Technological innovation has been deployed into various facets of our lives, and the banking sector is not left behind with the adoption of digitalization-driven models for ease of banking transactions. Attempts to explore digitalization in the banking sector are what birthed blockchain technology, mobile banking, etc., to facilitate seamless banking transactions as well as catch up with the technological revolution in the banking sector.
A survey conducted by Statista in 2020 revealed that 32% of Nigerians have admitted to using or owning cryptocurrencies. This figure and the fact that global cryptocurrency users are pegged at 300 million worldwide in 2021 alone shows the level of acceptance blockchain technology's continued adoption would have on the banking sector.
This piece aims at examining blockchain technology, its reception, challenges, and benefits in the banking industry.
- WHAT IS BLOCKCHAIN TECHNOLOGY (BT)
Blockchain is a distributed digital ledger that stores data of any kind. Blockchain technology, on the other hand, refers to a structure that stores transactional records, also known as the block, of the public in several databases, known as the "chain," in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a 'digital ledger'.1
Blockchain technology has been deployed in various aspects of banking. A recent example in Nigeria is the Central Bank of Nigeria's eNaira.
- BLOCKCHAIN ADOPTION IN THE BANKING SECTOR: THE NIGERIAN EXPERIENCE
Blockchain technology was greeted with mixed reactions upon inception. This is due to the fact that it is the same technology backing cryptocurrencies. Thus, many financial institutions were wary of its use at first. However, a vast majority of them found themselves leveraging its innovative approaches and models to digitalize banking toward facilitating a seamless experience for customers. Nevertheless, the contributions of blockchain to the sector cannot be emphasized. For instance, a recent study shows that Nigeria has the highest rate of crypto adoption in Africa, with over USD 3 billion of transactions recorded in June 2021 alone.2
Highlighted below are some of the mouth-watering contributions and impacts its adoption has had in the banking industry:
- Payment Transfer: Before adopting BT, regular
payment transfers required added fees and payments between sending
banks and receiving banks, especially for cross-border
transactions. However, with the adoption of BT, cryptocurrencies
like bitcoin and others were developed on a public blockchain,
making it free for anyone to send and receive money freely with
little or no transaction fees. The fact that BT is launched on a
decentralized network also makes it faster and cheaper to
seamlessly make payment transfers as opposed to what obtains prior
to its adoption. Settlement & Clearance System: In the past,
bank transfers take days to complete due to the complex system of
intermediaries from banks to custodial services. Also, the
settlement and clearance system requires a lot of paperwork which
BT has ousted since it is hosted on a decentralized ledger,
settling transactions on a public blockchain with no custodian
services. Loans & Credit: BT's influence in this aspect is
colossal. Before its adoption, getting loans and credit from banks
is very strenuous as it requires a lot of paperwork and back and
forth since the banks rely on a credit reporting system and had to
consult several other financial institutions to get credit reports.
Nowadays, the adoption of BT has made access to loans and credit
easier for customers as the data stored on the decentralized
network could be easily explored to obtain customer's credit
reports from credit bureaus
- as well as their past credit records to facilitate faster and easier lending services.
- Customer's Know Your Customer (KYC): For KYC, it usually takes banks months to ascertain a customer's photo verification, proof of address, biometric verification, etc. However, the adoption of BT in banking has helped ease the KYC process as customers' information could be stored on the blockchain for easy access by the banks.
- CHALLENGES OF BLOCKCHAIN ADOPTION IN BANKING
Despite the laudable innovations and improvements, adopting BT in the banking sector is not without shortcomings. Highlighted below are some of them:
- Potential for illegal activity: The fact that
BT is run on a public or private network makes it prone to illegal
money laundering and terrorist financing since it is difficult to
keep track of transactions fostered on the blockchain. This informs
the bank's early reluctance and withdrawal towards its
acceptance as regulators like the CBN felt it was an oil well for
illegal financial activities in view of its non-transparent nature.
To curb this, African countries are now leveraging on Central Bank
Digital Currencies (CBDC), with Nigeria being the first with the
launch of the eNaira last year. Technical, Regulatory, and
Institutional Challenges: BT in the banking sector is not properly
regulated. This apparent lack/of inadequate regulation stands in
its revolutionary mission to uplift the banking industry. In
Nigeria, for example, the CBN and SEC's refusal to endorse
cryptocurrencies operation by banks is evidence of the absence of
clarity on technical, regulatory, and institutional frameworks for
- successful operation of the sector.
- Shortage of infrastructure: Despite the level of technological advancement in Africa, the shortage of infrastructure has taken its toll on BT's successful implementation in the region. In Nigeria, for instance, over 60 million of its population do not have access to the banking system. In fact, this is further compounded by the fact that about 79% of financially excluded adults reside in rural areas.
The adoption of BT in the African banking sector has been slow. Nevertheless, the rise in tech inclusion in the sector is worthy of note. In fact, recently, the South African government has urged banks in the country to embrace close cooperation and engagement on BT. While BT adoption and usage tend to be higher on the side of the youth population due to their exposure to technology, it has recorded a relatively low usage amongst the older generations.
It is believed that BT is a milestone with great prospects, and the African banking sector is yet to fully explore its frontiers.
1. https://www.simplilearn.com/tutorials/blockchain-tutorial/blockchain-technology accessed on May 16, 2022.
2. https://thepaypers.com/expert-opinion/the-evolution-of-blockchain-technology-in-africa–1255285 accessed on May 18, 2022
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