In Malaysia, according to industry estimates, 55 per cent of the adult population is unbanked or underbanked. These unbanked and underbanked individuals, many of whom are already economically challenged, have few options to store money, send or receive remittances, obtain credit or insurance, and save for the future. Without any financial buffer, emergencies and crises can be devastating.
The World Economic Forum has highlighted that blockchain has promising potential for increasing financial inclusion since blockchain is global, open-sourced, and accessible by anyone regardless of nationality, ethnicity, race, gender, and socio-economic standing, as long as they have the Internet connection.
Traditionally, people rely on financial institutions to accumulate savings and investments. For the unbanked and underbanked, saving for the future is challenging while the alternative financial services tend to charge high fees. The cost of opening and maintaining a bank account as a result of minimum account balance requirements, overdraft fees, a great distance between branches, and the proliferation of formal process to open an account may be too high for poor households to manage. Ownership of physical assets such as fishing boats, cattle, crops, or lands are difficult to liquidate for emergency needs while hoarding cash makes them more susceptible to inflation.
Alternative platforms
Using blockchain technology, alternative platforms can be created for individuals to save, invest, transfer money, build credit, and obtain insurance. With cryptocurrencies such as stablecoins, any eligible individual can open an account by downloading the blockchain-based application and activating the digital wallet. The peer-to-peer architecture of blockchain allows execution of transactions without the need of any middleman or intermediaries, allowing financial transactions to be more secure, cheaper, and more efficient.
The first step to acquire the cryptocurrencies can be completed through transfer from another platform, or purchase through the participating physical stores in the solution network. Once the screening process is completed, users may decide how much money they would like to save and invest in their wallet. Total savings and performance of the investments can be monitored on the app, and users may choose to redeem the money anytime. Blockchain allows applications such as Xcapit in Latin America to provide a simple, less intimidating, and secure investment and savings interface in less than three clicks with average investment of $1,500 per user since 2021.
Blockchain-enabled solutions could also facilitate remittance services for the unbanked and underbanked by allowing individuals, and micro or small businesses to send and receive money directly without requiring a smartphone. The solutions connect feature phone users and low-end smartphones by dialling a short code to enable the users to get a menu that allows them to perform transactions.
Blockchain-based remittance solutions such as Ripple, Stellar or Celo charge settlement costs that are nearly zero and money can instantly and freely move between the chains, allowing users to take advantage of the global, borderless blockchain systems. This also means that the only fee associated with international transfers is mostly the currency conversion to fiat money when necessary.
Issuing tokens
Establishing credit and obtaining insurance for the unbanked, underbanked, and poor households can be difficult given more than a third of the population has no credit history and therefore has no safety net in difficult times. Blockchain solutions aiming to close the credit gap in low-income communities can be established by facilitating alternative concepts such as issuing tokens backed by all of the actual goods and services in specific community, such as crops, cattle, the work of carpenters or artists, and inventories.
In times of crisis or emergency, low-income communities might not have a line of credit or insurance, so the tokens can be used to secure a line of credit backed by their own resources. In addition, through the blockchain distributed ledger technology, micro and small business owners can maintain a record of their historical trade and tokenised assets that can be used to build their credit scores.
Successful blockchain projects such as the Grassroot Economics funded by UNICEF’s Innovation Fund has proven that such solution is possible as almost half a million transactions have been executed using their token equivalent of US$3 million since 2020.
Few years ago, most of these concepts and ideas about blockchain and financial inclusion were mostly theoretical. Currently new projects and initiatives are finally moving forward to benefit real individuals despite being in the inception stage. Blockchain can potentially increase financial inclusion and contribute to poverty alleviation, provided that the solutions are user-friendly and place the users at the epicentre. The adoption and implementation of blockchain requires efforts from all stakeholders in the blockchain ecosystem to continue exploring, innovating, prototyping, investing, and supporting the applications.
Dr Siti Hawa Yusof is a lecturer for the School of Accounting & Finance, Faculty of Business and Law, Taylor’s University.
