Sarafu: Crypto Currency for Rural Communities

By Carlo de Meijer

13-03-2023 | Carlo de Meijer | treasuryXL | LinkedIn |

Recently I read a very interesting and stimulating article in a Dutch newspaper. It was about the Community Currency named Sarafu that is used in Kenya’s rural communities thereby trying to solve the issue of proper circulation of finances.  

The Sarafu Network, is a so-called Community Inclusion Currency or CIC, yet only a few outside the country know of its numerous benefits. This virtual currency introduced by the Grassroots Economics Foundation is increasingly used by  farmers and small firms while stimulating trade in those communities.

The interesting thing of the Sarafu Network is that it has changed over to blockchain technology since 2019.

That inspired me to write this blog.

Grassroots Economics Foundation

The Grassroots Economics Foundation (GE), set up by the American development economist Will Ruddick, is the Kenya based non-profit foundation behind the Sarafu Network.

Financial inclusion in developing countries like Kenya has become a prominent development policy objective. The Foundation has been conducting research on Community Inclusion Currencies (CICs) in Kenya for over a decade.

GE has been supporting several Kenyan marginalised communities in designing their own local currency systems, such as the Sarafu Network. GE also made targeted investments in these areas aimed at ensuring the circulation of the community currency such as for maize milling, refrigeration, and water storage equipment.

Since 2010, CE has introduced CICs to more than 50 communities in Kenya.

What are the motivations behind these CICs?

There are various reasons why CICs are being introduced especially in the poor rural communities and why they are increasingly viewed as a useful tool for development.

A problem that especially touches rural communities in Africa is its flawed financial eco system. With many people having no bank account, one of the key issues is the need for proper circulation of finances. A challenge with humanitarian and development aid is that direct cash injections do not circulate for long in the targeted community.

While farmers have enough products and services, they lack cash money to buy and sell, making it impossible to exchange goods and services. This causes internal trade to seize up and for the local market to become unstable and stagnate.

To overcome these problems and fostering local trade as well as satisfying basic needs these Community Inclusion Currencies were introduced.

What are Community Inclusion Currencies (CICs)?

Community Inclusion Currencies are a unique application of currencies backed by the community’s productive capacity. They can potentially be seeded by local government or aid agencies but can also function without such support. What sets CICs apart, according to GE, is that they require strong community ties simply to function.

CICs are operating as a medium of exchange that can only be used within a certain community or network. Mutual credit network is another term for CICs because their participants effectively give each other (interest free) credit. For the many Kenyans for whom credit is not easily accessible — or when it is, offered under predatory conditions — CICs are a way for people to access and issue credit while avoiding banks altogether. They allow users to benefit directly from their products. In addition, they are designed with certain incentive structures that encourage holders to spend the currency instead of hoarding it. User transactions capture various economic and financial activities such as purchases, transfers, and participation in savings and lending groups.

Set up of CIC communities

CICs are used by a growing number of communities, all located in informal settlements or slum areas, including small businesses and schools. As of July 2022, GE had helped more than 50 communities in Kenya and South Africa to develop their own CIC programs, the most well-known being Sarafu.

Essentially, for it to work, the trust and the function of the community is critical in these CIC programmes. These are working really well in the rural areas and communities, as these have strong truly basic institutions.

When a new community is onboarded to the CIC network, GE typically identifies a hub such as a business, school, or community-owned social enterprise as a point of entry for integrating CIC into the local economy. The hub may receive support from GE and its donors in return for committing to offer goods and services in exchange for CIC tokens.

So-called “chamas” or informal cooperative societies that are normally used to pool and invest savings by people in Kenya are key to the operation of the CIC system. They play a prominent role as the recipients of direct donations. Chamas were selected by GE and partners based on CIC usage, membership size, and locality. Selected Chamas receive support for developing cooperative income-generating activities linked to CIC acceptance.

From paper-based vouchers to blockchain based tokens

In the earlier years when CICs were introduced, CIC designers turned to issuing cash injections in the form of paper-based vouchers. Thee that functioned as a Community Inclusion Currency in the targeted community. Each voucher was backed by a cash pool of funds donated by the Green World Campaign that was started ten years ago.

Essentially the voucher acts as a promissory note, a promise against future production. So a selected self-governing community of micro-businesses was committing their future production into a voucher and accept to trade with each other using these vouchers.

