Category Archives: Credit

Chelsea Football Club Innovates Financially

August 4, 2017 By in Credit, Analysis

I just found out that Chelsea Football Club is applying ideas from financial leasing to their football player lending programme.

I was shocked. The analysis is quite interesting. To me at least.

The movie Moneyball, based on the book by the same name, showcased the use of financial ideas in sports, in this particular case baseball. There are two parts to it. The first was picking the right performance indicators and, just as importantly, ignoring well established but ultimately useless indicators. A similar challenge happened with the infamous Black-Scholes equation, which ignored the probability of the price of a financial security rising or falling when computing the price of a derivative on that security.

The second part of Moneyball is to look at the price per unit for the new performance indicators when looking at buying or selling a player. This showed that the market in baseball was inefficient and the first teams to adopt this new pricing mechanism reaped great rewards. In effect what was happening was a weak form of arbitrage. Again, this is similar to traders in the nascent derivatives markets who adopted the Black-Scholes pricing model. Continue reading →

The Characteristics of an Alternative Lender

February 24, 2015 By in Credit Tags: ,

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In a recent article, this column laid out the case for the rise of the alternative lender as a natural consequence to the hole left by conventional banks withdrawing from the SME market. This article looks at what a successful alternative lender might look like.

The first step is to understand the relevant characteristics of a conventional SME lender. Conventional banks are, by and large, mature companies with an inflexible and conforming operating culture. This leads to risk rigidity, i.e. banks will usually get comfortable at one point of the risk curve and they will rarely leave it.

This in turn leads to product concentration and possibly myopia at the macro level with innovation only at the micro level. What this means is that the basic types of products do not change, so a salary loan will pretty much be the same at all the banks in terms of tenor and structure. One bank might add a lottery to the loan, another bank might allow deferral of one payment per year, but overall they are the same.

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The Rise of the Alternative Lender

January 20, 2015 By in Credit Tags: , ,

Standard Chartered, HSBC, Lloyds and RBS have all withdrawn from the SME sector in the UAE. Is this an indication of problems in the UAE SME sector? Absolutely not. It is an indication of troubled global banks and a flawed banking strategy.

Understanding the issue, and the opportunities that it presents, requires an understanding of the common attributes of these four banks and their failures. The starting point is that all of these banks are known as strong commercial banks catering exclusively to retail and corporate clients for most of their 150 to 270 year history.

Then along came Wall Street, its investment banks and fat deal fees. Mortgage backed securities, collateralised loan obligations, foreign exchange futures, interest rate derivatives. Fast talking MBAs backed by deep thinking PhDs. Black Scholes equations, Ito’s lemma, Gaussian copula functions and stochastic calculus. Easy as taking candy from a baby. What could go wrong?

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The SME Credit Gap in the Middle East

October 14, 2014 By in Credit, SME Tags: ,

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According to the IFC SMEs in the UAE represent 90% of total businesses. As a total percentage of GDP the estimates for rich MENA countries is estimated at approximately 51% contribution from SMEs with employment contribution at 62%. Paradoxically there is a SME credit gap in excess of USD 260 billion in MENA with only 4% of outstanding loans in the UAE awarded to SMEs. This points directly to the main challenge facing SME sector growth.

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