Credit Union – Certificate of Deposits (CD) and Credit Lines
In a fully formed NewVistas community, 24 community agencies regulate, moonitor, and facilitate access to services by participants. These agencies are organized into eight bureaus of three agencies each. For the most part, bureaus do not have any operational responsibilities within agencies, which are autonomous, legal entities within the NewVistas structure.
The Economic Bureau, however, operates differently. It is a single entity, with the three agencies – 7, 8, and 9 – operating as divisions within it, rather than autonomous entities as is the case in other bureaus. The bureau is legally and operationally constituted as a non-profit credit union. While the three agencies have distinct responsibilities and control different assets, their roles are geared towards aligned objectives of the credit union.
The credit union exists to serve its members, who are participants in the community, as their principal financial intermediary. It facilitates the entry and operations of participants in the community by receiving their deposits and creating CDs, which are designed to capture and leverage funds that are not needed for immediate living needs, bills, or active business operations.
These funds arise when a participant earns more in their business than is required to be sufficient in their life and business. While this surplus is the intent of any profit-seeking entity, participants can more easily realize a surplus because the community’s infrastructure is likelier to operate more efficiently. The system specifically refers to these funds as “residue.”
The three agencies in the credit union fund the acquisition of all assets, which they own. Most of these assets are managed by other agencies, which also, on behalf of the credit union, acquire or develop the assets that they subsequently manage.
Certificates of deposit (CDs) that participants receive after depositing in the credit union are not cash accounts. They are also not demand deposits, but stable, 5 – year financial instruments which ensure the stability and resilience of the community’s economic system even in the face of volatile economic conditions beyond.
Another important aim of the credit union is to improve the quality of the services it offers to its members.
Community set up and growth
This paper assumes that the community is already fully-formed and functional, with 24 agencies and 960 apartment buildings, with 960 apartment buildings, each with around 100 people. However, this is a slow process that takes many years, the speed being dependent on the recruitment of new participants. During this time, many agencies still perform their functions, though to different levels of optimization.
At the start of this process, the Newvistas Foundation donates system infrastructure, which contains building designs, general community architecture, and the operational manuals for every aspect of the community. This contribution is via a royalty-free license, perpetually owned by the foundation. It helps to establish the stability of the system, while reducing capital requirements that would have been required were the system a fully paid asset.
With the system in place, the recruitment of the first batch of renters takes place, with 40 – 50 participants being the target. The lease agreement that each renter signs is a conditional lease, which obligates the community to provide the promised housing and credit union services as the agreement may state.
After the 40 – 50 leases have been executed, the yet-to-form community seeks a credit union charter. This marks the formation of the credit union. Licenses that the newVistas foundation contributed are classed as part of the credit union’s capital.
After the credit union’s formalization, it creates loans which then fund the construction of the first apartment building, which will house the first 40 – 50 renters and their dependents.
After the building is completed, renters move in, at which point they also deposit $1,000 in the credit union in the form of CDs. The CD, regardless of other uses that the credit union may apply, is primarily meant to show a participant’s commitment and gain access to the community’s economic system. It is not simply a means of earning an interest or funding loans.
Other aspects of the credit union, such as autopay of rent and utilities from credit lines, and the servicing of the loans created to fund the construction of the first building are started.
At this juncture, there is a branch presidency made up of four captains, each serving 10 participants and their dependents. For the time being, this presidency also doubles up as all other presidencies, especially of those agencies that are in some way operational – agencies 2, 7, 8, and 9 (the latter three being part of the credit union, and agency 2 managing the building).
The process then replicates horizontally, always initiating the recruitment of renters, followed by construction of their building. The expansion means that capital demands gradually decline as more apartment buildings are built, potentially accelerating the growth of the community. All the buildings and the land they stand on will be the property of the credit union. In future, the land may be left vacant or be replaced by industrial blocks and farmland as the community’s physical plan takes shape.
The construction of apartment buildings will not focus on previously-unbuilt space or farmland. Instead, the community will endeavor to build in open spaces within towns and cities. It can also involve buying derelict buildings, pulling them down and building apartment buildings in their stead.
