How can DeFi help the Rural Poor?

Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

The concept of Decentralized Finance (DeFi) is attracting a lot of attention recently. The credit goes to the popularity of crypto and, more specifically, the blockchains that allow smart contracts. It is definitely set to revolutionize the fintech industry. In this article, we will specifically see how it can help the rural poor. Let us dive straight into it.

Charitable Institutions and Government Aid:

In the past few years, tax professionals have observed a trend of increasingly stringent laws and other measures relating to the setting up of charitable institutions, applying for tax exemptions, acquiring permission to receive foreign donations, etc. The need for such stringent legislation was born to curb the menace of misuse of benefits given to charitable institutions. Certain entities were set up solely as a means of tax evasion or money laundering too. Even when it comes to government projects and aid of any kind, we hear so many incidents of misuse of taxpayers’ money. This is largely due to the lack of accountability and difficulty in tracing the expenditure. Efficient use of DeFi via the blockchain could lead to increased transparency regarding the source and utilization of funds and also the establishment of a system of accountability for almost every penny spent. As a result, the funds reach their intended beneficiaries faster and without any unnecessary intermediaries.

Accessibility to financial services:

If one had to explain the business model of the banking sector in a very crude manner, it works on the principle that people who need money to spend will have to borrow from those who have money they want to save. Banks and other financial institutions act as the middleman in such a situation and take their cut as a reward for facilitating such transactions. However, with DeFi, it is possible to cut out the middleman entirely for most traditional financial services. In fact, a peer-to-peer system like blockchain will create a direct link between ‘savers’ and ‘spenders’ and allow them to execute whatever financial arrangement they want via smart contracts. For example, take a simple arrangement such as a housing loan. Consider the quantum of fees charged by banks as ‘processing charges’. Having a presence on the blockchain would eliminate the need to go via financial intermediaries, thereby making the whole process more affordable. Further, the increased transparency would also reduce the likelihood of loan-related frauds.

Improved stability of economy:

It is no secret that an unstable economy hits the poor the hardest. Poor decision-making, among other factors, can have a devastating impact, as was witnessed in Venezuela, where ‘hyperinflation’ had been observed back-to-back for at least 3 years with no end in sight. Taking a fairly long-term view, if we were to move to a payment system that is based on the blockchain, the decision-making relating to the country’s economic policies need not be left solely at the mercy of the Central Bank or the Ministry of Finance. Instead, it would probably be more helpful to place certain controls in the form of smart contracts that help regulate the economy autonomously. 

Removal of credit rating system as a barrier:

The current credit rating system followed in the financial sector is implemented to give assurance to lenders that the borrower has good financial habits and is likely to repay any amount borrowed on time. Higher the funds sought, higher the credit rating demanded.

“While banks and financial institutions try to lure the middle class with quick loans and urge them to leverage their creditworthiness citing healthy CIBIL scores, the formal sector seldom reaches out to the needy.”

The Times of India

With blockchain, smart contracts will accurately record the frequency and timing of borrowing and repayment. A separate type of credit rating can be assigned to the borrower independent of the rating given by CIBIL or other such agencies. 

Conclusion

India does appear to be seriously considering using blockchain technology. The Central Board of Indirect Taxes and Customs (CBIC) recently tested using an Electronic Cargo Tracking System which is a blockchain-based technology (more information here). If successful, this could also open up new possibilities and lead to lesser resistance in favour of the use of blockchain technology. 

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