Running Head: LENDING MONEY

Lending Money
[Name of the Writer]
[Name of the Institution]
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Lending Money

Credit is a complex and multifaceted phenomenon. Along with the categories of

"production", "exchange", "money", "capital", "finance", credit is included in the circle of

economic categories of the basic order. Credit is the most important economic category,

reflecting the special value relations regarding the provision of money resources in debt, as a rule

with interest payments.

A loan is the provision by a bank or a credit institution of money to a borrower in the

amount and on the conditions provided for by a loan agreement, under which the borrower is

obliged to return the amount received and pay interest on it.

At the same time, credit should be considered from an institutional perspective, as a key

element in the overall financial and credit structure of the economy.

By economic nature, a loan category is close to credit. According to law of UK, a loan is

interpreted as the transfer by one party (the lender) to the other side (borrower) of money or

other things determined by generic characteristics, and the obligation of the borrower to return

to the lender the same amount of money (loan amount) or an equal number of other things

received by him of the same kind and quality. Thus, a loan is a broader concept than credit,

because it involves not only money, but also things as an object of relations.

Credit as an economic phenomenon has a long history of evolution. Its occurrence is due

to objective factors, primarily the development of exchange relations. The prototype and direct

predecessor of modern credit was usurious credit as a typical companion of pre-capitalist

formations, which, in turn, originated during the decomposition of the primitive communal

system and existed under feudalism. K. Marx attributed usurious capital, as well as trading

capital, to "antediluvian forms of capital that ... are observed in the most diverse socio-economic
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formations". Loans to small producers, peasants, artisans, slave owners, landowners, and feudal

lords were provided with high interest rates on usurious capital, which was used

unproductively. In other words, it was used not as capital, creating surplus value, but as a means

of payment and purchasing means. But on the basis of usurious capital, there was a consolidation

of monetary resources in anticipation of the initial accumulation of capital. Thus, usurious capital

was the forerunner of loan capital as the basis of capitalist credit.

Under capitalism, there was a separation from industrial capital and the isolation of

commodity capital and money capital in the form of loan capital. On this basis, a loan

arose. Credit is a system of relations between loan (money) and industrial or trading

(functioning) capitalists regarding the provision and use of loan capital. Loan capital is the

money capital provided in a loan. Both lenders and borrowers use money as capital. This is the

fundamental difference between a usurious loan as a money loan and a capitalist loan as a capital

loan. Thus, in the framework of capitalist relations, credit has become a form of movement of

loan capital.

But how did loan capital come about? For this, we should recall the metamorphoses of

industrial and commercial capital and their circuit. Capital advanced by entrepreneurs, in its

movement takes three functional forms - monetary, productive and commodity, and in each of

them makes its own circuit. Capital constantly and continuously passes from one form to another

and is simultaneously in all three forms. Continuous movement is a trait organically inherent in

capital. Moreover, "the circulation of capital is normal only as long as its various phases without

delay pass one into the other".

In the course of the circulation and turnover of productive capital, various free economic

entities objectively and inevitably generate temporarily free cash as the main source of loan
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capital. This is due to the specifics of the functioning of various parts of fixed and working

capital and the release on this basis of part of the cost of production. The factors of accumulation

of temporarily free funds are the uneven production and circulation of funds, the mismatch of

cash flows to the enterprise with outflows of resources for organizing production, purchasing raw

materials, wages, and updating fixed assets.

The pool of free cash resources of producers is not the only source of loan capital. It joins

any temporarily free resources accumulated in other institutional sectors - the savings of the

population in the form of deposits in banks or invested in the products of non-banking financial

institutions; accumulation of budgets, extra-budgetary and sovereign funds, funds of budgetary

institutions; resources of large institutional investors (pensionn funds, insurance companies,

mutual investment funds); resources of non-residents (including international financial and credit

institutions).

Simultaneously with the release and accumulation of funds, other functioning enterprises

have an additional, in comparison with their own resources, need for funds to maintain and

develop the business. The motives are the formation of seasonal stocks, prepayment for imports,

financing of construction and installation works, etc. Subjects of other institutional sectors —

households, the general government sector — also feel the need for additional financial

resources.

The imbalances and gaps between cash inflows and outflows are due to the specifics of

the enterprise, temporary, seasonal, cyclical, technological, industry, transport, logistics and

other factors. The unevenness of production and circulation, the nonlinear nature of the

circulation of funds - this is the soil on which credit arises. The monetary resources released

during the circulation by means of credit satisfy the need for them of other economic
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entities. Thus, credit is objectively a means of resolving the contradiction between the

unproductive static form of funds accumulated by some economic entities and the nature of

capital as a continuously increasing value in the hands of other entities. The availability of credit

solves the problem of the inevitable deadening of capital, the temporary inconsistency of the

scale of accumulation of resources and the need for their spending.