As more and more buildings are put up, more agencies, presidencies, and functions will also be established and harmonized over time. For instance, after 3 buildings have been built, the three branch presidencies, now numbering 12 captains, and functioning in all other positions, will also work on establishing some agencies, and setting up the first operational agency presidencies, after which these presidencies will themselves replace exiting members.
As more and more buildings are built, there will be a natural movement towards these buildings, which are superior in structure and use. For instance, in a city of 200,000 people, if 100,000 people move to community buildings, the remaining buildings will be vacant, producing under-par returns to their owners, and subsequently being put up for sale. With sufficient space to put up the physical campus, or at least 1.2 square miles, the apartment buildings will be dismantled and reassembled as per the pattern of the Plat.
This paper, therefore, envisages not just a time when the full community is operational, but at a time when the supply chains and other economic activity in the community will have thickened enough to be viewed as a distinct economy, with the credit union playing a key role in this.
Community agencies and ownership of assets
As indicated, there are 24 community agencies, organized into 8 bureaus of three agencies each. In addition, agencies are loosely organized into three columns of eight agencies, which do not have formal operational coordination, but whose duties are aligned in many instances, enabling some degree of cooperation.
Each of the three agencies in the Economic Bureau belongs to one of the three columns. Agency 7 belongs to column 1, agency 8 to column 2, and agency 9 to column 3. The three agencies own and finance the acquisition of assets managed by agencies in their column. The agencies’ organization and the ownership and management of community assets is as illustrated below.
Credit union lending and credit operations
The credit union does not lend to any other entity besides community agencies. In addition, while it is subject to the rules of banking regulators and best bank practice, a few things set it apart from an ordinary financial institution.
The credit union does not borrow externally. Because it does not also lend externally, in theory, it does need to have settlement reserves.
In ordinary settings, financial institutions that provide credit rely on ratios, such as Basel II, and regulations that were instituted after 2008. They also rely on money supply and strict oversight by regulators to determine their leverage ratio; that is, how much they can give out in loans as a factor of the “regulated capital” they hold. For incorporated banks, this includes fully paid-up capital, retained earnings, and reserves, as well as securities and other easily-liquidatable instruments.
The credit union, instead, operates by a rule referred to in banking as “governed capacity.” In brief, the limit to which the credit union can extend credit is guided by what the community can actually use, rent, and repay. It also relies on the rules it has set around the treatment of CDs, loans as assets, and the real use of these and other assets – equipment, housing, and infrastructure.
Among other things, a key requirement for participants as they enter the system is full disclosure of their financial obligations. This includes all types of loans they have, fines, child support arrears, credit card debt, and every other future source of financial outflow, mortgages.
The disclosure has two aims. First, it aims to examine these obligations with a view of consolidating any debt that reduces outflow volatility. In the context of the credit union’s consolidation aims, this is a situation where a participant is faced by ununiform, usually high, repayments, which can affect the uniformity of their income and reduce their ability to plan and run a business optimally.
Therefore, debt consolidation makes it cheaper for service, and brings stability to participants, especially when they pay using their credit lines, as will be discussed later in the paper.
Not all debt is taken up by the credit union. Obligations that are speculative, non-productive in nature, or those that could create a moral hazard are not included in consolidation. In this category are student loans, child support obligations, criminal and other legal fines, gambling and other speculative debt. At the same time, mortgages and asset financing loans are not included in consolidation.
The second reason for 100% disclosure is to weigh the risk and thereafter make decisions on the credit line limit and other decisions that the credit union will need to enter to protect itself while being of service to the participant.
Certificates of deposit (CDs)
To join the community system, a participant signs a house-leasing agreement and deposits at least $1,000 as a Certificate of Deposit (CD) in agency 8. The CD is runs for an automatically renewable term of five years. The depositor can easily view their deposit, but as per the terms of the agreement they enter into with the community, they cannot arbitrarily withdraw it. This measure protects the credit union from bank runs and ensures the stability of the community’s economy.
CDs play a critical role in the community’s economic infrastructure. They are at their core, a net-worth accumulation tool, and a capital requirement for all participants. The presence of these CDs ensures the long-term stability of the credit union.
