Africa is a continent where most of the population is unbanked or does not have any bank accounts. Financial systems and banks have tried to change this status quo but have remained unsuccessful so far.
The primary reasons for this are as follows:
- Most of the banking infrastructure and processes are poorly built and handled.
- Conventional banking systems are challenging to build due to a lack of resources that can help people understand finance as a subject on a deeper level.
- Moreover, the physical banks are not available everywhere, thus taking a toll on the people due to the cost and time wasted traveling to one.
- There are certain banks that work with organisations to provide people with necessary loans, but the interest rates are pretty high.
- Finally, bureaucracy is a significant obstacle that people must overcome to create bank accounts and perform simple banking functions.
These are the main challenges people face while trying to leverage banking resources for sustainable financial growth.
Africa is a continent with a majority of the population under the age of 35 that has a higher usage of smartphones and the internet. This increases the opportunities for them to access banking services remotely via unconventional and innovative mediums such as DeFi.
Why Africa Is A Potential DeFi Hub
According to Cardano CEO Charles Hoskinson, DeFi is currently a service that not many people around the globe need. This is because people in countries such as the USA have enough banking systems that are fast, efficient, regulated, and provide all the services necessary for the citizens in a relatively straightforward manner.
Hence, shifting to a completely different finance paradigm will be difficult for these people, and there would be resistance from them since their needs are already being met.
The same logic can be applied to people in Africa who do not get help from any system. Although there is awareness about how institutions function in other places, people do not have institutions in place that can serve them.
This makes Africa a potential opportunity for DeFi platforms to engage with the people here and cater to them since they’d be more than willing to shift to systems that are faster, cost-effective, transparent, and have no central or bureaucratic authority managing them.
Advantages Of A DeFi System
- With DeFi platforms and systems in place, the people who haven’t had access to any financial systems can now access it anytime they want with just a phone and an internet connection.
- The platform will be run with tech, and hence there will be more autonomy and independence for people who want to manage their own wealth.
- It’ll be faster, cheaper, and relatively more secure.
- People can perform P2P transactions such as lending, borrowing, etc., and without the need for a central authority or intermediaries.
Challenges Of A DeFi System
- There might be a resistance to change and mass adoption of this innovative system.
- Since DeFi is a relatively new space, there can be programs to usher people into the space and showcase its benefits.
- Companies will need to work with government regulatory boards to co-create policies that best serve the public.
- Usually, DeFi as a system is seen as a threat by traditional banking institutions so a path needs to be charted where traditional institutions and new-age DeFi space can work together to elevate the banking experience for the public.
- The DeFi system will also need to have seamless on and off-ramp procedures for people who currently possess only fiat currencies.
- Though the system is more secure than the traditional ones, it still is prone to smart contracts and poor security risks.
- DeFi systems should have easy-to-use and understandable UI/UX so that people from all walks of life can avail and leverage its benefits for their growth.
- Finally, liquidity on the platform will be imperative for people to incur lower fees and obtain currencies at a minimal price.
Areas Where DeFi Can Be Used
DeFi systems in Africa can provide access to banking, getting mortgages or loans, wealth management tools, investment opportunities, solutions for small-to-medium sized businesses, insurance, and real estate too!
With all these systems in place, people will be able to have sustainable financial growth and, in the long run, make them more in control of their future.
Xend Finance is a Nigerian DeFi platform startup that was launched in 2019. It is the first DeFi platform out of Africa and claims to be the first DeFi Credit Union platform. The company participated in the Google Launchpad Africa Accelerator and Binance Incubator Program and obtained funding of $2.2 billion.
Built on the Binance Smart Chain, the platform looks at currency devaluation as a use case and wants to leverage decentralized systems to provide better financial services.
The platform will launch a $XEND token that will provide additional benefits to the users by providing them rewards for performing operations on the network. Furthermore, it will also enable decentralized governance in their finance ecosystem.
In essence, Africa looks promising for DeFi platforms, and the scope is enormous. As Charles Hoskinson said, it is predicted that over 100 million users will be part of different DeFi ecosystems in the next three years.