Please describe your proposed solution.
Summary
Build a dApp that fuses traditional cooperative operations in the form of smart contracts and integrates Atala Prism to provide credit to informal businesses in Africa. Organizing the informal sector on blockchain and recognizing its role as a profitable activity would contribute to economic development and easy large-scale adoption of Cardano in Africa.
Background
The blockchain provides the platform for Africa’s informal sector to put its deep-rooted traditional cooperative system used to provide credit to informal businesses. It is public knowledge that the Cardano blockchain has Africa as part of its strategic goal. To fully explore the potential of Africa’s market share, we cannot afford to ignore the informal sector in Africa.
The informal sector is the engine for economic growth and employs 90% of youths in Africa, yet the development agenda in Africa and from multilateral development partners seems to ignore the very engine of economic growth in Africa. This proposal seeks to provide financial inclusion by providing credit to businesses in the informal sector. It is established that the development of the informal sector is a great accelerator towards solving critical socio-economic problems, including Poverty, hunger, and improving the standard of living among others. Among the challenges faced by the informal sector, financing businesses or access to credit is a huge problem (Lader, 1996). Existing credit facilities and banks do not have financial products for businesses in the informal sector. This is due to the inability of the sector to document its activity or provide easy identification for its players as well as the inability to raise the needed collateral to secure loans or credit from banks, ,microfinance and financial institutions. Financial institutions with the formal sector structure their product to meet the needs of large corporations.
There is also element of discrimination with the credit constraints which depends on gender disparity gap. Abor and Biekpe (2006) identified that female-owned businesses in the informal sector are relatively small and less likely to employ debt finance. This is because, the necessary collateral to qualify for debt finance is not owned in their names and females are unable to penetrate informal financial network which affects their ability to gain useful information and source of capital (Greene et al, 1999).
Solution in Details
The solution proposes to use existing cooperative operations in Africa through smart contracts on dApp and provide secured and collateral-free credits at a rate of less than 2%. It is estimated that there are over 500 million cooperatives across Africa. As of 2016, South Africa had 132,000 cooperative movements and there are 25,000 cooperatives with 14,000,000 members in Kenya. Ghana equally has about 15,000 cooperative societies. It must be noted that several other cooperative movements operate with little or no records on them. Traditionally, the extended family in Africa forms the basic economic unit of communities. It must be noted that the extended family operates with a pool of resource, however, the extended family is a private entity as several other private families exists even within one community. Also, there exist co-operatives systems that pool resources on a mutual cooperative basis between several individuals from various families. For instance, members of a particular cooperative can undertake to weed individual farmlands in turns and on a weekly basis. It is how, traditionally, co-operatives organize various economic activities including farming.
The Cardano blockchain presents safety and reduces the risk associated with traditional cooperative operation. With smart contracts developed on a dApp which would code the traditional cooperative operation on the blockchain. Blockchain technology would present secure, transparent, and safe cooperation among individuals in the informal sector.
Smart Contract and No Collateral Credit for Informal Sector Businesses in Africa
Individual businesses in the informal sector form various co-operatives to contribute flat fees into a pool fund (savings mobilization) on a weekly or monthly basis. This amount is then given to a one member of the co-operative group. This would continue until all members within a cooperative group receive funds from the pool fund when their turn is due to end the cycle of the pool fund. This practice has sustained informal businesses till present-day Africa and the sector remains the backbone of economies in Africa. In such a cooperative system no collateral is needed to receive funds from the cooperative pool but solely on mutual cooperation basis. The smart contract would provide an imprint of cooperative operation on the Cardano blockchain. The smart contract would function to allow players in the informal sectors to undertake the following;
1. Form cooperative groups of 3, 5, and 7 to access financial credit
2. The group formed would serve as a security for credit and there would be no need for collateral
3. Individuals in the group getting more and high credit is dependent on the performance of all group members in repaying the loans.
