Pilot Launch | Haraka & Grameen Foundation: Leveraging reputation and local stablecoins to improve credit access for unbanked VSLAs in Ghana

Image courtesy of Haraka

Mercy Corps Ventures, Haraka, and Grameen Foundation launch a new pilot to increase financial access for unbanked women, testing the use of social reputation and social guarantees to underwrite DeFi microloans issued in local currency stablecoins in Ghana.

This post is the first of a two-part series; the second blog will share key insights after the pilot is completed. Written by Njeri Muhia, Pilot Manager at Mercy Corps Ventures.

Access to financial services is essential for individuals and businesses across the world, empowering them to invest in education, healthcare, and productive ventures. However, in Africa, under 20% of households have access to formal financial services such as savings and credit products. When looking specifically at credit on the continent, there is a growing $331 billion credit gap, significantly fueled by the information asymmetries between lenders and borrowers (such as the lack of formal credit histories). When coupled with the high cost of administration, these market gaps ultimately limit the number of credit products available to informal populations, and where and when they are available, the cost of borrowing is usually prohibitive.

This is where Village Savings and Loan Associations (VSLAs) play a vital role. Approximately 510 million individuals worldwide, 70% of whom are women, rely on these informal financial groups for savings and credit. Not only do VSLAs provide crucial financial services to their members, but they also have significantly lower default rates, where 99% of VSLA-provided loans are repaid in full. This is because group members hold each other accountable, making members more likely to repay their loans.

Despite the clear benefits of VSLAs and lower delinquency rates associated with group loans, we find, for instance, that 75% of microcredit issued in Kenya goes to individual borrowers while only 25% of credit is extended to group borrowers. Evidently, there is a significant opportunity in leveraging web3 protocols and reputation-based lending models to integrate VSLAs with broader financial institutions, which would create a powerful synergy for advancing financial inclusion.

The Pilot

We’re partnering with Haraka and the Grameen Foundation to launch a pilot focused on issuing stablecoin microloans to VSLAs in Ghana, based on social reputation

“We are very excited to explore the potential of blockchain and web3 for promoting financial inclusion around the world. Stablecoins have the potential to revolutionize last-mile finance with improved efficiency, transparency, and access to global capital sources. Through this partnership we hope to showcase how this technology can improve access to credit for communities underserved by traditional finance.” William Le | Co-founder & CEO, Haraka

Through this pilot, Haraka will disburse $200k in local currency stablecoins to 75–100 VSLAs in Northern Ghana, benefiting an estimated 3,000 members, 90% of whom are women.

Haraka will work with Grameen to access existing digitized saving circles that have years-long operating history and have been vetted for their ability to manage the default risk. Haraka will then assess the reputation at a group and individual level based on repayment, social guarantees and group dynamics, and savings behavior. Lastly, Haraka will develop a group credit protocol leveraging smart contracts to govern borrowing parameters and member guarantees.

Key Partners

Haraka is a blockchain-based community credit protocol that leverages social reputation as a form of collateral for underwriting. Haraka connects real-world asset investors in the tokenized private credit markets to entrepreneurs around the world who need capital to expand their businesses.

Grameen Foundation is a global nonprofit dedicated to ending poverty by investing in the power of women. Utilizing their expertise and partnerships, they connect poor rural women to essential financial, health, and agricultural products and services, while building empowering ecosystems that support their breakthrough.

Our Hypotheses

We expect that the use of group reputation combined with social guarantees and on-chain transactions can significantly improve on- and off-chain credit assessment for individual borrowers. We will measure:

• Difference in default rates between VSLAs with good and low reputation scores

• Increase in the number of individuals qualifying for higher loan amounts within the group based on their high group-derived credit scores (compared to their initial loan cycle)

• Decrease in overall credit risk for individuals, as reflected by improvements in their group-derived credit scores (from onboarding to the second loan cycle)

We also anticipate that the use of a web3-based group lending system (community credit protocol) could result in cost and time savings for financial institutions and VSLAs. We will measure:

• Transaction costs of disbursement

• Time from request to disbursement

• Decrease in operational costs

Haraka’s community credit protocol can provide attractive yields and performance for global liquidity providers. We will measure:

• Default rate

• Return on loans

• Utilization of group loans

Loan capital enables investment in sustainable practices and income diversification, leading to increased climate resilience. We will measure:

• Percentage of loan funds invested in long-term, sustainable practices that contribute to climate resilience

• Increase in the number of distinct income streams reported by VSLA members

• Increase in the percentage of VSLA members relying solely on a single income source

“Haraka’s social reputation protocol is very exciting and points to the promise of non-traditional sources of data to assess creditworthiness. Their solution has the potential to open new markets and opportunities for traditional MFIs by “proving” the creditworthiness of ex-ante risky/unknown populations (specifically, savings groups and their members) and pave the way for loans and economic support to this particularly vulnerable population. The potential social spillovers of this innovative solution to expand access to credit to women, via saving groups, cannot be understated.” Laura Chioda | Director of Research at Berkeley Haas

Ultimately, this pilot will test new ways of creating inclusive financial services for underserved communities, illustrating that VSLAs across Africa are creditworthy and economically viable for financial institutions to serve.

Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots responsibly testing web3 solutions for unbanked and underbanked populations in emerging markets.