INTRODUCTION

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The concepts of microfinance and peer-to-peer (P2P) lending have always functioned effectively in promoting access to financial resources, especially to people and businesses in developing sectors. However, the conventional microfinance methods in use have setbacks: large operational costs, long period processes, and scarce clarity. On the other hand, the use of digital currency seems to be the solution to these problems by providing quicker, safer and cheaper channels of conducting financial transactions.

With the rise in the use of cryptocurrency, enterprises are able to use it as P2P microloan which provides a platform without borders, enables transaction without contacting intermediary, and lowers fees and the time of the transaction initiation. This is of great importance in the case of P2P lending where borrowing and lending is executed without agents. Therefore, with the use of cryptocurrency, such systems can make international operations easier, enabling the majority of the people to make use of the services.

Thus, as blockchain and cryptocurrency gain traction, their application in microfinance and P2P lending is paving the way for a more inclusive financial ecosystem. These technologies are improving the availability of funds for lending and borrowing, but also increasing the degree of autonomy of users in managing their funds.

TRANSACTION COSTS DECREASE, ACCESSIBILITY INCREASES

Cryptographic currencies drastically lower transaction costs, thus, making it easier for low-income people to access micro-credit and P2P lending services. In the prevailing system, financial services are offered through third parties such as banks, which have high fees for international transactions as well as exclusionary policies should one wish to take part.

These third parties are removed by the use of these crypto platforms, hence, allowing sending and receiving of payments directly. For example, STELLAR, Celo Networks are blockchain networks that enable low-cost transactions for poor people. Like this, microfinance institutions are able to make use of cryptocurrency loans therefore making sure that borrowers maximizes her benefits from the loan made.

Increased accessibility encourages economic development as well as individuals who were locked outside of the systems to be able to access it through the altered lending. This modified access can enhance economic development as well as those individuals who were previously locked out of the system.

INCREASING TRUST AND TRANSPARENCY

According to the statistics, cryptocurrency and blockchain technology bring more trust and transparency into microfinance and P2P lending systems. In conventional environments, borrowers and lenders are concerned about funds’ management and possible undisclosed charges that can be encountered. The concern of these two problems is resolved by the blockchain technology as it creates permanent records of transactions which no one can alter.

For instance, the P2P lending , the Bitbond and ETHLend use the blockchain for tracking their loan transactions and prevent the abuse of funds’ overuse. In addition, smart contracts promote the clarity of the lending process since these contracts eliminate all human involvement by creating automatic systems which dispense funds upon the completion of certain requirements.

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Such transparency will eventually lift up the confidence levels of the borrowers and lenders and hence increasing the number of users in the ecosystem. It also minimizes the chances of fraud and abuse or misuse of funds in microfinance and P2P lending systems.

FORMING THE WORLDWIDE P2P LENDING NETWORKS

The advent of cryptocurrencies allows the formation of worldwide P2P lending networks, so that borrowers and lenders can interact freely without the need of conventional banks. This is especially useful to persons living in developing nations who might not easily have access to such local banking services.

Such platforms as Kiva and Moeda are using blockchain and cryptocurrency for international lending. Such systems enable lenders to extend even small amounts in cryptocurrency as microloans to borrowers from any part of the world. Stablecoins protect the borrowers and lenders from the excess volatility of cryptocurrency which would render the loans worthless.

P2P networks also enhance financial inclusion by connecting the marginalized with alternative sources of funds for borrowing. For instance, students can get loans to help them with tuition fees, women can obtain loans to start businesses, or even for medical assistance, and at the same time, the lenders earn profits from their services.

REDEFINING POWER OF DECENTRALIZED CREDIT SCORING

Most traditional credit scoring systems ignore first-time loanees since they may lack the necessary financial history making it hard for them to secure a loan. Integration of cryptocurrency and blockchain technology provides the ability to democratize the loaning process through different forms of loan scoring such as a transaction history or social trust.

For example, Bloom and Wala, are beginning to develop decentralized credit profiles as they build on the blockchain technology in their operations. These profiles are built from data given by borrowers and authenticated across the blockchain by its secure network. Such a technique enables lenders to determine the level of creditworthiness of a borrower even without the applicant possessing a credit score.

The ultimate goal of decentralized scoring mechanisms is to empower borrowers by creating a fairer world where they have control of their data and have better chances to secure loans from various resources. It also eliminates existing biases from traditional systems depending on the locality of borrower hence improving fairness and inclusiveness in microfinance and P2P lending.

CONCLUSION

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The future of microfinance and peer-to-peer lending is being redefined by cryptocurrencies since they will have low transaction fees, they will enhance transparency, they will create networks that span the globe, and they will use decentralized systems for credit scoring. These developments increasingly allow previously marginalized populations to access financial services, promoting broader growth and development.

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