AMR Future Brief| Digital Currencies and Financial Inclusion: How Cryptocurrency and Microfinance Are Empowering the Unbanked

The post-pandemic era has witnessed the rise in cashless resources owing to the endeavor to reduce operational costs involving physical cash. Embracing, faster transactions, round-the-clock support, and innovative solutions digital currencies are breaking geographical barriers and emerging as a powerful force to aid and empower the underserved, marginalized populations of the economy. The following discussion explores cryptocurrency and microfinance’s role in the financial inclusion of the undeserved and marginalized populations of the economy.??

Cryptocurrencies and blockchain technology’s assistance in catering the underserved?

The decentralized nature of digital currencies allows individuals to control their finances without relying on traditional banking systems, promoting financial autonomy and independence.??

Blockchain technology, which is the foundation of digital currencies, also plays a crucial role in empowering the unbanked through identity solutions. Many individuals in underserved regions lack verifiable identities, making it challenging to access financial services and participate in formal economic activities. Blockchain-based identity platforms like Civic, SelfKey, Blockstack, REMME, NuCypher, and Sovrin provide secure and decentralized verifications, allowing individuals to establish digital identities that are immutable and tamperproof. This not only enhances access to financial services but also protects an individual’s privacy and security, enabling access to financial services such as loans and insurance, and contributing to greater financial inclusion.??

Cryptocurrencies like Ethereum and Bitcoin have significantly lower transaction costs compared to traditional banking systems. This cost-effectiveness makes them ideal for small-value transactions, which are often prohibitively expensive through conventional banking channels. For instance, M-PESA, a mobile money platform in Kenya partnered with BitPesa to enable users to convert Bitcoin into local currency instantly and at a lower cost, promoting financial inclusion among rural communities. One of the significant advantages of cryptocurrencies is their cross-border nature making transactions faster, cheaper, and more accessible. For instance, Stellar’s partnership with Flutterwave allows users in Africa to send and receive payments seamlessly across borders using Lumens (XLM). This collaboration has facilitated remittances and cross-border trade, benefiting individuals and businesses alike.??

Moreover, cryptocurrencies offer a wide range of financial services to the unbanked including savings, loans, and investments. Platforms like Aaave and MakerDAO enable users to earn interest by lending their digital assets or collateralizing stablecoins, providing alternative avenues for wealth accumulation. Additionally, DeFi platforms like Celsius Network offer loans without credit checks, making financial services more accessible to those without traditional banking histories.??

Collaborations between cryptocurrency companies and traditional financial institutions are instrumental in driving financial inclusion. Coinbase partnered with PayPal to allow users to buy, sell, and hold cryptocurrencies directly through PayPal platform, expanding access to digital assets for millions of PayPal users worldwide. Such partnerships bridge the gap between traditional freelance and the crypto ecosystem, making cryptocurrencies more accessible to the broader populace.?

Role of microfinance in financial inclusion of the marginalized community??

Microfinance institutions (MFIs) promote financial inclusion by leveraging digital currencies, connecting with the group of people who have been excluded from formal banking ecosystem throughout history.??

Many people who have proper documentation paucity, fall below the poverty line, are financially illiterate, or are settled in remote locations lack access to basic financial services. The digitization of financial services has introduced microfinance enterprises across the globe, where individuals can acquire credit facilities and small-scale mortgages to hold their sustenance and entrepreneurial ventures. Small loans allotted by MFIs authorize these individuals to start or expand their businesses, leading to income initiation and job creation within communities. These activities not only aid them in fighting poverty but also notably contribute to local economic resilience and development.??

Savings accounts and microinsurance products, such as crop, livestock/cattle, health, natural disaster, disability micro insurances, etc. offered by MFIs provide a safety net for vulnerable households, enabling them to cope with unforeseen expenses such as medical emergencies and crop failures. This financial stability reduces the plausibility of individuals falling deeper into poverty due to unexpected setbacks.??

Microfinance has been particularly impactful in empowering women and marginalized communities. By providing financial assistance directly to women, MFIs empower them to become economically independent, improve their subsistence, and participate more actively in the decision-making process within their households and circle. SKS Microfinance, for example, provides financial services to rural women in India and offer various products such as insurance, income generating activities, and savings accounts. The Indian microfinance industry increased its reach by adding 80,000 female clients in November 2023, which lead to 6.64 crore low-income women clients, across 729 districts. Women’s World Banking is a global network of MFIs that focuses on serving low-income women, providing products tailored to women’s needs. This empowerment has far-reaching socioeconomic benefits, counting improved education and health betterment for women and their families. ?

Asian countries, especially, Malaysia, Vietnam, India, Thailand, Bangladesh, and Indonesia have widely adopted this model to raise funding for farmers and small businesses. Established microfinance companies like ASA International, Grameen Bank, Kiva, CDC Small Business Finance Group, and BRAC USA have transformed into small financial supporting units with greater operational leverage and access to deposits.???

Summing up?

Digital currencies empower the unbanked by providing access to financial services reducing transactional cost, enabling cross-border transactions, offering credit opportunities, and providing secure identity verification. These advancements foster economic inclusions and empower individuals to participate in the global economy with greater financial autonomy.?

For more tips and suggestions on how to capitalize on the opportunities offered by digital currencies, contact us today!??

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? **?????????????? ????????????: Saranya Ganguly?

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