Esusu and The Traditional African Savings Problem
For Xend Finance, our mission has always been to provide real-world solutions using emerging technologies. Unfortunately, a lot of blockchain projects have a vision that will take years to realize. Fortunately, we have an existing user base and deep connections in our communities that means we can make a difference immediately.
A major problem and opportunity we are tackling is one that we have seen firsthand and may not be well known outside of Africa. It is called Esusu and its connection to African communities has been passed down for hundreds of years. They’re also ready for disruption… in the form of security, technology, and dependability.
Esusu is a term used to describe a traditional form of cooperation in major African societies, also known by other variants like Susu, Tontine, Ajo, and Adaji — where groups of individuals contribute to informal savings and credit association for their different mutual benefits. This practice of credit financing that complements or substitutes modern cooperative institutions and formal financial systems are believed to originate from the Yoruba people of Nigeria. It has since spread across other African countries to various parts of the world.
A modern-day Esusu is applied in Credit unions and Cooperatives which is common in many parts of the globe and is normally formed by small groups of people who know each other. A pool is formed, where a monthly contribution is committed and distributed to one member of the pool in rotation until a complete cycle of distribution is completed.
Current Issue With Esusu
Though Esusu offers a rotational zero-interest savings platform to mostly unbanked, it has major issues:
- Default in contribution payment: It is common for most members in an Esusu pool to default in payment for some reasons. When one person defaults it affects the contribution cycle and reduces the total amount paid out to the current member. This is a very difficult issue because unlike traditional financial systems, member’s data in Esusu is not collected, and therefore there is no easy way to give credit scores or demand collateral for default.
- Group size (locality restriction): Esusu groups normally originate from small numbers of individuals that have some sort of social connection or reside in the same location. This restricts the number of members that can join a pool and therefore the amount of payouts. Most groups then increase the contribution amount or accept members from different cities, but this discourages members that can afford the contribution to join the pool and results in logistical hurdles.
- No Asset Security: There is usually no form of security for the assets or contributions made by the members of an Esusu. Lack of insurance greatly affects the confidence of people to join the Esusu cycles and this also results in very low performance in each Esusu cycle
The Africa Problem
Currency devaluation is a common economic nightmare faced in most African countries and other developing countries around the globe. The low export rate and high dependence of the economy on imports from other countries means that the value of money saved in traditional financial systems decreases.
A better option for people in such countries is saving or investing in foreign currencies that are more stable through financial platforms in developed countries. But it is also hard to access those foreign currencies because of strict rules by the authorities. There is also a large amount of paperwork and sometimes the monetary requirements create big hurdles that make saving on those platforms impossible.
Here is an example of Esusu which is created by a user and managed via WhatsApp. The voice note below explains how a Nigerian Esusu system works. This is similar to how it works in many other African Countries.
So, what solution can provide a savings platform for such people in these regions to save in a stable currency and hedge their assets against the devaluation of their local currency without the geographical limitation and bureaucratic restrictions?
The Era of Defi and Xend Finance
Decentralized finance (DeFi) is changing and improving the traditional financial system like never before and is expected to continue to improve as developers and entrepreneurs harness the potential of new technologies like Blockchain for developing DeFi applications.
Xend Finance is striving to solve all the shortcomings of the traditional Esusu system, credit unions, and cooperatives by building an accessible finance platform that can be accessed anywhere a user resides. Our approach to this is explained in the Diagram below.
Xend Finance aims to provide easy access to the global money market for everyone. By doing so, people from countries with unstable local currencies will now have access to a global digital currency that is stable, while traditional credit unions and cooperatives — currently with a market capital of 1.4T USD — now have access to a platform to channel their users' savings for higher yield returns and APY.
How Xend Finance solves Esusu problems
- By leveraging the blockchain, Xend Finance can have an Esusu cycle that can accommodate over 1,000 members who do not belong to the same geographical location or have knowledge of themselves as opposed to traditional cycles with a maximum of 12 closely related members. The Xend Finance smart contracts are designed to have multiple Esusu cycles with thousands of members all running concurrently.
- Xend Finance smart contracts enable flexible Esusu cycle payout times. Cooperatives/Credit Unions that create an Esusu cycle have the option of selecting any payout time interval that each member will receive their payouts. This is a great leap from the traditional Esusu process where members must stick to monthly payouts.
- A major problem faced by the traditional Esusu model is defaulting from other members when a selected member is supposed to receive his/her payout. Xend Finance has solved this problem by ensuring that the capital contribution of each member is locked within the smart contract and each member during payout receives the overall ROI of all the members while their capital is still secured in the smart contract. The capital for each member will only be withdrawn by the member when all members have received their payouts. This ensures that defaulting will be impossible in the Xend Finance Esusu design.
- Xend Finance will offer decentralized insurance to protect against any form of asset loss that can result from contract failures. This is a security that does not exist in the traditional Esusu model.
- The current Xend Finance Esusu model is powered by decentralized stable currencies to ensure that the contributions of the members of each cycle remain stable throughout the lifetime of the cycle and this protects against currency fluctuations that are faced by the traditional Esusu model.