Did you know that more than 40% of all applications for trade finance come from SMEs which is higher than both, large corporates and MNCs? And more than 50% of these loan applications get rejected. Reasons for rejection may include low credit score, lack of collateral or insufficient cash flow. In search of credit alternatives, these SMEs often turn to the informal finance sector.
SMEs are the driving force for any economy and one of the major constraints to them globally is the lack of trade finance. The problem is even more pronounced in developing countries where the financial markets are still underdeveloped.
The informal finance sector consists of Rotational Savings and Credit Associations (RoSCAs), Daily contribution collectors, Cooperative societies, money lenders, etc. This sector comes with its own set of problems like inadequate finance, maladministration, lack of registrations and supervision, lack of risk assessment and management, higher interest rates- the list can go on.
This is where Arboreum introduces its “credit unions-as-a-service” platform, which allows formal credit to piggyback on informal loans. Arboreum uses ‘social trust’ as a metric for assessing the creditworthiness of a business and provide affordable credit to these underserved businesses.
In a unique model, Arboreum allows a community to to create a credit union where they deposit some of their funds or future assets, such as receivables. The union members contribute part of the loan through these deposits, meaning they earn interest on risk. The external lenders contribute the rest through a structured loan product where their risk gets diversified across many loans.
Through the Algorand Foundation Grants Program, we aim to leverage blockchain technology such that it enables communities and credit unions to offer customizable credit facilities to their members in a decentralised manner. In addition to enabling communities to create financing facilities, we are also creating a whole new asset class on DeFi, that of short-term commercial paper. We allow anyone anywhere to support farmers and small businesses while earning a profit. Fundamentally, we are providing ad-hoc credit access through an online real-time money market without any financial intermediaries. Algorand is a permissionless and open-source blockchain network designed for borderless economies and we plan to leverage this for scaling our decentralised services with the highest level of security.
Together, Arboreum & Algorand will allow both crypto and regular investors to automatically diversify their investments as per their risk profiles. We work with USDC, one of the most trusted stablecoins, supported by Algorand. Our partnership with Circle also enables non-crypto lenders to invest with us.
Ultimately, Arboreum envisions a world where your personal AI-trading agent will gauge your risk profile with a few questions and then act on an on-chain global debt market that prices interest with respect to liquidity, trading in small pieces of microloans such that your idle funds are always accruing interest. We are glad to be taking the first steps towards this vision, with Algorand as our partner.
