Reposted from Everex, one of our bright startups from our Bangkok Bank InnoHub Programme.

The microlending industry has promised to eliminate poverty, offering low-barrier loans to those historically disincluded financially. Critics claim that the only individuals and entities gaining from the practice are lenders, lining their pockets with exorbitant rates and the interest of unpaid microloans. Either way, microlending has made significant inroads into finance as we know it today.

Commercial banks, such as Citigroup Inc. and Deutsche Bank AG, have established microfinance funds. People in well-developed countries are lending money to rice farmers in Ecuador and auto-mechanics in Togo already. Billions has been invested into the industry.

According to the United Nations, small loans can be used to “grow a thriving business and, in turn, provide for their families, leading to strong flourishing local economies.”

Yet, in the decade since microfinance garnered prestige, so-called “bottom-of-the-pyramid” solutions have led to strategies that many claim simply do not work and actually make poverty worse. In our research and development phase, Everex learned the problems facing traditional microlenders, and investigated the solutions certain blockchains might provide.

A main issue in microfinance is that most loans go towards the basic necessities people require to survive, instead of towards small-and-medium sized businesses so that people may earn new income used to repay loans. Those who start businesses often find they are too under-capitalized to succeed. In Mexico, micro-lending has been criticized for creating debt based on complex schemes for poor borrowers.

Everex plans to onboard small-and-medium sized businesses by offering them payment acceptance services with the Everex Wallet at 0% fees. Everex can then offer its Members loans based on their sales and a panoply of other data.

Many have concluded only the lender gains from microfinancial services. Micro-lenders are often pigeonholed as a new form of loan sharks. “Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people,” as London School of Microeconomics professor, Jason Hickel, wrote for The Guardian.

He cites a DFID-funded review that concluded “microfinance” has been built on “foundations of sand” since “no clear evidence yet exists that microfinance programmes have positive impacts.” Lamentations of exorbitant interest rates abound, reaching up to 200% per annum, such as at Banco Compartamos.

The Blockchain Factor

Trust requirements and corruption account for a large portion of problems arisen in the current lending landscape. Further, primary pain points for traditional micro-lending customers and providers are:

Large overhead and operating costs

High fees to compensate for heavy operating costs

Slow transaction resolution

Potential for corruption

Centralized structure moves slowly

We asked ourselves a simple question.

How does blockchain solve challenges in microlending?

Blockchain is a form of peer-to-peer data communication and file sharing that places trust among members of a distributed network by ensuring the majority of the network is in agreement and no one party or group can control that majority. Blockchain provides a clear set of incentives that benefit the microlending landscape.

How does blockchain reduce the potential for corruption?

If functions normally managed by a central authority in online systems are instead delegated to the constituent parts of the network, then corruption becomes far more expensive. That is a large part of blockchain’s innovation.

How can blockchain help break these bonds?

Traditional financial institutions suffer from high operating costs and a long wait before profitability. Modern startups in the microlending space have fewer overhead costs, such as branch maintenance. Classical financial institutions have to contend with those factors, while also facing agile startup competition and the changing habits of consumers.

How does blockchain speed up transaction verification?

Blockchain verification requires only that other network members sign off on a transaction. If a transaction has been sent, it cannot be sent again to spend the same money twice. By using this protocol to verify transactions, blockchain networks can verify transactions in minutes to seconds. Traditional banks may take days or even weeks.

Decentralized structures help speed up transactions

Decentralized structures issue a notice to the rest of the network that a transaction was sent, and then publishes that record to the rest of the network. By routing transactions through the whole network, more confirmations can happen, resulting in a faster resolution for transactions of virtually any size.

Conclusion

Blockchain is pushing the limits of financial inclusion further than traditional institutions were able to do so, resulting in a more aware and more involved citizenry globally.

By lowering the costs of cash transfer and doing business, blockchain could solve some of the main problems with microlending, allowing the new financial cottage industry to blossom and start lifting people out of poverty at a world-changing rate.

Want to learn more about Everex? Be sure to visit Everex.io, today.

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