Blockchain for Microlending: Towards a Solution for Poverty Reduction and Financial Inclusion of the Underprivileged Through Transparency and Auditability

Abstract

The purpose of this paper is to propose the conceptual design of a blockchain-based solution for group microlending suitable for the needs of developing countries. Our goal is to contribute to the growing body of research dedicated to greater financial inclusion and poverty reduction in the most needy parts of the world. The blockchain technology shows great promise in the provision of financial services to unbanked individuals in a trustworthy, transparent and auditable manner. Our solution builds on the design of Mukkamala et al. (2018) and provides complementary enhancements to its core functionality. We gathered our understanding of the context in which our solution will be embedded from the activity of Mukti, a social business operating in underprivileged regions of India, which has led to the delineation of our focus to this geographic area. Nevertheless, our concept was designed to ensure its generalizability to different regions. The research philosophy of this paper is based on a positivist epistemological view through which two research strategies - action research and case-study - are perceived and applied. Action research provides the structured approach to our research, while the case study of Mukti provides us with deep understanding of the challenges to be faced with our solution. The data collection was based on two multi qualitative methods - the interview and the analysis of secondary data on microlending and blockchain. We approach the defined research question inductively and extract insights and findings from our chosen sources Our research has shown that the most suitable blockchain network, which could be a synergistic complement to Mukkamala et al.(2018), would base on Proof-of-Authority or Proof-of-Publication as a consensus mechanism and incorporate smart contracts to automate the transfer of assets. Furthermore, security tokens proved to best serve as digital assets for blockchain-based microlending. As a final technicality, the introduction of the crypto-ATM was presented and suggested as a enhancing addition. To provide a comprehensive perspective on our work, we employ economic and business administration tools to assess the internal and external circumstances of our concept’s value. The issue of information asymmetry has been identified as a main inhibitor of trust in microlending contracts and is mitigated by the use of our blockchain design. The external circumstances of our design’s adoption are evaluated through the concepts of switching costs, and its internal coherence within the case organization assessed by means of IT alignment. Our paper provides a new value proposition for the various social business worldwide, regardless of the exact location. Firstly, it gives a comprehensive design of the blockchain-based solution, which is not provided in academic literature. Secondly, the incorporation of all stakeholders (social businesses, investors and borrowers) ensured the fulfillment of the necessities of all parties.