Micro Financing the global economy with Blockchain and Smart Contracts

People should wake up in the morning and say ‘I am not a job seeker, I am a job-creator” 

Muhammad Yunus - Nobel Peace Prize 2006

What is Micro Finance ?

Micro financing is Financing those who don't have collateral or access to the banking system. It's mainly used in developing countries, by small businesses, like craftsmanship companies or small shops.The size of those loans is usually below $1K.
Micro loans give usually between 7% and 25% yield with a 95-99% payback ratio : It is highly reliable because the borrower wants to keep access to this service . It’s a great way to give small businesses the opportunity to grow and meanwhile give a good return on investment to lenders.

One of the main limit of micro lending is the fact that at the end loans can be used for other purpose : A survey in Philippines showed that 46% of borrowers used part of their micro credit to pay their personal debt and 28% for a big household purchase.The majority of micro loans are not used for business purposes.

We don't know if microloans are helping to develop business, the result isn't obvious and their are too many incertitudes : the lenders have too much freedom to use their loans. The investment pipe isn’t waterproof.. It’s hard to fund and help a company to grow with micro lending over long term. A successful micro lending operation could be eventually use to leverage private funds : 

“BancoSol in Bolivia represents a few million dollars of donor subsidies in the mid- 1990s that turned into a loan portfolio of over $200 million and services for over 300,000 active savers and borrowers by the end of 2008, funded almost entirely from commercial sources”

Microloan and P2P lending

With the rise of the Internet, the loan business has evolved and P2P lending companies have emerged. Zoopa, a UK P2P lending company created in 2005 has issued 2 billion in loan since its creation.

        How does it work and could it be used to micro finance the economy ?

Lenders and borrowers meet through a centralized platform ( a website )The p2p company does the matchmaking and the credit check on the borrower for the lender. The lender sends the money through the platform to the borrower. The interest rate can be fixed by reverse auction. Because there are less intermediaries involved in the credit process, the interest rate is more interesting for both parties. 

The P2P lending system is very interesting and has many applications : college loans, consumer credit, mortgage…The system could nevertheless be risky : it’s a black box for the lender. They don’t have any visibility and the project and if the P2P company default, both lenders and borrowers lose everything. ( In 2015, TrustBuddy default - centralized platform.)

Blockchain system and micro financing.

Micro financing using the blockchain system is in some way quite similar to the old p2p lending model.
Here is an example of students from MIT using blockchain for Philanthropic Microlending.
In this example we can see that blockchain could have multiple benefits in the micro lending environment :

• An Unforgeable Credit Rating - the user will not be able to erase his credit history.
• A certification system : other users can testify to say if the goal was achieved or not
• Fraud = disincentivizes this behavior

ICO’s, a new tool for micro finance ?

ICO or Initial Coin Offering is a fundraising tool, the company looking to borrow issues a token against another cryptocurrency. Coins or tokens are like stocks, the company trades them for cash BUT unlike stocks, those coins do not confer ownership rights.You can trade most coins directly on the market after the ICO...not a very efficient way to do value investing or micro lending don’t you think ?

ICO is nevertheless a quick way to generate capital for a company : In 2017 Brave ICO raised 35 millions USD in less than a minute...
Right now ICOs are mainly used to finance blockchain related projects. The lack of regulation and clarity about company ownership does not fit well to a micro lending application. 

Smart ICO concept,

So how could we leverage the blockchain technology in microfinance ?
Who do we need to connect through the blockchain ?

• The entrepreneur who is seeking funds 
• The investor who is seeking for return on investment.
• The user who wants to participate, use his competences to develop a business and get pay.

How could it work ?
The entrepreneur or the company could do “a smart ICO on the blockchain”.
A “smart ICO” is a special way to issue a token. The Borrower ( the entrepreneur/company ) will issue several types of coins :

• “BronzeCoins” which can be traded straight after purchasing - No Shareholders rights.
• “SilverCoins” - 1 year blocked token (like Steem Power) - It gives Shareholders ownership rights and a right to claim dividends. 
• “GoldCoins” - 2 years or more blocked token - It gives more ownership rights and dividends, this coin is for long term investors and value investors. This Coin also gives access to management in the target business.

On 100 tokens issued the borrower will choose himself the spread :
He could select : 80% BC, 10%SC, 10% GC - this spread will show that the lenders want to keep the ownership for himself for example. But the cost is his capital value could decrease very quickly.

Another way to contribute
Users on the platform could instead of giving cash against token, bring their expertise : For example a bookkeeper in Chicago could help a fisherman business in Morocco in exchange for company’s coins. A smart contract could be issued between both parties to fix conditions of the agreement.

How to obtain a microloan ?

• No credit check needed
• No need to have an access to the financial system.
• The Borrower needs to be registered on the platform with for example his ID and biometrics.
• He needs to provide a business plan.
• He can provide references/certification from other users or 3rd party (NGO, other companies).
• Once the company is launched, he needs to provide an online and accurate balance sheet to every investors. 

Users on blockchain will give each other a reputation (like on steemit) and the best projects will be financed.
To verify the integrity of the project we could use a 3rd party to do some verifications punctually : for example users or shareholders could go visit the business and rate it.
All investors have an instantaneous access to the company balance sheet. No Blackbox, our system is a glassbox.

Example : A fishing business in philippines.

Paolo lives in Dagupan and would like to set up his fishing business. He is probably the best fisherman of the bay but he doesn’t have any access at the financial system.Paolo could go on our Micro lending platform, register and then start a project.He will create his business plan online and start his ICO.Jack a student in London believes in this project, he bought some SC. As soon as Paolo’s company will have cash flow, Jack will be able to claim dividends.In Paris, Julien a restaurant owner saw Paolo’s Project and would like to contribute to make it grow. Julien and Paolo then enter into a smart contract. Julien will give his knowledge and Paolo will give his coins. In New York Bill saw on the platform that Julien, a user with a high reputation is helping Paolo with is business. Bill bought some GC and will follow closely this business. The balance sheet is available for Jack Julien and Bill at anytime.1 year later, Paolo’s business is providing cash, Julien gets paid and Jack and Bill claim their dividends.

Conclusion :
Micro Financing is complex and tracking the loans isn’t easy. People who need microloans don’t use it to set up businesses. The Blockchain could be the answer at “How to make micro finance efficient”
People with no access the financial system could become entrepreneurs and raise capital, users could work for companies all around the world and everybody could become a shareholder.

I’m currently developing this Smart ICO concept for microfinancing the economy and I’m looking for fresh ideas and skills to be part of the creation of this system !

Contact me in the comments - Follow me here !