Blockchain Technology in the Informal Sector in Sierra Leone
Summary
Blockchain technology has the potential to significantly improve Sierra Leone’s informal sector by enhancing financial inclusion, transparency, and efficiency. It can provide access to banking services through mobile wallets and cryptocurrencies, reduce fraud with transparent record-keeping, and facilitate cross-border payments. Blockchain’s decentralized platforms can also enable smart contracts, alternative credit scoring, and secure land ownership registration. Initiatives like Kiva’s digital ID platform are paving the way for broader access to credit. However, challenges such as digital literacy, infrastructure, and regulatory frameworks must be addressed to ensure successful adoption and integration, ultimately boosting economic growth and social inclusion.
Introduction
Informality is an issue that affects workers, enterprises, and society at large. Microenterprises, especially those owned by women, and vulnerable groups in the informal sector face additional challenges. National organizations, including social partners, have a responsibility to put in place a legal, policy, institutional and support framework that facilitates transitions to growth. In particular sectors and for given occupations, informal enterprises and workers are impacted by the way in which laws are interpreted and enforced. This may lead to further barriers that prevent access to relevant information, services, and support.
Blockchain technology has the potential to significantly impact the informal sector in Sierra Leone, offering a range of benefits in areas such as financial inclusion, transparency, and efficiency. The informal sector in Sierra Leone, like in many developing countries, is vast and plays a crucial role in the economy, yet it is often underserved by traditional financial systems and subject to inefficiencies and corruption.
Micro, small and medium-sized enterprises (MSMEs) play an important role in stimulating economic activity in Sierra Leone, creating jobs, alleviating poverty, and uplifting living standards. They contribute to the socio-economic development of the country by enhancing entrepreneurship amongst people and are therefore often considered a nursery for spurring creativity amongst young people. The UNDP — ILO project Baseline study report states that informal enterprises are the main sources of employment activities, accounting for about 90 % of the labour force and about 42 % of overall economic activities in Sierra Leone and estimates that 40 % of GDP is generated by informal enterprises.
Informal enterprises play a crucial role in people’s efforts to meet basic needs and improve living conditions for disadvantaged groups, people with disabilities, and poor rural families. Yet they face multiple constraints to grow and formalize their business operations which is a barrier for the transformation of the economy.
Many individuals in the informal sector in Sierra Leone lack access to traditional banking services. Blockchain-based cryptocurrencies (like Bitcoin or stablecoins) and mobile wallets can provide an alternative means of conducting transactions, particularly for those in rural or underserved areas. Decentralized Finance (DeFi): DeFi platforms could enable individuals to access loans, insurance, and savings products without relying on traditional banks, which may not be available in remote areas.
Many businesses in the informal sector engage in trade without transparent record-keeping, making it easier for fraud and corruption to occur. Blockchain’s immutable ledger could track transactions and goods, ensuring a higher level of trust between parties, whether it’s between buyers and sellers or between suppliers and vendors. Blockchain’s transparent nature can help reduce the opportunities for corruption by providing an auditable and tamper-resistant record of transactions. For example, public sector services, aid distribution, and governmental transactions could be tracked more transparently. Foremost, under the leadership of the Ministry for Trade and Industry, it attempts to provide an overview of context in which informal enterprises operate, including some relevant policy initiatives and stakeholder-led interventions, and identifies key challenges related to enterprise development .
In Sierra Leone, remittances from the diaspora are a major source of income. Blockchain can help reduce the high transaction fees associated with sending money through traditional channels, making remittances more efficient and cost-effective.
Blockchain can facilitate microtransactions, which are common in the informal economy, by reducing the transaction costs typically associated with small payments. This could benefit vendors, traders, and artisans who deal with low-value transactions.
In many parts of Sierra Leone, land ownership is often not formally documented, leading to disputes and insecurity. Blockchain could offer a decentralized, transparent platform for land and property registration, providing clear and immutable records of ownership and transactions. This could increase the security of property rights for informal sector workers and entrepreneurs.
Smart contracts, which are self-executing contracts with the terms directly written into code, can streamline agreements between informal sector participants. For instance, they could be used to automatically trigger payments when certain conditions are met, reducing the need for intermediaries or the risk of disputes.
Many people in the informal sector do not have access to formal credit scoring systems. Blockchain could enable the development of decentralized credit scoring models based on alternative data (e.g., transaction history, social interactions) to assess an individual’s creditworthiness, making it easier for informal workers to access loans and credit.
