Liquidity-Saving through Obligation-Clearing and Mutual Credit
* Paper: Tomaž Fleischman, Paolo Dini, and Giuseppe Littera; Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis
URL = https://www.mdpi.com/1911-8074/13/12/295
Abstract
"During financial crises, liquidity tends to become scarce, a problem that disproportionately affects small companies. This paper shows that obligation-clearing is a very effective liquidity-saving method for providing relief in the trade credit market and, therefore, on the supply-side or productive part of the economy. The paper also demonstrates that when used in conjunction with a complementary currency system such as mutual credit as a liquidity source the effectiveness of obligation-clearing can be doubled. Real data from the Sardex mutual credit system show a reduction of net internal debt of the obligation network of approximately 25% when obligation-clearing is used by itself and of 50% when it is used together with mutual credit. These instruments are also relevant from the point of view of risk mitigation for lenders, based in part on the information on individual companies that the mutual credit circuit manager can provide to banks (upon the circuit member’s request) and in part on the relief that liquidity-saving provides especially to NPL companies. The paper concludes by outlining recommendations for how even greater savings could be achieved by including the tax authority as another node in the obligation network."
Discussion
Dil Green:
"It was as if someone had turned the lights on.
It turns out that, unbeknown to most, a significant body of technique and experience has been developing over decades in Slovenia for the analysis of trading networks at scale, and, in particular, the discovery of ‘cyclic structures’ or ‘loops’ of obligations within the economy (A owes B, B owes C, C owes D, D owes E, E owes A) – the very circularity that the Circular Trade Analytics group set out to understand.
The paper describes an ‘invoice clearing’ mechanism that, through detecting these structures, helped the Slovenian economy to bounce back from its war of independence from Yugoslavia by allowing up to 8% of the country’s trade transactions to be settled without money changing hands. It considers the impact such a system might have if deployed in the existing Sardex business network. The authors thereby demonstrate the remarkable impact that two key ‘new economy’ approaches in combination – namely, multilateral obligation set-off and mutual credit – can have on business finances.
The paper analyses a large number of Sardex business-to-business mutual credit transactions (over 130 000, totalling >€30M’s worth of trade for the year 2019), looking at the impact of different approaches to the settlement of these transactions on the fiat balance-sheet positions of the participant firms. At any point, each business will have a trade balance of outstanding ‘accounts payable’ (to creditors) and ‘accounts receivable’ (from debtors).
The default position, of course, is that each invoice is settled individually with a bank transfer. This is the trade world as we know it, with all its attendant risks and impacts – late payments, defaults, invoice factoring, expensive overdraft finance, and the rest. This is known in the jargon as ‘Real Time Gross Settlement’ – and is taken in the paper as the ‘baseline’ for comparison."
(https://www.mutualcredit.services/blog/someone-just-turned-the-lights-on)