Blockchain in Financial Services

Blockchain can help increase access to credit for SMEs

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Access to credit fuels economies everywhere. And small and medium enterprises (SMEs) are often the primary generators of new jobs and economic growth, particularly in the developing world. Unfortunately, the global demand for SME credit stands at $2.38 trillion with three quarters of the SMEs being financially constrained.

Countries with the appropriate legal and institutional framework — and collateral registry — for securitized movable assets, experience increased credit access, lower interest rates, and faster economic growth. This discussion focuses on the importance of trusted, movable asset collateral registries (including agriculture equipment, inventory and accounts receivables) to increase access to credit for developing countries.

Lenders are more willing to provide credit, securitized by movable assets, when there is confidence and transparency in a country’s collateral registry. When lenders lack confidence access to credit is constrained.

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Untapped market potential for movable collateral

Mature economies have movable asset collateral registries that are secure, trusted, and transparent, but still vulnerable to unexpected creditor risks given the complexity and specificity of the filing process and involvement of multiple intermediaries. Incomplete or inaccurate financing statements can render a lender’s claim unsecured resulting in significant financial exposure and loss.

For emerging economies, increasing access to credit by unlocking the value of movable assets is key to economic growth. A World Bank report from 2013, based on a survey conducted in more than 100 countries, found that collateral was required in more than 75 percent of all loans. It also found that movable assets typically comprise an especially large percentage of collateral required for SMEs.

Developing countries are at the forefront of implementing secured transactions laws and promoting credit accessibility for SMEs through collaterals. However, lenders are not willing to take movable assets as collateral if the registry lacks transparency and integrity.

In industrial countries, borrowers using collateral get nine times the level of credit, repayment periods up to eleven times longer, and interest rates 50 percent lower than borrowers without collateral. In developing countries, 78 percent of the capital stock of businesses is typically in movable assets but if lenders are reluctant to accept it as collateral, it becomes “dead capital”. The introduction of registries for movable assets increases access to bank finance by almost 8 percentage points and access to loans by 7 percentage points.

Blockchain to the rescue

With a collateral platform based on blockchain, the entire process can be streamlined. The lenders and intermediaries will act as the node(s) and the integrity of the lender’s loan registry, at the secured asset level can be ensured, with the legal claim placed on the secured collateral. Such a platform will also have the ability to provide near real-time notifications, improving the monitoring capabilities and thereby prevent many of the creditor concerns highlighted before.

Also, a blockchain-based collateral platform can help lender organizations to create an enhanced portfolio of securitized assets which can be sold or traded faster. Investors’ ability to monitor risk is limited due to the inherent complexity in securitization, especially the non-stationary credit quality that are time and structure-dependent. With the help of blockchain, revalidation of data can be eliminated and the time frame to trade and settle can be improved, resulting in significant cost savings for organizations in the secondary market. In effect, collateral blockchain platforms can increase the transparency and efficiency for the entire value chain and the upstream securitization process.

Other value adds and additional features to ensure perfection can be:

  • Near real-time notifications to file amendments if debtor/collateral details changes
  • Advanced analytics that can learn from previous filings to identify missing attachments and inconsistent details and provide timely alerts
  • Enhanced debtor name searches, including name variants with the help of advanced analytics to reduce time and labor cost
  • Advanced analytics to provide insights into creditworthiness and collateral valuation
  • Latest/amended laws executed in the form of smart contracts

Going forward

Many banks have jumped onto the blockchain bandwagon and are experimenting with it in payment transactions, clearing and settlement, and digital identity among other use cases. This movement will have significant impact on all the stakeholders, disrupting the way of conducting business and adding value to the existing processes. With the help of blockchain, governments can build upon this and construct a collateral platform for creditors with assured integrity and transparency.

The practice of using collateral as security against defaulting on payment has a long history. Technological advances have made the process smooth and transparent, attracting more lenders who were previously skeptical. Forward-looking government agencies, creditors and intermediaries are exploring blockchain-based collateral platforms to improve lending liquidity and fuel growth further. As this change grows at an unprecedented rate, competitors should keep abreast of the advances or themselves become collateral damage.

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Business Account Manager - US Public Sector

Juan Delacruz

Transformation Executive - IBM Global Government Industry

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