P2.4 HOW TO READ THIS PART OF THE BOOK
This part of the book explains the underlying logic of credit analytics in the back office of banks. Among other themes, we will discuss how financial contracts work, which risks play important roles, and how banks have been managing them successfully.
To do this, we will use descriptive examples and financial mathematics to give both a qualitative and a quantitative perspective. But before we get started, a note of caution: banking and financial mathematics can be highly complex, much more so than a casual observer from the outside of the financial sector would expect. In some cases, this may alienate those readers without a background in finance or economics. However, we feel it is important to outline the moving parts and the mechanics of bank lending in detail. This will equip readers and aspiring and established entrepreneurs in the P2P lending space with a solid understanding of the viewpoint that a bank would take when building and analyzing a loan portfolio. In the third part of the book, we will then fuse the findings of Part One with those of Part Two to arrive at recommendations to pick the best of both worlds in a Hybrid Financial Sector.Whenever possible, this part of the book starts each segment with relatively simple introductions, examples, and diagrams that give an outline of the subjects discussed in the chapter. As the chapters progress, we will then delve deeper into the mechanics of financial contracts, analysis of all financial risk factors, which will be important when quantitatively analyzing the financial events of debits and credits and applying the analytics into liquidity, value, income and risk. Those who simply wish to get an overview of the mechanics of bank lending may skip ahead when the details become overwhelming. Those who have a solid background in finance may find the introductions and examples overly simplistic. Feel free to skip past the introductions into the more financially analytical part of the chapters. Of course, entrepreneurs in the FinTech space can operate without getting a PhD in financial maths, but they should at least understand the process, the instruments, and analytics native to bank lending.