17 July 2017

How bitcoin can help fight poverty in Africa

By Stacy Ndlovu

If bitcoin were a country, it would be Somalia – horribly unstable and the perfect breeding ground for a boss-class of criminals. Or so Jim Edwards argued in a 2013 Business Insider article. Today, the cryptocurrency still hasn’t lost the stigma of being volatile and ideal for criminal activity.

Yet, while it may be true that some criminals love bitcoin, it is also true that criminals tend to choose whatever means of exchange is most efficient. So, it’s not a stretch to imagine that cryptocurrencies must also be of some value to the rest of society. In particular, bitcoin and the way it circumvents some of the bureaucratic obstacles that push out small businesses, might be one of the modern world’s greatest hopes to drive productivity and fight poverty in Africa.

One of the major impediments to Africa’s development is the high cost of doing business on the continent, both for local and international business owners. For Afro-entrepreneurs, the cost of funding from banks and investors -when they can get it – is generally prohibitively high, with some banks asking for up to 150 per cent of the borrowed amount in repayment.

Worse still, most entrepreneurs do not have access to formal banks and venture capital in the first place. They often lack access to financial markets and financial instruments such as savings, credit and insurance, which would enable them to engage in economic activity and help their countries achieve sustainable financial growth.

According to the African Development Bank (AfDB), overall, only about 23 per cent of adults in Africa have an account at a formal financial institution. Although this number fluctuates by region, with 42 per cent in Southern Africa to 7 per cent in Central Africa, the data still paints a gloomy picture. Additionally, international banks tend to be reluctant to establish branches in Africa because the continent is essentially a blank slate: they would have to invest too much in infrastructure or to acquire regional banks before they could expect any major returns. In any case, when big banks move to Africa, they are often more interested in working with established regional companies than with aspiring entrepreneurs who may not even have a banking or credit record.

The few who do own bank accounts are often inhibited by their countries’ monetary policies. Take the current situation in Zimbabwe, where banks have an individual withdrawal limit of as little as $40 a day (which is barely enough to survive on because life in Zimbabwe is insanely expensive) and people have to sleep in queues outside banks just to be first in line, hoping to get their hands on some ready money.

Citizens have little choice but to use a government-issued pseudo-currency – the so-called “bond notes” that are supposedly equal to the US Dollar – or pay cash-traders for another currency with a 15 per cent markup. These significant inconveniences could determine the success or failure of a growing business. (One might argue that Zimbabwe is the exception, not the rule. But even in more stable countries such as South Africa, recent political infighting has led to fears that the country’s central bank will soon be subordinated to the whims of politicians.)

Thus, in most African countries, bitcoin’s decentralised nature offers a promising alternative to government-controlled options. This isn’t a pipe dream, either. Digital payment systems, especially mobile banking, are already the norm all through the continent. Since more people have access to mobile phones than to bank accounts, mobile banking payment systems such as M-PESA, Tigo Cash and EcoCash have taken off. These systems have increased financial access to those who would otherwise be completely excluded from the traditional banking system – for example, those working in the informal sector, in villages, or who have too little capital to make formal banking a feasible option.

But while mobile banking has led to significant progress in financial inclusion for the masses, it does have its limitations. The system is still dependent on cash, which can cause problems for small businesses when there are cash shortages (as is the current situation in Zimbabwe). There are also restrictions on the amount of money that can be kept in a “mobile wallet” and most important of all, users cannot transfer money across different mobile networks (except in Tanzania). These mobile money services often don’t have the capability to transfer across international networks, and have to partner with existing remittance giants like Western Union or MoneyGram, with fees of up to 15 per cent per transaction.

This is where bitcoin comes in. It is already being used to overcome some of the mobile-banking deficiencies, with two notable examples being BitPesa in Kenya and Bitmari in Zimbabwe. In 2013, former employees of Google, Facebook, Apple, Credit Suisse, KPMG and JPMorgan, founded BitPesa in Nairobi, Kenya. BitPesa is a mobile-oriented bitcoin payment system that enables seamless, cross-border transactions and remittances. It not only helps East Africans living abroad to send money home cheaply, but also significantly reduces the cost of doing business for local and multinational companies.

According to a recent Leaders League interview with BitPesa’s CEO Elizabeth Rossiello, they’ve “lowered the cost of international payments by 75 per cent” since their founding. Although the service is currently active in Kenya, Uganda, Tanzania and Nigeria, BitPesa facilitates payments between over 85 countries around the world.

In Zimbabwe, Bitmari has been introduced to help women in the agricultural sector. Although about seven out of every 10 workers in the agricultural sector are female, they tend not to benefit from agricultural schemes and other types of formal or government funding. The Zimbabwe-based bitcoin company, Bitmari, has launched the Women Farmers Accelerator Program called Kurima neBitmari (Farming with Bitmari), in response to this problem. The beta program is helping an initial 100 female farmers pay for materials and equipment to boost farming and educate their peers on the use of bitcoin as an alternative payment method. After a year, another group of women will be nominated for the program and the cycle will (hopefully) continue.

While it is still early days, Bitmari has proved particularly useful because it uses existing traditions and practices to introduce a new technology. In Zimbabwe, and other African countries, many women participate in rotating credit unions in which an average of 12 members contribute money to a “fund” every month. Each month, a different person takes the money to invest in a business or a project, and the system rotates. The idea of rotating Bitmari will, thus, be relatively easy to understand in practice. Moreover, it is available in several indigenous African languages, instead of requiring users to navigate English-language technology by default.

Bitcoin usage has also progressed in South Africa, Botswana, and Nigeria. That said, bitcoin is no silver bullet. It would be disingenuous to claim that cryptocurrencies will solve all of Africa’s problems and those trying to encourage bitcoin use in Africa will have to overcome many infrastructural, economic, political and even social hurdles.

Although it does not require intermediaries, blockchain technology still needs some level of government approval, or passive tolerance at the very least. There is still a long way to go to educate the public and politicians on bitcoin’s potential to transform the lives of those cut off from more formal channels of financing.

But while one must remain cautious with this relatively new technology and the challenges it presents, it would be madness to ignore bitcoin’s potential as a tool to drive economic activity, and thus, fight poverty.

Stacy Ndlovu is a Zimbabwean writer and a recent graduate of Cornell University