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Blockchain for Social Enterprises to promote Financial Inclusion

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Project dissertation submitted to University of Sunderland on September, 2019
Blockchain for Social Enterprises to promote
Financial Inclusion
Kokou Aladji-Weka
Faculty of Computer
Science/Engineering
University of Sunderland
Sunderland, United Kingdom
Mahendra Kumar Shrivas
School of Technology
BlueCrest University College
Accrs, Ghana
Philip Irving
Faculty of Technology
University of Sunderland
Sunderland, United Kingdom
AbstractThe twenty-first-century world, in which one-
third of the population is denied access to affordable financial
products and services that can meet their needs in a responsible
and sustainable way, still presents a challenge but an attainable
goal.
To fill the gap and address the issue in order to leave no one
behind, social economy models such as social enterprises play an
important role in financial inclusion, but still face challenges
such as customer identification, corruption, fraud, cost of
operations, and technology, which are impeding the models in
reaching their objectives.
The financial technology or FinTech sector has brought
forward various digital solutions to efficiently address the issue,
but Blockchain appears to be an undeniably ingenious
technology that creates cost-effective operations, provides an
open and immutable system of record-keeping and brings
numerous advantages, such as confidence, transparency and
efficiency for financial inclusion.
This research aimed to demonstrate the power of a
Blockchain based solution to build a secure, scalable and
innovative solution to administer a social enterprise community
for financial inclusion.
Keywords— Blockchain, Financial Inclusion, Social
Enterprise, Digital Identity, FinTech
I. INTRODUCTION
The financial exclusion is defined as the inabilities or
difficulties faced by a particular group of people to have access
to basic financial products or services.
The number of excluded people amounts to 2.7 billion,
representing one-third of the world’s population.
To resolve this inequality, the world has set itself the goal of
reducing poverty by 2030 [1]by changing the paradigm in
finance and promoting financial inclusion initiatives and
innovations that can bring positive sustainable economic,
social and environmental changes among communities.
Social enterprise falls under this type of human-centered
business model purposely set-up to address social inequality
in accessing financial products and services and to bring
positive sustainable economic, social and environmental
changes among communities [2]. In addition, the social
economy promotes inclusive growth because of its focus on
people and social cohesion. It attempts to provide elements of
a response to the challenges of globalization, the
financialization of the economic world, the loss of citizens'
confidence in public decision-makers, the lack of democracy
in business, and gender equality.
Though social enterprise proposes to respond to the challenge
of financial inclusion, other issues such as customer
identification, corruption, fraud, cost of operations, and
technology are impeding the business model in reaching its
objectives.
The evolution of the Internet along with the rise of new
technologies has given social enterprise the opportunity to
address the issue with technologically innovative methods that
can improve and automate the delivery of financial products
and services: financial technology.
Financial technology or FinTech, the confluence where
finance meets technology, serves a key purpose arising from
its capacity for using emerging technologies to overcome
barriers and challenges faced by the financial system to offer
sustainable financial services without excluding people.
Various technologies exist to support social enterprise
initiatives and innovations to digitally and efficiently address
the issue of financial exclusion. This is known as ‘innovative
financial inclusion’.
Innovative financial inclusion refers to the use of technologies
to offer financial products and services outside the
conventional financial framework to reach the financially
excluded population [3].
Among these technologies, one in particular takes center
stage in every discussion on the future of the digital world, an
undeniably ingenious technology capable of enabling
economic and social transactions [4], the technology is called
Blockchain.
Blockchain uses various technologies: computer science
fundamentals, cryptography, encryption algorithms and data
storage at a high level. The key concept behind Blockchain
technology is to provide a reliable secured decentralized
network.
Blockchain is a record of all transactions or digital events that
have been executed and shared among participating parties
over a distributed ledger technology [5]. It can also be defined
as: “a chronological database of transactions, which are
recorded into blocks and checked by other participants in the
Blockchain network” [6].
For the financial sector, Blockchain appears to be the single
most effective technology that enables cost-effective
operations, provides an open and immutable system of record
keeping and brings numerous advantages, such as confidence,
transparency and efficiency for financial inclusion.
A solution using Blockchain technology that allows the
network user to make transactions without a third party
appears to be the holistic solution.
This research article discussed the power of Blockchain to
build a secure, scalable and innovative solution for financial
inclusion in a social enterprise context and hypothesizes that
factors impeding financial inclusion can be addressed with
Blockchain technology.