Given it’s only businesses and individuals signed up to the program that would accept the vouchers as payment, this locked the injected value into that network. The end result is the value circulated for longer in the targeted community, giving the businesses and the local economy a better chance to flourish.

But paper vouchers had their limits. Over the years GE found that Community Inclusion Currencies (CICs) such as Sarafu worked at a scale of 100 to 200 businesses but, given design constraints, had trouble expanding beyond that. CICs constantly racked up printing costs and couldn’t be exchanged for other local currencies.

Since 2018 GE has migrated its community currency network from physical vouchers to digital vouchers, in the form of blockchain-based tokens, thereby removing these barriers. Since users only acquire the token inside the network, it creates a sense of value, ensuring users to conduct business within the blockchain network, thereby creating more profit and growth.

The Sarafu Network

When changed over from paper-based vouchers to blockchain-based tokens the Sarafu Network was set up. The Sarafu success story has inspired a growing number of humanitarian organisations to leverage the use of alternative currencies as a viable alternative to cash transfers. In March 2021, the Kenyan Red Cross announced that it would begin distributing blockchain-based Sarafu tokens to anyone who registered for its new nationwide basic income system. They use Sarafu as part of their basic income programme.

The Network is nowadays the combined collaboration between Kenya Red Cross, Danish Red Cross and the Grassroots Economic Foundation. This partnership led to one of the largest blockchain networks in Kenya that is purposefully trying to grow and improve local communities.

By the end of 2019, the system included a large number of different community currencies. The Sarafu system was consolidated into a single CIC on January 25, 2020. On that day these precursor currencies were folded into a single CIC called simply “Sarafu”, which is the Swahili name for currency.

The Sarafu currency is 100% backed socially by goods and services. Sarafu involved communities all have their own collateral and their own currency pool because they are all connected to the Kenyan shilling in that way, the reserve they can all interchange with each other too. That collateral right now is an on-chain asset.

Sarafu network: how does it work?

Blockchain integration was simple, as only Sarafu digital tokens were used within the system. Blockchain thereby offers additional functionality for CICs that may be incorporated in the future. Users do not need internet access to trade their Sarafu tokens.

Users of precursor currencies received an anonymous wallet address on the blockchain as a unique identifier and were sent a disbursement transaction of Sarafu equivalent in size to their balance held in prior wallets, at a 1:1 conversion rate. As sustained transaction activity is considered key to the sustainability of a community currency, GE incentivized particular kinds of activity with weekly rewards in Sarafu. Uniform weekly rewards ranged from 20 to 50 Sarafu until February 16, 2021 when they were standardized to 30 Sarafu 

New participants: Creating a Sarafu account

Individuals can create an account and join the Sarafu system by dialing a USSD (Unstructured Supplementary Service Data) short code and setting a personal authentication code (PIN). This would establish a new account tied to their phone number, secured behind their PIN.

The identity of Sarafu users is to be kept confidential, to mitigate disclosure risk.  New users could opt into supplying their name, gender, and “home location” via the USSD interface. Users could also choose to describe the goods or services they provide to the community and intend to exchange for payment in Sarafu, the “product category”. Newly created accounts receive an initial disbursement transaction. On
May 1, 2020 initial disbursements were fully automated and reduced to 50 Sarafu.

How users interact with the Safaru community

Users interact with the Sarafu community currency over the USSD  interface, secured behind an authentication code. The USSD interface requires a phone number (i.e. a SIM card) and access to a mobile phone.

The core functions of the interface are checking the account balance, making Sarafu transactions to other accounts, and updating account information. Instead using paper-based tokens, transactions now take place through USSD codes that can be sent between feature phones and the local telecom network—similar to how a mobile money system like M-Pesa functions.

Bloxberg decentralised ledger system

Grassroot Economics initially utilized the public, non-profit decentralised ledger system called Bloxberg –  an Ethereum Virtual Machine (EVM) sidechain –  named Kitabu in Kenyan to issue the Sarafu tokens and validate all transactions within the Safaru network.

This Ethereum-based blockchain network runs on a Proof-of-Authority consensus mechanism. The blockchain network offers free transactions as validators are a consortium of academic institutions. The CICs network can quickly expand and accommodate various users. All they are required to do is to register. This last fact has led to the continued expansion of the application of digital currencies.

