Revolutionizing African Credit: MSME Bond Indices

DeFi lending & real-world asset tokenization has the potential to revolutionize financing for African SMEs.

Robert Greenfield IV
6 min readJul 19, 2023
“MSME Worker in Rice Farm” by Midjourney AI (@.blackcrypto)

Micro, small and medium-sized enterprises (MSMEs) are the backbone of Africa’s economy, contributing to job creation, income generation, and poverty reduction. They constitute more than 90% of businesses and employ about 60% of workers across the region.

However, access to credit (i.e., loans) remains a significant challenge for these businesses, with a massive financing gap across the continent. The advents of real-world tokenization, on-chain asset management, and decentralized finance (DeFi) lending more broadly has the potential to revolutionize the financing landscape for African SMEs, providing them with expanded credit access and unlocking flexible institutional investment in this critical sector of the global economy.

The following brief delves into the African MSME financing gap, the obstacles that MSMEs face when attempting to build credit, and how real-world asset tokenization, on-chain lending, and on-chain index creation could revolutionize the multi-trillion dollar MSME market.

The Multi-trillion Dollar African MSME Financing Gap

The financing gap for formal MSMEs (i.e., legally registered and tax paying) in developing countries is estimated to be around US $5.2 trillion, US $331 billion of which is attributal to sub-Saharan Africa, according to the World Bank Group & the International Finance Corporation. This figure does not even account for the financing needs of informal and micro enterprises, which are even more significant in Africa. The lack of access to finance hinders the growth and development of SMEs, limiting their ability to create jobs and contribute to economic growth.

Challenges Faced by African MSMEs in Accessing Financing

African MSMEs face numerous challenges when seeking financing, including high interest rates and stringent collateral requirements. The average interest rates for MSME loans in Africa can range from 10% to 30%, making it expensive for businesses to borrow. Additionally, many financial institutions require significant collateral deposits, often exceeding the value of the loan itself (i.e., 100%+ down). This poses a major barrier for SMEs, as they often lack the necessary assets to secure financing.

Understanding Decentralized Finance (DeFi) Lending

An Example of DeFi Lending to Credit Institutions (Credit: Umoja Protocol)

Decentralized finance, or DeFi, is an emerging ecosystem of financial applications built on blockchain technology. It operates without intermediaries or central administration, allowing for greater transparency, efficiency, and accessibility. DeFi lending platforms, such as Umoja — which focused on providing affordable, localized financing to African enterprises, enable users to lend their crypto assets and earn interest, while borrowers can take out loans directly through the platform. These platforms utilize smart contracts to automate lending and borrowing processes, eliminating the need for traditional financial intermediaries.

The Real Web3 Dashboard (Credit: Umoja Labs)

To date, over US $174 million in financing has been disbursed using DeFi lending. However, 100% of these loans are denominated in USD, leaving much to be expected regarding how blockchain technology can help reduce the cost of capital by crowdsourcing global financing and reducing existing financing costs, such as servicing the loan, FX conversion & devaluation costs, loan insurance, loan reporting, loan management fees, and, for borrowers, collateral minimums.

Emerging lending applications, such as Umoja have introduced novel approaches to localize on-chain loans within the native currency of the borrower (e.g., loan denominations in Kenya Shillings, Nigerian Naira, and Tanzanian Shillings), which single a change in DeFi protocols better localizing toward the needs of international borrowers.

Despite current shortcomings within the DeFi lending ecosystem, the technology will undeniably provide competitive & more accessible credit options to MSMEs as African Web3 venture funding increases, thus helping improve the quality of existing DeFi loan offerings. With a US $330 billion MSME financing gap, the potential for DeFi lending on the continent is nearly 1,900 times larger than its current total debt volume on-chain.

Funding Multiple MSME Loans with DeFi and Token Sets

Beyond the novelty of tokenizing a single loan and enabling investors to fractionally invest in it and trade such interests (i.e., bond tokens), an even more powerful way to harness the technology is to create bond token portfolios and form on-chain indices (and thus, bond index tokens).

