Split-Velocity Solutions, Outreach 7th March 2019
By far one of the most exciting aspects of our Split Velocity system when it is applied to managing a national economy is the advances it brings to the banking industry. Credit like any commodity can be accelerated.
If you recall earlier it was mentioned that the United States economy with its current population was 125 times smaller than it should be. Let’s illustrate why this may be the case using the banking sector. Commercial banks in the United States issue loans at an interest rate that is sometimes as low as 2%. When interest rates are too low, they make borrowing more attractive, but the reverse effect is that low interest rates compromise the earnings of lenders, making it difficult for them to cover the costs of managing and issuing credit.
Should we use a Split Velocity system to accelerate credit in the United States, as an example, the debtor is no longer burdened with interest when borrowing. Loans in a Split Velocity model are issued interest free, at 0% interest, which to the end user or loan applicant is a Wealth Creation financial product. A Split Velocity model achieves this by increasing the efficiency of money. Though commercial banks no longer charge interest, the new financial model now allows them to earn a Return on Credit (ROCr). In a Split Velocity model the standard rate for the ROCr is 100%. In the current inefficient system if a commercial bank issued loans with a 100% rate of interest the demand for loans would fall dramatically due to the interest rate burden being too heavy for borrowers. However, using Split Velocity this burden is shifted to the increase in the efficiency of money and is not felt by borrowers. Commercial banks can now issue loans with no interest, yet operate with a Return on Credit of 100%. Were our Split Velocity system introduced by the US Federal Reserve Bank today this improvement would make some aspects of the banking industry in the United States 50 times more profitable than they were in the old more inefficient and ineffectual system. This jump in efficiency and profitability helps explain why the current inefficient financial architecture has stunted growth over the years in the US. When credit is cheap it encourages borrowing. However, if this borrowing is taking place in the current inefficient economy it is not balanced with output. The result will be a disproportionate rise in domestic or national debt with no equal or balancing growth in output. A Split Velocity model does not allow this debt quagmire to emerge due to the fact that it would constantly balance expenditure on consumption with expenditure on output and productivity ensuring that the capacity to repay loans grows consistently alongside a nation like the United State’s economic growth.
If the Bank of Zambia (BoZ) introduced our Split Velocity system in Zambia where interest rates can average as high as 25% banks would be able to issue loans with no interest with the ROCr set at 100%. A ROCr of 100% has the same profitability profile as commercial banks issuing loans at an interest rate of 100% the difference being that the end user experiences no (0%) interest rate burden. This highly innovative approach complies with Islamic banking. Banks in Zambia would become 4 times more profitable and yet charge no interest on loans.
Firstly, commercial banks would be able to issue more loans thus driving growth in the economy, Secondly in this new financial architecture commercial banks would be able to invest significantly greater amounts in the work they do and the distribution of credit, for example they would now be able to:
- Spend more on improving and refining customer service
- Improve accessibility by opening more branches, extend branch networks to rural and other areas that are difficult to reach
- Invest in research and development (R&D) that advances technologies which improve the management and distribution of credit
- Invest in buildings, infrastructure, vehicles, ATMs and other capital equipment required to enhance banking
- Significantly increase the number of people they are able to employ in the countries where they operate
- Greatly improve on salaries and offer better conditions of service than have ever been able to before for those employed in commercial banks
A commercial bank’s baseline profit from issuing loans should ideally not be less than 100% of the loan amount issued. In a Split Velocity model this is the break-even margin for credit creation. Under the current financial architecture this means commercial banks are unable to reach their full earning potential mainly due to the fact that interest rates are operationally incapable of functioning in the current inefficient financial architecture as the burden on borrowers would be too high. At present commercial banks, the world over, are therefore operating well below their earning potential and this is weakening their capacity to provide credit to a broader spectrum of clients and they are at present less able to grow fast enough to fund high value investments.
Increasing the efficiency of money, forces it to do more work at constant price, placing the burden of growth on money rather than on people. When the burden of economic growth is placed on people rather than technology this creates what is referred to as an “austerity measure”.
The advances made in the use of finance such as Split Velocity cannot be understood without an improvement in financial literacy. Highly educated and well qualified professionals in economics, business and finance would still require training to fully grasp the new architecture and the benefits it can bring to the financial sector. This has little to do with skill. A change in architecture often entails a reconfiguration of norms, left becomes right and up becomes down and it becomes necessary for anyone to have to adjust to these new developments in order to navigate concepts successfully. Once these professionals have understood these reconfigured norms they should become the elite in economics, business and finance as they can provide operational solutions to financial problems and how to end poverty no one else today has concise answers to. They become the new elite also because they have freed themselves and shaken off the many shackles that restrain many professionals in these fields whose mind set is still trapped in the limitations of the current ineffectual and inefficient economy and financial system that prolongs and sustains poverty, shuts businesses down unnecessarily and is responsible for much of the suffering we see in the world today. While old school thinkers are perturbed by how to gain a 4% growth in GDP the new elite professionals should be able to demonstrate how to extract financing equivalent to GDP with which to enhance growth, while the old school thinkers are perplexed by how to counter poverty they should be able to detail systemic changes to the economy that will free resources that end scarcity, because their knowledge and understanding of economics, business and finance has eclipsed that of the old school. They will be able to achieve, in economics, business and finance, what old school thinkers thought was impossible and easily bring about financially liberating changes to economies old school thinkers once believed could never be done. Where old school thinkers have failed, they should succeed, where old school knowledge and theory has exhausted its purpose and can rise no further, they should take the mantle with renewed strength and implement the changes in economics, business and finance that liberate economies from scarcity and the strife it brings with it. They should be able to hold their ground in any intellectual setting, in any part of the world where state of the art or cutting edge theory and practice in economics, business and finance is contested or debated. This enhancement in financial literacy when achieved will lead to a dramatic increase in the profitability of banks and have a positive impact on output enhancing a country’s growth in GDP.
When a Split Velocity model is applied to businesses, it is unlikely that credit creation in its current inefficient and ineffectual design could cope with the demand for loans from businesses whose growth is being accelerated. Businesses operating in an economy where Wealth Creation is present are better positioned to repay loans, their capacity to grow is significantly enhanced therefore their appetite for loans will increase dramatically to the extent that for banks to keep up with the demand for loans credit itself would need to be accelerated, otherwise banks would be unable to keep up with the economy’s demand for loans.
This improvement in the banking industry is one that we look forward to unveiling through a pilot of a Split Velocity model to provide the necessary proof of concept for the system before it can become mainstream.
We refer to our Split Velocity System as “the most advanced economic and financial operating system for central banks and businesses in the world.” And hope you now understand why.
The advances in finance Split Velocity promises to bring attest to this.
This approach has never been tried before anywhere in the world. When it is applied, it will be a first in the banking industry. For a more visual and simple to understand explanation on how our Split Velocity system is designed to enable central banks like the Bank of Zambia (BoZ) to accelerate credit in a national economy watch Episode 4 in the video section.
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