II. OVERVIEW OF BLOCKCHAIN AND
AFFERENT TECHNOLOGIES
Though the core concept behind Blockchain technology was
developed in 1980 by Leslie Lamport, it only achieved
widespread publicity as a distributed database technology
combining several computer technologies, data storage,
encryption algorithms and consensus [7] in 2009 with the
cryptocurrency Bitcoin established by Satoshi Nakamoto [8].
Blockchain is now revolutionizing the digital world by
bringing a new perspective to system security, resiliency,
efficiency and scalability.
Blockchain technology has become one of the research areas
of financial institutions [9] because it is believed that its
breakthrough in data storage and digital information
transmission could essentially transform traditional financial
and economic models [7].
This section describes Blockchain technology, its application,
major advantages, challenges and appropriate examples in
finance tech (the confluence where finance meets technology),
also known as FinTech [10]. It focuses specifically on
Blockchain application to reduce poverty by addressing the
issue of financial inequality in society, using Blockchain
technology to provide financial products or access to
resources.
A. Overview of Distributed Ledger Technology
Distributed Ledger Technology (DLT) refers to the
mechanism by which users of a network secure and share
information by encrypting it and distributing it on multiple
databases (ledger) network instead of a centralized system
playing an authority role.
Fig. 1 illustrates the difference between centralized and
distributed ledgers.
Fig. 1. Difference between centralised and distributed ledgers
B. Blockchain Technologies
If there is a technology that is on almost everybody’s lips it is
Blockchain. Unfortunately, it is also the most misunderstood
technology.
Blockchain is a record of all transactions or digital events that
have been executed and shared among participating parties
over a distributed ledger technology [5].
Blockchain is a data structure type where data is stored and
transmitted in single units called “blocks” and interlinked to
each other by a digital chain. It involves data protection
(cryptography) and algorithms to organise data across the
system in an almost immutable way. Thus, in the blockchain
every single transaction is recorded, and once a transaction is
verified by participants in the system, it cannot be altered or
deleted unless by participants’ consensus [11].
Blockchain technology uses well-known processes of
computer science and cryptographic primitives (cryptographic
hash functions, digital signatures, asymmetric key
cryptography) mixed with record storage technology [8].
C. Block Architecture
A block is formed of two portions: block header and block
data portion.
The block header holds block hash, root hash, timestamp,
nonce, previous block hash as illustrated in Fig. 2.
The data portion contains information about transactions,
such as the transaction number and detailed information on
the transaction (sender address, transfer amount, recipient
address, transaction fee, etc.).
Fig. 2. Illustration of sequence of blocks to form a Blockchain
D. Cryptographic Hash Functions
Cryptography or cryptology is the science and the study
of techniques to protect and secure information,
communications and sensitive data from third parties. It
consists firstly of transforming a message into a coded form,
and secondly, from the coded form back to the original
message [12].
Blockchain is made of “blocks” interlinked to each other
by cryptographic hash to form a chain of blocks.
Hashing is the process of generating a value from a string of
text using mathematical functions. The hash result of the
block header is called “digest”. By integrating hashing in its
concept, Blockchain benefits from the security properties
related to the hash function: collision-resistant, preimage
resistant and second image resistant.
The secure hash algorithm (SHA) with a 256-bit output
(SHA-256) is a particular cryptographic hash function used in
several Blockchain.
SHA-256 has an output of 32 bytes (1 byte = 8 bits, 32 bytes
= 256 bits), generally displayed as a 64-character
hexadecimal [11].
E. Key Characteristics
The key characteristics of Blockchain technology are the
following:
Decentralization: By decentralizing transactions,
Blockchain reduces the intervention of a third party
acting as an authority for a transaction between two
parties.
Persistency and immutability: All transactions are
confirmed, broadcasted and recorded at every node
in the system. Thus making transactions virtually
tamper-proof.
Anonymity: The possibility to prevent identity
exposure by generating an anonymized address. It
allows some transaction information to be hidden.
Transparency and auditability: Every record can be
verified at any node of the network. This guarantees
traceability and transparency of records over the
network (Chen, 2018).