CDs do not fund loans, or rather, this is not the reason for their existence in the first place. Loans, which the credit union agencies issue to themselves to facilitate the development and acquisition of assets including buildings, land, equipment, and infrastructure, are backed by deposits which come about when the loan is created.
CDs are also not present to act as a source of liquidity for the credit union. The presence of structured binding contracts between the depositor and the credit union means that the credit union does not face imminent liquidity concerns where it could be required to give out large sums of money beyond its capacity. CDs earn an interest of 12% per annum.
Credit lines
Participants do not have cash accounts where they can withdraw or deposit “their” cash at a whim. They also do not hold demand deposits, which they can withdraw when they want. There are, in other words, no transactional products with a positive balance, such as current accounts and prepaid debit cards. For the credit union, there is no discretionary lending, so that it can deny one person the access to a credit line, while allowing others to access. Instead, all participants have credit lines.
Credit lines are pegged to the CDs that participants have with the credit union. A credit line is capped at 10 times more than the value of the CDs they have with the credit union. This means that, if a participant has deposited $1,000, they can have up to $10,000 that they can use for business and daily personal activities.
This level of leverage is high, and in most modern settings, it is impossible to achieve. When giving credit lines to individuals, banks consider several scores, including credit scores, assets held in the bank, and monthly income. Banks, for instance, can only give clients a credit card limit of upto 1.5 times their monthly income. They also charge high interest rates for this, due to their professional perspectives about the risk that the debt carries.
In addition, credit lines consider liquidity risk – that the funds invested by an individual can be withdrawn, leaving the bank with no leverage for the credit line. Banks also must consider their own capital adequacy, so that they do not over-lend contrary to regulators’ requirements, and other considerations.
Assuming that a participant meets the conditions that the credit union’s algorithm uses to set the credit line limit, they have a limit that is up to 10 times the amount of CDs they have deposited in agency 8.
Assuming a participant has a CD of 1,000, at the moment they start using their credit line, the limit is $10,000. this is the amount of money they can draw on the credit line without repayment.
As they earn through their job or business, their income goes to the credit line and repays it. However, when it approaches the –$100 mark, meaning that it will soon have a positive balance, the system automatically buys a CD drawn from the credit line, giving the participant both a higher limit, and capturing the surplus that could have made the balance positive. This therefore fulfils the role of a CD as a residue-capture instrument.
On the other hand, a person, perhaps a business owner, may continually draw on the credit card without even partial repayment. If they run the risk of running out, the credit union liquidates a part of their CDs, which replenishes the credit line. It is therefore essential for a person to be productive, since failure to regularly replenish the credit line will reduce their CDs and the limit of their credit line over time.
Why is the credit union able to offer such high credit lines?
The credit union, however, can avoid most of these scenarios due to the unique structure of participants’ contractual obligations regarding their CDs, and the economic infrastructure of the community’s economy, which reduces risk beyond what modern corporations can manage.
As indicated above, every participant has deposited at least $1,000 and holds a CD. Every participant also has a lease agreement signed with the community. In many cases, they also have equipment and tools’ lease agreements. All these agreements make it easier for the credit union to have as much information as possible regarding its customers.
Once a participant has been admitted, they are encouraged, by the many advantages and opportunities that exist in the community economy to open a business. They are, however, not required to do so. It is expected that after understanding the concept and seeing the benefits that most people will prefer to have businesses within the community, where they can easily access the support of various agencies and a good market for their services.
In some instances, a participant already has a running business, which they simply adapt to the community’s economic system. In other instances, they establish that business, with help coming from different agencies and contractors. In yet other circumstances, a participant may decide to deposit in the credit union and continue with their business or employment outside the community.
The credit union maintains a banking monopoly in the community and is the sole financial intermediary through which all participants transact. Because the credit union owns all assets, any charged use passes through the credit union’s three agencies. The bank is cashless and does not provide opportunities where cash can be hoarded.
The credit union has direct and unfettered access to most of the participants’ financial transactions, especially for those who have a business in the community. It can therefore tell at any given time how they are faring in their business and in their personal finances. In addition, participants are not freely able to liquidate their deposits, enabling the credit union to realistically use them to peg the credit lines they can advance to participants.
