Thursday, July 27, 2017

Myanmar microfinance could see fintech first

Blockchain technology – long touted for its revolutionary potential in the world of finance – could be coming to Myanmar, where a local company is hoping to become one of the first microfinance firms in the world to use a blockchain-based core banking system.

BC Finance and Japanese software company Infoteria are in the process of testing the use of blockchain technology in BC Finance’s microfinance business.

An initial test was conducted in June – where microfinance transactions were successfully recorded in a blockchain. A second test recording over a month’s worth of microfinance transactions should finish around September.

Blockchain technology was invented in 2008 to create the digital currency Bitcoin – known for its die-hard adherents, wild swings in value and the shadowy identity of its creator Satoshi Nakamoto. But away from the intrigue, the underlying blockchain data structure has broad application across the financial system.

A blockchain acts as a ledger – a data structure that records a series of transactions in a chain that gets longer with each transaction. The use of cryptography makes the blockchain exceptionally hard to tamper with and copies of the ledger can be distributed across several different severs and updated instantly.

One of the key advantages is safety – the blockchain is very hard to interfere with, and because it is updated instantly on different servers there are multiple copies.

The initial BC Finance test used servers based in several countries including Japan and China. Banks typically spend a great deal of money on backup systems, which blockchain technology could render unnecessary.

Another advantage is cost, according to Jeremy Kloiser-Jones, chief executive of Bagan Capital, of which BC Finance is the microfinance arm. BC Finance is happy with its existing software system, which is provided by a Bangladesh firm, but “we’re always looking for the next development”, he said.

There is as yet no existing blockchain-based software system that Bagan Capital could use for its microfinance business. Although Infoteria has successfully recorded microfinance transactions using a blockchain, a core banking system would require a user interface allowing the loan data that BC Finance employees input to be recorded automatically.

But the initial tests have gone well so far and Mr Kloiser-Jones expects a finished system to be cheaper to develop and run, and offer more flexibility than a traditional core banking system.

“I think blockchain technology is going to be quite revolutionary,” he said. “As soon as it gets to a format where it’s usable by an average company we’ll be adopting it.”

Mr Kloiser-Jones is also hoping to use blockchain technology to offer a Myanmar peer-to-peer lending service – matching borrowers with lenders online. Bagan Capital has not yet selected its tech partners for this venture, he added.

Myanmar is not known for being at the forefront of technological development. But BC Finance and Infoteria are likely the first to test blockchain technology in the world of microfinance, said Shigeto Miyamoto, a manager at KPMG Consulting, which is providing advisory services for the test.

Mr Miyamoto has also met with several local commercial banks to explain the advantages of blockchain technology, and found an interested audience, he told The Myanmar Times.

The country’s lack of technological development is something of a benefit when it comes to adopting blockchain. Although the software may be safer and potentially cheaper than the core banking systems run by many financial institutions worldwide, most lenders have sunk a great deal of time and money into their existing systems and are reluctant to change.

Core banking systems in more developed markets like Japan are also more complicated, built around highly complex accounting structures and regulations, Mr Miyamoto said. In Myanmar much of this architecture has yet to be put in place, which should make the adoption of blockchain technology simpler.

Microfinance has the added advantage that, unlike many banks, the business does not handle hundreds of transactions every day. This means the frequency with which data is added to the blockchain is relatively low – a key point in a country struggling with low internet speeds.

Infoteria encountered little difficulty in recording microfinance transactions in a blockchain, but hit minor issues with internet capability when it converted a backlog of older transactions into a blockchain in bulk, an Infoteria engineer said.