Finance changing the world

Finance is representing the value exchanged between two or more subjects. We can compare it to energy in the nature or blood in our body. By its setup finance doesn't bring any value in terms of new road, new bread, new car or new service. It is a mean of exchange.

Finance itself doesn't need to be in terms of cash. Many people exchange cash foe finance and finance for cash. Finance can be also in terms of state bonds, traded equity, gold, diamonds....and anything else that keeps the value and is relatively small to make exchange. Finance is often connected to money, as by electronic transfers it became much easier to realise transactions.

Economy itself needs a mean of transaction. Well known formula describes Price value * Economical output = Monterary base x Velocity of the money.

This equation tries to describe the substance. If we care about the growth of the economy (and we dont focus on equal distribution of the wealth) we have to increase the velocity of the money and monetary base. Of course the price will react and go up, as the increase of the velocity and base will immediately cause the price to raise, but in medium term we will see economy growing, as people will get to mew ways of payment and will get use to it and trust it.

In the above equation we keep everything else constant. We dont focuse on education, quality of production, interest of people to produce more, time.... on the other hand we can see, that for a developing economies could a limited amount of money together with bad velocity decrease the economical output.

Consumer finance and new means of payment are changing that. They provide new amount of money not before accessible to people in poorer countries. They give them chance to grow, but expects payback in return therefore stimulating the investment with return and proper management. They also allow much smaller transactions do quicker without logging to crazy complicated Internet bankings, where u spend 5 or more minutes just to make transaction happen. For all this current banks are not ready. Current banks will take same time to approve loan for 100 or 1000. And they will not care for loan of 1 or 10 as the approval process is rigid and slow with too many conditions. Reason for being so is RWA, risk weighted assets, where they shall not overcome 8% - rule set by BASEL I and onwards. (very simple look). How can than a bank approve a small loan with RWA of 12%? It will cost them so much capital, that it will be unreasonable to provide the loan.

Consumer finance and not so developed economies are the place with NPL over 10%. Sometimes reaching 12%, in some cases of internet landing up to 50%. For this types of companies is not worth to ask for banking licence, as it will kill them in their balance sheet.

On the other side every loan or group of the loans can be divided. Imagine one single loan of 100. The probability of first 30 to be not paid from 100 if smaller than last 30 of the same 100. This is how loans work. If we divide the loans given to first 30 and last 30 we can put risk of first 30 to bank, additional 40 to consumer finance and rest 30 to risky investors. Than we will be able to fulfill the BASEL criteria and still provide more risky loans to less developed part of economies.