Over 400 million economically disadvantaged unbanked individuals in Africa are losing out on chances to safeguard and develop their savings, access credit to assist their families and businesses and use insurance services to protect their households and livelihoods
- Blockchain technology is universal, transparent, and available to anybody with an Internet connection, regardless of ethnicity, nationality, gender, race, or socioeconomic status.
- Traditional banking operates on centralized control, but decentralized finance, commonly known as “DeFi,” enables users to gain financial services over a decentralized blockchain network.
- Through varied financial services, open transactions, and accessibility via a permissionless network, DeFi appears to reverse inequality and effectively increase financial inclusion across the board.
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The latest global financial crises have emphasized that even the most established banking institutions worldwide can fail under certain conditions. The fractures in the current, unstable economic system that rewards economic elites while ignoring low-income earners have become progressively more visible, underscoring a growing need to decentralize financial operations away from the conventional banking systems.
According to World Bank estimates, 1.7 billion individuals, or 31 per cent of all adults, are “unbanked,” particularly in developing economies; the figure is as high as 61 per cent. Women have an even more significant disadvantage, accounting for 55 per cent of the unbanked.
Over 400 million economically disadvantaged unbanked individuals in Africa are losing out on chances to safeguard and develop their savings, access credit to assist their families and businesses and use insurance services to protect their households and livelihoods.
These 400 million Africans, many of whom are already economically disadvantaged, have few options for efficiently sending and receiving money, building a savings account, obtaining credit, or acquiring insurance. And, without a financial backup, crises can be disastrous.
DeFi creating solutions through blockchain technology
Blockchain technology is universal, transparent, and available to anybody with an Internet connection, regardless of ethnicity, nationality, gender, race, or socioeconomic status.
At its core, the technology is essentially a decentralized method of organizing transactions in a database, or ledger, so that several untrusted entities may agree on the status of those transactions with no need for a mediator.
All transactions that get recorded are indelible, verifiable, and encoded. In this regard, blockchain is altering the role of banks, governments, and companies by enabling more secure, cheaper, and efficient financial transactions than traditional options.
For many years, most of these blockchain and financial inclusion proposals were theoretical and inconceivable. Now, the idea is coming to life, with implementations beginning to demonstrate early successes in addressing humanitarian issues. As a result, blockchain holds remarkable promise for increasing global financial inclusion.
Advantages of decentralized finance over conventional banking in Africa
Traditional banking operates on centralized control, but decentralized finance, commonly known as “DeFi,” enables users to gain financial services over a decentralized blockchain network. People may make transactions through an indelible public transaction record, eliminating any need for intermediaries like brokerage firms or banks.
DeFi stems from the idea of revolutionizing finance by substituting central institutions (such as banks) with peer-to-peer connections that do not involve intermediaries. In theory, Africans’ current financial services, including loans, savings, insurance, and so on, may one day operate on a blockchain network rather than through banks.
DeFi presently allows users to do various activities previously only available to banks, including borrowing, lending, earning interest, purchasing insurance, trading assets and futures, and more. The main distinction is that transactions are substantially faster and do not involve a third party or the documentation often associated with traditional financing.
DeFi eliminates conventional financial systems’ control over public money, financial services, and financial goods. DeFi is built on secure distributed ledgers and is available to everyone (i.e., one can use the blockchain network and decentralized finance platforms to make payments, borrow, invest and even lend funds to all regardless of origin or location). It is primarily based on Ethereum, allowing programmers to continue creating a diverse range of safe and efficient financial platforms.
Furthermore, DeFi allows consumers to retain their money in safe digital wallets rather than banks. The high fees charged by financial companies in return for their services are no longer applicable under DeFi. Furthermore, because DeFi is entirely self-sufficient — anybody with an internet connection may use it without requiring clearance from a centralized power — payments can take seconds to transfer.
Blockchain technology, cryptocurrencies, smart contracts, oracles, stablecoins, and decentralized applications are all integrated within DeFi. This combination results in massive financial power. Traditional financial services are sometimes expensive, from opening an account to paying fees and penalties. Customers with little income in Africa may struggle to locate a viable solution inside traditional banking institutions, which is reasonable.
DeFi is redefining financial freedom in Africa
Financial independence, at its most basic, means having access to financial services that can assist one in managing their finances. Many persons with lesser earnings may not be able to get loans, invest, or even create accounts in their names under traditional financial institutions.
Banks seldom provide financial goods and services geared toward low-income people. Traditional institutions often have stringent conditions, such as high credit scores, hefty fees, and high salaries. Such inaccessibility makes it much more difficult for low-income individuals to grow their money, creating a vicious circle that stacks the odds against the unbanked at each step.
Decentralized finance, as opposed to traditional finance, provides equitable access to financial goods in a safe environment. As bitcoin and conventional money continue to clash, the societal ramifications of decentralized finance are becoming apparent.
Through varied financial services, open transactions, and accessibility via a permissionless network, DeFi appears to reverse inequality and effectively increase financial inclusion across the board.
DeFi ushers a new era of democratized and accessible financial services
The design of blockchain technology allows users to transact securely without the control of a centralized authority. Because the infrastructure of centralized finance requires guarantees (such as collateral in the case of a loan) before it can execute its functions, conventional finance cannot provide it.
Blockchain technology validates transactions via a decentralized public ledger. This ledger is accessible to all network users and maintains an immutable record of all transactions. As a result, the system remains protected against fraud and corruption without requiring a single institution to oversee or function as a network gatekeeper.
DeFi projects using blockchain networks lower the barrier to entry for traditional financial services supplied by conventional banks. Unbanked people can use DeFi to access previously unavailable opportunities and services, such as loans and investments.
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Because DeFi requires no monetary input to create a loan, microloans and micro-investments (smaller loans and investments made by individuals) are accessible. The infrastructure distributes the risk across the many investors that back the loan, eliminating the need for a single corporation to carry the funding risk. A developing-country unbanked entrepreneur, for example, may utilize a decentralized lending pool to raise funds from global investors for his bitcoin concept.
To advance financial inclusion, innovators must make blockchain systems more efficient and environmentally conscious. To manage and stabilize the market, governments must also implement legislation. Entrepreneurs must also test blockchain technology and share their results with investors interested in investing in breakthrough blockchain enterprises. The unbanked 31% of the global population will allow for more innovation and research into solutions that promote fairness and financial inclusion. Even if blockchain is only a part of the answer, it is worth looking into more.