India is considered the pinnacle of the fintech revolution, yet about 20% of the Indian population doesn’t even have a bank account. The lack of access to financial services is one of the biggest and most neglected obstacles in developing India. This article will explore how credit is a powerful tool that can double the income of the poorest in the country, and how building a new banking system that can issue microloans to people without a conventional credit history is essential to uplift the poor.
Why Credit is a Miracle of Economics:
Credit is a powerful tool that can double the income of the poorest in the country. To illustrate, we take the case of Sita, a 19-year-old girl from a low-income family. To double her income, all she needs to do is learn English and take up soft skill training to get a job in a call center or work at a store like Domino’s, where she can make about 15,000 rupees per month. However, she cannot pursue an English course as she doesn’t have the five thousand rupees required to invest in the course. She can’t get a loan either, as she doesn’t have a credit history or a transaction history. This lack of access to credit would cost her an opportunity that can uplift her entire family in just 90 days.
- Sita would first need to create a digital identity on the platform, which would include personal information and financial data such as income and expenses.
- She would then specify the amount of money she needs and the repayment period.
- The lending platform would use a smart contract to evaluate Sita’s creditworthiness based on her financial data and assign her a risk score. This process is automated and transparent, with no human intervention.
- If Sita’s risk score meets the lending platform’s requirements, she would receive a loan offer, which would include the interest rate and other terms and conditions.
- If she accepts the loan offer, the funds would be transferred directly to her digital wallet, and the repayment schedule would be automated through the smart contract.
How Blockchain Can Solve Sita’s Problem?
Blockchain technology can potentially solve Sita’s problem by enabling a decentralized platform for peer-to-peer lending. With blockchain-based lending, Sita could obtain a loan from multiple lenders without needing a credit history or transaction history. This would allow her to access the funds needed to invest in an English course and soft skill training.
A blockchain-based platform could provide a transparent and secure way for lenders to evaluate Sita’s creditworthiness by using alternative data sources, such as her educational background, work experience, and social connections. This could be achieved by creating a digital identity for Sita on the blockchain, which would allow her to build a reputation and establish a credit score based on her behavior and interactions within the ecosystem.
Furthermore, blockchain technology could ensure that the loan is executed and repaid in a secure and transparent manner by using smart contracts, which would automate the lending process and ensure that the funds are only released once Sita has completed her course and secured a job. This would provide lenders with greater confidence in the repayment process and reduce the risk of default.
In summary, blockchain-based peer-to-peer lending could provide Sita with the access to credit she needs to pursue her education and improve her job prospects, which could ultimately uplift her entire family.
Why Micro Loans are Not Easily Accessible to the Poor:
The banking system, in many ways, has not been able to develop a system that can make financial services easily accessible to the poor. This is due to three valid reasons. Firstly, providing micro-loans is not seen as a profitable or viable venture by the banks. Secondly, most people do not have valid IDs or addresses, which makes it challenging to trust them. Lastly, there is currently no way to determine if a person who is taking a loan is or will be capable of paying back the loan.
The Role of Blockchain Technology in Building a New Banking System:
The answer to building a new banking system that can issue micro-loans to people without a conventional credit history lies in the breakthrough innovation happening in Africa. The technology that they’re using is none other than revolutionary blockchain technology. Blockchain technology offers a decentralized, immutable, and secure platform that can enable secure transactions and storage of data. By using blockchain technology, we can ensure the privacy and security of the borrower’s data while also providing a transparent and tamper-proof system for tracking their creditworthiness.
Why is the government not implementing this?
The reasons for the government not implementing blockchain-based peer-to-peer lending platforms are complex and varied. It is not necessarily due to the influence of banking giants, although their interests may be a factor.
There could be several reasons why the government has not yet implemented such a platform. One possible reason is a lack of understanding of the technology and its potential benefits. Blockchain is a relatively new technology, and many policymakers may not fully understand how it works and how it can be applied to solve real-world problems.
Another reason could be regulatory challenges. Blockchain-based lending platforms could face regulatory hurdles in some jurisdictions, and governments may need to develop new policies and regulations to facilitate their operation.
Furthermore, there could be political and economic considerations that affect the government’s decision-making process. For example, the government may be more focused on other policy priorities or may be hesitant to disrupt the existing banking industry.
Building a new banking system that can issue micro-loans to people without a conventional credit history is essential to uplift the poor in India. Blockchain technology can be the game-changer that enables this system. By creating a new banking system that leverages the power of blockchain, we can help millions of people access the financial services they need to improve their lives. Let’s work together to create a brighter future for all.