Smart Contracts: The (not-so) Secret Weapon in Africa’s Financial Evolution

Smart contracts may sound like tech jargon, but beneath the name lies a game-changing solution that’s reshaping finance as we know it. The purpose of this piece is to, or at least attempt to anyway, succinctly describe smart contracts and what role they may play in driving financial value both in the private and public sectors. Part digital notary, part middleman eliminator, these little marvels of code bring automation, transparency, and reliability to agreements, making them a prime candidate for financial transformation in Africa. For a continent where traditional finance often feels more like a long queue than a quick transaction, smart contracts offer a refreshing, tech-fuelled alternative. Having explored their impact, it’s clear that smart contracts could become a cornerstone in Africa’s financial evolution.

At their heart, smart contracts are self-executing agreements written in code and stored on a blockchain. When the terms of a contract are met, the code activates, executing the agreement without human intervention. That means no middlemen, no missed payments, and a lot fewer excuses. Think of it as a digital contract that signs itself, securely and instantly, once all boxes are ticked.

While that sounds straightforward, the business value is significant. For sectors like finance, where intermediaries and manual processes often bog down transactions, smart contracts can cut through the red tape. They promise fast, cost-effective transactions and bring trust into the mix by ensuring contracts execute exactly as written. It’s a little like having a contract that doubles as a referee, cutting down the back-and-forth and getting straight to the result. While this piece covers smart contracts at a high-level, it does not go into the expansive nuances of the technology, so I would advise the piece be read with that in mind. 

Smart Contracts in Liquidity Management

One of the most compelling applications of smart contracts for financial institutions lies in liquidity management, a critical yet cumbersome aspect of modern banking. Currently, managing liquidity involves a web of interbank agreements, manual reconciliations, and outdated processes that can leave institutions scrambling to meet short-term obligations. Delays, errors, and inefficiencies in these systems often result in missed opportunities or costly interventions.

Here’s where smart contracts change the game. Picture a financial institution using a smart contract to automate and optimise its liquidity management. A pre-programmed smart contract could monitor real-time balances across multiple accounts and automatically move funds to cover shortfalls or capitalise on surplus opportunities. For instance, if a bank needs to ensure a specific reserve level at the end of the day, a smart contract could trigger the necessary transfers between accounts or even initiate a short-term loan from a partner institution, all without manual intervention.

Contrast this with the legacy system: liquidity managers have to rely on a mix of manual oversight, email exchanges, and fragmented software systems to monitor accounts and manage positions. It’s slow, prone to errors, and unable to adapt quickly to changing conditions. With smart contracts, these processes become seamless, real-time, and error-free, giving institutions a significant edge in staying agile and competitive.

This isn’t just theoretical; projects like JPMorgan’s Onyx platform are already leveraging blockchain-powered solutions to manage intraday liquidity and streamline interbank payments. Imagine similar systems deployed in Africa’s financial markets, where institutions often operate with thinner margins and higher risk profiles. Automating liquidity management with smart contracts could be a transformative leap forward, allowing banks to better serve their customers and improve operational efficiency.

Smart Contracts and their growing impact on African finance

Africa’s financial landscape faces some unique challenges: high remittance costs, limited access to formal banking, and cross-border trade barriers. Smart contracts, with their ability to automate and streamline, offer practical solutions to many of these issues. Consider the millions of Africans who rely on remittances, a critical flow of income that’s often slowed down by fees and delays. With smart contracts, remittances can become faster, cheaper, and more transparent. Funds could move instantly from one crypto wallet to another, eliminating, or in some cases streamlining, the need for traditional intermediaries—and the fees that come with them. It is not just payments where their use cases could find and are finding traction, take the example of loans and credit.  In traditional finance, accessing credit requires lengthy application processes and approvals. With a smart contract-based lending protocol like Aave, borrowers and lenders interact without needing a traditional institution(s) to facilitate it. Interest rates are set automatically based on demand and supply, and the loan terms execute as soon as the criteria are met. Imagine the potential in Africa if small businesses could access such decentralised, instant loans in local currencies. With smart contracts, the wait-and-see approach of traditional finance could be replaced with immediate, trusted access to funds.