4. Governance mechanics exist to resolve real situations of setbacks, justifiable bad debt, and participatory recovery plans.
The credit would not be given in isolation as plans exist to provide identity and accounting management to help businesses get credit ratings that can be an indicator to rely on for future access to credit.
Module: Bottom-Up Approach
The sustainability of the project hinge on advancing traditional co-operative principles. We seek to use the bottom-up approach for increased participation of businesses in the informal sector to have a sense of ownership in the entire project. Cooperative operation is grassroots-oriented therefore, the bottom-up approach is a sustainable way to address socio-economic challenges associated with affecting informal businesses.
Market Research
The informal sector is dominated by individual private businesses undertaking various economic activities that are vital to the economies of countries in Africa. Caprio & Honohan (2001) have argued that GDP growth rate could increase by 2% if credit flow to the private sector is doubled. It has been established that the level of economic activity is highly affected by any disruption to the supply of credit (Melzer, 2007). Currently, the informal sector is faced with existing credit constraints. According to the World Bank (2008), access to finance is described as absence of price and non-price barriers to the actual use of financial services (credit). In practice, documentation process alone provides difficulty to the informal sector and prevents them from accessing credit from existing financial institutions.
Naturally, at the going market rate, when demand for credit exceeds supply, borrowers will be prepared to pay higher rate to obtain credit but a high-interest rate will reduce the expected returns of lenders since higher interest rate can be a disincentive to repay the loan. What is more crucial is that a high-interest rate takes away the borrower's expected returns; therefore, borrowers are motivated to engage in high-risk ventures with high returns and low possibility of success. Therefore, there is a moral responsibility on lenders not to increase interest rates (price) in response to increasing demand for credit even though borrowers may want to pay higher prices (Domeher et al., 2014). However, high interest rate can induce more lenders to increase supply of credit and reduce interest rates in the long run.
Since the project would take off in Ghana, it is important to note that, in Ghana, small enterprises in the informal sector mainly source their credit from non-bank financial institutions. In addition, the nature of small enterprise borrowing in Ghana is interesting as Domeher et al., (2014) revealed that the amount of loan SMEs desire to borrow has a significant association with the average amount of cash generated per month by the business. Thus, the loan amount increases as the cash generated per month by the business increases and vice versa. This is good for lenders and the economy as a whole because SMEs only borrow as much as they can afford. To put it another way, SMEs that generate higher cash per month are relatively big businesses with bigger financial needs hence, mostly decide to apply for large amounts of credit.
This presents an opportunity to use smart-contract to imprint on the Cardano blockchain credit operations that have made informal businesses survive in the face of adversities and neglect from financial inclusion.
Atala Prism Integration
Decentralized Identity Verification: Decentralized identities for individuals and enterprises operating in the informal sector may be created using Atala Prism. This minimizes the possibility of fraud and boosts participant confidence by ensuring that each entity on the blockchain has a distinct and verifiable identity.
Reputation and Credit History: Each group in the cooperative smart contract system would have their transaction history and reputation tracked by Atala Prism. It would keep track of productive loan repayments, company performance, and other pertinent information. Lenders may consult this credit history to assess the creditworthiness of unregistered enterprises.
Smart Contract-Based Loan Application: Smart contracts would be used to submit loan applications from informal enterprises. These agreements may be created to incorporate certain clauses like the required collateral, interest rate, loan amount, and payback conditions. The applicant's identity and credit history kept in Atala Prism would be instantly verified via the smart contract.
Transparent Loan Repayment: Payback conditions and automated payback procedures can be included in smart contracts. Tracking loan repayments using Atala Prism ensures accountability and transparency. The borrower's credit history may benefit from timely payments, which may improve their ability to obtain credit in the future.
Continuous Improvement: To learn more about the efficacy of the cooperative smart contract system, data gathered through Atala Prism may be evaluated. This knowledge would be used to enhance credit availability, loan conditions, and lending procedures for Africa's informal companies.
