DeFi (decentralized finance) is one of the most exciting innovations in the financial technology arena in decades. The promise of DeFi is to provide access to more inclusive financial services, especially in areas or countries where the traditional financial institutions like banks are not available or not reliable. Even in areas where banks are well-established, DeFi brings a transparency and security sorely lacking in the traditional centralized finance space.

The failure of cryptocurrency:
The justified criticism of cryptocurrencyfocuses on the fact that it has never really gained adoption for its intended purpose: making payments and replacing the current financial services. Instead, a large share of the crypto ecosystem runs on speculative investing,where investors seek to make quick profits instead of building a better financial infrastructure.

The recent collapse of many centralized cryptocurrency institutions highlights the failure of a crypto industry that is patterned after the traditional finance industry. With similar power dynamics and looser rules, it was inevitable that the crypto industry come crashing to a halt. What’s interesting is that much of the capital that was in the industry has been moved from centralized institutions to decentralized, self-custody solutions.

The rise of DeFi:
In other words, the people voted against centralized crypto and for decentralized finance.

WithDeFi, blockchain may have finallyachieved its breakthrough technology. DeFi allows exchanges to take place directly between two parties, removing complexity and cost.As a result, DeFiis creating an entirely new set of financial rails that are separate from the banking system yet designed to offer the same range of services. This includes savings, mortgages, and loans as well asflexible contractual arrangements and asset trading.

DeFi and Africa:

Africa contains some of the fastest growing economies in the world today and leads the world in mobile money adoption. Add to that the large youthful population, and you can see why fintech has progressed so much faster here than elsewhere in the world.

DeFican removehurdles for African businesses, especially in areas critical to Africa’s continued growth.

  1. Trade financing:

Considering DeFi’s underlying advantages, the DeFi financial railscouldaddress the existing gaps in trade financing. Through DeFi, traders could access micro and medium-level loans to fill in the gaps that banks cannot or will not consider.For instance, a small African business processing coffee for export must go through a long and expensive compliance process to get a bank’s credit approval. DeFi makes that process faster, cheaper, and offers better value to both lender and borrower, because there are fewer hands grabbing value along the way.

  1. Cross border trade:
    By lowering the costs and complexity of operating in multiple jurisdictions and multiple currencies, DeFi could transform cross-border trade. For example, a Kenyan trader who sources sugar from Zambia must first convert local currency into USD at exorbitant rates, drive with cash-in-hand across the border to Zambia (hoping not to be waylaid by thieves or asked for bribes by border officials) to buy the sugar, then drive back to Kenya to sell the product. Using DeFi, the trader could cross the border cashless, making all of their transactions through their phone, and reducing time, cost, and risk.
  2. Africa Continental Free Trade Area (AfCFTA):
    Although the AfCFTA agreement has created a unified market for goods and services throughout Africa, currency variations have created barriers in achieving the full vision of the agreement.Consequently, traders conduct most of their cross-border deals in USD or the Euro, magnifying the cost and compliance barriers. DeFi resolves these challenges by allowing cross-border businesses to transact through local currencies. The traders can convert the currencies into cryptocurrencies and make instant transfers.

Despite all this growth, centralized finance or CeFi still controls much of digital finance in Africa. The growth curve is reaching a plateau, hampered by a centralized rule book which favours those in power and is therefore preferred by governments or institutions. Despite exceptional progress, fintech is still be hampered by the lack of innovation in this centralized financial system. They can only innovate as fast as the traditional institutions can accommodate.

Add to this the reality that a centralized and opaque system makes it easier to conceal illicit transactions, allowing bad actors to misdirect funds to line their own pockets. With DeFi, every user can monitor the movement of money through the system, including the movement of illegal funds.

Traditional banks require the government’s approval to operate, which makes it easier for them to be influenced by the government on whom they depend for survival.

This is where DeFi has the potential to disrupt and solve endemic problems of corruption and a notoriously fragmented banking system, bypassing the traditional institutions entirely and setting up a parallel financial rail, unimpeded by bureaucracy.  With DeFi, there are no approvals to obtain. Anyone can create their own digital bank, governed by trusted software.

The so-called “last mile” is one of Africa’s most pressing challenges: getting finances to communities and businesses operating remotely in peripheral and rural regions. With DeFi, people in Africa without adequate access to banking can finally gain access to financial tools such as liquidity, borrowing, lending, insurance, savings, and investment, all of which are essential in a growing economic market.

DeFi has a transformative effect on moving financial inclusion forward in Africa, assisting in trade, and strengthening Africa’s economy, all of which meet the global sustainability agenda and match with UN Sustainable Development Goals.

With decreasing trust in traditional banking institutions, the young and tech-savvy population needs digital solutions to problems of accessing banking and controlling their own finances

DeFi will leapfrog traditional banking in Africa by providing access to banking for a larger population, as well as lower costs and better returns for everyone.