The current commodity trading landscape excludes those who are unbanked and offline. Many of these people are in Africa (and other developing countries) and have valuable commodities and assets to sell: sugar, wheat, cotton, maize, coffee; arable land, livestock and machinery.
These citizens need to be brought into the formal economy, says Julius Akinyemi, a Donald Gordon Innovation Fellow at the University of Cape Town’s Graduate School of Business (GSB) and Entrepreneur-in-Residence at the Massachusetts Institute of Technology.
“This would enable ordinary citizens of developing economies to move from day-to-day subsistence or survival mode to personal wealth creation and growth,” says Akinyemi.
It’s time to rethink commodity exchange to build the self-reliance of individuals and unleash the wealth of nations, said Akinyemi, speaking at the GSB’s thought-leading Social Innovation Speaker Series.
In the same way that the first organised exchange was created out of necessity in Chicago in 1848, due to the inability of sellers to access buyers, a virtual exchange is essential to bring buyers and disenfranchised sellers together, and into the global marketplace today.
On average, 70% of business transactions in emerging economies are done in cash; in some African countries, up to 90% of transactions are unrecorded. When there is no record of the transaction, there is often no recognition of the value of the assets. A seller often needs cash more than they need their produce, and haggling is part of the deal. It’s not part of culture to know the value of assets, adds Akinyemi, himself a native of Nigeria, and this is why commodities are often undervalued in developing countries, particularly in Africa.
“By registering people, and recording their assets and life events on a global digital database, and through economic modelling, we will work to mobilise the currently dormant trillions of dollars in local assets in developing nations in order to generate local capital that fuels the economy via commodities trading,” says Akinyemi.
“By bringing developing economies into the digital marketplace, we would give identity to the nameless and faceless individuals who are currently excluded from commodity trading.”
“Citizens’ assets would become currency nodes in the global financial nervous system that would enable them to participate in the world’s market economy and free trade. Investors would still look for the best return on their investment at an acceptable risk.”
Given that most of developing countries’ assets are underpriced, these countries stand to gain from competing investments as has already been seen with China’s investments in Africa. This capability will rebalance the investment allocation and uplift some of the balance of payment to narrow the disparity of wealth.
Akinyemi has developed a system for matchmaking buyers and sellers in a virtual marketplace, through an information exchange platform, beginning with the registration of citizens. The eRegistry is a database of citizens’ assets – machinery, livestock, farmland; and the type of produce: cocoa, coffee, rubber, apples and so on. The registry also contains data mining capabilities and localized economic models that deliver "communal wealth" to all corners of the world without the enormous traditional capital outlay. The second layer of the plan is the ‘open information exchange platform’- in effect, an information brokerage that creates a virtual market place where supply and demand can be matched automatically.
The eRegistry has endless possibilities, and could match up not only buyers and sellers, but also SMMEs with approved microlenders; entrepreneurs with venture capitalists; and virtual doctors with patients.
But for the system to work – several other factors need to be in play: A virtual marketplace requires virtual money for a start, and one of the implications of this is that a common digital currency would need to be introduced. “Banks do not like it, but we are already seeing the European Central Bank issuing guidelines around digital currency, so there is acceptance that it will be part of the future of money,” says Akinyemi.
Another requirement of a mobile commodity exchange platform is a system of automatic compliance controls that would include self-reporting capabilities in line with local regulatory requirements. The platform could provide access for trading with price quotes by commodity type on a real time basis and via SMS; digital futures contracts; and partnerships with local banks for financial settlement of trades. This process alone would improve financial inclusiveness.
Both the eRegistry and open information exchange platform could be built to scale from the communal market to national or global levels. “They are architected for agility to respond quickly to local nuances,” says Akinyemi. Above all, everyone benefits from the creation of a positive wealth-advancing eco-system: Local farmers or producers would benefit from achieving a true market price; suppliers would enjoy a wider commodities offering; improved transportation needs would mean opportunities for logistics service providers; and governments would benefit from every recorded transaction as a tax base.
One of the keys to success of the digital marketplace is, of course, the most ubiquitous item of our day and age – the handheld device or smart phone. Widely accessible mobile technology is a major cog in the transformation of the commodities trading landscape: Digital technology can make financial transaction trade inclusive.
Said Jeffrey Sachs, senior UN advisor and the director of the Earth Institute: “Mobile phones and wireless internet end isolation, and will therefore prove to be the most transformative technology of economic development of our time.”
Converting the unbanked is another process that must happen in order to create a digital marketplace – another step in mobilising dormant assets. “Every citizen could be a customer of a bank; anyone who can monetize their assets should be of interest to a bank,” Akinyemi says.
“Particularly relevant in South Africa,” says Dr François Bonnici, founding director of the GSB’s Bertha Centre for Social Innovation and Entrepreneurship, “is that by revolutionising the credit risk system and adding value to previously unaccounted assets, we can significantly reduce the cost of borrowing, unsecuritised lending and exploitative microlending rates. This would bring equality and inclusion to financial services, reducing the ‘poverty penalty’ of paying more for everything (cellphone airtime, milk and, of course, financial loans/ credit).”
The rewards for getting it right are significant.
“If we can extend organised virtual commodity exchanges to the rural areas of the world, we can create and grow local wealth and improve global prosperity. We will enhance the freedom of trade in most of the economies and bring free market pricing to producers that have been taken advantage of by warlords that could be described in the words of R. K. Slosson in 1878 against the Chicago market manipulators as ‘members of a filching machine’,” says Akinyemi.
The implications of wealth creation for the previously excluded hold untold riches both figuratively and literally. Perhaps the most fundamental of which is the alleviation of poverty and the transformation of markets from developing to developed. With a digital commodity exchange, this could all be possible.
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