Blockchain Opens Up Kenya’s $20 Billion Informal Economy

by crypto journalist
International Business Machines Corp. — is one of a growing number of apps trying to address a major hindrance to Africa’s growth: a lack of finance.

Access to credit in the informal sector is not well-known because the data is neglected,” said Anzetse Were, a development economist based in Nairobi. “If you want to penetrate markets in Africa, you need to have a strategy for the informal sector.”

Small businesses in Africa face a $331 billion lending gap, according to the International Finance Corp., the World Bank’s private lending arm. In Kenya, demand from micro-, small- and medium-sized enterprises, or MSMEs, is estimated at $6.5 billion a year, according to 4G Capital, a Nairobi-based provider of loans to small companies in Kenya and Uganda.

“Sub-Saharan Africa has some way to go in building the financial infrastructure needed for MSMEs,” said 4G Chief Executive Officer Wayne Hennessy-Barrett. The company expects to lend $40 million to so-called MSMEs in the next 12 months, double the amount it lent out last year, he said.

Playing Field

  • Number of licensed MSMEs = 1.56 million
  • Unlicensed entities = 5.85 million
  • Providing livelihoods for 14.9 million people
  • Contributing 29% of output in $70.5 billion economy

— Source: Kenyan central bank website

“If a small-shop owner can take 10 $200 loans over the course of a year and there are 3.25 million small shop owners and 10 times that number of traders, you’re talking about a lot of people who need to buy inventory and sell it and don’t have access to a financial product designed around their needs,” Hennessy-Barrett said.

Better Access

Banks in East Africa’s biggest economy have been averse to lending to small business because they’ve been unable to grade the risks of individual entities, relying instead on their judgment of the sector, said Habil Olaka, chief executive officer of the Kenya Bankers Association.

“Currently, small businesses have trouble accessing credit, because they are assumed as a group, but if you have a good track record, you create your own score, therefore your performance in the credit market gives you access and better terms,” he said.

As traders like Wacheke punch their daily orders and funding needs into their phones, the data gets analyzed to create patterns in spending, credit histories and demand for goods and other services. The project comes as lending slows after President Uhuru Kenyatta almost two years ago introduced limits on commercial interest rates, which has made it harder for banks to differentiate customers based on their risk.

Photographer: Luis Tato/Bloomberg

Twiga and IBM processed more than 220 loans for small-food kiosks like Wacheke’s stall during an eight-week pilot program. During the trial phase, loans averaged about 3,000 shillings ($30) each and helped boost order sizes by 30 percent and the profits for each retailer by 6 percent, according to the companies. The loans ranged from four to eight days with interest rates of 1 percent to 2 percent in total and might be extended to other countries in the region in the next phase.

“If you put the whole transaction history on the blockchain, then you have something that doesn’t change forever and you are forming the history,” said Solomon Assefa, a vice president at IBM Research in Kenya. “This information allows the banks to expand their reach, the shopkeeper to access credit and the farmer to access the market.”

Given the difficulties of analyzing the complexities of the informal economy, Olaka said the technology shouldn’t be seen as a panacea.

“I wouldn’t say that blockchain technology will solve the challenges that affect this group of transactors,” he said. “I would say it has got the potential to.”

— With assistance by Thomas Wilson

(Updates with information on rate caps in third paragraph after Better Access.)

This content was originally published here.

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