In this article, we’re diving into a fascinating discussion I had on our show Emerging Markets Today with Emmanuel Daniel, a global thought leader in the future of finance. Our conversation focused on the concept of equitable financial inclusion, especially in emerging markets. We talked about everything from the role of microfinance and the rise of digital payments, to the importance of token utility in the world of cryptocurrencies. We also discussed the need for transformative thinking in the financial industry
Financial inclusion has long been a buzzword in the finance industry, often hailed as a benevolent move to bring the unbanked and underbanked population into the traditional banking industry.
However, Emmanuel Daniel, challenges this perspective. He argues that as long as financial services are seen as something to be monetized, the concept of financial inclusion is flawed. Instead, he advocates for a shift towards creating equitable, self-sustaining financial systems that truly serve the needs of the unbanked and underbanked.
Microfinance: A Tale of Two Models
If we want to talk about real financial inclusion, there are lots of wonderful models that have worked. For instance, Grameen Bank in Bangladesh, which lends to groups of six women in a small community setting, has created a governance structure that makes sure that even if it’s a $100 loan, it’s repaid.
In Grameen Bank’s model, the interest rate was as high as 30% per annum, which someone who’s not in community financing or in reaching the unbanked will say is an exorbitant interest rate. However, that was the interest rate that could sustain the business because the risk level is very high, the liquidity is hard to generate, and so on.
The Indian model of microfinance, which was applied in the 1990s into the 2000s, unlike Grameen Bank where the business was funded at the grassroots, was funded by venture capital companies.
In the Indian model, they were lending to itinerant workers, poor migrant workers into the cities, and they actually lived on the fringes of the cities. They lent to mostly men and many of them living alone and so on. And because it’s venture capital funded, multiple venture capital-driven microfinance players, this became a very profitable model.
The difference between the Grameen Bank model and the Indian model is that in the Grameen Bank model, they were lent to small groups of women in stable local communities, static communities, whereas in the Indian model, in many of the states where microfinance was ticking off, they were lending to itinerant workers, poor migrant workers into the cities, and they actually lived on the fringes of the cities. They lent to mostly men and many of them living alone and so on.
The Grameen Bank model is an excellent example of how community financing can be used to reach the unbanked and underbanked population. However, the Indian model of microfinance, which was venture capital-funded, shows that financial inclusion can become a burden on the unbanked population if the focus is on monetization. Financial inclusion needs to be approached with an equitable mindset that focuses on creating a self-sustaining financial system
Digital Payments: The New Norm in Financial Transactions
The financial industry is witnessing a significant shift towards digital payments. Digital wallets, in particular, are becoming increasingly popular, especially in emerging markets where traditional banking services are less accessible. The rise of digital wallets and the simplification of cross-border payments are reshaping the financial landscape, emphasizing the importance of robust payment infrastructure for the growth of various sectors, including e-commerce and retail.
Utility Tokens: The Key to Sustainable Cryptocurrency Practices
In the rapidly evolving world of digital payments and cryptocurrencies, token economics plays a pivotal role. Daniel argues that tokens need to have utility rather than being mere objects of speculation.
He mentions Axie Infinity, a blockchain-based game, has been a significant phenomenon in the Philippines, where it has been used as a source of income. The game allows players to earn income through nonfungible tokens (NFTs) and cryptocurrencies by breeding, battling, and trading digital pets called Axies. This model, known as “play-to-earn”, has been particularly impactful in countries like the Philippines, which have been hit hard by the pandemic.
In Daniel’s opnion, the value of a token should be tied to its practical use, such as facilitating transactions or representing assets. This approach is crucial for the industry’s move towards a decentralized financial system where individuals have more control over their transactions.
Embracing Transformative Thinking in the Digital Age
The shift towards digitization in the financial industry requires transformative thinking. Financial institutions need to look beyond their current products and services and embrace new technologies and innovative business models to remain competitive.
This includes considering the potential of blockchain technology, the implications of decentralized finance, and the opportunities presented by digital currencies.
The industry needs to focus on creating equitable, self-sustaining financial systems that prioritize the needs of individuals over profit.