Pilot Launch | Savings for low-income users in Cameroon through DeFi bond tokenization
Mercy Corps Ventures and Ejara launch a unique savings offer in Africa: tokenized bonds sold as a savings plan for low-income individuals.
This post is the first of a two-part series; the second blog will share key insights after the pilot is completed.
Written by Ken Kou, Pilot Lead at Mercy Corps Ventures, and Nelly Chatue-Diop, CEO and Founder of Ejara.
Individuals across Africa lack access to high-yielding, low-risk savings products.
This is especially true in Francophone Africa, where there is a sizable lack of confidence in financial institutions with their high barriers to entry (including high buy-in costs and no offer of financial education) and low reward (including low interest rates and locked savings plans). This is coupled with a rapid inflation of the local currency — the West African CFA franc — where, in Cameroon from 1969 to 2021, the average inflation rate was 5.7%, meaning that those who kept their savings in cash were losing 5%+ of their wealth every year.
In many countries, buying government bonds can be a low-risk, high-yielding opportunity for people to grow their savings while protecting against market volatility and inflation. However, for users in Cameroon and many other emerging markets, such bonds are largely inaccessible for the average individual or retail investor. The bonds cannot be fractionalized, demanding a minimum buy-in of 1 million CFA (USD $1,600), and must be purchased through an accredited institution.
The Pilot
We’ve launched a pilot with portfolio company, Ejara, to offer fractionalized government bonds in the form of savings plans to Cameroonian users directly on their app. After acquiring an asset manager license allowing them to buy and sell government bonds from the Bank of Central African States, Ejara will tokenize these bonds so that retail investors (i.e. their users) can enter the market at low price points.
Ejara
Ejara is the first decentralized investment and savings platform to experience regional growth in Francophone Africa. Founded and led by Cameroonian entrepreneur, Nelly Chatue-Diop, Ejara’s vision is to enable the mass market, including underserved users (e.g., women, urban gig-workers, community savings groups, smallholder farmers, and marginalized rural populations) to invest and save in common cryptocurrencies, stablecoins, and tokenized assets. This is done through a simple mobile interface that leverages the benefits of blockchain and crypto to offer lower fees, faster transaction processing, and higher yield than traditional financial services. Ejara takes a fundamentally different and healthier approach than many other African crypto platforms which encourage “get-rich-quick” day-trading by emphasizing financial education and responsible investing, through bite-sized digital training videos, community groups, and more. From this, Ejara is fostering trust with groups historically ignored by financial innovations, reflected in their female user base being 34% (as of March 2022), a percentage that is much higher than crypto industry averages.
Through this pilot, Ejara is offering fractionalized bonds sold as low-risk, high-yielding investment assets tokenized on-chain for seamless settlement and full transparency.
Bonds are available for purchase in 1,000 CFA denominations (~$1.53 USD) and have varying maturity, from 26 weeks to several years. Depending on the maturity, APR is as low as ~4% (for shorter bonds) and higher for longer bonds. Each bond is its own smart contract, secured on Ejara’s blockchain and implemented as an additional feature on the Ejara mobile app.
User journey
Ejara’s customers can either access the product directly through their app, or are being reached through in-person training led by local agents. These agents are driving from city to city with regional leaders in Cameroon to lead offline acquisition and manage pilot operations. Alongside this financial education component, the service offered in the app also removes a barrier to entry as the user does not need to travel to a bank or pay account opening and maintenance fees, and can easily track their transaction and balance from their mobile.
The user retains full flexibility to withdraw their full principal investment at any time. If the withdrawal occurs before the bond’s maturity date, there will be a deduction on the interest earned but not on the principal. This will hopefully promote better savings behavior as the user will earn the full interest amount if they retain their balance until the bond maturity date.
Why Ejara and why DeFi?
In Cameroon, the traditional financial system presents many challenges, including being paper-based, making it administratively burdensome for users who have to travel to a bank or an asset manager to create an account. In addition, users must pay management fees (in the case of banks) or entry fees (at an asset manager, they must deposit between $10,000 and $50,000) to simply access savings products. In some poorly digitized banks, clients pay to consult their savings accounts (e.g. Banque de l’Habitat in Senegal).
There is also a misalignment of incentives. Since the system is not digitized, financial institutions will minimize KYC costs by only pursuing large accounts (i.e. those for insurance, pension funds, major corporates, etc) instead of serving the mass market with affordable products (i.e. fractionalized bonds).
With Ejara, users can complete all transactions from an app and don’t need to pay entry or maintenance fees as all processes have been automated. Ejara also digitized its KYC process, allowing them to process several thousand KYCs per week without heavy administration costs. With these strong foundations, Ejara identified the bond system as a potential savings tool for their users and is utilizing blockchain to deliver this product.
1) Transparency
For users, Ejara’s application of blockchain brings transparency and traceability to transactions. This reduces the risk of fraud that exists in the cash world in popular local savings systems such as tontines. For regulators, they will have full transparency on transactions, unlike traditional institutions where lack of visibility often leads regulators to block services like microfinance.
2) Efficiency & Affordability
Fractionalization typically increases the administrative burden of managing asset ownership, payouts, and settlement. Through smart contracts this process becomes automated, allowing for infinitely-small fractions and lowering barriers to entry for users by 1000x (splitting a bond from into 1,000 CFA (~$1.53) tranches).
Our Hypotheses
Blockchain-based smart contracts will enable the fractionalization of government bonds, thus making them accessible to individuals. This will be measured by:
- Successful integration of government bonds on the Tezos blockchain via smart contracts
- Total $ value of government bonds fractionalized and made available to users
- Total number and $ value of bonds purchased by users
- Number of participating users
Access to affordable, high-yielding savings products will drive financially responsible behavior and lead to greater savings. This will be measured by:
- Change in total number of Ejara customers pre- and post-savings product
- Total $ value of user deposits (and average per user)
- Total $ amount of interest earned by users (and average per user)
- Amount saved x duration locked up x interest rate
Our Learning Questions
- How do customers perceive a savings product?
- How to attain higher adoption / growth among lower-income customer segments?
- What communication strategies are most effective in driving savings behavior?
- What is the ideal length of time to keep funds in a savings product?
- What incentives (i.e. interest rate, no cash-in/cash-out fees) need to be offered to encourage savings behavior / discourage early withdrawals?
If this pilot is successful, Ejara will expand the product into more priority markets in Africa (such as Burkina Faso, Côte D’Ivoire, DRC, and Ghana), they will rigorously promote this savings option to new and current Ejara customers, and offer more variants of the savings products (e.g. shorter/longer lockup period, different interest rates). This would also involve buying more government bonds to satisfy the increased demand, which would have a positive impact in raising capital for various projects such as infrastructure spending.
This pilot aims to illustrate an important use case for blockchain technology in reducing barriers to entry for promoting financially responsible behavior and driving flexible and accessible savings options for customers.
Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots, responsibly testing DeFi solutions for unbanked and underbanked populations in emerging markets.
