Can Crypto Reduce Friction and Create a Boom for Micro-Loans?
Published by Kevin Denman on: October 9, 2023 | Read on Medium
The ascent of micro-loans is an inspiring story. It has all the makings of a rags to riches fairy tale whereby a poor, underserved individual gets access to credit and is able to compound this credit into a more prosperous future.
Grameen Bank remains the poster child for the micro-loans sector. In short, Grameen bank devised a risk model that enabled them to disperse micro-loans (typically no greater than $2,000) to individuals without any collateral. This may not seem like a lot of money, but for a small street vendor in Bangladesh, this loan can enable them to increase their inventory and double their revenue. Prior to micro-loans, these unbanked entrepreneurs lacked the ability to access credit and therefore could not accelerate the growth of their businesses as easily as their more affluent counterparts. This reality left them severely disadvantaged and less likely to break out of poverty.
Despite Grameen bank and others incredible efforts and successes to date, the macro reality is still quite grim. It is estimated that nearly 25% of adults globally remain unbanked today. This means that they lack access to basic financial services like a checking account, payments, insurance, and credit.
How can a crypto infrastructure help ameliorate this global issue? By reducing friction. You may not think much about friction with respect to the global financial system; but it is actually one of the most important variables when considering the level of access the global population has to it. The higher the friction, the harder it is to profit from the long tail of the market. Who is the long tail of the market, you might ask? It is the poor.
The more friction there is in the global financial system, the lower the probability that financial services will reach the most impoverished populations.
Trustless, crypto infrastructure does an incredible job at eliminating friction. It enables a single entity to distribute capital to an infinite number of wallets (with an infinite number of owners/custodians) in an infinite number of jurisdictions without requiring a complex apparatus of intermediaries to shuttle the currency from source to destination. Prior to global-first blockchains, sending small amounts of money about the world in this way simply was not practical. As our beloved Wall Street executives love to put it, “the juice ain’t worth the squeeze”.
In a crypto-based economy, the juice may just be worth the squeeze as we continue to drive financial friction down to zero. The micro-loan space, albeit quite new, is poised to explode as a result of low friction blockchain-based financial infrastructure. All of the money that now goes into fees to disperse loans, collect payments, track balances, and manage accounts can be repurposed into more accurate and scalable underwriting techniques. This will grow the pie.
It is my hope that once the crypto industry is tired of speculating with their perps on worthless shitcoins and pumping up meme tokens in the spirit of “internet culture” someone will decide to launch a company focused on doubling the size of the micro-loans industry, enabling iced out entrepreneurs around the globe.
Let us never forget that at human scale, friction is everything.
Sources
- International Monetary Fund (IMF). "Nearly 24% of the world's adult population remains unbanked." Accessed August 13, 2024. IMF Annual Meetings 2022.
- Grameen Bank. "Official website of Grameen Bank." Accessed August 13, 2024. Grameen Bank.
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