By collaborating and working with microfinance organizations, blockchain applications can truly deliver on the promise of democratizing access to financial resources.

2015 Bloomberg Finance LP

Before diving into how blockchain is connected, and can improve, applications such as microfinance, it is important to make sure that the terminology is defined. Even though these ideas have been in existence, have been discussed, and been implemented by organizations across the world, there is still some ambiguity as to what these concepts actually mean.

Microfinancing arrangements can take several different forms, but it is generally designed and implemented to democratize access to financial resources. The specific amount of financing that is provided will, of course, vary depending on the projects being considered and geographic region, but the idea is the same. Providing this financing is not usually done by incumbent financial institutions since these loans are generally speaking not profitable for incumbents, or the individuals/organizations seeking this credit might not qualify for traditional loans.

If that seems a lot like the idea behind blockchain and crypto, that is because the core idea of democratizing access to financial information is common to both ideas.

Even more encouraging is the quantitative evidence, documented by the World Bank and other institutions, that microfinance if implemented correctly does in fact generate economic wealth creation for those participants involved.

Despite this success, however, there are pain points that continue to hinder microfinance initiatives, and prevent the true potential of this concept from being realized. These include, but are not limited to, the high operating costs (compensated through the high rates charged to recipients), slow transaction resolution, lack of transparency and standardization, and the potential for corruption. No single technology tool can address these issues, but blockchain-based applications can certainly help.

Blockchain, with transparency and data integrity lying at the core of the system, is uniquely well positioned to make such arrangements more accessible to wider groups of individuals and organizations. Lets take a look at how a blockchain-based microlending platform can improve and increase accessibility to microfinancing options.

Increased trust and transparency. A core issue whenever there is external financing of ownership concerned is how these various ownership interests are recorded, maintained, and communicated to the marketplace; microfinance is no exception. Especially since many of the recipients of these microloans do not, for any number of reasons, have access to incumbent financial services, establishing and maintaining integrity over this financial information is critical.

An additional benefit of this increased trust and transparency is that, as awareness and access to blockchain-augmented microfinancing increase, the interest rates charged to borrowers should be able to be lowered. This not only reduces the burden on borrowers, enabling more focus on the projects versus making interest payments, but will also help improve the reputation of the industry as a whole.

Digital first identity. To an individual with a U.S.-focused perspective or world view, this might come as a surprise, but the so-called emerging markets have, at least some extent, leapfrogged the U.S. and Western Europe in terms of digital-first payments and identities. This is not to say that every single non-U.S. market is the same, but this bias toward digital payment creates an interesting opportunity as it connects to microfinancing. Put simply, a digital-only or digital-first financing model might actually be better suited to emerging or developing markets than might otherwise be suspected.

In order to succeed in this creation of a digital-first identity, however, the security over this identity must be as strong as possible. Particularly since the rules and regulations toward consumer information and privacy can vary widely from jurisdiction to jurisdiction, a blockchain-based platform can serve an important role as a neutral third-party guarantor of identity security.

Banking the unbanked. This is something that has been said so many times that it runs the risk of becoming a clich, but one of the most prominent underlying goals of blockchain was to democratize access to financial resources and information. Whether that took the form of banking the unbanked, disrupting incumbent financial intermediaries, or some other application, this democratization is not something that can be relegated to the back burner.

Microfinance is the epitome of the attempted democratization of the financial resources and payments system. For all the good that has already been accomplished, there are issues related to costs, transparency, and the potential for bad actors that continue to serve as headwinds to wider and more comprehensive adoption.

Blockchain is not a perfect technology, and has evolved rapidly from the original bitcoin blockchain that attracted so much interested into the space. By collaborating and working with organizations and individuals in the microfinance space, blockchain applications can attain many of the original goals associated with the technology, and democratize the wealth creation process across the globe.

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Blockchain Promised Democratization Of Finance Collaborating With Microfinance Can Make This A Reality - Forbes