From Tracing Impact to Creating Credit History
How blockchain-powered supply chains can provide an infrastructure for responsible financial inclusion
June 10, 2020ImpacTech in Practice
The last fifty years have witnessed a tremendous transformation in the agri-food sector. As globalization swept across emerging markets, agricultural development became a centrepiece of the movement to fight poverty and increase employment opportunities for rural populations in low-income countries. A new focus on sustainability and ethics has begun to shine a light on small-holder farmer’s participation in global value chains (GVCs).
Today’s growing population of conscious consumers is invested in knowing who produces their items, what they are paid, the conditions they work in, and how these items are produced. However, the value of this interest for small-holder farmers is insignificant, when they do not have the agency to progress financially within these systems. The challenge remains that with limited access to financial services, small-holder farmers have few opportunities to move up their value chains and benefit from this global attention.
Globally, about 31% or 1.7 billion adults remain unbanked, meaning they have no access to a bank account, lending facilities or savings options. Without access to financial services, unbanked populations have no formal opportunities to save money or borrow in order to invest in growing their businesses. While there are a number of complex reasons why such a large portion of society remains unbanked, poor service access in rural areas, a lack of documentation, and distrust in financial systems present three of the most fundamental barriers for those who wish to utilise financial services.
Digital banking solutions that attempt to address a lack of financial service access are gaining quick traction across low- and middle-income countries where mobile penetration is extremely high (around 85%), even in rural or remote regions. However, while this sector is improving access where many traditional financial services do not reach, many people are still unable to demonstrate their credit-worthiness due to a lack of documentation.
According to a 2017 World Bank Global Findex Report, around 235 million unbanked adults receive agricultural payments in cash, and about 59% of them have a mobile phone. A cash-based payment system inhibits the creation of a digital or paper trail, making it difficult for a farmer to validate their economic activities using traditional means of evidence. Currently, however, there are few incentives for this population to switch to mobile banking services in order to capture and record their economic data. This creates a significant limitation to responsible loan appraisal, regardless of the accessibility of financial services.
Microfinance lending is a popular banking mechanism used to provide small loans (usually focused on business development) to traditionally excluded, marginalized, or remote and rural populations. This financial inclusion service confronts the challenge of a lack of documentation through a number of alternative methods of credit assessment, along with the imposition of high interest rates in order to help guarantee repayments. Regardless of its widespread popularity, microfinance lending does not appear to have demonstrated the level of success that its high repute suggests.
There is concern that microfinance lending has even inadvertently caused more damage than good. Without access to reliable data detailing an applicant’s economic history, microfinance institutions (MFIs) can trap already economically-vulnerable populations in a cycle of debt, rendering the entire concept of these alternative services counterproductive to the initial mission of financial inclusion. This reputation impairs the ability of MFIs to build critical relationships of trust between unbanked populations and microfinance lending services.
Responsible loan appraisal is thus critical to the success of financial inclusion technologies and services. Still, without verifiable data, it is not possible to build an accurate economic history to assess whether or not a loan can be repaid. Some MFIs and other lending institutions do focus specifically on responsible financial inclusion; however, these efforts can be expensive and resource-intensive. Some emergent, digital banking solutions use non-traditional sources of information, such as social media activity or mobile phone usage, to assess risk factors and create a financial identity for those who may otherwise be unable to participate. However, it is early days for these nascent tech-focused approaches, and critics worry that consumer protection and privacy laws are not at pace with innovation.
What if these financial services had access to verifiable, relevant information with history (meaning, including a historical trail) that could speak to a farmer’s financial position? With blockchain, that data is already being securely produced, captured and stored.
As an increasing number of GVCs are digitized in order to address fundamental challenges brought to light by the impacts of COVID-19, blockchain technology is flexing its muscles as a promising solution. Already, blockchain technology has been applied to supply chains across the sustainability and social impact world, in order to engage a certain sector of consumers by proving claims about the provenance of goods, ethical wages, and farming certifications like organic or fair-trade. Farmers working in blockchain-powered supply chains are actually the ones creating that information, and either directly or indirectly generating the data trail contained in that digital ledger. They not only participate in GVCs but are the very entry-point.
There is a massive opportunity to bring a human-centric approach back to that data and empower those who are creating it to make use of it.
Topl’s blockchain infrastructure is helping to extend responsible financial inclusion to small-holder farmers producing their own data within transparent supply chains. Here’s an example of how:
Topl’s on-the-ground partner, Catena, utilizes our blockchain infrastructure to record proof of information about farmers’ production histories across harvests, along with evidence of good farming practices, such as their use of fertilizer, crop rotation and certifications on seeds. This information is produced by farmers, inspected and verified by Catena, and recorded on Topl’s blockchain. These data points can then feed into financing models, like that of PayCode. PayCode uses this infrastructure and verified proof of information to provide a financial service that complements a country’s existing national payments infrastructure, enabling financial inclusion by providing citizens with a biometric means of verifying their identity securely and digitally that works offline in real-time at an extremely low cost.
Topl exists to facilitate the creation of these ecosystems. Our blockchain technology empowers farmers themselves to provably capture, store, and securely share verifiable data with third-party financial services like PayCode. In this way, our blockchain technology provides an infrastructure for facilitating responsible financial inclusion services and technologies. This is critical to helping MFIs reduce the heavy administrative costs incurred by formulating credit histories for cash-based populations, thus reducing interest rates and the cost of loans. Likewise, empowering a farmer’s ability to provide verifiable, relevant data about their economic history combats the incipient privacy challenges arising from alternative credit scoring methods.
The reason blockchain technology can be such a powerful tool in this system, as a trustless technology, is two-fold: First, blockchains require good data. The adage, “garbage in, garbage out” demonstrates the value of blockchain solution: because blockchains capture not the data itself but evidence of that data means that the data has to be verifiably true in order to be incorporated. Fundamentally, this helps to combat predatory loaning based on false or lacking economic information, as data must be independently corroborated and cannot be tampered with.
Second, it gives farmers autonomy over their own financial information. In other financing models, data can be sourced and used against those who unknowingly produce it. Farmers, who are the entry point for agri-food supply chains focused on social impact and sustainability, have the power to control the creation of their own digital identity and access to their economic history because they are producing it themselves, based on the economic and social choices they make. Further, the security features of blockchain technology allow for control over how that data is used and by whom.
Topl provides a source-focused digital infrastructure for ecosystems where supply chain digitization enables farmers to make, record and share provable claims with financing institutions, creating a promising inroad for financial inclusion among a largely unbanked population. However, we see a secondary impact of this technology that reaches far beyond the promise of standard track and trace applications. Our impact-specific blockchain technology presents users with the opportunity to not just streamline information generation or highlight sustainable and ethical practices, but to actually induce responsible financial inclusion through these practices. Topl believes this represents the future of social and environmental impact — a true convergence of purpose and profit — and we’re here to make that happen.
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Image Credit: “Women in Agriculture” by Filipino activist and painter Federico (‘Boy’) Dominguez