AFRICA NAZARENE UNIVERSITY
NAME: NELVIN AMUNGA
STUDENT NO:16G01ABA036
UNIT: CREDIT MANAGEMENT
UNIT CODE: FIN 408
LECTURER: ROSEMARY MUKUNA
Due date 03/03/2020
Introduction
According to Koroma, B. (2018), Credit creation has proved to be an important function of
commercial banks since it is the main source of commercial banks’ internally generated
revenue. From the commercial perspective, credit involves giving out resources obtained
from depositors held in their customers’ accounts, to another party at an interest rate higher
than what they pay to suppliers of funds with the aim of maximizing profit.
Financial accommodation to industries:
Industries get short-term credit from foe commercial banks and the long-term credit from the
development banks. This enables them not only to tide over the temporary financial
stringency but also to maintain continuity in their activities.
Economy in the use of money:
The credit system economises the use of metallic money and paper notes. The credit
instruments like promissory notes, bills of exchange, cheques, credit cards, etc. are used in
the modern society as money-substitutes, and so they have reduced the cost of issuing
metallic money and paper notes. Likewise, they have minimized or eliminated the risks and
inconveniences involved in cash transactions.
Easy exchange and remittance:
The credit instruments minimize the cash transactions and thereby make the scope of
exchange wider and the remittance of funds easier. They permit wealth to be transferred to
places where more economic use can be made of it.
Promotion of trade especially foreign trade:
The bills of exchange have increased the scope of both internal and external trade as the
trade- payments can now be made without the transfer of funds or gold. The commercial
credit enables the buyers to make payments for the value received at convenient times. So,
the credit system enables the traders to tide over periods of difficulty.
Expansion of bank credit:
The credit system enables the banks to create a large amount of credit out of a small amount
of deposit. This has resulted in the vast expansion of bank deposits.
Benefits to consumers:
Bank credit to the consumers enables them to buy durable consumer goods, especially
household goods on instalment basis.
Credit to the government sector:
The credit to the government also helps them to meet both temporary necessities and growth
requirements.
Stability:
If the issue of credit is properly regulated, it tends to stabilise trade and reduce fluctuations in
prices.
Helpful to production:
The credit system facilitates large- scale production. It stimulates and finances production in
anticipation of demand. Producers nowadays very often obtain credit from banks to begin and
expand their operations. Even the farmers and the small artisans depend on bank credit for
production. The wholesale and retail traders conduct their trading with bank credit. It is
rightly said that the credit system lubricates the production processes and keeps the wheels of
production constantly moving. There is a steady flow of goods from the wholesaler to the
retailer and from the latter to the consumer with the help of credit.
References
Jens, B.-A., Lars, R. and Morten, S. (2014) Money, Credit and Banking. Monetary
Review. 3rd Edition, Danmarks National Bank, Danmarks, 65-81.
Achou, T.F. and Tengu, N.C. (2008) Bank Performance and Credit Risk
Management. Diva Portal, Hisborn.
Charles, O. and Kenneth, O.U. (2013) Impact of Credit Risk Management and Capital
Adequacy on the Financial Performance of Commercial Banks in Nigeria. Global
research, Lagos.
Small-Business-Briefs/Small-Business-Brief-Credit-Management (2016).
Abedi, S. (2000) Highway to Success, Credit Management Journal.
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