Globally, companies are already proving that smart contracts aren’t just for crypto die-hards. AXA’s “Fizzy,” was a blockchain-based flight insurance product, which showed how smart contracts can turn complex processes into smooth, user-friendly experiences. With Fizzy, if your flight is delayed, the smart contract verifies the delay in real-time and automatically triggers compensation—no forms, no customer service calls, no problem. Imagine a similar setup for Africa’s growing insurance sector. For the average consumer, it’s a huge leap from complicated claims processes to immediate, transparent payouts. For the industry, it’s an example of how smart contracts can enhance customer trust and satisfaction.

But what would this actually look like? 

South Africa’s FlexClub, a platform allowing drivers to rent-to-own vehicles, could potentially leverage smart contracts to handle payments and ownership transfers. In sectors where trust is low and informal agreements are common, smart contracts can provide clarity, security, and a shared understanding. With FlexClub, for instance, drivers could see precisely when they’ll own the car outright, while owners can be assured of secure, scheduled payments. This isn’t just fintech—it’s a whole new way of doing business, removing ambiguities that can otherwise undermine confidence in transactions.

Building TRUST in a world that needs It

Financial fraud is unfortunately a reality that affects businesses and individuals alike across the continent. The transparency and immutability of smart contracts make them formidable tools in the fight against fraud. When agreements are coded into smart contracts and stored on a blockchain, the result is a tamper-proof, fully transparent system. This innovation has the potential to transform public funding, particularly in regions where corruption has long undermined accountability. Having spent significant time at Oxford researching blockchain’s integration into tendering processes in South Africa, I’ve seen first-hand how much impact this technology could have on governance, especially in combating corruption in public procurement.

Let’s bring it closer to home to understand what this impact could look like. In South Africa, corruption in public procurement is a systemic issue that costs the government billions every year. Tendering processes, which should facilitate the allocation of funds for essential services like infrastructure, healthcare, and education, are frequently manipulated. Contracts are awarded to companies with political connections, bids are inflated, or services are never delivered despite payments being made.

For example, the Zondo Commission unearthed alarming cases of tender fraud, including ghost projects, overpayment for substandard work, and kickbacks disguised as consulting fees.  This has resulted in poorly maintained infrastructure, shortages of critical supplies, and a lack of public trust in government institutions. Smart contracts could offer a way to redesign tendering systems for greater transparency and accountability. Here’s how (this is at a high-level):

Smart contracts are stored on a blockchain, which is a decentralised, tamper-proof ledger. Once the terms of the contract are coded and agreed upon, they cannot be altered. This ensures that the original terms of a tender—including costs, deadlines, and deliverables—are preserved and publicly accessible. In practice, this means no last-minute changes to bid specifications, no falsified amendments, and no arbitrary allocation of funds. For South Africa, where tender documents are often mysteriously misplaced or altered to benefit select bidders, this immutability is a game-changer. The smart contracts would then execute automatically when predefined conditions are met. For example, payments for a construction project could be released only when specific milestones—such as the completion of a foundation or the delivery of materials—are verified.

Verification could come from IoT devices tracking construction progress, third-party audits, or geotagged photos stored on the blockchain. This eliminates the possibility of payments being made for incomplete or non-existent work. Every transaction executed by a smart contract is recorded on the blockchain and can be viewed by stakeholders in real time. This transparency ensures that funds allocated for public projects are spent as intended and that the entire tendering process is auditable.

In South Africa, where public tenders often vanish into a black hole of bureaucracy, this level of visibility would allow citizens, watchdog groups, and the media to monitor spending and hold officials accountable. A blockchain-based system can anonymise bid submissions, ensuring that evaluations are based solely on merit rather than personal connections. Smart contracts could automatically score bids against predefined criteria, reducing the risk of nepotism or favouritism.

This is more than just "cool tech"
In conclusion, smart contracts represent more than just a cool tech tool—they’re a pathway to financial inclusion, efficiency, and trust. By automating payments, enabling cross-border trade, and reducing fraud, smart contracts could become fundamental in building a robust, transparent, and inclusive financial ecosystem. In an environment ripe for leapfrogging old(er) systems, smart contracts offer a way to sidestep traditional bottlenecks and build something that’s truly future-ready. From remittances and micro-loans to complex cross-border deals and liquidity management, these digital contracts have the potential to power Africa’s next wave of financial innovation—one line of code at a time.