Unbeknownst to most, BTCJam, a peer to peer bitcoin loaning website, is bringing their service to numerous developing countries, where the average citizens don’t have access to loans. In 2014 the company partnered with bitcoin exchanges in Brazil, Mexico, the Philippines, and other parts of the world.
The purpose of these partnerships with the exchanges is to promote bitcoin loans to the exchange’s users, which are advantageous to the large unbanked populations of these countries. Something that might seem obvious to most people. Bitcoin and the unbanked? No brainer! Not having a credit history isn’t problem. There is no fees for storing funds or any kind of requirements. Anyone with a mobile phone or computer can join this virtual financial system.
But bitcoin loans’ real promise for the unbanked is cheaper transaction costs. As the non-profit microloan organization, Kiva’s website explains transaction costs is sole reason for high interest rates for the poor. “To break even on the $100 loan, the MFI [Micro-Finance Institute] would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can’t be cut below certain minimums.”
How much is the average interest for the unbanked? Well according to Kiva, 30 percent and 70 percent interest rates are common. Something BTCJam founder Celso Pitta, a Brazilian, had in mind when he started the business.
[blockquote]In Brazil the interest rate for a personal loan can easily reach 200%. Simultaneously, the borrower has to jump through many ‘bureaucratic hoops’, making the application a lengthy process.[/blockquote]
BTCJam proudly mentions that their average interest rate for a loan, which can range from $50 to $1,000, is around 5 to 10 percent, a interest rate much smaller than usual loans. This powerful advantage in addition to Bitcoin’s demolishment of the legal and regulatory barriers and their unique reputation system which accesses online profiles instead of credit history, makes their platform very attractive to the unbanked.
BTCJam has recently made their service more well known in India by partnering with the country’s most popular bitcoin exchange, Unocoin. The exchange will now list the company as one of its partners and promote the company in one of the fastest growing bitcoin markets. Bitcoin in India is relatively new to bitcoin compared to countries like the US, but already features numerous bitcoin meetup groups with over 200 members and an growing number of bitcoin startups.
India is not a country new to microloans. The microfinance industry in India started in 2006 but faced rough waters in 2010 after a string of people indebted to these institutions committed suicide. According to the government of the south Indian state, more than 200 indebted residents of Andhra Pradesh killed themselves in late 2010. It wasn’t until a year later would the industry figure itself out and the suicides stopped.
Over zealous microloans institutions coupled with high interest rates of more than 30 percent, dug a hole the average poor Indian could not afford to dig themselves out of. With no escape and the problem seemingly only getting worse, many decided to end their own lives.
Today the Indian microloan industry has revised their business practices and the suicides have stopped but the tragedy lives in the back of minds of poor Indians. Many have shunned the notion of getting a loan as a result, as one Indian women whose husband committed suicide because of microloans. She told BBC News, “Big or small, loans kill. I will never take up another loan.”
Bitcoin’s existence outside of the existing banking system is not nearly as an beneficial as the low transaction costs are for India’s unbanked and the unbanked around the world. BTCJam’s low interest rate loans could be a new viable option for India’s poor, helping them get the capital to build small businesses and raise themselves out of poverty.
[blockquote]Our mission is to connect individual lenders looking for attractive returns with borrowers looking for accessible and affordable loans. We are very excited about and highly committed to fulfilling our mission to change how the financial industry operates, and enhance the social impact of Bitcoin[/blockquote].
Banner image courtesy of Shutterstock and has been amended.