NATURE AND

FUNCTIONS OF
CREDIT

Reporter:
Hazel Ann Marie Escoro
Jenny Rose Estrada
Rosemarie P Culili
 Nature and Function of Credit
 Various stages of economic development.
 It is most evident that the credit system among others things, has
been very instrumental in the development and progress of nations.
 The rate of economic growth of a country depends on the availability
of sufficient credit of course on the proper use of credit.
 Not prosperous countries United States, Canada, Japan, Europe are
becoming more progressive.
 the poor countries lack capital natural resource. Need credit
economic, social development, education, health, housing,
transportation, communication and technology.
 Their ability to obtain credit depends naturally on their capacity to
pay their debts.
The Development of Credit
 Credit being tool of development and progress of people and society.
 Credit has been improperly used by both individual and borrowers.

Pre-Spanish Time
 The Philippines had been trading with foreign countries.
 The barter system was used in the conduct of trade with the foreigners.
 The Filipino exchange their native products.

SPANISH TIME
 Spain adopted a policy of trade .
 A product of mercantalism policy in the Philippines was GALLEON TRADE.
 GALLEON TRADE was carried by transpacific galleons.
 Those who participated in Galleon Trade secured their loans from the OBRAS PIAS
 The fund of OBRAS PIAS were donated by rich citizen
 The funds of the OBRAS PIAS could been used for the development of country.
AMERICAN ERA
 The American administrators introduced a better banking and credit system
to promote economic development. The credit programs of the government
was the organization of the first agricultural bank in 1908 for the benefit of
the farmer. In 1915 the Rural Credit Law was enacted to complement the
agricultural bank. The Rice and Corn Fund was established providing 1Million
for loans to the farmers credit cooperative. To remedy shortcoming in the
credit system, the Philippine National Bank was established in 1916. In
extended long term loans to agricultural and industry.
 Factors the led to the failure of the credit program.
 Farmers did not have steady income due to destruction to their crops by
natural calamities.
 They were exploited by the landlords by giving them unfair share in the
harvest.
 The negative attitudes of the borrowers towards their debts influenced their
refusal to settle their financial obligations.
 They considered their loans as another form of dole outs and therefore they
did not feel the responsibility of paying the government lending institutions.
 UNDER THE REPUBLIC
 The scars of World War II still conspicuous when the Philippines became a
republic on July 4,1946.The national economy greatly needed money for
business and economic development. The Rehabilitation Finance Corporation
was established on October 29,1946.

 It provided credit facilities for the rehabilitation of agriculture. In 1958, the

Rehabilitation Finance Corporation became the Development Bank of the
Philippines. The financial system was established of the Central Bank of the
Philippines in 1949.
 BASIC CONCEPTS OF CREDIT

1.CREDIT
 CREDIT came from a Latin word "CREDITUM" means TRUST. Credit refers to ability to
acquire something of value.
TWO PARTIES INVOLVED IN CREDIT TRANSACTION
 CREDITOR -Who provides the thing borrowed
 DEBTOR -Who receives it and assume the obligation to pay.
DEBT & CREDIT
 DEBT -Refers to the person or institutions who is obliged to pay.
 CREDIT- Refers to a person or institution to whom the future payment is made.
2.CREDIT INSTRUMENT
 Paper contains in writing obligation of the debtor and the right of creditor.
3. CREDIT SYSTEM
 This speeds up economic growth of the country. It is possible that the credit
system can make the rich richer. A good CREDIT SYSTEM the needs and
welfare of the poor
 ELEMENTS OF CREDIT
A. Trust- it implies that the creditor has faith in the ability and willingness of the
debtor to fulfill his obligation.
B. Time of Payment- borrower has an obligation to pay his debt in a definite
time or date.
C. Risk- uncertainly that an unfavorable event may occur.

BASES OF CREDIT
1.CHARACTER – refers to the personal integrity of borrowers.
2.CAPACITY- refers to capital resources
3.CAPITAL- refers to the resources owned by the borrowers.
4.COLLATERAL-Title of land security for a loan.
5.CONDITION- a safety measure for the payments of loans.
 SOURCES OF CREDIT INFORMATION
It is possible for them to evaluate properly the credit worthless of borrowers.

SOURCES OF CREDIT INFORMATION

1.INTERNAL RECORDS
 Credit consumers records for instance.
2. APPLICANTS INFORMATION
 Important data about the credit worthiness, personal interview, direct
investigations, mailed questionnaires, analyses of financial statement of the
business.
3. BUSINESS REFERENCES
 Upon request financial institution give information among themselves
regarding the credit standing of loan applicants.
4.CB CREDIT IMFORMATION SYSTEM
 to ensure confidentiality, the CB assigns a reference number of each inquiry.
 USERS OF CREDIT
1. CONSUMER
 The role of credit has more extensive under the present modern marketing
economy.

2. BUSINESS
 Finance their business through credit. They borrow money from financial
institutions.

3. GOVERNMENT
 Their income from taxes and their internal credit are not enough to
implement their economic and social project. They borrow money from the
rich countries.
 SUPPLIERS OF CREDIT

1. BANKS
 banking system provides loan to individuals, firm and government.
2. CREDIT COOPERATIVES
 Credit associations grant loans to their members for productive and
providential purposes.
3.PAWNSHOP
 financial problems are saved or reduced by pawnshops. Borrowers offer their
valuable goods as collaterals for their small loans.
4. UNLICENSED MONEY LENDERS
 They are found in all places. Their credit scheme is illegal. The poor is the
victim of loan shark
5.OTHER INSTITUTIONS
 financial institutions which supply credit, such as investment and financing
companies, savings and loan association, insurance companies, GSIS AND SSS.
 FUNCTION OF CREDIT
This means the more essential needs are given the first priority. Economic
prosperity for all members of society is the natural aspiration of any economic or
political system.

TWO MAJOR FUNCTIONS OF CREDIT

1.ECONOMIC FUNCTION- through credit more goods and service are acquired

2.SOCIAL FUNCTION- to gain higher social status.

 ADVANTAGE OF A CREDIT ECONOMY

1.It is more convenient, economical and effective type of money.

2.Permits the business firm to make liquid or spendable non-liquid
wealth.
3. Through credit they could organize their own firm.
4.Provide security and more income to wage earners.
5.Government projects can financed through bonds and loans.
6. It accelerate production, employment, income, consumption etc.
7.Allows consumer to enjoy the consumption of goods and other things.
 DISADVANTAGE OF A CREDIT ECONOMY

1.Heavy borrowings by the government my lead to inflation.

2. Borrowing by the government may likely lead to EXTRAVAGANCE &
INEFFICIENCY.
3.Good will REPOSSESSED in case of failure to fulfill promise to pay.
4.The debtor may not be have cash or some liquid assets.
5. Business errors in the application of credit funds effects on the
company.
6.Excessive loan from other countries by the government may be burden
to the future generation.
7. Credit reduces the future consumption of debtors.