Emerging market opportunities
Goldfinch has issued $100M in loans to help scale businesses in emerging markets. Does analysis show that emerging market investment offers more risk than opportunity?
- As macro factors drive investors to new sources of yield, bringing real-world lending on-chain provides value to borrowers and stable growth to lenders
- Expert analyst models show emerging market financing as a growing, viable, and attractive opportunity for investment
- Goldfinch’s Borrowers are established lending businesses with track records of success driving growth in emerging markets, and their credit fund model can provide additional risk mitigation to Investors against individual end-borrower losses
- All Pools on Goldfinch are currently overcollateralized off-chain, and transparent communication channels exist for evaluating performance and communicating directly with Borrowers
Goldfinch was built to achieve DeFi’s core goal of expanding financial access. To achieve this the most efficiently, it was optimized first for the borrowers who could benefit from crypto the most, and where crypto has the greatest impact — lending businesses in emerging markets. You can learn why in our post on starting with emerging markets.
When first learning about Goldfinch, many people ask about the perception that emerging markets offer risky investment opportunities. So how is Goldfinch’s Borrower model designed to help mitigate risk, and what do experts say about the opportunities emerging markets have to offer for investors?
Macro views from the finance ecosystem
Macro tailwinds position private debt to become a mainstream asset class providing reliable yields, relative resilience, and diversification for investors. According to McKinsey, as of 2022 private debt is the only private asset class to grow fundraising every year since 2011, including through the pandemic.
Emerging markets are not exempt from this trend of growing opportunity, with private debt fundraising in emerging markets 3x’ing from $2.4 billion to over $8 billion per year from 2009–2019, and Africa officially becoming the fastest-growing fintech ecosystem in the world through 2021 despite COVID downturns globally.
Emerging market direct lending is growing rapidly and investors plan to continue growing exposure. The International Finance Corporation cites that emerging market private credit fundraising is growing due to its “Goldilocks’ risk-return profile — not too risky but also not too bland.”
Amidst ongoing global risks analysts believe emerging market growth is likely to show sequential improvement, powering ahead of developed market growth with models predicting at least a 10% return for the EM Bond Index for the next 12 months.
Current year-over-year growth of quarterly GDP shows this trend beginning to play out: According to current Trading Economics data, the US has seen 1.6% YoY GDP growth and the Euro Area has seen 3.9% growth while the majority of Goldfinch’s Borrowers’ regions have seen higher growth, up to 13.5% — displaying the strength of emerging market economies throughout overall global downturns.
In addition, emerging market credit funds and fintechs with proven lending track records continue to show successful models throughout periods of inflation and economic uncertainty still unfamiliar to North American and European businesses.
For example, while the US is dealing with record inflation for the first time in recent history, Borrowers in emerging markets have been living with high inflation and high-interest rates for decades — as such, this does not present a net new risk factor to these regions.
Instead, the proven businesses seeing growth in these regions have a long history of operating in high-inflation economies, throughout which their business models have continued to succeed.
Vision for the future on-chain
At the heart of Goldfinch is a core thesis about how the global economy is shifting and moving on-chain. While that migration plays out, private credit funds continue to post strong performance — often 8–10%+ — driven by private deals with private companies.
While traditionally participating in these private credit markets has been an insider’s game, with Goldfinch anyone can become an Investor financing these international private credit deals via Goldfinch’s Borrowers.
Today, executing this financing on-chain via Goldfinch is attractive for both Borrowers and Investors. On the Borrower side, businesses in emerging markets face difficulty accessing capital at all due in part to the inability for traditional financial institutions to provide financing, as well as competition with government bond investments.
In contrast, DeFi is borderless, permissionless, liquid, open, nimble, and capital-rich, offering a solution by default to growing business sectors in emerging markets. As the IMF noted in their recent Global Financial Stability Report, DeFi could provide up to 12% in annual savings to borrowers when comparing DeFi vs. Non-Bank Emerging Market sources of lending capital.
