Re-learning the use of credit in times of COVID-19: how can governments help?

TLDNR — Reintroducing the use of peer-to-peer credit on a large scale, with governments partially guaranteeing the IOUs being issued, could help mitigate the cash crisis many companies face because of COVID-19.

In a short LinkedIn article, entitled IOUs as tools of economic autonomy, I recently noted that direct credit operations between businesses, for example via bills of exchange, have mostly disappeared in the Western world. The last country where this was done on a large scale was Germany: as late as 1986, the rediscounting of corporate bills of exchange (“Wechsel”) still represented 60% of central bank liquidity for German banks. This market disappeared almost completely in 1999, as the ECB stopped discounting bills of exchange.

Most credit operations are now naturally done via the intermediary of banks, but this does have a downside, and the article concluded:

“Should banks be forced to reduce the level of credit they are prepared to provide, as happened in 2008, businesses will find it more difficult to revert to using credit directly, as they have mostly forgotten how to do it.”

I therefore believe that re-learning the use of peer-to-peer credit, even to some limited extent, can actually have a positive effect even in an advanced economy. It can foster economic autonomy in the sense of having less dependence on the banking system.

sikobaPay itself is mostly targeted at developing countries, where informal and undocumented credit is widely used: it specifically aims to overcome the limitations of such informal credit by making legal recognition possible, allowing for efficient clearing of debt and providing an audit trail. But there is no reason why sikobaPay could not also be used in developed countries, by individuals and businesses alike, in order to have a back-up mechanism in place, just in case.

This was written less than two months ago, and at that time it was not yet clear (at least to me) how massive the impact of COVID-19 on many businesses will be. Today, that effect is felt everywhere. COVID-19 forces us to consider alternative and unusual solutions, and re-introducing peer-to-peer credit on a large scale is one of them. It is not a panacea, but it could help individuals and businesses to do more even when money is very scarce.

The problem is that most individuals and businesses in developed counties are not comfortable using credit, so there needs to be an incentive to jump-start this activity. One solution is the following: governments could guarantee IOUs created in a system such as sikobaPay, up to a certain amount. These guarantees could be given, in different amounts, to individuals, self-employed people and companies. This would provide everyone with an incentive to start using p2p credit, while governments would not have to make an immediate cash disbursement.