Every single person has a blockchain address, they all have a private key. Every single transaction is anonymous but transparent on the public blockchain. As compared to paper vouchers or cash, blockchain transactions are easily trackable. This means the effectiveness of Sarafu can be measured.

Scalability is another advantage. Delivering vouchers to users in digital token form is more efficient than paper vouchers, as there is no travel involved or concerns about the physical security of the vouchers.

In addition, Sarafu transactions are also traceable. This minimizes the various illegal activities that users can conduct with the token. Any dubious or scam activity is easily detectable within this blockchain network.

What is Celo blockchain

Since early this year Sarafu works on the Celo blockchain eco system. Celo blockchain is a global blockchain-based payments infrastructure that makes financial tools as accessible as possible to anyone with a mobile phone.

Celo that has a Proof of Stake (PoS) consensus mechanism focuses very clearly on developing countries, where many people do not have a bank account, but a mobile phone. With Celo it is not needed to send money to complicated crypto addresses.

Why Celo blockchain?

Grassroots Economics has been in search for some time for the ideal blockchain platform that could meet two competing needs: providing the benefits of a public blockchain such as security, decentralisation and liquidity, and delivering low gas fees, given the income profile of the communities that GE works with.

Celo agreed to provide GE with enough stake to run a validator node. This will allow GE to cover user gas fees for Sarafu transactions using rewards that the Celo protocol provides to validators. The support from Celo meant that GE was now independent as it doesn’t need Celo’s help for gas fees, while at the same time the GE ecosystem will be enhanced by the benefits of being part of an established public blockchain.

With the move to Celo, it appears GE has finally found an arrangement that meets both these needs adequately. Other reasons why GE chose Celo include its physical presence in Kenya (Celo already has a number of initiatives ongoing in the country), its EVM compatibility, on-chain liquidity, mobile-first approach and humanitarian focus.

How does Celo work?

This move means that tokens up till now being been build and issued by communities in GE’s ecosystem will now be issued on the Celo blockchain.

When a user downloads the application he creates an account and verify that with an SMS-code that is sent to him. After that his wallet is linked to his telephone number. Once users have registered for a Sarafu program, tokens are deposited to this blockchain wallet which is transferable via USSD, meaning users don’t need internet access. From that moment they have a place where everybody can sent the crypto currency.

Every wallet is a Node on the network, which means that every participant cooperates to secure the network. The participants get for this also a compensation  in the form of Celo.

Celo blockchain can be used everywhere to release vouchers like Sarafu and everybody can do that. The exchange of Sarafu credits allows people to save on their local currencies and use the credits to buy and sell products and services within their community.

Present state

While the adoption of Safaru in urban regions was rather low, that has changed since GE moved to blockchain-based tokens. We are increasingly seeing that the point has been reached where it really benefits local villages and communities.

By condensing the Kenyan Crypto Community to a small scale, the Sarafu Network has proven, when applied correctly, it can effectively improve small communities. Sarafu is now becoming a main payment instrument, that works very well in terms of capturing value in closed communities. The model is now also widely used in Nairobi’s slums.

In 2022, more than 50 communities are currently using Sarafu-credit in Kenya totaling over 80.000 registered households in both urban and rural areas to trade their basic needs with each other.

Sarafu’s success in Kenya has inspired a number of similar initiatives across Africa. In South-Africa, a growing number of community currencies have taken inspiration from the Sarafu-Credit model and were consulted by Grassroots Economics Foundation.

The way forward

Whether or not Sarafu will be able to transition a local used digital currency to a network of self-sustaining micro-economies may depend on the scale it will reach. There are positive developments that may contribute to a larger use of Safaru. First of all the change-over from paper-based to blockchain-based. The blockchain is one way to offer greater transparency. And there are the various initiatives from GE partners to educate and explain Sarafu or CIC in general  to potential participants, not only how to use it but also why they should trust it. This in order to make an informed choice. Another is the link of Sarafu to the national currency. Sarafu is not only backed by the Kenyan shilling, it also uses Sarafu’s familiar M-Pesa system, which is heavily backed by the government.

Founder of GE Will Ruddick has previously shared a vision where networks of CICs are joined together via liquidity pools, allowing CIC holders to hop between communities with their value via decentralised exchanges.

In his latest post, Ruddick confirmed that this plan is still on GE’s roadmap. The prospect of such an approach being tested on a major public blockchain marks GE as a project that could be transferred to more African countries.