CHAPTER 1
THE EMERGENCE AND
CHALLENGE OF THE
CREDIT ECONOMY
GROUP 1
LEARNING OUTCOMES
1.Know the transition from barter
economy to credit economy;.
2.Understand the birth of credit;
3.List down the advantages of credit
and;
4.Disadvantages of credit
5.Understand the cost of using credit
6.Understand the Interest, Operating
Expenses, and Risk
7. Identifying the Foundation of Credit
INTRODUCTION
As a human history moves toward the year
2000, with its awe-inspiring challenges and
opportunities on the one hand and a host
problems, on the other business and industry
are attracting increasing attention from
companies and institutions almost on a global
scale that could affect the life and standard of
living people all over the world.
From the time simple barter,
through the stage of money
economy to today’s credit
economy, remarkable
developments have taken place
far and wide. A number of them
has been quick to coin such terms
as “ The moneyless society,” “
The Credit Society,” and many
others to describe such
development.
Transition from Barter Economy
to Money Economy
The early stage of human history was marked by
economic self-sufficiency of small family units. Able-
bodied members of family units were charged with
the task and responsibility of providing the basic
needs of life, such as food, clothing and shelter. But
as man equipped with better tools as well as learning
in the production of goods, surplus goods beyond the
immediate needs of the family became common.
Hence, the need for a system of exchange termed as
barter.
Barter may be defined as “ the direct exchange of “ one
commodity for another” of goods for goods, services for services,
goods for services or vice versa”. This exchange of goods for
goods was understand as the “barter economy.”
The complicated money and credit exchange system of today is
the product of a long process of evolution.
Although simple barter represented an advance over economic
self-sufficiency in permitting high levels of productivity through
economic specialization, nevertheless, it remained a highly inefficient
method of exchanging goods. A major problem generally arises when
the economic goods being offered in exchange were of quite different
values. More so, when they were invisible.
The Need for Money
In his book entitled “ Wealth of Nations” Adam Smith
entertained the belief that money originated in man’s rational
effort to meet the necessity of finding some medium
exchange. Thus, it was introduced into man’s economic life
designed purposely to overcome the shortcomings of barter.
Money in whatever from has only eliminated the
shortcomings of barter and facilitated exchange
transactions but, moreover, continues to plan an
important role in economic society.
The use of money for production insures and spreads
benefits to every member of economic society.
However, in the beginning the use of money was
not intended for production. Rather, it was
intended for sumptuary purposes, that is for
consumption.
Barrenness was to him an essential nature of
money; usury ( interest) which made money
bear fruit, was unnatural. Saint Thomas
Aquinas took up this view and combined it
with the doctrine of Roman Law which
distinguished between goods which were
consumptibles and fungibles.
In due time, important modifications appeared
in the history of thought governing interest, of
these exceptions, the most important was the
doctrine of
“ damnum emergens ” that is, the suffering of a
loss by the lender.
Still more important in helping to break down the
original prohibition was the doctrine relating to
“ lucrum cessans.”
THE BIRTH OF CREDIT
One of the unique features of our business
system is that it operates to a large extent on
promises, called credit.
The word credit comes from the Latin word
credere, which means "to trust." The widespread use
of credit is a strong evidence to support the belief
that the people have trust in one another.
The emergence of credit might be helpful to point
out that it is not one design, rather a product of
necessity. Thus, as may be logical to expect, it
passed through. a long process of evolution and
development.
NATURE OF CREDIT
A credit transaction involves two parties-
creditor and debtor.
1. In so far as the debtor is concemed, credit to
him represents power-the ability to obtain goods
without in actual tender of payment. Since the
grant of credit by the creditor to the debtor is
accompanied by a promise on the part of the
latter to pay at a certain date, an obligation.
arises which must be discharged as promised.
2. The creditor, as a seller of goods or services
on credit, has both the moral and legal right to
demand of his debtor to pay the obligations
when due.
Thus, credit is essentially a transfer of goods,
services, or funds giving rise to obligations that must
be discharged in the future. .
