store, as roadside retail shops are known in Filipino. We met Sofia at her shop in Mandaluyong, a bustling neighborhood in Manila. Sofia is working hard to grow her business and needs funding to buy additional store space, stock inventory, and a fridge to store perishable goods. But securing funding from a bank seems like a long shot for Sofia. Most banks and financial institutions in the Philippines require collateral, documentation and licenses that Sofia doesn’t have. As a new business owner without a credit score or documented history of sales and profits going back years, Sofia is unable to meet the bank’s requirements.
Due to these barriers, Sofia is having difficulty securing the funding she needs to grow her business. What’s more, Sofia’s husband owns their house and financial assets, so she is unable to put up any collateral under her name to secure a loan.
For microentrepreneurs like Sofia, traditional ways of securing funding are often burdensome and inaccessible. This is often where small business owners fall prey to “loan sharks,” informal local lenders with sky-high interest rates. When she has an emergency need for funding, Sofia turns to lenders in her market known as “5–6” for the 20% interest rate they charge over a short time — for example, borrow 5,000 pesos on Monday; pay back 6,000 pesos on Friday. Borrowing from these lenders can trap business owners like Sofia in a cycle of debt, with rising interest rates and late fees accumulating month after month. This cripples small businesses and stifles economic activity and growth in communities where it is most needed.
Until now. The rise of decentralized financing, or DeFi, has the potential to transform economic opportunity in emerging markets, with blockchain-based loans and stablecoins enabling entrepreneurs like Sofia to access capital. In markets like the Philippines, the use cases for DeFi and blockchain technology go beyond traditional asset speculation and trading to sustainable real-world use cases that can help Sofia grow her business.
How Jia works
Jia provides blockchain-based financing to small businesses in emerging markets who, like Sofia, face an unmet need for capital. With Jia, Sofia applies for financing and provides data about her business, which many banks are unable or unwilling to look at to underwrite, from her current sales and inventory records to her ecommerce transactions. Jia’s data-based credit scoring underwrites Sofia without the level of collateral or burdensome documentation most banks require.
When she repays, Sofia gets rewarded with Jia tokens, opening up access to the world of Web3 and putting her on the path to create wealth and prosperity for herself and her community. As Sofia develops a credit history of successfully repaying loans with Jia, she gains more tokens, translating into an ownership stake of the Jia protocol, which she can use to unlock lower interest rates, higher credit limits, or even stake as collateral for members of her community to access capital.
So how is Jia able to approve and disburse loans based on such little information? Behind the scenes, Jia works closely with partners that serve MSMEs, such as the wholesalers where retailers like Sofia buy their goods or e-commerce platforms where merchants sell their wares. Since these partners are working with MSMEs everyday, they are able to help identify credit-worthy small business owners with a need for additional capital. Once an MSME is identified, these partners co-sign and in some cases provide collateral for the loan, earning token rewards, yields & fees for their services.
How Bluejay works
Once Sofia’s loan application has been approved by Jia, it is time for her to make use of those funds. The loan is processed in the following way:
- Liquidity providers deposit stablecoins on-chain in the Jia liquidity pool
- Once the loan amount is raised, Jia off ramps the stable coins into local fiat currency
- Jia then sends the fiat currency directly to the merchant as a cash loan OR Jia sends fiat currency to a partner on behalf of the merchant, who provides the goods to the merchant. The merchant then repays the loan in fiat currency.
Whilst there are clearly improvements in access to capital and disbursement efficiency, there remains friction points in the on-chain element if the loans are based on US dollar (USD)-pegged stablecoins**.
As far as Sofia is concerned, she has borrowed Philippine Pesos (PHP) and is required to repay PHP plus any accrued interest. However, if the on-chain element is denominated in USD, Sofia and millions of others are left exposed to potential foreign exchange risk. The cost can be significant, especially given the current macro conditions where local currencies have been depreciating — for example, the PHP has depreciated against the USD by 14% in the last ten months.
Sofia could be potentially paying a premium on the loan just because her currency has depreciated through no fault of her own. This leaves her and many borrowers like herself in the precarious position of not being able to afford to pay back their loans with the increased cost of capital.
This is exactly where Bluejay’s local stablecoins can come into play, to allow borrowers to access financing and ensure the on-chain element is also denominated in their local currency. For Sofia, she sees little difference. However, the on-chain element is now delivered in bluPHP (Bluejay’s PHP stablecoin), protecting people like Sofia from the FX risk associated with using USD denominated stablecoins.
Bluejay Finance is a protocol for issuing local stablecoins for Asia, which are fully-backed and collateralized by Bluejay’s treasury which holds other USD stablecoin reserves such as DAI. The protocol’s treasury is not only used to back the stablecoins but also used to deploy deep liquidity into various bluStable and USD stablecoin pairs on DEXes.
Bluejay’s mission is to bring the foreign exchange market on chain to accelerate financial inclusion. That is why it is working with ecosystem partners such as payment protocols — building crypto rails for cross-border payments or remote work payments — and real world asset lending players like Jia who are disbursing loans to emerging market players. Sofia will not need to think about how 1 USD exactly translates to PHP; instead, her FX exposure and the unfamiliar unit of account in USD will be abstracted away by on-off ramp and real world asset lending ecosystem partners.
DeFi’s Financial Inclusion Moment
We are at a critical moment in DeFi. We’ve seen impressive innovation so far, and now there is growing demand for bridging DeFi into the real world economy, from disbursing loans for real world businesses in emerging markets to cross-border payments. DeFi holds the potential to provide small business owners like Sofia the funding they need and let them deploy those funds seamlessly in their communities.
For DeFi to reach its promise of financial inclusion and reach entrepreneurs like Sofia, we need to see more local stablecoins issuers like Bluejay and blockchain-based lenders like Jia emerging to onboard new users and build ecosystems across underserved geographies. Goldfinch, a protocol providing crypto liquidity to real world lenders, was launched in February 2021, and has already facilitated the disbursement of over $100M USD to more than a million businesses across 20 countries.*** While DeFi is not a silver bullet to the massive $5T credit gap, we at Jia and Bluejay are excited about the potential of blockchain technology to help MSMEs, one at a time.
We have exciting updates coming out soon. Please follow us at @jia_DeFi and @BluejayFinance on Twitter to stay connected as we launch.
*We changed the name of Sofia to protect her identity.
** If Sofia had to borrow from a Singaporean bank like Aspire Bank (who themselves borrows from Goldfinch) and the loan originated in EURO, Sofia would have lost 15% from last year on the surface. Realistically, the cost of this is 30% because the lender has to stomach the EURO/SGD, SGD/EURO, and this may pass on to the borrowers.