MSME Index Token representing a portfolio of MSME loans (Credit: Umoja)

Institutions can utilize DeFi lending platforms such as Umoja and Token Sets to fund multiple MSME loans and create the world’s inaugural MSME index bonds.

Token Sets is a decentralized platform for crypto portfolio management that allows users to create and trade baskets of tokenized assets. Simply put, it allows you to take a group of tokens, put it in an on-chain portfolio, and produce a portfolio to freely trade within the secondary market.

With the ability to create portfolio tokens that represent multiple loans, institutions such as development banks can more efficiently participate in financing thousands of MSMEs at a time with perfect (and automated) loan reporting. The individual loans would originated and be financed on DeFi lending protocols such as Umoja, and then the resulting bond tokens of each loan from a single sector category (e.g., Agri-MSMEs) could be put into a portfolio (otherwise known as a ‘set’) on the Token Sets protocol to produce an Agri-MSME portfolio token. This portfolio token, which represents a ownership share of the underlying portfolio of tokenized loans, would be equivalent to a tokenized bond index (i.e., in this case, and Agri MSME bond index).

Why is this revolutionary? The resulting emerging market bond tokens would

  • have higher transparency & yield than market-leading financial instruments such as J.P. Morgan’s EMBI, providing collateral down and corporate financials for each loan;
  • enable MSMEs to access global, institutional financing, and;
  • create the world’s first internationally liquid MSME bond financing market.

By tokenizing MSME loans and creating bond indices, institutions can attract institutional investors and unlock capital for SME financing. This innovative approach can provide diversification, liquidity, and transparency to investors, while simultaneously addressing the financing needs of African MSMEs.

Forecasted Potential of MSME-Focused DeFi Lending

The projected potential of MSME-focused DeFi lending is immense. By leveraging blockchain technology, DeFi lending platforms can overcome the challenges faced by African MSMEs in accessing financing. These platforms can provide SMEs with faster, more affordable, and more accessible credit, enabling them to grow, create jobs, and contribute to economic development. Furthermore, the creation of MSME index bonds through Token Sets can unlock institutional investment in this critical sector, providing much-needed capital for SMEs in Africa.

Decentralized finance (DeFi) lending has the transformative potential to revolutionize the financing landscape for African micro, small, and medium-sized enterprises (MSMEs). By leveraging blockchain technology, DeFi lending platforms can expand credit access for MSMEs, overcome the challenges they face in accessing financing, and unlock institutional investment in this critical sector. The creation of the world’s inaugural MSME index bonds through Token Sets can attract institutional investors and provide much-needed capital for African MSMEs. With the potential to address the massive financing gap and drive economic growth, MSME-focused DeFi lending holds great promise for the future of African SMEs.

Read more here:

  1. Small and Medium Enterprises (SMEs) Finance
  2. Supporting Small and Medium Enterprises in Sub-Saharan Africa through Blended Finance
  3. Unlocking The Potential Of Africa’s SME’s Using Emerging Technologies In Africa
  4. How Does DeFi Lending Work?
  6. TokenSets (Set Protocol)

About the Author

Robby Greenfield has over a decade of experience in blockchain and financial engineering. He has served as an industry leader in deploying decentralized applications in emerging markets, such as Sub-Saharan Africa, the Asia Pacific, and LATAM. Robby has worked with renowned blockchain firm ConsenSys, co-deploying innovative solutions and collaborating with organizations like the U.S. State Department, the World Bank, the UNOPS, Oxfam International, and Care International. Currently, he is the CEO of Umoja Labs, a Coinbase and Mercy Corps-backed Web3 fintech providing payments and credit infrastructure across Sub-Saharan Africa.



Robert Greenfield IV

CEO of Umoja Labs, Former Head of ConsenSys Social Impact, @Goldman Alum, @Cisco Alum, @TFA Alum, Activist, Intense Autodidact