The careful planning of participants’ businesses, elimination of leakages from the system, and the presence of CDs are all factors that combine to enable the credit union to provide credit lines that are up to 10 times higher than the CDs they already own. Additionally, the credit union operates with little information asymmetry regarding its customers, with whom it has agreed on structures that virtually eliminate risks that otherwise make such leverage much lower.
How the credit union deals with information asymmetry
Financial institutions do not know everything they need to know about the people they lend to. They rely on financial statements, pay checks, credit scores, and any other material information they can get their hands on. Still, they cannot tell the true intentions of the customer or what the future holds.
Faced with such a situation, a financial institution may increase the price of loans, but this is only viable up to a certain point, when good borrowers can no longer accommodate the price. They then turn to rationing, where people either do not get the funds they apply for, or some do not get anything at all due to insufficient information or negative scores.
In addition to credit bureau records, financial records, and collateral, banks can also operate strong relationship management to identify patterns, establish waterproof covenants, coupled with vigilant monitoring.
The credit union goes a step further to bridge the information asymmetry gap and democratize credit lines so that they are accessible to all participants. The credit union has access, through other agencies as well as its interactions with participants, to much more data on participants than an ordinary financial institution would have on its customers.
This information, is analyzed using AI and other tools, augments the significance of a credit score, which converts the information known about a participant into a probability score, from which other considerations – pricing among them – flow.
Participants are not required – but are encouraged – to start a business within the NewVistas community settings. Having a business gives the owner access to a large, lucrative market. It also gives agencies, especially those that are part of the credit union, access to more complete information, which they use to form a better picture of their clients.
Uses credit lines
Credit lines can be applied to both personal and business uses. A credit line takes care of a participant’s business needs, including ordinary business expenses and the lease and maintenance of equipment. It also caters for charges to the business by agencies which offer business-related advice including marketing, business planning, and risk management.
The credit line also takes care of personal expenses – rent, food, personal effects, entertainment, education, travel, and services from agencies that are personal in nature.
Business expenses
Businesses in the community, which are all owned by individual participants, offer services instead of being sellers of goods and services. All businesses are part of a system of value addition, by processing, breaking down, or otherwise changing the state of a good or service for the convenience of the ultimate consumer. Throughout the process, the inventory that they use to provide a service is owned by agency 7 (and managed by agency 1 along with other current assets), premises by agency 8, and equipment by agency 9.
Since businesses do not own the inventory that they trade in, their main job is to convey the inventory, or to change it through a pipeline that starts at raw material extraction, or the harnessing of a set of skills, to final consumption. Consumers, therefore, pay a subscription for a service, rather than buy a good. This is as true for inventory-intensive businesses – such as a deli – as it is for service-based businesses, such as a doctor with a specialist clinic.
The community’s focus on enhanced self-sufficiency, quality, and efficiency in production mean that more often than not, a community-based business finds it more beneficial to engage another community-based business. This greatly streamlines supply chains, improves turnover, and reduces the cost of doing business. All these factors mean more profit and ease of doing business for business owners.
Illustration
This illustration depicts a time when the community is fully formed, and different agencies operate optimally. This means businesses have support from credit union agencies, as well as other community infrastructure, such as the storehouse and farmland.
Ben, a miller who manufactures animal feed, needs corn, soy, sunflower, canola, minerals, bran, and barley as his inputs. He also needs a series of mills and mixers, as well as packaging materials for the final product. Beyond all this, he applies his knowledge in feed formulation, animal nutrition, and his ability to constantly research ways of improving his products’ quality.
Corn is a major component of the feeds Ben produces, accounting for 70% in weight. He has therefore seen it wise to directly procure the corn from 3 corn farmers who produce in the community’s cropland, outside the physical campus. The farmers are always rotating their farming, and since he needs a constant supply, it is necessary for Ben to engage all three.
When farmers harvest the corn, they deliver it to a grain storage facility owned by the community, where it is dried and stored safely. Farmers do not own the corn that they produce.
