Decentralized group solidarity lending model

Sevi: Making microfinance more affordable

For years Microfinance has been thé promise for economic development in emerging markets. However, in recent years the industry suffered from negative stories about high interest rates and the negative impact of late fees and rollover fees, which have brought borrowers in a tight spot, instead of providing them with an increased livelihood. We live in an exciting time where new technologies provide for more efficiency, lower cost and therefore decreased interest rates, to unlock the full potential of Microfinance.

The current microfinance industry has grown over the past decennia to an estimated 139 million low-income and underserved clients with loans totalling an estimated 114 billion dollars. The industry is still growing, in 2017 with a growth of 5.6% in total borrowers and 15.6% in loan portfolio.

The main challenges in microfinance is providing small loans at an affordable rate. The global average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets. These interest rates are the sum of the cost of funding, the cost of trust, the cost of operations, the cost of risks and a premium. By decreasing these costs, microfinance becomes more affordable and is therefore able to reach more borrowers and can achieve a higher impact on each single borrower. Every percentage point reduction of this interest rate, directly benefits the live of the borrower.

The microfinance industry has impacted millions of lives while maintaining an average default rate of only 2%. This is quite impressive given the context these institutions operate in. However, the costs to maintain this low default rates are high and very labour intensive.

Sevi has the aim to make micro finance more affordable by lowering operational cost. Group solidarity mechanisms are widely applied and have been proven through decades of microfinance experience. Sevi has translated this proven mechanism into a decentralized lending model. It runs a fully automated community oracle for client verification and an open credit rating database for micro lending.

Decentralized group solidarity lending model

Self-sovereign identity is the concept that people and businesses can store their own identity data on their own devices, and provide it efficiently to those who need to validate it, without relying on a central repository of identity data. This is a digital identity managed by you. It’s origen is a blockchain wallet where the ID details are stored. This open source wallet is provided by Sevi, but stored and hosted by the person itself and shared with us. A digital identity can be one of the main drivers of inclusion. Other parties that require an identification later on in the process can use the same information. We aim to embed an existing application with a proof of concept on self-sovereign identity that works according to the ERC-725 and ERC-735 protocol.

The verification of the information can be a continuous process done by all stakeholders of the identity, like peers, governments, banks, MFIs, driving license proof etc. All these institutions verify who you are.

From their wallet the user provides the information, required for our application process:

• Phone verification to integrate mobile money
• Photo of face
• Location sharing (GPS)
• Full name
• Current residential addresses
• Any legal document (e.g. passport, driver license, birth certificate, utility bill, bank statement, school diploma)

Community verification oracle to increase trust

On top of the ID verification a secondary layer is introduced to increase additional trust in the system. The lack of official proof of income, collateral and a credit history cause microfinance models to create an extra layer of security. In most models this is done through group solidarity mechanism. Our model is based on some common denominator of the current implemented microfinance lending models, which often use some kind of peer pressure. Though the system can work with any of the existing models, we introduce a universal standard that can be easier scaled and promoted from a technical perspective.

After the enrollment with a Decentralized Identifier (DID) and completing the KYC the client is asked to invite five people from his inner circle to vow for his trust. The questions will be “is this person who he says he is?” and “do you believe this client is able to repay this loan?”. These people are required to go through the same enrollment process. When a friend vows for the client their credit rating can be increased or decreased based on the main client’s performance. To create a controlled environment, we start with an ‘invite only’ strategy. Clients from our partner MFIs with the highest credit score are invited first.

Social credit scoring

Assessment of the risk or potential risk presented by the client is a key activity for MFIs. Based on this assessment a credit score is determined, which is a value expressing the creditworthiness of the client. This score will evolve over time and determines whether a client is eligible for a loan as well as the loan amount. The systematics are based on a tiered approach and overtime the clients score will increase/decrease as it is a relative metric between the members on the platform. Working with MFIs and the data they already have on their clients provides for a head start and reduces cost.

When the loan is approved an automated contract is established between the client and the MFI. The five people who verified the person, are made part of this contract to incentivize them. The client’s mobile wallet is linked to the smart contract in order to make an automated loan disbursement and repayment(s) possible and thus effectuate the contract.

Once the loan is fully repaid and the contract fulfilled, the client’s credit score increases and is stored on the blockchain. The oracle incentivizes for trust, so all the people who verified are being rewarded by receiving an increase in their credit score. For future loans the MFI and other MFIs are able to get information from the blockchain on credit ratings and outstanding loans, once a client permits the MFI to have access to this information.

Transparency

All transaction are recorded on the blockchain. So in the future other NGO’s/Companies can use this date to make their own risk assessments on doing business with this person. We will report all individual HASH IDs to make sure to comply with a fully transparent ecosystem.

Let’s get real

Ok so all these nice words sound awesome but what does it look like in practice? Actually for the borrower the process is quite simple:

Step 1:

Download the Sevi app

Step 2:

Your loan: Slide to the amount you wish to borrow and enter the purpose of the loan

Step 3:

Create a profile, enter some basic information like your name, GPS location and your photo

Step 4:

Terms: you will receive a loan of X amount with a 3% interest rate for a 30-day period. Do you agree?

Step 5:

Invite 5 friends:

Step 6:

Friends reply: these friends are asked to answer two basic questions:

Is this person who he says he is?

Can this person repay his loan?

Step 7:

Disbursement: Receive the loan in your mobile money wallet.

Step 8:

Repay your loan: we will send you reminders.

Step 9:

Increase of your credit score: Congratulations you have repaid your loan, you are now eligible for a higher loan!

Step 10:

Increased credit score of your friends: Congratulations your friend has repaid his loan, you can now also apply for a loan!

Support

Do you know people who could support us in developing the Sevi concept further or would like to be part of our beta test group. Please contact us at: support@sevi.io