F. Blockchain Types
The main difference between types of Blockchain relates
particularly to how access is granted to the network, and how
data is accessed and maintained. Based on the Blockchain
maintainability [8] and data accessibility [11], Blockchain can
be categorized as follows:
1) Permissionless Blockchain
In this type of Blockchain, anyone in the chain is
authorized to add blocks in the chain without requiring
permission from a higher authority. Thus, basically anyone
can read, write, carry out transactions or make changes
legitimately in a permissionless Blockchain.
Most permissionless Blockchains are open source and
though they may look open to anyone, to prevent the
immutability properties of ledgers, permissionless
Blockchains use a consensus mechanism that incorporates
network participants into their maintainability or expenditure
by rewarding them when performing this process [8]. This is
referred to as mining
2) Permissioned Blockchain
Unlike permissionless Blockchains where transaction
processors are rewarded, in permissioned Blockchains,
participants are not rewarded or rather, participants are
rewarded in other ways [9]. In this type, participants are
granted permission before publishing blocks.
Permissioned Blockchains use a consensus mechanism,
not with the intention of rewarding participants (since
identification is required to be a participant) but because
in this case it is faster and computationally much less
expensive.
3) Hybrid blockchain
A hybrid Blockchain combines a permissionless and
permissioned Blockchain. Hybrid Blockchains are often used
by organizations that wish to benefit from both permissionless
and permissioned Blockchain characteristics. In most of these
cases, sensitive data is protected in the permissioned
Blockchain while open data is accessed in the permissionless
Blockchain.
G. Transactions in Blockchain
The fundamental definition of a transaction, from a
technical point of view, is an interaction between parties that
is accepted under defined conditions. In Blockchain, a
transaction occurs with the participants' agreement called
consensus.
1) Consensus Mechanism
In the Blockchain technology, a consensus mechanism is
the manner through which a transaction is verified and added
to the chain in order to ensure transparency. It makes use of
the algorithm specified in the development of the Blockchain.
Transactions in Blockchain are verified by consensus of the
majority of participants in the network.
Different approaches exist with regard to reaching consensus
in the Blockchain like Proof of Work (PoW), Proof of Stake
(PoS) or Delegated Proof of Stake (DPoS).
Proof of Work (PoW) is a consensus strategy in
which all the actors on the network participate in a
requirement to reach a target. Actors or participants
calculate a hash value of the block header, confirm
the transaction and effect that the block is added to
the existent chain. In PoW, the more users
participate in the requirement, the more authentic the
candidate block becomes. Once it reaches a certain
number of blocks, it is almost impossible to alter the
transaction. Participants in the calculation of the
hash value are called miners.
Proof of Stake (PoS) is an alternative to PoW. To
commit a transaction, instead of getting rewarded
after every PoW transaction, miners are required to
invest their rewards in calculating a hash value of the
block header. Doing so helps to calculate the hash
value quickly and commit participants to the
authenticity and success of the transaction.
Delegated Proof of Stake (DPoS) is a consensus
strategy that implies a practical byzantine fault
tolerance algorithm (PBFT) and the delegated proof-
of-stake algorithm (DPoS) [13].
Other consensus algorithms for certain types of Blockchain
platform also exist.
Proof of Importance (PoI) is used on the NEM
platform. It makes use of a process called
“harvesting” that consists of the eligibility of an
account holder to add a new block to the existing one
[14].
Proof of Elapsed Time(PoET) is used by the Intel
Sawtooth Lake platform. Here the leader is
randomly selected among participants by the system
[14].
H. Applications of Blockchain
With Blockchain technology getting more and more
mature and its multiple capabilities becoming more accessible
as technology is improving, many areas of life are exploring
the advantages of Blockchain for their respective business.
If there is one area that is making intensive use of
Blockchain and is far ahead in the development of Blockchain
applications, it is finance. Yet, sectors like logistics,
agriculture, health, entertainment, IoT, public and social
services are actively making use of Blockchain technology as
well.
In finance: this area directly related to Blockchain is
where the technology is completely transforming the sector.
From banking activities (clearing, settlement, savings,etc.) to
the peer-to-peer financial market, a lot of hope is being placed
in Blockchain to extend the limits of the traditional financial
model by resolving risk, trust, traceability and inclusion
issues.
In insurance: Blockchain appears to be a solution to the
world of insurance. An asset can be verified and ownership
can be traced and proved.