The storehouse premises are owned by agency 8. However, the inventory it holds is owned by agency 7, and managed by agency 1. The storehouse holds all types of inventories, including work in progress (WIP), raw materials, and supplies. The storehouse is managed by agency 1 through participant-owned businesses, which charge proper handling, storage, and logistical coordination between different consumers of the inventory. Therefore, the agency does not actively operate the storehouse.
During the corn production process, they have used their credit line to obtain seed, insecticides, and cover some other expenses. They have also used irrigation services provided by other businesses. They have paid irrigation services using the credit line too, as part of their cost of production.
When they sell the corn to Ben, they do so after adding a margin to cater for their trouble, so that they make enough from the business to cover their cost of production, credit line charges (6% p. a. on the amount they have used), and leave enough for their own sufficiency, and to thrive as a business.
When the corn is delivered, the farmers issue an Invoice to the miller quoting the agreed-upon price. Ben, the miller, uses his credit line to immediately settle this invoice. In this simple transaction, the credit union, through agency 7, settled presented as the invoice, and ensured the farmer does not need to wait for an extended period to get their money. The agency has also facilitated the change in custody of the inventory, enabling Ben to access the corn while it still owns it.
Custody of the corn, now as a raw material, has changed hands. The participant who has custody in inventory, even though owned by the credit union, has operational discretion – they are at liberty to change the state of the inventory to add value and move it along the chain. Meanwhile, the farmer has replenished their credit line using the proceeds from the sale. If the result is such that the credit line is fully paid, the surplus is fixed as an additional CD in the credit union.
Soy, sunflower, and canola are not used extensively in making feeds, and the miller only needs tiny amounts of them. He therefore does not need to talk directly to farmers, instead seeking businesses that produce other products using the raw material he needs.
Likewise, Ben obtains these goods using his credit line, with the goods changing hands. He also needs minerals, in trace quantities, and therefore does not need to contact miners – just processors who have already broken down the products into smaller quantities for the convenience of people like him.
With the assembled raw materials, the miller uses a few machines to process them. The machines are owned by the credit union’s agency 9. However, a business has leased the machines from the agency, and in turn leases them out to the miller and others. The machine-leasing business maintains the machines, replaces them over time, and notes their efficiency through reports from customers. It then files these reports with agency 9.
The corn is first milled and is intended as a base for all products the miller produces. In this state, as work in progress, it has significantly changed value and applications, but is still owned by agency 9, as are all the other materials, as their state is altered en route to the final product.
The machine leasing costs, as well as raw material expenses, logistics, and storage, are all part of the cost of manufacturing/production. So too is the packaging, which the miller obtains as finished packets from a business which buys paper and fashions it into bags and packets.
The miller thereafter sells the products to farmers and to stockists. From the sales, he will issue invoices, which will be paid by the buyers’ credit lines. The action will replenish Ben’s credit line so that he can continue doing other transactions for the business.
Because he has earned significantly more than he drew on the credit line, the credit union will automatically buy CDs to keep the credit line negative, meaning he will have access to a higher credit line limit, and more CDs paying interest.
Throughout this process, a number of unique processes take place, enhancing the flow of money, inventory, and services. This boosts the system’s productivity and optimizes the community’s economic system’s performance. The lack of cash accounts by participants means that all money is at the credit union’s disposal. It cannot be hoarded in savings accounts or as cash. It also greatly enhances the resilience of the credit union as a banking institution, regardless of any external shocks.
When some of Ben’s products are used by a chicken farmer to produce meat, this chicken farmer will take the feed as part of their cost of production, while the credit union will consider the meat as a new form of inventory, with its value added.
With a highly leveraged credit line, business owners quickly procure what they need, keeping production lines moving and adding value. Having the credit union’s agency 7 own all inventory enables the agency to always know the value of its assets, and therefore accurately gauge its lending power.
Personal use
A participant also uses their credit line for personal expenses. Credit lines have a limit of up to 10 times the CDs that are dedicated to that credit line. In practice, the extensive amount of data that the credit union possesses regarding participants means that it can more accurately determine the limit that a person will access in each of the lines. These instances are discussed elsewhere in this paper.
