With six African countries in the top ten fastest-growing economies in the world and the continent being demographically the youngest, the 1.2 billion people living in this continent are gradually becoming positioned for the financial revolution of DeFi. Traditional banking systems in Africa have recently seen being on the verge of default due to debt and currency crisis, making the population wanting better access to banking solutions and customer services.
With decreasing trust in traditional banking institutions, the young and tech-savvy population are in need of digital solutions to problems of accessing banking and controlling their own finances, such as through a Decentralized Financing (DeFi) model. With DeFi, people in Africa without adequate access to banking can finally gain access to financial tools such as being provided liquidity, borrowing, lending, (insure), saving, etc, that will be essential in a growing economic market. It is important to discuss how DeFi will leapfrog traditional banking in Africa as it will be able to provide access to banking to a larger population that traditional banks were not capable of doing so.
How DeFi can help to defeat illicit transactions in the traditional banking system
The growth of the African economy has been stalled by intransparency. The emerging markets in the continent are controlled by a few people who want to maintain a monopolistic market. The traditional banking system has been known to be susceptible to mutability, and alterations, a fundamental flaw leverageable when engaging in under-the-table transactions, money-laundering, diverting funds or defrauding investors.
This centralized and opaque system makes it easier for concealing illicit transactions, aiding bad actors with the necessary platform for looting funds to the United States and Europe. With DeFi, every user can monitor the movement of money from the economy through the system; because DeFi is an open network, users can monitor the movement of illegal funds.
Traditional banks require the government’s approval to operate, which makes it easier for them to be influenced by the government, a level of dependency that easily makes them pawns. With DeFi, a lot of problems are addressed because anyone would be able to create their digital bank, which is accessible in Africa.
How DeFi can help to solve the banking crisis in Africa
The popularity of mobile banking in Africa has increased in recent years because of the arrival of cheap smartphone brands like Infinix and Techno. Most people in rural communities cannot afford expensive smartphones like the iPhone. There were more than 500 million internet users in Africa by December 2019, which means most African communities are connected to the internet.
The rise of mobile banking and USSD have increased recently. Many fintech companies like Paystack, Opay, and Flutterwave have come out with solutions that can improve transactions’ speed. The speed of transaction is essential for the growth of Small and Medium Enterprises (SMEs) and is also essential for the growth of the economy. Many businesses in Nigeria prefer to collect large payments through bank transfers or cards to protect themselves from theft.
TechCrunch reported that Flutterwave processed 107 million transactions worth US$ 5 billion. The companies working on these solutions still have to work under the central authority to achieve their aims. Their operation rules are mostly dictated by the government’s central bank, unlike DeFi, which has no central authority.
Zimbabwe as a case study
Zimbabwe is one of the greatest examples of the banking crisis that has been experienced by a country in Africa. The economy crashed, and the country’s central bank looked for a temporary solution to their problem, which is printing money, which escalated the crisis because as the money printing increased, the Zimbabwe dollar devalued to the extent that trillions of their currency couldn’t purchase bread in the market.
The citizens abandoned the currency, and banks were forced to adopt the Chinese yuan or US dollar as a means of payment for local transactions. The banks issued banknotes not because it was demanded by the public who had already lost faith in it, but because they were instructed by the central government to do so.
The adoption of DeFi in Africa will provide individuals necessary freedom, and tools to help manage their personal finances, with less government restriction encountered. Hedge against inflation and the decentralized system means that you can decide what to do with your money, unlike the central banks, which dictate how your money should be spent.
Nigeria as a case study
There is an ongoing banking crisis in Nigeria. It is less discussed because it hasn’t led to hyperinflation like in Zimbabwe, but we do not know the extent of this current banking crisis. The Central Bank of Nigeria pegged the Naira’s value to around ₦387, but the problem is that there is a wide shortage of dollars, and people are forced to buy dollars from the local exchange market that pegs it at ₦480.
This development has affected and stalled foreign investment in the country, and banks can no longer sell dollars to the public. Many Nigerians are now using blockchain solutions like Bitcoin and Etherum for foreign transactions. Still, it would be preferable for them to adopt a decentralized financial system for their transactions with a proper currency structure. DeFi can provide a better currency infrastructure in which businesses can have access to foreign exchange without government restrictions.
How DeFi can help in the flexibility of loans
Access to loans is one of the most important parts of the economy, loans are important for businesses to grow, and businesses’ growth will help grow countries’ economies. Banks are responsible for giving out loans in Africa, but the problem is that many banks prefer to earn through transfer charges and substantial amounts of money is deducted from their clients than making interest from loans.
Many central banks do not have a proper structure for lending, banks are also afraid to take risks with loans, so they set up collateral rules that are almost impossible to meet by small businesses. They can ask for a property worth 5 million for you to obtain a loan of 1 million, which is unrealistic. Many banks in Africa are also afraid of being defrauded.
Another challenge with traditional loans is where banks and business owners take advantage of the system. This situation happened in Nigeria, where banks were lending loans to borrowers without collateral. The fraud occurred because the banks received bribes from the businessmen that enabled them to get collateral-free loans, which they did not payback. An EFCC (Nigeria government organization responsible for fighting fraud) spokesman, Femi Babafemi, told local media,
“With the collaboration of both the debtors and the bankers, they have been using fictitious companies and names to apply for loans and get at this money. That also raises the question of money laundering.”
DeFi can solve loan problems in Africa. We have the possibility of creating a decentralized loan system like AAVE or dYdX in which the participants will provide liquidity to earn a profit on interest, and businesses can lend loans to grow. UTU is a company in Kenya that is testing out uncollateralized loans with DeFi.
The African economy is undergoing tremendous growth that has not been experienced before. Opportunities offered in terms of transparency are extremely valuable to counter banks supported by untrustworthy governments, which contribute to illicit trades and money laundering, overall not fulfilling their duties towards economic development.
If the people in Africa, especially with it being the youngest continent in the world, can adopt DeFi, this would lead to a massive increase in banking access for millions of people. This helps them to control their finances, enabling businesses to grow by accessing quick loans. This also includes expanding banking service to rural regions, where mobile payment may be more accessible than traditional banking systems, that could potentially alleviate some factors of inequality between rural and urban areas.
However, it is also important to mention the limitation of Defi in bringing access to finance in the African continent, especially in terms of a lack of concrete governance in emerging economies without a developed financial infrastructure that could result in transparency being an issue. DeFi application is limited to who is using them, and if a corrupt institution uses DeFi technology, they may be able to continue their corrupt behaviours through this technology. This is especially the case in emerging economies, like many in the African continent, that still have a loose legal structure that may not be able to govern fraudulent activities on the DeFi network as of yet.
Aly Madhavji is the Managing Partner at Blockchain Founders Fund which invests in and venture builds top-tier Start-ups and consults organizations such as the UN. He is a LP at Loyal VC and Draper Goren Holm, an award-winning author, a Senior Blockchain Fellow at INSEAD, and recognized as a “Blockchain 100” Global Leader by Lattice80.
Mario Egie is the CEO of Kite Financial. Mario has a first degree in physics and has been working as a software developer for more than 4 years. He is the winner of the Tony Elumelu–U.S. Consulate entrepreneurship award of 2019. With a keen interest in African capitalism, Mario founded Kite Financial — a Nigerian blockchain-cryptocurrency startup that is ushering a new financial infrastructure, which will provide the youthful continent financial access, inclusion and freedom.