Function of Credit

The principal function of credit is to transfer property from those who own it to those who wish to use it, as in the granting of loans by banks to individuals who plan to initiate or expand a business venture. The transfer is temporary and is made for a price, known as interest, which varies with the risk involved and also with the demand for, and supply of, credit.Credit transactions have been indispensable to the economic development of the modern world.

Credit puts to use property that would otherwise lie idle, thus enabling a country to more fully employ its resources. One of the most significant differences between some nations of Africa, Asia, and South America and the advanced Western nations is the extent to which the use of credit permits the latter to keep their savings continuously at work.

The presence of credit institutions rests on the readiness of people to trust one another and of courts to enforce business contracts. The lack of adequate credit facilities makes it natural and necessary for inhabitants of developing countries to hoard their savings instead of putting them to productive and profitable use. Without credit, the tremendous investments required for the development of the large-scale enterprise on which the high living standards of the West are based would have been impossible.

The use of credit also makes feasible the performance of the complex operations involved in modern business without the constant handling of money. Credit operations are carried out by means of documents known as credit instruments, which include bills of exchange, money orders, checks, drafts, promissory notes, and bonds.

These instruments are usually negotiable; they may legally be transferred in the same way as money. When the party issuing the instrument desires to prevent its use by anyone other than the party to whom it is issued, he or she may do so by inscribing the words “not negotiable” on the instrument.