The intention is for the microfinance institutions to use Stellar to cut costs and make it easier and cheaper to move money around and ultimately use a cryptocurrency based payments network. The move comes as Ripple has been establishing more banking relationships all over the world that plan to use the Ripple decentralized network to move value throughout the globe.
Although controversial in many areas due to exorbitantly high interest rates, microfinance has made great in-roads into the developing world where established banking institutions find it difficult to originate loans at a much smaller scale. The microfinance institutes (MFIs), which are regulated as non-banking financial entities in most countries, work by lending small amounts of money to people in need and make profits by charging a much higher rate of interest than banks.
Cryptocurrencies provide a unique opportunity to make this market even more efficient by cutting transmission costs and matching lenders and creditors who are on different continents. There have been a few centralized solutions that resemble microfinance but none of them trustworthy enough for people to really use and really make a difference. The goals of microfinance and peer-to-peer lending are easy to combine with cryptocurrencies, since sending money to an address is almost free, irrespective of geographic location.Stellar, the cryptocurrency created to mirror the ideas behind Ripple but with an intention to make the initial distribution better, is entering the microfinance industry, with a partnership with Oradian, a core microfinance software company.
The major challenges facing the microfinance industry are more social and less technical, however. Some of the largest lenders, such as SKS Microfinance
, have been linked to multiple suicides among the poor who took microfinance loans, after their inability to pay the company back.
There are many challenges facing the MFIs in the world today, and one of them is the quick and easy transfer of funds. Oradian’s software is meant as a means of communication among the global MFIs. With Stellar integration, it would be possible for all these institutions to communicate with each other and also send money to one another quickly. The aim, ultimately, is to get rid of physical cash transfers completely and digitize the industry to make it easier, faster and cheaper for the institutions and their borrowers.
The program is starting on a pilot basis, first in Nigeria.