OTHER MEANINGS OF CREDIT
In banking, credit is held refer to "an entry in the books of a
bank showing its obligation to a customer, that is, for the
deposits made by the latter. In bookkeeping, credit is "an entry
showing that the person named has a right to demand
something but not necessarily money." In commerce, credit
pertains to "an exchange transaction." In another sense, credit
may be held synonymously with specific reference to the
buyer's credit standing, that is, the ability to obtain goods and
services, or even money against a promise to pay for them at a
later date. Likewise, the term credit may refer to a credit
instrument, that is, a document which serves to evidence the
existence of a business transaction anchored on trust.
THE USE OF CREDIT
The use of credit especially in the business world is so
common that, by way of compliment, it is generally called
as "the life-blood of business."
For the sake of emphasis, business entities and
individuals find credit a distinct convenience.
It helps total production, employment, and
consumption, just as it helps raise the national income
and improve people's standard of living.
ADVANTAGES OF CREDIT
1. Credit facilitates and contributes to the increase
in wealth by making funds available for productive
purposes.
2. Credit saves time and expense by providing a
sater and more convenient means of completing
transactions.
3. Credit helps expand the purchasing power of
every member of the business community from
producer to the ultimate consumer.
4. Credit enables immediate consumption of goods
thereby providing for ar increase in material well-
being.
5. Credit helps expand economic opportunities
through education, job training and job creation.
6.Credit spreads progress to various sectors of the
economy.
7. Credit makes possible the birth of new
industries.
8. Credit helps buying become more convenient
for customers
DISADVANTAGES OF CREDIT
1. Credit, at times, encourages speculation. This happens
when those in charge of the savings of other people throw
caution to the winds and thereby become careless and
unscrupulous in their eagerness and desire to expand credit
and make huge profits.
2. Credit also tends to contribute to extravagance and
carelessness on the part of the people who obtain them.
3. Because of credit, many entrepreneurs resort to over-
expansion.
4. Credit causes one businessmen to be dependent upon
others.
THE COST OF USING CREDIT
To use credit wisely, it is necessary to know how much it
costs. But it may be asked:
What then determines the cost of credit? The price of
credit, like the price of almost any other good or service,
depends upon the cost of providing it.
When you use credit, the price you pay has to cover the lender's
cost plus a fair profit. The reason why credit charges vary is
simple.. Some lenders charge higher rates than others.
In general, however, all sellers of goods produced by means of
borrowed funds have the same kinds of costs: interest, operating
expense and risk.
In general, however, all sellers of goods produced by means of
borrowed funds have the same kinds of costs:
Interest - Money has many uses anyone who extends credit
cannot use the money loaned in some other way until the debt
is paid. He, therefore, has a right to charge for its use. This
charge is called interest. Interest is usually expressed as a per
cent, such as 12 per cent. This is the interest rate. An interest
rate of 12 per cent means that for every peso owed, the
borrower must pay 12 centavos. Unless stated otherwise,
interest is usually quoted as an annual charge.
.
Operating Expenses- It is hardly necessary to point out the
observation that business enterprises that extend credit
shoulder the same operating expenses as other businesses.
They must pay rent. They also pay for light, telephone service,
water and others just as they must pay their workers for their
services in production.
Risk - Extending credit always involves a risk for the lender since
he can never be certain that the debt will be paid. When a
lender is unable to collect a debt, he takes a loss. Losses from
unpaid debts represent an added cost of doing business.
Needless to say, such losses are highest among lenders who
assume the greatest risk.
FOUNDATIONS OF CREDIT
Foundations of Credit are:
1.creditors must have absolute confidence in the personal
character and in the ability as well as willingness of their debtors
to accept honor and settle their obligations.
2. proper facilities must exist for performing credit operations.
Sources of credit information must be available to those granting
credit if a correct and proper evaluation of credit rating is to be
made which is the first criterion in the grant of credit.
3. the money standard must be stable.
4. the government must stand ready to assist the creditor in
enforcing payment of loan extended to the debtor. Our laws
recognize and protect the enforcement of valid obligations arising
from contracts freely and lawfully entered into by the contracting
parties. While it is true that, as provided in our Constitution, no
individual shall be imprisoned for non-payment of a debt,
nevertheless, our courts can order properties of debtors attached
for their refusal to honor and pay their indebtedness and have
them sold at public auction to cover their obligations.
THANK YOU!