The credit union banking app can help participants further subdivide their credit lines and organize them. This means, for instance, that on their app, a participant can set up many other accounts dedicated to specific issues such as emergencies, rent, shopping, medical bills, vacation, and others. The credit union’s AI-powered system can help them with anticipating and partitioning their accounts.
Community agencies automatically deduct due bills from a participant’s credit line. These bills include rent, services provided by agencies such as business and life planning, insurance, equipment lease, land, among others. These bills are due weekly, enabling participants to plan well and avoid bills from ballooning to uncomfortable levels.
CD and credit line interest
As part of the joining process, a participant uses the credit line at their disposal to settle other obligations they have – specifically, credit card debt, and personal loans. This is designed to help them consolidate debt and lessen the debt burden they currently have, and the accompanying regular repayments. This will help them free up more resources for business and life in the community, and ensure that ultimately, they have more disposable income.
Credit lines are not meant for some types of debt, including student loans. In addition, loans taken to acquire assets, such as asset finance to acquire vehicles and equipment, or mortgages, are not settled using credit lines.
The attractiveness of the community’s model is easy to see. Currently, unsecured personal loans in the US are, on average, 10 – 15%, potentially going higher as a person’s credit score dictates. Credit cards are much more expensive, averaging 20%. Even mortgages and car loans, which are cheaper, are rarely ever below 6%. By giving a standard interest rate of 6%, with the assured income of 12% on their CDs, participants have much cheaper credit options by joining the community.
For instance, a person with 1 CD of 1,000 dollars will earn an interest of 120 dollars every year. They will also have a credit line of 10,000. If they are always at the limit of this credit line, they will pay $600 as interest on the credit line. In practical terms, therefore, they will have paid $480 as interest. Therefore, the effective interest rate on the credit line, at its greatest extent, is 4.8%.
Within the community, the stated rates of 12% interest income from CDs and 6% interest charge on credit lines are explicitly written into the community bylaws. The community is certain about its ability to achieve these rates because, among other things, there is no external debt – either incoming or outgoing. This gives the credit union the ability to safely predict that, based on its performance and the resources at its disposal, it can deliver these numbers.
The credit union actively invests in infrastructure, assets, and credit lines, ensuring that financial resources in the community are always at full employment. In situations where the community feels that, based on data, it is paying too much interest, it actively increases lending, which generates more income and boosts economic growth.
The community’s organizational structure and every other aspect are carefully designed to ensure sound governance and optimized system performance.
Can the credit line limit be changed?
In theory, all participants’ credit lines are up to 10 times the CDs they have in the credit union. In practice, some factors may prevent this from being the case.
Constantly, the credit union analyses participants’ use of credit lines to determine their limit, and to see whether they can intervene to encourage better utilization of the service. One major signal that the credit union looks for is changing spending habits, sometimes coupled with changed incomes. If a person gradually starts spending more, and their business warrants this, they can adjust the credit line limit, and vice versa.
Besides the normal measures that financial institutions employ to set credit line limits, the credit union focuses on three key measures – a participant’s assets and cashflow before joining, their ability to rent an apartment, and where necessary, trading space, and their performance, checked against their experience and verified business plans.
The credit union, when assigning a credit line limit, also considers a person’s observable behavior patterns. Apart from this, the credit union does not employ any other moral, psychological, or discretionary judgment, which could lead to subjective assignment of limits.
As mentioned elsewhere in the paper, a participant is contractually bound by their agreement with the community to fully disclose their financial position, especially any obligations they have, as well as assets and income. This information gives the credit union a good, but partial image, of their cashflows, and ability to service their credit line.
Another key measure is the participant’s performance in their business or employment. For those businesses that operate within the community, the credit union examines a verified business plan, and the participant’s present and past performance, to further construct their image of the participant as a customer. Other sources of income besides the business are taken through rigorous stress tests to see whether they can stand the test of time as dependable sources of income and proof of productivity
Verification of a business plan involves an underwriting process, which examines the risks associated with the business, i.e. the probability that it will succeed or fail, or not match the expectations expressed in the plan. This report further strengthens the view that the credit union has on a participant and informs the final decision on the limit.