At the same time, bringing real-world lending on-chain provides a new, compelling, and uncorrelated yield for DeFi investors. Most crypto lending opportunities rely on ROIs generated by use cases tied to recursive on-chain actions, and as such are tied to the performance of the wider crypto markets and dependent upon crypto price appreciation.
Goldfinch bridges DeFi to real-world opportunities. It enables lenders to take advantage of the yields crypto has to offer without being over-exposed to DeFi’s risk of a collapse in ROI when on-chain volatility hits. This is because Goldfinch’s USDC returns are generated by Borrowers who are expanding viable business growth off-chain.
In fact, Goldfinch’s yields were cited by Messari as “among the highest in DeFi,” and as of August 2022 Goldfinch had the second-highest USDC APY in DeFi for protocols with at least $50M in TVL according to DeFiLlama metrics.
You can learn more about how real-world lending offers DeFi investors stability by insulating from DeFi’s on-chain volatility in Warbler Labs CIO Sam Eyob’s post.
Security and recourse through a credit fund Borrower model
Currently, all Borrowers on Goldfinch are established lending businesses — credit funds and fintechs — with track records of success driving growth in emerging markets.
Those lending businesses draw down USDC from their Goldfinch Borrower Pool, exchange the USDC for fiat currency, and then deploy that funding on the ground to end-borrowers in their local markets.
In this way, the protocol provides the utility of crypto (specifically, its global access to capital) while leaving the actual end-borrower loan origination and servicing to the businesses best equipped to execute those functions in their own communities. You can learn how this works in the protocol overview.
Put simply, these Goldfinch Borrowers are not accessing funding from the protocol to cover their own personal loans. Instead, these established businesses access funding on Goldfinch to scale ongoing operations for profitable real-world businesses, continuing to drive growth across a sector of investment where they are already seeing success.
This model helps to mitigate risk for Goldfinch Investors as the credit funds and fintechs take on some of the risk of any end-borrower default. Each credit fund or fintech represents a diversified portfolio across various sectors and/or individuals to ensure stable returns; as such, any one business owner or individual failing to repay their smaller end-loan does not directly jeopardize a Borrower’s ability to make a payment on their Goldfinch loan.
And, when evaluating a Borrower on the Goldfinch protocol, the standard underwriting process defines a reasonable expectation for end-borrower default rates. This includes evaluating whether the Borrower would be able to honor all of its Goldfinch loan payments despite their expected rate of end-borrower defaults.
Via that evaluation process, all loans on Goldfinch are structured so that Borrowers are able to comfortably meet their obligations even with some expected defaults within their loans to their end-customers. It is also important to note that all Goldfinch loans are over-collateralized by off-chain assets, and are tied to real-world legal structures, with the relevant legal agreements signed by the Borrowers and Backers.
Strong Borrower performance
So how does the strong macro performance in emerging markets, the growth of investors seeking new sources of yield, the stability of bringing real-world lending to DeFi, and Borrowers who are established credit funds with track records of success, all come together to provide value to Goldfinch’s participants?
Since launching in early 2021, Goldfinch has doubled its active loans every two months (154x growth) to lend out over $100M+ to fintechs and credit funds in emerging markets, with zero defaults to date.
Goldfinch’s diversified portfolio has a significant repayment track record of over $16M with no losses, generating over $1M in protocol revenue. At the same time, the capital raised on Goldfinch has reached over 1 million businesses and people via the protocol’s Borrowers, across 20+ countries.
Ready to invest your USDC in emerging market opportunities? Follow our step-by-step guide to get started as an Investor on Goldfinch, or look around at current Pools at app.goldfinch.finance. Of course, every participant must make their own participation decisions based on their expertise, personal research, goals, and risk appetite.
You can learn more about how Goldfinch works in the protocol overview, or ask the community questions in the Goldfinch Discord. Sign up for weekly community updates to stay tuned with the latest from the Goldfinch ecosystem, or follow along on Twitter @goldfinch_fi.