World Bank Releases Research On The Impact Of Smart Contracts For Financial Inclusion

The World Bank released its report on smart contracts and the impact it’ll have on the development of financial systems across the globe. A brief report on the working paper, titled ‘Smart Contract Technology and Financial Inclusion,’ states the research focused on digital financial inclusion in leveraging communities that suffer from access to formal financial services.

Smart contracts is a self-executing agreement coded on blockchain technology. Over the years, smart contracts have been lauded for their potential to reduce the cumbersome contract processes involved across the financial industry by allowing trustless transactions and reducing the costs involved.

According to the research, smart contracts can be utilized by micro, small, and medium businesses to drive the inclusion of consumers in particular financial services such as index-linked insurance and supply chain finance.

However, the authors write that the smart contract technology impact may be bound to some challenges in other areas of finance, such as short term unsecured credit.

Read More: World Bank: The Potential of Blockchain In Bid For Financial Inclusion

Limited Scope for Smart Contracts

As mentioned above, the research found out that smart contracts’ impact on digital financial inclusion may have a more significant effect on some areas than others. One of the regions bound to benefit from smart contract integration is index-linked insurance, such as weather linked insurance.

Smart contracts enhance the overall trust, transparency, and product suitability on the insurance, but there remain some issues unfixable by integrating smart contracts, the authors conclude.

Alternatively, the issue of integrating smart contracts on the unsecured loans market may turn out to be less impactful than the retail insurance market. Smart contract integration could help “yield efficiency gains across various phases of a loan lifecycle,” the paper writes, but the application and approval of unsecured credit are “already highly automated.”

A Closer Focus on Blockchains

Governments and financial authorities across several states are closely monitoring the impact of smart contracts in a digital financial system despite the slow adoption of the technology. To this end, the research recommends regulators take a closer look at the impact of smart contracts in accommodating financial consumer protection, KYC/AML compliance, and legal foundation requirements.

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Author: Lujan Odera

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