How does your proposed solution address the challenge and what benefits will this bring to the Cardano ecosystem?
The proposal provides blockchain and decentralized solutions to a critical and unique niche within the African continent thus the informal sector. The informal sector has the ability to scale up ADA use and adoption rapidly in the face of competition from other ecosystems in the crypto market share of Africa.
The credit would be paid in ADA value and allow players in the informal sector to use Yoroi wallet to receive credit facilities to support their businesses. This would provide evidence-based support and development of real businesses and grow cryptocurrency trust among real business owners. This would be easy to build grounds, in the long run, to adopt Cardano for real-world business value delivery.
The proposal provides a win-win situation for players in the informal sector by addressing the problem of lack of access to credit by informal sector players and making Cardano adoption accelerate on the African continent. Developments of the informal sector in Africa have a huge tendency of accelerating adoption and hence should be given needed attention because blockchain technology exists to provide self-governance to the informal sector that abhors control from a centralized authority.
Through smart-contract with businesses in the informal sector, the future of growth in adopting Cardano in Africa would accelerate since this proposal presents a solution to the informal sector which is the engine of economic activities in Africa.
Finally, the proposed solution spreads up adoption and provides representative stakeholders working within groups for a decentralized ecosystem that provides credit to informal business owners.
How do you intend to measure the success of your project?
The impact we have on enterprises in the informal sector, providing them with a trustless credit system through a decentralized application (dApp) leveraging cooperative smart contracts and Atala Prism on the Cardano Blockchain that can be trusted for their financial inclusion in Ghana and throughout Africa, is how the team defines success. Particularly, the measures characterize our success below:
- Adoption and Usage: The degree of dApp usage and acceptance by informal companies is critical to our success. How much SMEs would use the platform to conduct financial transactions, confirm their identities, and access other services, therefore, the number of active users, transaction volume, and user engagement are key indicators for success.
- Financial Inclusion: The main objective is to increase SME financial inclusion. The number of formerly financially excluded enterprises/ SMEs that have obtained access to financial services through the dApp would be used to gauge success. Financial inclusion development would be monitored by keeping tabs on the rise in the proportion of SMEs having access to loans, credit score, payment services, and other financial instruments.
- Stakeholder Engagement: It's critical to collaborate with stakeholders including SMEs, financial institutions, regulators, and community organizations. The degree of cooperation, collaboration, and support gathered from different stakeholders may be utilized to measure success.
- Long-Term Sustainability: Long-term insights on the dApp's capacity to continue supporting SMEs may be gained by analyzing the dApp's financial sustainability, scalability, and flexibility. The success of the project may be determined in part by tracking its development, funding, and potential for growth.
KPIs
The project sought to use the following indicators to measure progress.
§ Number of Users
§ Number of Wallets Created (Yoroi/Nami/CC-Vault/Daedalus) for informal businesses
§ Number of Credit Applications
§ Number of Credit Facilitated and Approved
§ Number of Informal Businesses Paying Back Credit
§ Number of informal business owners/players attending the workshop
Please describe your plans to share the outputs and results of your project?
Documentation and Reporting: Keep complete records of all project activities, obstacles, and outcomes, as well as significant milestones. Create frequent progress updates and thorough project documentation that reflect the approaches employed, the impact made, and the implementation process. The outputs of the project will be shared using this documentation as a base.
Stakeholder Engagement: Throughout the project, include and involve stakeholders to foster ownership and guarantee their active participation. Engage in regular communication and collaboration with all relevant parties, including the neighborhood's companies, financial institutions, governmental organizations, development groups, and government agencies.
Workshops and Training Sessions: To disseminate the information and insights learned from the project, hold seminars, training sessions, and capacity-building initiatives. These seminars would be directed toward informal businesses, financial institutions, and pertinent parties. Sharing best practices, showcasing the advantages of the cooperative smart contract system and Atala Prism, and offering advice on putting such projects into action should be the main priorities.