Tajikistan is a developing country which heavily relies on remittances. Until 2014, the share of remittances made up around 43 percent of the national GDP roughly US$ 4 billion a year, which has sharply declined to 20-25 percent in the subsequent years due to the global recession and the depreciation of the Russian and Tajik currencies against US dollar. Despite significant decline in remittances, labor migration continues to be attractive to almost 1 million Tajiks annually, in view of the lack of employment opportunities domestically. Every labor migrant uses a money transfer system to remit their earnings home.
Several UNDP led rural development projects have revealed that money from labor migration is fully consumed for covering immediate basic needs (clothes, food, energy, etc.), household maintenance, celebrations (weddings, funerals) and needs alike. Only an insignificant number invest in potential technologies that could save money and create conditions for better livelihoods like for instance in energy efficient retrofitting of a house or renewable energy systems which lead to significant savings if applied.
With this consideration, UNDP proposed a project to use the remittances from labor migrants in Russia to pay for energy efficiency (EE) and renewable energy (RE) systems. The proposed scheme considers paying certain amount of the remittances towards EE/RE systems, which in the end should lead to significant savings of the family budgets. A study carried out by the Basel Agency for Sustainable Energy (BASE) in 2013, suggested that most of the interviewed labor migrants were willing to use part of their remittances for purchasing solar energy systems. In the course of the project development phase it was identified that a robust mechanism for channeling the remittances towards purchasing solar equipment was lacking and the need to its development was yet another challenge to be overcome for the project to be successful.
That’s why UNDP Tajikistan and Bitspark proposed to study the potential for blockchain remittances as a solution to improve financial inclusion in the country. Lots of insights and conclusions to be shared!
UNDP + Bitspark
The purpose of our trip, as outlined in our prior blog was to see if Bitspark’s Blockchain based payment systems can improve financial inclusion and access in Tajikistan particularly in the areas of migrant workers receiving remittance payments from abroad. Upon speaking with stakeholders, remittance service providers and users, it was found that Tajikistan still remains a relatively underbanked country with an estimated 85-90% of the population without formal banking accounts and relying on non-bank services for domestic and international payments demonstrating a large potential for innovative new services to assist in improving financial access and inclusion nationwide.
In this view, UNDP considers that unlike the traditional money transfer systems which are geographically centralised in the country yet widely known to the labor migrants and their families, incorporation of blockchain technology in the UNDP projects that work with labor migrants could address the challenges and open up a new prospect for using the remittances to apply EE and RE, and more widely for other economic activities which require domestic money transfers like sending money to a remote village where banking is not developed.
Since the blockchain technology is considerably a new concept for Tajikistan, there is an understood skepticism from the bankers and national regulator over its utilization in parallel with the banking system. To overcome the skepticism and demonstrate the advantage of the blockchain technology in money transfer and banking operations, a pilot project needs to be implemented.
Some of our Key findings are below:
- There is a massive distrust of the banking system since the country’s financial crisis in 2014, many utilise informal methods of cash transfer otherwise known as the hawala system. The hawala system has been used for thousands of years around the world and revolves around the netting of payments between trusted intermediaries in cash. Often meaning there are trust, security, delivery time and other considerations not to mention for regulators, no oversight. We heard one anecdote that frequently people get a bundle of cash and call up a taxi driver to deliver it to their friend in the next town!
- Money Transfer Shops are having difficulty as systems provided by larger incumbents fail to provide a competitive edge in regards to technology, operations and profit margins. Often many things are not automated, there are situations where one agent will make a transfer which will have no approvals or oversight from their HQ and needs to later be traced and also they often need to integrate with (untrusted) local banks which still run MS-DOS. This results in reduced efficiencies, higher costs and lack of capital for innovation.
- Money Transfer shops told us of the abundant red tape issued by local governments and the central bank has depressed the market with fewer players able to shoulder the costs which otherwise would have greater competition in new areas.
It’s important to note that Tajikistan’s inbound remittance has reduced the last couple of years as the devaluation of the Russian Rouble, decrease of emigration due to high costs, and lack of opportunities resulting in the return of overseas foreign workers has had an negative impact. However, what this suggests is that there may a greater role to play for domestic payments. This is interesting to note as the domestic payments market lacks the adequate infrastructure that supports Tajikistan's international remittances and is in great need especially as these payments are ‘hand - to - mouth’ meaning they are the primary/only source of income for dependent. Creating a domestic infrastructure which is built on ease of use, transparency and trust(or trustlessness) is a big consideration and something that fits with the features of Blockchain based systems.
UNDP Tajikistan and Bitspark propose a pilot of Blockchain based remittances for migrant workers and their families in remote areas sending and receiving payments via their smartphones to be used in the context of UNDP development projects and financial inclusion for unbanked customers. People are familiar to sending and receiving cash and this proposal seeks to streamline that process with the mechanism being, instead of calling a taxi and handing over a bag of cash, the use of Bitspark’s digital payments app Sendy for instant, verifiable, trustless payments cash in cash out.
The various stakeholders consulted during the mission will play a key role in the development of the network and the end result will ultimately lead to cheaper, faster and more secure payment systems for the benefit of the local people, businesses and the government with more efficient delivery of payments creating greater opportunities for economic development and opportunities.
While internet penetration is low (~20%) but mobile penetration high (~100%) in Tajikistan, especially among the young adults who work and send remittances, there is not yet a pervasive mobile money provider of choice in the country. It will be interesting to see how this evolves as the rise of cheap $20 android smartphones will perhaps lead more people towards eventual smartphone based payments compared with the SMS based feature phone payment systems already present elsewhere in the world.
It was only a few years ago when globally smartphone sales eclipsed that of feature phones and the trend is clearly headed in the direction of smarter, more internet enabled devices. This is good for payments as it enables richer feature sets and better service for customers- QR codes, camera authentication, zero-doc KYC and branchless banking are just some of the reasons smartphones are taking off in the payments space and something Bitspark seeks to utilise in the context of Tajikistan.
UNDP together with Bitspark and various stakeholders in Tajikistan will be working together to pilot a development project for financial inclusion which we hope will address many of the fundings on our recent mission. The application of new financial technologies like Blockchain can assist in increasing the number of people with access to the financial system at less cost and at a scale necessary to make an impact and ultimately improving economic opportunities for people in Tajikistan and around the world.
This is an adaptation of the blog Bitspark contributed to at the Altfinlab here