Centralized finance refers to banking institutions in this context. Over the years, centralization in finance was considered ideal as a way to maintain stability in financial processes across the globe. This is because it is more stable and secured for users to manage their personal and business finances through bank institutions.
Centralized finance system was also highly valued because it facilitates cross-border transactions as bank institutions have infrastructures that are legally recognized in all countries of the world. In reality, centralized finance is only as stable as we think it to be. The system regularly grapples with forgery, fraud, and even questionable lending processes aimed at exploiting users.
Although some may argue that the issues with centralized finance became more glaring with the introduction of decentralized finance (Defi), the reality is that, there has been growing disenchantment with traditional finance systems over the years. Decentralized finance has created an alternative for disgruntled users of centralized finance.
Problems Of Centralized Finance
The challenges faced by centralized finance systems in Africa can be summarized in the following statements, most centralized finance institutions in Africa lack the technical expertise to handle cybersecurity risk. They are also encumbered with outdated KYC processes that limit financial inclusion, inadequate talent management, development, and retention. Another thing centralized finance is known for is slow integration with technology and as a result, it still uses outdated processes and management systems that have poor user experiences.
Additionally, there is a lack of appropriate risk assessment and framework to use against advanced digital frauds while providing digital solutions to users. While the rise of cybersecurity attacks and other cyber frauds are considered by banking institutions as the most significant challenge, operational efficiency on all staff levels of these financial institutions also poses a problem to the centralized finance of today.
Furthermore, there seem to be a shortage of IT and digitization skills in these institutions coupled with the fact that most of the senior management staff of these institutions are not up to date with modern technology. Thus, they do not see the need for the application of better technology in their operations.
Recently, the pandemic gripping the world has brought to light several inefficiencies of bank institutions and these have affected the overall reputation of the centralized finance systems. Still, banks in Africa seem to have survived the pandemic due to the protection they got from the government and central banks.
However, the euphoria of stability may not be that long-lasting for centralized finance systems. The decentralization of finance, in particular, has posed an enormous threat that can't be ignored by centralized finance systems in Africa.
Like the rest of the world, Africans are increasingly demanding control over their data, and money. Decentralized finance offers that control to African users. Through decentralized finance systems, the unbanked can be banked with lesser requirements and anyone can access banking services from these finance systems.
In contrast with centralized finance, decentralized finance provides a financial system that is distributed and built on open-source networks of Bitcoin and Ethereum. It offers many improvements to financial systems found across the world. Since it has no central point of control or intermediaries, these systems are unlikely to be affected by fraud, manipulation, or governmental policies. It also provides a wide reach for peer-to-peer transactions worldwide to take place transparently and reliably.
There are limitations to decentralized finance however. Centralized financial institutions are capable of processing large numbers of transactions per seconds while decentralized systems have been unable to replicate that success. To keep up with that type of demand, Defi developers have started creating solutions such as the Lightning Network which adds a second “layer” onto the Bitcoin to improve the scalability of decentralized finance systems.
While Defi developers are still searching for the perfect solution to decentralized finance scalability, centralized finance all over the world and in Africa remains stable and may not become irrelevant as fast as we expect.
However, the question is this "will centralized finance survive in Africa when Defi developers find a solution to DeFi's scalability?'' Or will it merge with decentralized finance systems to offer the best financial solutions to customers?
What is clear however is that a fnancial revolution is inevitable and the centralized finance institutions in Africa will do well to prepare now for such a time. Till then, decentralized finance remains centralized finance's biggest threat in Africa.
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