Ever since the Second World War ended, a majority of the countries that were affected by the war have had to rely on other governments and international banking institutions for funds to be able to handle their economic problems. For this reason, the problem of international credit has intensified. The International Bank for Development and Reconstruction, and the International Monetary Fund thus helped to organize for the provision of loans (Choudhry 2001).
Such loans were meant for the rehabilitation of industries, as well as the restoration of international trade in war-torn countries. These developments were arranged at the United Nations Monetary and financial conference in 1994 that was held at the Breton Woods, New Hampshire (Copeland 2000). The United States, through the land lease, the loan agreements, and the 1948 marshal plan, availed credit to a number of the European nations. In addition, the international bank for development and reconstruction also helped extend credit to countries in Asia, South America, and Africa, a move that led to the economic growth of these countries.
In the late 1970s and the early 80s, there arose two major credit problems. The problems were especially buoyed by the almost tenfold increase in the oil process that started in 1973. Consequently, many countries were forced to seek credit from other bigger economies that were willing to the extent of such loans. In addition, several countries already had in mind overambitious development plans. As a result, they were already overburdened with a debt burden. As the interest rates arose, coupled with a decline in the price of export commodities, these financial burdens became unbearable to these countries, and so they had no choice but to seek international credit (Copeland 2000).
History of international credit
The Pilgrims are believed to have initiated installment credit in the United States. Nevertheless, the use of loans or installment credits for purposes of selling merchandise is nothing new. Credit sales may have existed as early as the days of Pilgrims, but they are not as structured as installment sales are. As such, farmers used to re-pay their debts upon harvest, while debtors would pay their grocers as they willed. As early as the 1700s, it was not possible for merchants to survive without the issuance of credit. For example, between 1775 and 1811, a cabinetmaker in Philadelphia is believed to have recorded almost 92 percent of his business through credit.
The insistent on cash would have ensured that such customers took their businesses elsewhere. The modern international credit has largely been attributed to Franz Hermann Schulze-Delitzsch, a German, who in 1852 helped develop what was then known as the urban credit union system. At that time, there was a severe shortage of financial institutions in rural Germany, which had hitherto been viewed as being un-bankable, owing to their limited human resources and seasonal cash-flows. It is also through the efforts of another German, Raiffeisen, who refined the credit system into what was later called social capital, thus setting the stage for the current global credit identity. Upon his death in 1888, the concept had already spread to France, Italy, the Netherlands, Austria, and England, among several other nations. From a cultural perspective, credit has traditionally been viewed as for development, from the viewpoint of efficiency, stability, and rationalization (Germain 1997). In this regard, culture becomes important when one looks at how different groups of people traditionally viewed the idea of credit extension, and its usage in everyday life (Copeland 2000).
Forms of international credit
Sight credit: this is the most commonly used form of credit, and it makes it possible for the beneficiary to receive payments once the stipulated documents have been presented, and on such a condition that such documents are in compliance with the terms and conditions of the credit being extended (Valgreen 2007). As such, sight credit is a form of payment against documents.
Revolving credit: This form of credit has a provision for the frequency and value control of say, goods that may be shipped by an exporter to a buyer, within a stipulated period of time. For example, merchants and manufacturers may require a limited amount of commodities and raw materials each month in order to meet the requirements of the market and the maintenance of production, while also ensuring that the other operations in the business are still running smoothly (Valgreen 2007). Therefore, credit facilities come in handy. Irrevocable document credit: this is a conditional guarantee that credit banks issue for purposes of ensuring that a beneficiary gets paid for their goods upon the shipment of their goods, and once they have raised the necessary documents.
Functions of international credit
Principally, credit exists to enable the transfer of property from those that have it to those who would wish to use such a property but are cash-strapped. For, instance, a bank normally issues loans to individuals or governments who have plans to expand businesses or fund projects. Such a transfer of money thus works on a temporary basis, and a certain percentage of interest is usually tied to the credit supplied, payable in installments (Valdez 2004).
Credit transactions have proved indispensable, owing to the rapid economic development that is being witnessed in the world by countries that are ambitious, yet they are not in a position to fund their projects. Through credit transactions, properties that would otherwise have remained idle are usually put to use. This then enables a country to fully utilize the available resources. For example, a developing country may assume credit from an international lending institution such as the World Bank for the development of its road infrastructure. This would then enable the accessibility of the countryside, thus making it possible to market agricultural products that would otherwise go to waste but for the improved road infrastructure. Unlike countries in Asia, Africa, and South America, economically advanced countries of the west, through the use of credit, are better able to continuously keep their savings at work. This means then that the economic disparity between the developing and the developed countries continues to widen (Pilbeam 2005).