Credit, therefore, is a specific form of movement of money capital, a form of

accumulation and transfer of free money into a loan as loan capital, which can bring surplus

value. Loan capital represents a special kind of goods. Its use value consists in the fact that in the

hands of the borrower-entrepreneur it is used productively and makes a profit, part of which

takes the form of loan interest as a payment for the ability of loan capital to bring this

profit. Thus, in the process of using the loaned value, it is not only saved, but also increased,

which makes it possible to return its equivalent with a percentage.

An essential characteristic of loan capital is the specific form of its functioning. It is in

cash at the beginning and end of its movement. But between these stages there is a use of loan

capital by the borrower in a transformed form - the purchase of raw materials, equipment, other

assets, the organization of production, the sale of goods and, finally, the release from circulation

of a part of the value in cash for repayment to the lender. This process is described by the well-

known formula.

D-T-P-T-D

Since loan capital and credit are categories of redistribution of value in cash, only credit

provision and repayment should be considered credit relations. Only at this stage the lender and
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the borrower interact directly. The use of loan capital in a transformed form in the production

process is a prerequisite for its return in cash.

Loan capital meets the needs of subjects of the national economy (state, legal entities and

individuals) in free financial resources. These processes occur on the loan capital market, the

main participants of which are lenders, intermediaries and borrowers. Lenders are primary

providers of available funds; borrowers - persons experiencing a lack of resources and

demanding funds from lenders; intermediaries - financial institutions represented by banks and

non-banking organizations, which convert the free resources of primary lenders into loan capital

and deliver it to borrowers for a fee.

The main accumulator of resources and a universal creditor is the banking

sector. Concentrating free resources, banks lend to all subjects of the national economy. At the

same time, banks use other sources of loan capital (equity, central bank refinancing loans,

interbank sources, issued bonds, resources of non-residents, etc.).

In fig. 9.1 presents the composition of the sources of loan capital.

Fig. 9.1. The formation of sources of loan capital and their use
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Let us consider in more detail the subjects of credit . In general, they are the lender and

the borrower. Their position as a creditor and borrower is often a modification of the initial

position of the seller and buyer. This happens, for example, in the case of a deferred payment,

which is, in fact, a form of credit.

The characteristics of the lender and the borrower cannot be presented autonomously

from each other. They can be described only in the context of the closest relationship of these

entities in the framework of credit relations. The lender and the borrower condition each other

with their presence, and their inextricable unity is the essence of the credit relationship. In

addition, the diversity of economic life makes it possible for the same person to act

simultaneously or alternately as a lender or borrower. In fact, an enterprise can be credited and

lend to other entities. The state, depending on the state of public finances, also acts both as a

sovereign borrower and as a creditor. Households can accumulate savings by acting as primary

lenders, but they can also be borrowers.

Historically, the first creditors were individual entrepreneurs, but subsequently banks

appeared as universal lenders. If a bank acts as a creditor, it uses mainly borrowed funds as credit

resources and only in a small amount - equity. The Bank, attracting the resources of enterprises,

the state, citizens, thereby lends to them and at the expense of these resources lends to other

economic entities.

Thus, banks act as lenders squared, as intermediaries in credit relations between primary

lenders and borrowers. Any mediation, on the one hand, increases the degree of riskiness of a

transaction, but on the other hand, facilitates it and saves transaction costs. The lender, therefore,

whoever he is, carries out an important public mission to awaken sleeping capital and transform

it into a productive asset.

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And what are the characteristics of the status of the borrower? The borrower is a recipient

of loan capital; this is the party receiving the loan. Just as the first creditors were individuals and

enterprises, the first borrowers were individuals. Only with the development of the economy and

the emergence of banks in the credit relations in the status of a borrower were institutional units

of all institutional sectors involved - enterprises, state bodies and budgetary institutions,

households, as well as non-residents. The circle of borrowers also includes enterprises of the

financial sector - banks, non-bank financial intermediaries. In particular, banks, as

intermediaries, are universal structures - both borrowers and lenders.

The role of the borrower can be any competent legal or natural person who has property

and (or) earns income. This is an important guarantee for the lender to repay the loan. The legal

feature of the status of the borrower is his identification as a temporary owner, and not the owner

of the loaned resources. This follows from the essence of the loan as the transfer of funds for use,

rather than ownership. The productive use of the loan allows you to repay it with a percentage

that expresses the special use value of the loan capital - the ability to generate income.

The status of the borrower implies its sovereign, independent and at the same time equal

position with the creditor. This is expressed in the voluntary, compromise and responsible

conclusion of a loan agreement. Any loan agreement can be considered as a form of

harmonization of the interests of the lender and the borrower. We believe that equal parties are

the fundamental basis of loan agreements. The borrower is not dependent on the lender in the

legal sense. His obligation to repay the loaned value with interest is based on the economic need

to use the loan productively as productive capital as part of his business. But the lender does not

interfere with the sovereign affairs of the borrower. His powers are limited to a preliminary

calculation of the effectiveness of the credited transaction, verification of the intended use of the
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loan. But even credit sanctions cannot be regarded as dictates by the creditor of his will. This is a

legal form of protecting his interests, as well as the borrower has the rights supported by the

contract. In general, the lender and the borrower have equal rights and obligations of different

contents.
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