Please describe your proposed solution.
Summary
Build a dApp that fuses traditional co-operative operations in a form of a smart contract 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 the 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 co-operative system used to provide credit to informal businesses. It is public knowledge that 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 sector's inability 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 in the formal sector structure their product to meet the needs of large corporations.
There is also an element of discrimination with the credit constraints which depends on the 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 formal financial networks which affect their ability to gain useful information and source of capital (Greene et al, 1999).
Solution in Details
The solution proposes to use existing co-operative operations in Africa through a smart contract 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 resources, however, the extended family is a private entity as several other private families exist even within one community. This is the Africa Ubuntu meaning 'I am because, we are', and the 'we' refers to the extended family that is a private entity and basic economic unit. 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 contribute (money) to support individual farmlands in turns and on weekly basis. It is how, traditionally, co-operatives organize various economic activities including farming, retail business, and services among others.
The Cardano blockchain presents safety and reduces the risk associated with traditional cooperative operations. With smart contract developed on a dApp which would code the traditional co-operative operations on the blockchain. Blockchain technology would present secured, 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 cooperatives to contribute flat fees into a pool fund (savings mobilization) on a weekly or monthly basis. This amount is then given to one member of the cooperative 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 co-operative pool but solely on mutual cooperation basis. The smart contract would provide an imprint for cooperative operations on the Cardano blockchain. The smart contract would function to allow players in the informal sectors to undertake the following;
- Form co-operative groups of 3, 5, and 7 to access financial credit
- The group formed would serve as a security for credit and there would be no need for collateral.
- Individuals in the group getting more and high credit/good credit ratings are dependent on the performance of all group members in repaying the loans.
- Governance mechanisms exist to resolve real-world situations of setbacks, 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 hinges on advancing traditional cooperative 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 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 the 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 activities 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 the absence of price and non-price barriers to the actual use of financial services (credit). In practice, the 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 a higher rate to obtain credit but a high-interest rate will reduce the expected returns of lenders since a higher interest rate can be a disincentive to repay the loan. What is more crucial is that high-interest rate takes away the borrowers 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 rate (price) in response to increasing demand for credit even though borrowers may want to pay a higher price (Domeher et al., 2014). However, the high-interest rates can induce more lenders to increase the 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's main source of credit are non-bank financial institutions and individuals who charge high interest. 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 informal businesses (including SMEs) only borrow as much as they can afford. To put it another way, SMEs that generate higher cash per month is relatively big business with bigger financial needs hence, more likely to apply for a large amount of credit.
This presents the opportunity to use smart-contract to imprint on the Cardano blockchain credit operations that have made informal businesses to survive in the face of adversities and neglect from financial inclusion. Also, existing credit charges higher interest rates, as well as a high cost of processing loans from banks, also take significant part of the loan which is used to pay for processing fees. Therefore, dApp would be a revolutionary and innovative solution as it solves existing problems associated with traditional cooperatives and provides financial inclusion using the blockchain.
Please describe how your proposed solution will address the Challenge that you have submitted it in.
How the Proposal Fits The Challenge
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 the 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 in Africa. This would be easy to build grounds, in the long run, to adopt Cardano for real-world business value delivery while providing financial inclusion for actors, creators, and entrepreneurs in the informal sector.
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 in 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.
By organizing cooperatives using 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.
What are the main risks that could prevent you from delivering the project successfully and please explain how you will mitigate each risk?
The proposal tackles a need that has been a difficult challenge facing informal businesses in Africa. Despite its positive enthusiasm, the team foresees that the low levels of education and digital connectivity would be a major challenge for the project. However, we plan to mitigate the risks associated with internet connectivity by focusing on the urban informal sector and gradually expanding to rural areas with time.
The team would also provide periodic educational outreach and annual event to constantly engage individuals in the informal sector and facilitate easy use of dApp, governance, and resolve challenges. These outreach events are categorized as follows;
Ubuntu Convention – This is would be an annual event organized once a year.
Ubuntu Outreach – This would be a quarterly event organized four times a year.
Ubuntu Family Event – This would be a self-initiated event that would be organized by individuals in the informal sector depending on their own needs.
Note: Ubuntu Origins Africa as an organization would provide resources including personnel to educate locals at various organized strategic events.
Also, there is an increasing number of graduate unemployment in Africa and these graduates would be provided the opportunity to serve as agents and assist business owners in the informal sector to facilitate easy use of dApp.