KALD has been developed to eliminate the risk of default on a secured loan by converting this risk into a KALD-converted equity that is traded in the financial market to generate profit for the lender, and sometimes the borrower. Basically, KALD converts risk of loan default into a profitable financial asset. Likewise, it is designed to promote liquidity in the market by making credit accessible to retail investors, while enticing lenders to disburse loans at premium interest rates to investors.
Antony Kagirison
Can the risk of loan default by a person or small business be converted into a financial asset?
Can this financial asset eliminate the risk that created it in the first place?
The Kagirison Aleatory Loan Derivative (KALD) has been developed to turn the risk of loan default into an equity that generates profit for the lending institution. Statistically, the borrower can also benefit from KALD by being able to repay his/her entire loan plus interests (as per the binding lending agreement) but at only a fraction of the entire amount (which can be as low as only 1% of the loan amount). How is this possible. Let me explain.
KALD
The Kagirison Aleatory Loan Derivative (KALD) is a structured asset-backed credit derivative inspired by the collateralized debt obligation (CDO). Like CDO, KALD converts the risk of loan default into a financial security that can be traded in the capital market. However, unlike the CDO, KALD is not based on probability of default because it ensures that the lender is repaid fully. In fact, KALD can enable the lender to receive up-to 5 times the loan amount. The only downside of KALD at the moment is that I have designed it to work only with secured loans. This is because the lending institution needs to be assured of full loan repayment. Another downside of KALD is that the borrower can lose his/her/its pledged collateral as will be explained later.
KALD converts the risk of loan default into an equity that can be traded in the financial market at a profit. This profit is realized as the extra money the lender makes after the loan has been repaid in full within a short time (usually, less than half the loan repayment period).
KALD is designed to promote liquidity in the market by making credit accessible to retail investors, while enticing lenders to disburse loans at premium interest rates to investors who request for these loans. By allowing banks to offer loans at high interest rates that exceed returns from government bonds and other high-yield debt securities, KALD aims to induce lending institutions to invest in the manufacturing sector and the retail market.
I am still developing KALD but I can use an example to describe its benefit to the lender. I will later use another example to explain how KALD benefits the borrower.
The first example is based on the description of KALD provided in the post titled, Does Research-Backed Short Selling Manipulate the Capital Markets, or It Promotes Efficiency and Competency in the Financial Markets? Because I want KALD to pioneer in Kenya, I will use the Kenyan currency, the Kenya Shilling (KES) in the following two examples.
By allowing banks to offer loans at high interest rates that exceed returns from government bonds and other high-yield debt securities, KALD aims to induce lending institutions to invest in the manufacturing sector and the retail market.
Antony Kagirison
How KALD Benefits the Lender – An Example
If a bank offers me a loan of KES 1,000,000 at a compound interest rate of 10% per month with the loan repayment period set at 1 year, the bank expects me to have paid back KES 3,138,429 at the end of the loan calender (i.e 12 months). The loan principal is KES 1,000,000; and the annual compounded interest of 213.84% generates KES 2,138,429 from this principal. KALD allows this loan to be turned into a financial asset that can generate KES 7,000,000 for the bank. That is, from the loan principal of KES 1,000,000; the bank makes a profit of KES 6,000,000 after receiving KES 7,000,000 from its KALD-converted loan. I will explain KALD conversion later.
Let us consider the second example.
How KALD Benefits the Borrower – An Example
If I take a loan of KES 1,000,000 at a compound interest rate of 10% per month with the loan repayment period set to 1 year (12 months), I expect to clear the loan by paying KES 3,138,429 due to the annual compounded interest of 213.84%. KALD would allow me to clear this loan by paying only KES 3,200. The KES 3,200 that I have used to repay the loan is called the Kagirison Aleatory Price (KAP).
So, how does KALD do this? Simple, it converts the risk of loan default into an asset that can be traded in the financial market.
At the moment, I need to explain what is the Kagirison Aleatory Price (KAP), and why KAP is the basis of the structured credit derivative that is KALD. I will also explain why KALD can be called the Kagirison Aleatory Credit Derivative (KACD) by creditors, while debtors can call it the Kagirison Aleatory Debt Derivative (KADD).
