The first part:
https://www.publish0x.com/real-world-assets/private-credit-defi-and-emerging-markets-xlgzgkk
Jia is a decentralized lending protocol with the aim of supplying capital to small business in emerging markets. It links investors with local businesses by providing MSMEs with short-term loans and delivering lenders with real and consistent yield. Let’s look at four types of ecosystem participants in order to understand how the protocol works.
- Partners. These are platforms who support Borrower’s (defined below) business. Their role in the protocol is to refer Borrowers to Jia and provide data for underwriting purposes.
- Borrowers. Participants borrowing from Jia lending pools are referred to as Borrowers. Borrowers, who are MSMEs in emerging economies, either can come to the protocol themselves or through the referral by Partners. If they choose to provide collateral, Borrowers can negotiate better loan terms.
- Lenders. Part of Borrowers’ repayments are distributed to Lenders because they supply capital for Jia lending pools.
- Sponsors. These are actors who post collateral on behalf of the Borrower to decrease default risk. For playing the role of a guarantor they get part of Borrower’s repayments. Once the loan is repaid fully, the Sponsor gets his collateral back.
How is it going
In the first half of 2023, Jia managed to originate $400K+ to more than 600 borrowers in Kenya and Philippines. The protocol’s repayment rate is fairly high, 92% which can be attributed to the fact that it employs machine learning to build credit models based on high quality data. Providing unsecured loans is a risky business, especially in DeFi. Since everything is done on chain and you won’t see your customer from the point of loan origination until repayment, assessing borrower’s creditworthiness can be hard. This is the reason why most DeFi lending protocols are overcollateralized. To mitigate the risk, Jia’s underwriting system obtains data from multiple sources:
- As already mentioned above, Partners provide data about the Borrower they refer to Jia. This can be any financial data about Borrower’s business, such as sales or inventory.
- Loan application of the Borrower. Information about expenses and the purpose of the loan can be extracted from the loan application which can be of great importance to assess the Borrower’s creditworthiness.
- Third parties. To bolster financial information about the applicant the protocol can get data from local financial institutions, such as credit bureaus and banks.
It is expected that the highest demand from Borrowers will be for short-term loans with the maturity between 30 and 90 days. The standard loan amount varies between $100 and $5,000 with the monthly interest rate varying in the range of 2% — 7%.
JIA Token
The protocol has its native token both for governance and rewards purposes. The token is distributed to all participants to align players’ incentives and to support growth of the ecosystem. Partners earn JIA when the Borrower they referred repays the loan fully and in time. Likewise, Borrowers themselves receive earn when they successfully redeem the loan. Once a collateral has been provided on behalf of the Borrower, Sponsor will earn his share of JIA tokens. Finally, Lenders receive JIA when they supply capital into the protocol’s lending pools.
Credix links institutional investors seeking higher yield, such as alternative asset managers, family offices and hedge funds to non-bank lenders in Latin America. It should be noted that, unlike JIA, Credix doesn’t directly lend to MSMEs. The protocol’s borrowers are credit fintech startups and non-bank loan originators. Looking at current active deals gives information about the profile of a typical borrower from Credix.
For example, Atria, which has borrowed $1.9M with the rate of 12.8%, is a Mexican fintech firm established in 2022 focusing on used car loan services. Credmei, which has 2 active deals with Credix, is a Brazilian credit fintech company specialized in the agribusiness and food industries. And Clave is a leading LatAm fintech startup digitizing loan origination and servicing for the region.
Built on Solana, Credix issued more than $44 million to its borrowers on which the protocol earned $5.6M interest. Five deals were repaid fully while 25 are still active. To exploit in Credix deals and pools accredited have to deposit USDC. At the time of writing, according to Defillama, the median APY on Credix is 11.64% which is more than twice as high as the yield on the blue-chip AAVE protocol’s USDC pool which offers “only” 5.03%.
There is a high potential for private credit in Asia because 96% of all businesses are SMEs. Like Africa and Latin America, emerging economies of Asia also face the challenging problem of finance gap. More than half of people in Southeast Asia remain underbanked ad don’t have access to affordable credit. Most MSMEs remain underserved due to stringent banking regulations and legacy lending practices which are mostly risk-averse. This creates opportunities for more risk-seeking players, such as private credit providers who are keen to fill in the place of capital suppliers for SMEs. One of these actors is Bluejay Finance.
Bluejay Finance has a decentralized fixed income protocol called Bluejay Earn which offer over 7% APY to liquidity providers. By supplying stablecoins to the protocol investors can earn fixed interest in any available pool. At the time of writing, there are four open private credit funds all of which were issued by “a well-established and well-capitalized regional FinTech player in Southeast Asia.” All deals have a maturity tenure of 360 days. Interest is distributed to lenders on a quarterly basis in SGD, i.e. Singapore dollar. Funds collected from these pools will be lent to SMEs located in Vietnam, Singapore, Indonesia, and Thailand in the borrower’s local currency.
Micro, small and medium enterprises in emerging markets lack access to basic financial services, such as credit. This has many reasons, among which persistent high interest rates in these economies and strict regulatory requirements for financial institutions to originate a loan which create a risk-averse banking environment are probably the most important ones. But as the popular quote by John Adams says, “‘Every problem is an opportunity in disguise.” Solving finance gap in emerging markets is something at which DeFi can excel. Connecting capital with MSMEs will fix a real world problem which can result in the massive adoption of DeFi by those who are left underserved by TradFi.
