This archive report was first published on 6 November 2019.
Blockchain Offers a Solution to Exorbitant Lending Rates ¶
As Kenya grapples with the issue of regulating interest rates, the country is on the verge of adopting blockchain technology. This distributed ledger technology has the potential to disrupt existing economic and business models, making it a radical innovation similar to the steam engine or the Internet.
According to Marino Nefolos, writing for the World Bank, blockchain technology has the power to disintermediate, improve transparency, and increase auditability. Established companies, particularly those in the financial industry, are gradually adopting private distributed ledgers for internal use and conducting transactions with trusted partners.
Blockchain technology has the ability to deploy cryptographic mechanisms to reach consensus across parties in the distributed ledger, eliminating the need for a central authority or intermediary. This creates a distributed test system of value transfer, increasing speed, lowering transaction costs, and enhancing security in the network.
Kenya still has a lower bank penetration, and blockchain technology would ensure the creation of financial products that were previously unavailable or unprofitable. It would also facilitate and decrease the costs of trade finance and remittances from diaspora, both of which boost growth and improve living standards.
Use of blockchain has already helped credit reference bureaus establish digital identity inexpensively. Most Kenyans who borrow are known, and in case of default, they are also identified across networks that lend money.
Asia has already challenged the United States in the adoption of this technology, and according to the IFC EM Compass publication, blockchain will boost growth due to the richness of new financial markets. China has made blockchain a pillar of its economic development strategy and is pushing regulations and industry to collaborate on emerging standards.
However, the challenge will be for our financial regulators to strike a balance between allowing enough space for innovation to flourish while also effectively managing the associated risks and costs. Blockchain has to overcome scalability, interoperability, security, transition costs, data privacy, and above all, governance.
As President Uhuru Kenyatta recently rejected the Finance Bill 2019, saying that the cap on interest rates has reduced credit available to micro, small, and medium enterprises, blockchain technology could reduce regulatory costs and increase transparency, helping to reverse this trend.
