Financially Inclusive Digital Products: a better alternative to informal lenders
By: Vanessa Barrameda
Tags: Financial Inclusion, Cryptocurrency, Fintech, Blockchain

Financially Inclusive Digital Products: a better alternative to informal lenders

The dilemma and opportunity in serving the low credit rating population

In the previous articles, we’ve been talking about how most of the adult population in emerging markets are unbanked and why this is the situation in countries like Indonesia, the Philippines, and Myanmar. Most of them cannot afford to maintain bank accounts and prefer to keep their cash where it is most accessible to them.

This why financially inclusive solutions are important. These initiatives help provide the lower income bracket population access to credit, micro-insurance, savings, and faster, more efficient transactions not normally offered to them by formal institutions. No matter how small the amounts involved seem to be, these stimulate investments that eventually lead to an upgrade in their source of livelihood.

According to a recent ADB study, increasing the opportunity of digital finance in emerging countries could boost GDP by up to 32%. Taking advantage of this opportunity could also help shape the future of these markets’ financial services industry, where most needs are failed to be met by formal institutions.

Low Credit Rating

Take for example a small business owner like Rosita, who sells home made pastries to her neighbours and friends.

Like many struggling entrepreneurs, her monthly earnings is barely enough to meet her family’s basic needs. She couldn’t afford to register her business formally nor pay for permit fees and taxes. Her only form of advertising is through word of mouth.

A small business loan would have done wonders to assist Rosita in financing her micro business for potential expansion. She could have used that extra capital to buy more materials that would have increased production. She could have also used some of that money to build signages to advertise her pastries and reach more potential customers.

But because Rosita doesn’t have a record with any bank and can’t be vouched by any company or formal institution, her credit rating is very low. If she ever applies for a loan, she would most likely be disapproved. Sadly, since no family member or friend has the cash she could borrow, Rosita’s only option is to go through informal lenders that charge steep interest rates in exchange for quick cash.

Informal Lenders

Also known as private moneylenders, loan sharks, or underground lenders, these groups allow individuals to borrow money even if they are not deemed credit-worthy by banks.

But this type of lax financial service comes at a hefty price — some informal lenders charge as high as 3% interest per day (that’s 1,095% per year!) and the collection methods can be quite unorthodox (not to mention, sometimes brutal). A 2013 report from The Economist relayed a story about a woman whose home was raided by a loan shark together with his thugs after not being able to pay an informal loan for just two days.

Despite hearing horror stories like this, many people still resort to this type of financing, possibly brought about by lack of education on the different ways one can avail of formal financial services, but more likely due to ineligibility and desperation. Though there are no official numbers released to track the size of the informal lending sector in Southeast Asian emerging countries, estimates reveal it to be as large as 47% of GDP (in Thailand).

No wonder many poor business owners in these markets get trapped in the endless cycle of loan and debt repayment!

Financially Inclusive Option

Providing alternative options to informal lenders can help alleviate the clamour for more affordable financial services.

XONIO, for example, allows every single person with a mobile prepaid phone access to inclusive blockchain-powered financial products like micro-lending, micro-insurance and remittance using nothing more than their prepaid airtime credits. There is no need for them to fill up lengthy forms or fall in line to submit their applications. All they need to do is download XONIO Mobile, register and convert their prepaid airtime credits.

Through the XONIO Token, they can participate in hundreds of financially inclusive decentralised projects that can ultimately help improve their economic standing, regardless of their traditional bank credit rating.