Blockchain Market Insights: Kenya
Though we often speak of the underserved population as one group, the reality is that small businesses each sit in different markets that vastly differ from each other. The potential impact of blockchain is, as a result, just as varied based on the market in question.
Starting with Kenya, in this new blog series, we analyze the potential impact of blockchain-powered lending across various key markets.
In Kenya blockchain has the capacity to solve lending challenges in both the public and private sector; helping to remediate the crisis of faith between public officials and the Kenyan population and helping to attract much needed foreign investment.
Restoring Trust through Transparency
Kenya’s public sector has infamously struggled with distrust and corruption. This impacts the government’s capacity to raise capital both internally and externally; with citizens being reluctant to pay taxes and regular lapses in foreign investment.
The use of Blockchain technology can help regulate public goods and services. By tracking citizen income on a public distributed ledger, blockchain would allow the government to allocate services to those most in need. It would also incentivize the population by providing proof that the sums they give to their government are being fairly used.
Such efforts are already underway with the Kenyan Affordable Housing project. Whilst still in the process of regulating the ways in which cryptocurrencies are used, the Kenyan government recently committed to using blockchain to implement public services. The Kenyan Affordable Housing project is expected to raise 6 billion Kenyan shillings a month (about $59,000) through Kenyan citizens contributing 1.5% of their base salaries to a fund which will be used to finance affordable housing. Blockchain technology in turn will be leveraged to determine who the 500,000 properties go to, how the fund is managed, and to give homeowners an irrefutable record of ownership.
Assuring Accountability
Just as blockchain technology can be valuable in restoring citizen’s trust in their government, so too the government’s trust in its citizens. In Kenya it is estimated that there are around 5.85 million unlicensed MSME’s; almost 4 times the amount of licensed MSME’s, where the number stands at around 1.56 million. Blockchain can be used to harness data on these unlicensed businesses both in order to assure that operations occur above board and to ensure that these businesses are paying their taxes. Imposing regulatory standards and forcing unlicensed businesses to keep records of their transactions can also come as a great asset to the private sector. More on this below.
Access to (the Right Kinds of) Finance
There are a number of market characteristics specific to Kenya that make it well suited for private sector blockchain penetration, specifically in regards to data-driven lending. Most importantly the fact that the majority of account owners in Kenya utilize mobile payment methods as opposed to a traditional bank account. According to the Global Findex Report around 40% of Kenyans only use a mobile money account, with 29% holding both a mobile money account and a traditional bank account.
Why this number is so staggeringly large is in part because access to financial institutions in the country is extremely limited. 75% of Kenya is rural and banks are often placed within urban centers. This factor, coupled with the fact that a large quantity of businesses are unlicensed, means it is common for Kenyans to turn to unregulated, unlicensed lenders with unsustainable lending rates, rather than traditional financial institutions.
One example is Micromobile, which links lending to future payrolls. Similar to US payday lending the company will lend up to 50% of a borrower’s monthly salary. This model commonly results in a debt cycle where the high-fee, short-term nature of the loans means customers must continue borrowing to pay off previous loans and associated fees.
Another example is the Mjiajiri model which closely resembles a pyramid scheme. This common lending model in Kenya requires users to pay a KES 200 initial registration fee, after which users earn commissions of KES 40 for recruiting others to register for loan access; the user’s available loan size increases as he or she recruits more members.
Projects like LendLedger leverage the blockchain to reform the data-driven lending market. Rather than taking advantage of Borrower’s lack of financial access, the network leverages the data available to connect Borrowers with institutional Lenders in a secure and transparent manner.
How does this assure responsible lending? On the LendLedger platform Borrowers have the option of a variety of Lenders and, the terms of their loans will be visible to all through the blockchain. This deters the need to resort to unsustainable lending terms and also ensures that all costs of borrowing are visible to all. Equally blockchain ensures the establishment of an immutable reputation. Whether a Lender is a good Lender (or a Borrower is a good Borrower!) is unalterably recorded. This incentivizes correct behavior, and enforces a new standard of equity in finance.
Moving Forward
Whether in the public or private sector it’s indisputable that blockchain technology could be a real asset for Kenya and other emerging economies in and around the region. Though not as significant for Kenya, the surrounding countries of South Sudan and Zimbabwe have been prone to hyperinflation; something that cryptocurrencies have the potential to remediate. Whilst new technology is always intimidating, it is important to further blockchain adoption in light of both the void it can fill and how suitable the Kenyan market is for penetration. The next steps to furthering this journey involve furthering blockchain’s prominence in Kenyan legislation and creating a trading platform where Kenyans can buy and sell their crypto holdings.
