Why Africa is Considered the Best Place for Adoption of Decentralized Finance (DeFi)?

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Friday, February 12, 2021 / 09:10AM /Maria Taylor/Header Image Credit: Maria Taylor


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A large part of the African adult population is unbanked. The continent had 298 million adults with bank accounts in 2017 according to data by Statista. By 2022, the number of banked adults will likely rise to 456 million, or roughly 38% of the continent's population. The United Nations estimates that three-quarters of the continent's population is under the age of 35.

 

Africa's need for financial inclusion is rising as its young population grows. Banking is vital for poverty reduction and sustainable growth. The traditional banking system has however failed to bridge the gap. Consequently, mobile money and open banking platforms have quickly taken over most banking roles.

 

These two financial sectors have leveraged mobile phone technology and data to build efficient domestic payments and financing systems. Introducin decentralized finance platforms to the continent's largely youthful population can leapfrog the region's financial development, creating a new paradigm. 

 

Why Africa needs DeFi

Africa's major banking challenge is its existing inferior and redundant banking system. The infrastructure is poor and financial education is short. For decades, banks have been trying to reach out to the unbanked, but their efforts are marred by the underdeveloped state of the market. Most of the population has low income and the judicial systems are fragile.

 

Political instability has constrained the advancement of the classic banking system. Most banks rely on expensive technology, limited talent, branch networks, and inadequate systems. For this reason, businesses and individuals have turned to mobile money for payments because of high account maintenance charges.

 

In many regions in the continent, bank branches are scarce, meaning the person with a bank account has to incur travel and time expenses just to use the services of banks. The legacy banking systems are also very bureaucratic. Low banking levels have adversely affected the creation of financial data and access to insurance and loans.

 

Many African adults bank with Savings and Credit Cooperative Organizations (SACCO), relying on trust and eliminating the need for collateral or extensive documentation in financing. Unfortunately, while the SACCO offers quick money access, it often has high-interest rates. This implies that a system based on trust that leverages the growing wave of smartphone usage could further revolutionize banking for the continent's tech-savvy youth especially when the coronavirus pandemic continues to heap pressure, forcing a paradigm shift.

 

Advantages of DeFi

Here blockchain-based smart contracts and cryptocurrency solutions that do away with third-party charges can flourish.

 

Decentralized finance (DeFi) is a global alternative finance system. Decentralized finance avails freedom to the consumer, by eliminating the need for banking institutions altogether.

 

DeFi has blockchain-based automation that transacts digital assets. Built mostly on the Ethereum blockchain, DeFi is attributed to the exponential rise of ETH valuation.

 

Other smart contracting platforms like Tron, COSMOS, EOS, and Polkadot are also building open DeFi protocols as well. On DeFi, the African population can access crowdfunding and smart contracts for trust that meet any economies of scale.

 

Some excellent examples of DeFi platforms include Compound for peer-to-peer lending. Uniswap, a decentralized exchange allows trading while Curve and Balancer are trading liquidity pools. Synthetix enables the representation of real-world assets as synthetic assets and their exchange in digital currency format.

 

In the developed world, reinventing the financial sector calls for massive human and financial investments. There would need to be lots of research, and a willingness to move from what is working systems to DeFi. The comfortable population would have to accept blockchain's efficiency and choose it over ATMs and online banking.

 

Africa is different. There are a problem and an opportunity. The continent's incremental steps to financial innovation can focus on DeFi rather than the outgoing online banking and ATM systems. Simply hop the continent into the frictionless and novel DeFi movement. Decentralized finance applications will bring the advantage of trust, transparency, and easy access for every person in need of banking.

Since these platforms do not rely on humans to run them, they have fewer errors than traditional banks. There is no bureaucracy, and the user can interact with the platform without filling lengthy forms. All they need is a crypto wallet. Cryptocurrency platforms are the future of Africa. Through them, affordable seamless cross border transfer of funds will become affordable.

 

As Facebook and Google lead the race towards rural internet access, opportunities for DeFi will widen. The Cardano CEO puts it clearly saying, "given that the human capital, physical capital, and economics are all moving in the right direction, I believe that Africa will be the most promising economic environment in the next ten years."

 

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