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Decentralised finance as key driver of financial ecosystem in Africa

Decentralised finance has come a long way from being a term only known to tech insiders. Although still in the early stages of development, DeFi has the potential to open the door to a new industry within the African financial ecosystem.

Africa is home to some of the world’s fastest-growing economies, has a young population, and has proven to be a fertile market for digital financial services. The continent leads the world in mobile money adoption, with digital transactions in Africa accounting for more than 45 percent of global mobile money transactions. All these factors make the continent a strong candidate for adoption of new financial services and technology.

As the younger population on the continent grows the need for financial inclusion increases. As much as banks are crucial to poverty reduction and sustainable growth, they have been unable to fill this gap. As a result, mobile money and open banking platforms are rapidly taking over the role of many banks. Both are leveraging mobile phone technology and data to build efficient domestic payment and financial systems.

The African fintech start-up scene has not only provided an alternative to traditional banking options, but it has also replaced traditional institutions in some places. This, however, is not a coincidence. Fintech has created a conducive environment in Africa for thousands of merchants, small businesses, and consumers to thrive and gain access to diverse financial solutions in a fast-changing and competitive world. Fintech startups have disrupted the financial sector value chain, increasing financial inclusion, innovation, and productivity throughout Africa.

According to a study conducted by the European Investment Bank, sub-Saharan Africa has one of the world’s highest rates of bank account ownership. It goes on to say that digital financial services are particularly popular in rural areas where access to traditional banking is limited.

The introduction of decentralised financial platforms could help accelerate financial development on the continent, leapfrogging traditional technology systems.

Defi is a common term used for decentralized financial services, including decentralized exchanges and decentralized money markets. Blockchain technology and cryptocurrencies are responsible for disrupting financial intermediaries to achieve what was once impossible in traditional money markets.

Defi describes a whole new financial system designed on public blockchains such as Bitcoin and Ethereum. These digital assets are basic open-source networks that can be used to transform the way the world economy works. For example, decentralised finance allows one to pay for goods and services without the intervention of an intermediary, whereas in the current system, financial institutions are situated between the user and the owner of the goods and thus have the power to continue, stop or suspend the transactions.

Read also: Kenya holds lessons for Nigeria on local tech adoption

Some significant ways in which decentralized finance is being used to resolve difficulties in Africa include Crypto trading which has really taken off in Africa. Bitcoin and Ethereum are the two largest cryptocurrencies by volume in the world as well as in Africa. They are also the most traded cryptocurrencies on the continent. Stablecoins like USDT and USDC have also seen a massive upsurge in trading due to inflation and cross-border trading.

Crypto investing and saving are also used to resolve difficulties on the continent since signing up to platforms such as global cryptocurrency exchanges like Binance, is allowing investors to save their money in decentralised stablecoins for investment. This means they essentially have a tokenized dollar to allow them to build a portfolio and if needed, exchange at flexible rates for fiat currency.

The opportunities for Defi in Africa are limitless. Smart contracts and decentralised blockchain, for example, have the potential to create entire industries with products designed to meet a wide range of needs. With the exponential growth in online trading and e-commerce, smart contracts can be a smart, easy, and decentralized way of facilitating online transactions.

Lending is another important area where DeFis can be used in Africa. Micro and small businesses, as well as individuals, have benefited from an increase in micro-lending platforms and lend tech startups in Africa. Crypto loans are loans that are collateralised or uncollateralised and are given to borrowers in exchange for their crypto assets as collateral or no collateral at all. In this manner, the borrower obtains fiat loans from lenders in place of his crypto assets, which serve as securities in the event that the loan is not repaid.

With the aforementioned developments in mind, decentralized finance will definitely be a key driver of commerce in Africa in the future, especially owing to the impacts of the Covid-19 pandemic which accelerated the digital transformation on the continent.

Carr, a principal at Flourish Ventures, writes from Kenya

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