As the country grapples with whether to artificially regulate interest rates of give a blank cheque to the bankers to draw from the public and thereby exploiting them, Kenya is at the threshold of using blockchain.
Blockchain is a distributed ledger technology commonly known for crypocurrency famous for Bitcoin and Ethereum. However, defining it this way is just like saying that the Internet is the technology behind email, although this is true, it simply ignores the much we know about the Internet.
According to Marino Nefolos writing for the World Bank, this technology may prove to be a radical innovation similar to the steam engine or the Internet that triggered previous industrial innovations. This is because it has the power to disrupt existing economic and business models through disintermediation, because it improves transparency and increases auditability.
Established companies particularly those in the financial industry are gradually adopting private distributed ledgers for internal use as well as for conducting transactions with trusted partners attempting to experiment with the new technology while maintaining data confidentiality.
Blockchain, has the ability to deploy cryptographic mechanism to reach consensus across parties in the distributed ledger. This eliminates the need for a central authority or intermediary thereby creating a distributed test system of value transfer.
This increases speed, lowers transaction costs and enhances security in the network. Blockchain is essentially a metatechnology that consists of game theory, cryptography and mainstream software engineering.
It verifies number or programme, time stamp them and enter them as a block into a continuous chain linked to all previous blocks linked to the original transaction.
What goes unmentioned about the current banking crisis is the fact that access to credit was still difficult before the days of Section 33 B Cap 470, which forces banks not to exceed interest of more than 4,000 base points above the prevailing central bank rate.
Therefore, before and now one thing is certain, banks have been out to curb risks and lower compliance costs, this way it has meant to lending to a very select few who over borrowed and did what the banks were avoiding.
Recently President Uhuru Kenyatta rejected the Finance Bill 2019, saying that the cap on interest rates have reduced credit available to micro, small and medium enterprises.
The President said that banks had addressed the underlying concerns on affordability and availability of credit that led to the caps. Blockchain could reduce regulatory costs and increase transparency and help reverse this trend. This way there will be a broadening of access to financial services.
This is because it will diminish the role of intermediaries who command market power, collect significant fees and slow economic activity.
Such intermediaries include Facebook, Amazon, Gmail, Google and the like, they have extended the reach of Internet based services but at the same time they have become monopolies in their areas of interest.
Kenya still has a lower bank penetration and blockchain would ensure the creation of financial products that were previously unavailable or unprofitable.
Blockchain will also facilitate and decrease the costs of trade finance and remittances from diaspora both of which boost growth and improve living standards.
Use of blockchain although not highly publicised, has already helped the credit reference bureaus establish digital identity inexpensively. Most Kenyans who borrow are known and in case of default they are also identified across networks that lend money.
Blockchain will also complement platforms such as mobile platforms that are currently on an exponential phase in Kenya.
Asia has already challenged the United States in the adoption of this technology and according to the IFC EM Compass publication, blockchain will boost growth because of the rich of new financial markets.
China has made blockchain a pillar of its economic development strategy and is pushing regulations and industry to collaborate on emerging standards.
However, the challenge will be to our financial regulators to strike a balance between allowing enough space for innovation ecosystem to flourish while also effectively managing the associated risks and costs.
Blockchain has to overcome scalability, interoperability, security, transition costs, data privacy and above all governance.
Mwangi Ngamate, via email