In part 1 of this article, we discussed that one of the biggest obstacles that are hindering the growth of poor people in developing nations like India and Ethiopia is the lack of access to easy credit. Now, in this part, we will be discussing the solution to this problem that is been implemented by Ethiopia.
The answer to the poverty lies in a breakthrough innovation that’s happening in Africa, and the technology that they’re using is none other than the revolutionary blockchain technology. To tell you about it, Ethiopia is one of the poorest countries in the world. The condition of Ethiopia is so bad that 15.9% of the population is still living in extreme poverty. And the systems in this country are so corrupt that people cannot even rely on banks. Now, with such a broken system, giving people a bank account is not a solution.
And this crisis is not just limited to Ethiopia but is being faced by multiple countries in Africa. In those countries, the situation is even worse, and Ethiopia is one of the fastest-growing countries in Africa. So, you can imagine what’s happening to the rest of the countries.
Well, guess what? In April 2021, the Education Ministry of Ethiopia officially declared that it will collaborate with IOHK, which is a parent company of a blockchain called Cardano, and together they plan to build a robust identification system, eventually to lay the foundations to redefine the way banking is done in Africa.
After its launch in 2015, Cardano (ADA) cryptocurrency ADA has seen a meteoric rise in market cap. In January 2021 it crossed $5 billion and as of not, it has surpassed a staggering mark of $85 billion in market capitalization. And this blockchain came into the limelight after Elon Musk made the announcement saying that Tesla won’t accept Bitcoin due to environmental consoles. And this is when the world started to look for more sustainable blockchains. And that is when Cardano came to the limelight.
Why? As Cardano is 1.6 million times more energy-efficient as compared to Bitcoin, which makes it suitable to be used in poor countries like Ethiopia. And IOHK plans to deploy a tool called Atala Prison, which is built on the Cardona blockchain to revolutionize the fundamental systems in Ethiopia. And from what we know is going to be implemented in multiple phases. The first phase will focus on providing digital identities to 5 million students using which their academic credentials and their identity verification can be provided.
And this is being done with the vision that the same IDs would be used to verify their citizenship and further also be used as a verification feature by financial institutions. Therefore, the first challenge of microfinance is being sold, and that is the lack of authentic digital identity. The second phase is all about developing a traceable system to track peer-to-peer transactions. Now, what this means is since these people do not have a credit history, the blockchain will start computing the credibility of the person by looking at their day-to-day digital transactions.
For example, let’s say you’re a Mason working at a construction site. First of all, blockchain allows you to make digital transactions by which you can buy, sell, borrow and lend money through your digital IDs. So, if you borrow Rs 500 from your uncle and if you return it within 30 days, the system will understand that you have the capability to pay back Rs 500 in 30 days. So similarly, the system will note the simple data point that happens in your day-to-day transactions. For example, the system will note that you are saving Rs 100 per month consistently. It will also note that you pay your electricity bill on time, or if you’re the one who never pays back the loan, the system will track that also, and it will reduce your credibility accordingly.
Therefore, by looking at the patterns of these microtransactions, the system will determine what is the creditworthiness of an individual. So, the system understands that you have constantly saved Rs 500 per month and hence the system will certify that Prakash is capable of paying back Rs 3000 loan in one year because he has been saving Rs 500 per month consistently for one year. This is how the second challenge of microfinance can be sold and that is lack of credit and transaction history. Eventually, when both these challenges are sold automatically, the third challenge also can be sold and that is the un-viability and profitability of microfinance.
Now, in this case, the best part about blockchain is that all of this is being done without depending on a bank and is done in a decentralized system that is non-hackable, non-corruptible, super-efficient, and most importantly, it’s sustainable for the environment.
This is how a country like Ethiopia is envisioning solving its crisis using revolutionary blockchain technology. Now the question over here is, what are the lessons that we can learn from this case study to apply this system in India?
There are three very important points that we need to take away from this case lesson. Number one, just like Ethiopia, the citizens of India at the bottom of the pyramid desperately need a reliable microfinance system and we just cannot neglect these people because unlike us, for them, Rs 5000 is not pocket money but a question of survival itself. In our case, we saw that if Sita’s father is able to get a microloan of Rs 5000. She can upgrade from an Rs 8000 salary directly to a Rs 15000 to Rs 20000 salary.
And this upgrade could transform the lifestyle of her entire family. So tomorrow, if there’s a medical emergency in their family, this difference of Rs 8000 to Rs 10000 can be the difference between life and death itself. Lesson number two, if this robust system of creditworthiness is built, a single mother like Mrs Sheetal will be able to pay her son’s College fees. And once her son is on the payroll of a corporate company with a three to five lakh salary a year, then from that generation onwards, he will no longer need micro-financial services.
So, the system of microlending needs to be treated as a pipeline to empower the poor rather than a singular profitable venture. Because in this case, the profit is not the interest that Mrs Sheetal is going to pay on Rs 15000, but the taxes that her son is going to pay every single year with a five to seven lakh salary after he starts getting a promotion. Therefore, if at all the system is executed, we need to start looking at profits in the long term and not just the short-term profits.
And last and most importantly, if a country like Ethiopia, without a stable government, without stable Internet connectivity, and with one of the poorest populations in the world, dares to experiment with blockchain. A country like India, in that case, is a paradise for this kind of technology. We are already five years ahead because we have amazing Internet penetration. We’ve got rich finance institutions, and most importantly, we have a stable government in place. Therefore, it is time that we at least start experimenting, if not fully embrace their blockchain technology, because in this case, it can give us the superpower to transform the lives of the poorest in India.
