The representative of an Islamic microfinance institution walks around a market in Indonesia before dawn, as she chats with each seller and collects money, either savings destined for an Islamic microfinance institution or a profit-sharing payment on financing used to support a family’s small business. This situation, to an observer seems convivial, combining a business transaction with a trusting relationship.
A man hustles between some of the other businesspeople at the market, collecting interest on loans. The lender is literally hiding in the shadows, collecting interest payments from those to whom he has loaned money informally. The light and darkness of the two different transactions happening in different parts of the market conveys also some of the relationship between the people transacting, one out in the light and another in the dark, author Blake Goud writes.
Through the trusting relationship with the MFI worker, a mutually beneficial relationship has developed that helps the businessperson transition from borrower to saver as the business becomes more profitable. The MFI grows too, fueled by the profits from its financing, which, unlike with the informal lender, are being channeled back into the community through free deposit accounts for people to save and by generating profits that are invested into projects with a social purpose.
The mobilization of local funds at MFIs like the one in the example above – a Baitul Maal wat Tamwil (BMT); a form of Islamic microfinance institution common across Indonesia – is a strength for such MFIs but it slows growth. Potential social impact investors lose the opportunity to help scale up the MFI’s financing activity while generating positive financial and social returns. Some social impact investors would be interested to provide financing, but the scale at which the MFI operates creates significant cost challenges. For example, the record keeping and administration of a sukuk may be so costly as to make an otherwise profitable investment unprofitable.
Using conventional structures, the administrative expense of collecting funds from investors, tracking and directing payments to the originator, and then collecting and distributing profits from the obligor to be directed back to investors may be too high for a sukuk issued at a size that is needed by the MFI. Blockchain and tokenization of the sukuk could help reduce the administration costs and make it possible to issue a sukuk at the appropriately size to generate the most social impact.
Blossom Finance has for several years provided peer-to-peer financial support for Indonesian BMTs, and in the process they found that bitcoin could be a useful tool for reducing the transaction costs of moving funds into Indonesia from third-party countries. Their latest development is to create what they call a “Smart Sukuk”. The Smart Sukuk is designed to allow social impact institutions to raise funding from investors globally, using blockchain to more efficiently facilitate flows through regulated financial intermediaries.
Applying new technology like blockchain easily gets attention when it promises to upend the traditional structure of the financial sector. However, more incremental changes like the Smart Sukuk, which allows broader access to finance by financial institutions and especially those investees who are profitably focusing on social impact, could become more revolutionary. It could become more impactful because it doesn’t require a change of financial institution by the people at the marketplace, who will only see a change in the breadth and affordability of what they already use today.
Source LinkedIn