Pilot Launch | Unlocking DeFi Loans for Informal Micro-enterprises in Colombia
Mercy Corps Ventures and Quipu launch a new pilot to test the use of a decentralized finance (DeFi) lending protocol to connect micro-entrepreneurs directly to loan providers without any intermediary, with aims of building climate resilience.
This post is the first of a two-part series; the second blog will share key insights after the pilot is completed. Written by Timothy Asiimwe, Innovation Project Manager at Mercy Corps Ventures.
In Latin America, micro, small, and medium enterprises (MSMEs) are one of the strongest drivers of employment and economic growth in the region, representing 60% of employment and 20% of GDP. However, the growth of these businesses is often limited by a lack of access to credit. The MSME credit gap across Latin America and the Caribbean is estimated to be $1 trillion, which is 3x greater than the currently available amount of funding.
Nine out of 10 MSMEs in LatAm are classified as micro-enterprises. Given their informal way of operation, many micro-businesses have no way to prove their commercial activity and are therefore unable to access formal loans. As a result, many are forced to turn to informal and predatory lenders who charge exorbitant interest rates (up to 400% APR).
Additionally, in certain countries, such as Colombia, informal micro-entrepreneurs often find themselves permanently blacklisted by credit bureaus because of historical defaults or non-payments of bills.
The Pilot
We’ve partnered with Quipu to launch a new pilot to test the use of a DeFi lending protocol, running on Polygon, to connect MSME borrowers directly to loan providers without any intermediaries.
Quipu is a Colombian fintech, which uses AI to credit score and provide unsecured loans to informal micro-businesses. Since launching in 2022, Quipu has grown its customer base to over 5,000 borrowers (90% of whom are blacklisted by credit bureaus). In 2022, Fast Company selected Quipu as one of the 10 most innovative companies in Latin America. More than 60% of Quipu’s customers are women and they typically use Quipu loans as working capital to purchase supplies. In fact, Quipu has established partnerships with several big suppliers in order to enable its customers to get better prices.
This pilot extends the model pioneered by Real-World-Asset (RWA) lending protocols such as Goldfinch and Credix, and eliminates the intermediaries (such as credit funds) between the lender and final borrower. Additionally, borrowers do not have to post any collateral (crypto or otherwise) to qualify for loans. Instead, a prospective borrowers’ credit score is computed using Quipu’s AI algorithm and a loan is issued if the borrower’s credit score is above a set threshold.
To make the user experience more fluid and to reduce the friction involved in navigating crypto wallets, Quipu has partnered with El Dorado to enable users to receive the borrowed funds as fiat currency in their digital wallets. 8 of out 10 people in Colombia use digital wallets like Nequi and Ahorro a la mano. With these wallets, users can send money, receive money, save money and much more.
What’s more, Quipu has designed the token incentives to encourage borrowers to better manage their loans and engage more with the product. Borrowers who repay their loans on time, or refer new borrowers to the platform will receive reward tokens.
Through this pilot, we are testing a new way to unlock affordable credit for the millions of informal micro-entrepreneurs in Latam, who are otherwise unable to access formal credit at reasonable rates.
Our Hypotheses
DeFi-enabled capital can directly unlock affordable credit for MSME borrowers who are unable to access formal credit in Latam. This will be measured by:
- Avg. increase in income for borrowers
- Avg. increase in number of customers for borrowers
- % reduction in borrower APR vs. informal lenders
The use of token incentives can lead to better loan performance and more product engagement. This will be measured by:
- % increase in on-time loan repayment
- Avg. # of customer referrals per user
Connecting borrowers directly to DeFi lenders in an autonomous manner results in shorter time-to-money as well as savings in operational costs. This will be measured by:
- % reduction in loan processing time
- % reduction in operational costs
Access to affordable credit builds climate resilience by helping MSME borrowers to better prepare for, adapt to, and recover from climate-related shocks and risks. This will be measured by:
- % borrowers who used the credit to invest in climate resilience solutions
- % borrowers who feel more resilient to climate change after access to loans
“Our mission at Quipu is to foster a truly transparent and decentralized financial ecosystem, ensuring success for all. This pilot marks yet another stride towards the realization of this vision, as we work to construct a financial system that empowers everyone.” Mercedes Bidart | CEO & Co-Founder, Quipu
Through this pilot, we hope to demonstrate how a lean lending protocol can be used to channel funds from on-chain lenders to micro-entrepreneurs in Latam, in a cost-effective and scalable manner.
If successful, this model could be scaled to other emerging markets such as Africa and Southeast Asia, which have equally huge funding gaps for MSMEs. Additionally, this protocol can be scaled to allow any fintech or third party to integrate their credit scoring algorithms in order to increase accuracy of credit scoring to attract more lenders to participate on the platform.
Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots, responsibly testing Web3 solutions for unbanked and underbanked populations in emerging markets.