Blockchain Role in Formalizing the Informal Sector
To Start with, by motivating the informal enterprises to register with the government, comply with regulatory requirements, and obtain local business licenses by streamlining and simplifying the registration process using blockchain-based digital IDs and verification. By Connecting informal businesses with formal supply chains through online platforms and blockchain-backed market linkage programs. These tools will help them build partnerships with buyers, suppliers, and distributors, ultimately expanding customer bases and growth potential. Enabling more businesses to register formally, this initiative will increase tax compliance and generate revenue for the government. Blockchain’s transparent record-keeping will help monitor compliance and support policies that protect small businesses. Providing workers with access to blockchain-backed micro-insurance and affordable cross-border transactions. This access ensures that workers and small entrepreneurs have a financial safety net, helping to safeguard their livelihoods.
How Blockchain Enables This Vision
Digital Identity and Real-Time Verification (Kiva Protocol)
Through Kiva Protocol’s digital ID and Know-Your-Customer (KYC) technology, informal workers and small businesses can quickly establish digital identities and gain access to essential financial services. digital ID system will enable individuals to control their information, create a verifiable credit history, and unlock real-time credit checks. The government’s integration of this system allows seamless registration, improving access to capital and reducing costs significantly for informal sector participants.
Smart Contracts for Informal Agreements
Blockchain’s smart contracts will allow informal sector workers, such as gig economy participants, to enter into self-enforcing agreements. Payment terms and service conditions are automatically fulfilled, giving these workers protection and reliability. By providing enforceable digital contracts, informal workers and small businesses can operate with more security, increasing trust between clients and reducing risks associated with informal work.
Transparent and Immutable Record-Keeping
Blockchain’s secure ledger system will help informal enterprises keep accurate, immutable records of all transactions and interactions. These records offer accountability, foster trust, and enable informal businesses to build a credit history, facilitating loans, investment opportunities, and partnerships with formal businesses.
Secure Cross-Border Payments and Remittances
Blockchain-enabled platforms will allow informal sector workers who rely on remittances to receive secure, low-cost cross-border payments.This will increase the disposable income of recipients, as fees are reduced, and funds are made readily available for reinvestment in local enterprises and communities.
Kiva Protocol in Sierra Leone
San Fransisco-based Kiva, a financial services charity, has launched a blockchain platform to create online identities for Sierra Leone residents. The Kiva Protocol will allow those who struggle to get loans to prove their credit history. The 14-year old organization has provided more than $1.3 billion in microloans. A report published by Reuters said Kiva and Sierra Leone President Julius Maada Bio officially launched the system in the capital Freetown on Wednesday. It was developed in conjunction with the United Nations.
According to Sierra Leone’s central bank, over three-quarters of the African country’s population lies outside the formal banking sector. Informal institutions like community banks and microfinance lenders are more common. But they rarely share credit information and often charge extortionate interest rates. Sierra Leoneans will be easily able to access credit services in the country as the Kiva Protocol provides lenders access to citizen’s credit histories. The platform will use the fingerprints and other biometric data of the citizens that were collected by the Sierra Leone government to issue voter ID cards. Kiva Protocol has demonstrated the feasibility of a blockchain-based digital ID, enabling rapid KYC checks.
With Rippleworks’ $5 million funding, Kiva Protocol is one of the few blockchain initiatives designed to enhance social impact by integrating digital identity, secure record-keeping, and transparent credit history systems into a single solution. This approach will scale to other countries, targeting unbanked populations to increase access to affordable capital, allowing Sierra Leone to serve as a model for similar economies worldwide.
Challenges and Considerations
· A significant portion of the population may lack the necessary digital skills or access to smartphones and the internet to fully utilize blockchain-based solutions. This should be countered by effective awareness-raising activities in the capital city and province regions.
· The government needs to develop regulations that facilitate blockchain adoption while protecting consumers and ensuring that illicit activities do not take advantage of the technology. This includes to strengthen the existing offer of business development services and financial services to address barriers faced by micro and small entrepreneurs. Improved services and approaches should also be provided to help entrepreneur’s access new market opportunities, which can be a strong incentive to foster growth. These and other activities will involve the responsible actors from the Government, social partners, service providers and representative organizations of micro and small enterprises.
· Infrastructure and Internet Connectivity: Reliable internet and electricity are prerequisites for blockchain systems, and Sierra Leone still faces infrastructure challenges in many regions.
Conclusion
Blockchain technology has the potential to bring significant improvements to Sierra Leone’s informal sector by increasing financial inclusion, enhancing transparency, reducing transaction costs, and facilitating secure agreements. However, for blockchain to reach its full potential, it will require targeted efforts to improve digital literacy, infrastructure, and the regulatory environment in Sierra Leone.
Reference
ILO (2018). Women and men in the informal economy: a statistical picture, Third Edition, International Labour Office, Geneva
Statistics Sierra Leone Census of Business Establishments (CBE) 2022 Preliminary Report'