International credit thus enables to reduce such disparities, especially for third world countries, for they can channel their local resources for short-term projects at home. As long as credit institutions exist, then it becomes mandatory that people can trust one another. In addition, this calls for courts to rise up and help in the enforcement of business contracts. When adequate credit facilities are lacking, then the inhabitants of developing countries are naturally forced to hoard their savings, as opposed to putting such money into productive and profitable uses. Moreover, a lack of credit would also handicap the required tremendous investments for large-scale enterprise development, especially in developing countries (Choudhry 2001).
Economic agents and institutions that participate in international credit markets
During times of recession and following the occurrences of natural disasters, the affected countries may be unable to purchase foodstuffs, fuels, and other essential commodities. In order to provide assistance in such instances, organizations that allow for the subscription of member countries have been set up. The IMF is a typical example, and its members now approach 200. The fund allocates grants and credit to the successful applicants for purposes of promoting the economic recovery of member countries.
The International Bank for Reconstruction and Development has the objective of reducing levels of poverty in both the middle-income countries and their poorer and creditworthy counterparts (Fabozzi & Modigliani 2003).To achieve this, IBRD offers such countries guarantees, loans, analytical and advisory services, in order to promote sustainable growth and development. The International Finance Corporation is the credit lending arm of the World Bank, charged with the promotion of sustainable investment of the private sectors located in developing countries.
IFC is the largest source of loan and equity for the funding of private sector projects. In order to achieve its goal, IFC is involved in the financing of company projects in the developing world, as well as in the helping of private companies in the same region to mobilize finances in the international market. Additionally, IFC provides technical support and advice to both businesses and the government in matters pertaining to international credit (McInish 2002).
How credit crunch affects businesses and credit regulation
According to the World Bank, the current global credit turmoil, the rise in the inflation rate, coupled with the slowdown in economic progress by the industrial countries is projected to reduce the rapid growth that was being experienced by the developing economies. Additionally, the World Bank has observed that there could still be a worsening in the global economy if such financial turmoil as the U.S. housing market were to become more severe, hence leading to a prolonged effect. Up until recently, the international monetary fund and the World Bank had opined that the developing countries would not be affected by the current economic crisis that has greatly affected major banks in Europe and the U.S. while the bank expects a modest growth across most regions of the developing countries, the largest decline, however, shall be observed in the Pacific, East Asia, and Latin America. Notably, China is expected to witness a 2.5 percentage point fall in growth in 2009 to stand at 9.2 percent. Sub-saharan Africa in contrast, is expected to hit the highest growth rate in 38 years, at 6.5 percent (Valgreen 2007).
However, the World Bank is worried about the doubling in food prices that has been observed since 2005, as a result of a rise in demand for both food and biofuels. Consequently, inflation in the developing world is complicating efforts by governments to cushion the effects of financial turmoil and a slowdown in economic growth. This also complicates the roles played by fiscal and monetary policy in the maintenance of macroeconomic stability for a medium-term period. The striking of the appropriate balance therefore will differ from one country to the other, and it is therefore important for individual governments to be aware of such a limitation.
For any country that wishes to witness active economic development, it becomes important to amass the necessary financial resources to achieve such an objective. For the most part, the achievement of economic prosperity calls for loans and credit facilities. To this end, a majority of the developed countries have been able to utilize such facilities more than their counterparts from the developed countries. For this reason, such lending institutions as the World Bank, the International Monetary Fund, and the International Bank for Reconstruction and Development (a member of the World Bank Group) have been set up. International credit enables the development and tapping of natural resources, while also allowing countries to utilize their native resources for other development initiatives. Nevertheless, the current credit crunch that has currently led to financial woes in some major banks in the United States and Europe, and the housing market crisis in the United States are an indication of just how credit can lead to a fragmentation of even the most stable economies if not adequately addressed. It should therefore act as a wake-up call to all of us that in as much as credit facilities are a necessary evil, nevertheless, we must attempt to handle financial matters with caution for the sake of future generations.
Choudhry, M, 2001, The Bond and Money Markets: strategy, trading, analysis, Oxford: Butterworth-Heinemann.
Copeland, L. S, 2000, Exchange Rates and International Finance, 3rd edition, London: Prentice Hall.
Fabozzi, F. and Modigliani, F, 2003, Capital markets: institutions and instruments, London: Prentice Hall.
Germain, R, 1997, the international organization of credit. London: Cambridge university press. 2008. Web.
McInish, T. H, 2002, Capital Markets’: a global perspective, Oxford: Blackwell.
Pilbeam, K, 2005, Finance Financial Markets,2nd ed. Macmillan Business.
Valdez, S, 2004, An Introduction to Global Financial Markets, 3rd ed. Macmillan.
Valgreen, C, 2007, the global financial accelerator and the role of international credit agencies. Web.