In trade: a lot of projects and contemplations are
underway with Blockchain technology, to the point that the
World Trade Organization is seriously contemplating
operating international trade inside a Blockchain platform. IT
and Logistics giants (IBM and Maersk) are teaming up to
build a robust and powerful Blockchain platform called
TradeLens [15].
Public and social services: Blockchain is opening up a lot
of opportunities and improvements for public and social
services such as land registration, energy management,
education and free-speech rights, and marriage.
Land registration: with Blockchain, land registration and
associated services such as land transfer or mortgage
establishment can be improved through the recording of
physical status, ownership and related rights.
The education sector can also make use of Blockchain
technology. The democratization of information and its
securitization can promote human rights and free-speech
rights.
III. FINANCIAL INCLUSION AND BLOCKCHAIN
A. Financial Inclusion : Concept And Definition
Cited for the first time by Leyshon and Thrift in 1993 [16],
the term “financial inclusion” refers to the access to
appropriate and affordable basic financial products and
services for the vulnerable population in a fair, sustainable
and transparent way [17]. In terms of financial inclusion,
basic financial products and services for the vulnerable are
payment services, transfers, remittances, savings, and credit
services.
Access to these financial products and services gives the
unbanked population the capacity to increase, stabilize and
build their income or assets. It strengthens their resilience to
economic shocks as well [3]. However, maintaining non-
inclusive financial systems contributes to further widening
the gap between the rich and the poor.
Economy growth reduces poverty and inequality. Poverty
and inequality that the United Nations Organization is
engaged to reduce through the UN’s 2030 Sustainable
Development Goals agenda. It’s then important to financially
include the unbanked population to participate in the global
economy and the financial system [3].
B. Blockchain for Financial Inclusion
The proliferation of digital financial solutions (mobile
money, digital payment, crypto-currency, etc.) due to the
emergence of new technologies powered by the Internet, has
contributed to improving financial inclusion in recent years.
To efficiently address the issue with technology, the
financial sector sees Blockchain as the solution that will not
only bring a revolution to the financial system but also
efficiently improve financial inclusion, in particular because
Blockchain brings transparency and trust into the system,
which is in line with the business practice of the excluded
population.
In order to maintain trust, financial institutions need to
verify identity or proof of ownership before processing
transactions. Blockchain enables access to financial services
and products with a digital identity through KYC (Know Your
Customer) processes [18].
C. Key Applications of Blockchain for
Financial Inclusion
Interest in blockchain technology and particularly in
experimental blockchain-based finance applications has
demonstrated a great deal of promise.
Many initiatives and projects based on the blockchain
technology have been developed to address the issue of
financial inclusion.
Bitpesa allows payment between some African
countries and China.
ABRA allows people to perform banking transactions
without a bank account.
BanQu is a digital identity blockchain platform used in
the Syrian war as e-KYC for refugees.
ShoCard is a digital identity platform provider [10].
Oradian, built from open-source blockchain
technology (Stellar), is a remittance application that
has helped more than 250,000 Nigerian women to
cheaply transfer money.
Regalii, Ripplie and Worldremit are massively used by
refugees or migrants to transfer money or pay bills.
The United Nations Children’s Fund (UNICEF) Game
Changers crowdfunding application has demonstrated
how financial inclusion can be obtained through
blockchain technology [1]
Credit Vision, a London fintech company, is proposing
creating a blockchain of blockchains to allow digital
identity to be universal [19].
Deloitte Inside Magazine of 2018 cites the example of
an initiative by the former Brazilian president (Bolsa
Família) that reached one-third of the Brazilian
population by enabling them to process digital
payments to credit cards or bank accounts.
The M’Pesa project provided an e-payment platform
for the Kenyan population.
Looking at the various progress made so far by Blockchain-
based financial applications, a lot of investment is being made
in Blockchain-based FinTech projects to efficiently address
financial inclusion challenges. order to maintain trust,
financial institutions need to verify identity or proof of
ownership before processing transactions.
IV. CRITICAL EVALUATION
Weaver, Rasheda L.(2019) in their article titled “Social
Enterprise and the Capability Approach: Exploring How
Social Enterprises are Humanizing Business” have conducted
research into the effect of capabilities in humanizing social
enterprises on reducing financial inequity, hence poverty.
Their research, clearly illustrates that social activities in terms
of services, products, and programmers have the ability to
reduce financial exclusion [20].
Don Tapscott, one of the world’s most brilliant theorists on
society and business, cited by Khudnev (2017) in his thesis,
stated that the economy becomes more effective when it is
working for everyone and that the condition required to fill the
gap is the establishment of distributed business platforms
rather than redistributed capitalism [21].
The capacity of Blockchain technology to embed
immutability, transparency, reliability, and efficiency offers
the world of finance multiple advantages for financial
inclusion, an aspect which is lacking in the current financial
system. And the truth is that allowing everybody to be
financially included is an untapped opportunity both for
economic growth and business profit [22].
However, some financial institutions such as microfinance
institutions have proven sufficiently that their business model
is sustainable enough and effective in promoting financial
inclusion. Challenges like customer identification, corruption,
fraud, cost of operations, and technology are impeding the
model in reaching its target, challenges that Brastad, Stendahl,
and Stamland (2018) identified in their research as a brake to
financial inclusion [23].
The introduction of digital currency into the financial
system will help solve the problem of excluded or underserved
populations [10].
A. Challenges and risks of Blockchain
for Financial Inclusion
Despite the hype around Blockchain technology, which a
lot of publications are talking about, it poses some challenges
and risks intrinsically related to the technology. Major
security flaws in some public Blockchain applications were
found recently [24]. Some of major challenges are:
1) The immutability of a Blockchain
When talking about Blockchain, the characteristic of
information immutability is touted first and foremost. Indeed,
Blockchain technology is not immutable per se. There are
certain situations where the Blockchain can be immutable: in
block competition in which each block carries its hash value;
the block with the longest hash value is adopted, leaving the
other block in the system not added. These are some of the
situations that attackers use to corrupt the Blockchain mostly
in permissionless Blockchains [8] by manipulating consensus
mechanisms. This type of attack is known as a 51% attack
[24].
2) Security breaches
Software or applications used to run the Blockchain need to
be maintained and monitor in order to prevent attackers from
gaining access to codes, credentials or any information that
can help them corrupt the system [24].
3) Scalability
The fully decentralized Blockchain network is a myth.
However, the more decentralized the network, the more
security it implies and the more drawbacks it contains in terms
of scalability or development [25].
4) Quantum Computing
Quantum Computers are much faster than Super-Computer
and may easily break Blockchain cryptography. Adoption of
post quantum cryptography amongst Blockchain platform
providers are very slow [14].
V. CONCLUSION AND FUTURE RESEARCH
DIRECTION
The Blockchain exposes both the advantages and risks as
far as using of Blockchain technology for financial inclusion
in the financial sector concern.
Based on the analyses in the literature review, Blockchain
technology is reengineering the global economic model by
enabling access to financial services and products to the
excluded population, by offering cryptocurrency [15] as an
alternative to fiat money and a digital identity to allow the
unbanked to be identified [19].
The second point concerning digital identity is more
interesting for the unbanked because it opens up access to
fundamental financial services and products.
Based on specific business model and requirements of
social enterprises can develop and adopt Blockchain based
applications to offer financial inclusion to underserved or
unserved communities.
Though there are some limitations associated with
Blockchain technology, the technology offers great promise
in the majority of sectors of life and especially in the financial
sector.
The Blockchain technologies are still evolving and there
are huge opportunities to offer robust, transparent, tamper-
proof and with append only record tracking of financial
transaction powered by digital identity and electronic Know
Your Customer (eKYC) processes.
It would be very interesting for the researchers and
Blockchain communities to venture into Blockchain based
robust services, applications and platform for handling social
business and enabling financial inclusion sustainable in a
systematic manner.
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Presentation
This Article was published on Coinintelligence on 11 January 2019 as part of a series of lectures I gave at the 2018 Hard Fork Decentralized events on 13-14 December 2018. In order to achieve the agreed-upon global 2030 Agenda, it is high time we embraced both more innovative and nuanced ways of thinking and new technology that is not susceptible to corruption and bureaucracy, which will withstand changes in political tradition by going to the citizens directly. The solution, in fact, is staring us right in the face: blockchain is the answer and the way forward. In September 2015, some 193 countries of the United Nations' General Assembly agreed upon 17 Sustainable Development Goals (SDGs) to be achieved by 2030 . These worldwide aims span social and economic challenges, and include addressing poverty, hunger, health, education, global warming, sanitation, and energy.