Credit and

Collection
The Nature and Functions of
Credit
The Development Of Credit
• Credit has, since ancient times to the present, served the
specific and relevant needs of the economy.

• Societies after passing through the process of food gathering

into primitive agriculture adopted the system of barter.
Pre-Spanish Time
• The barter system was used in the conduct of trade with the
foreigners.
• The Filipinos exchanged their native products, such as cotton, pearls,
betel, nuts, sinamay fiber etc. with the goods of the foreigners, like
porcelain, silk, ivory, etc.
• Hundred of years prior to the arrival of the Spanish colonizers, Filipino
traders were famous for their honesty and excellent credit record.
• Manila was the emporium of trade.
Spanish Time
• During the initial years of Spanish rule, free trade was encouraged.
• Subsequently, Spain adopted a policy of trade restrictions in line with
prevailing concept of mercantilism in Europe.
• Galleon Trade -> a product of mercantilism in the Philippines. The
Manila-Acapulco Trade.
• Obras Pias -> the forerunners of the banking institution in the
Philippines. The funds were donated by the rich citizens for religious
projects and managed by the religious orders.
• It neglected the more economic projects, especially rural development.
American Era
• Agriculture remained underdeveloped under the Spanish regime,
thus, American government gave priority to its development.
• American administrators introduced a better banking and credit
system such as the organization of the first agricultural bank in 1908
for farmers.
• In 1915, Rural Credit Law was enacted which initiated the
organization of agricultural cooperatives, particularly credit
association in every town all over the country.
• Rice and Corn Fund was established providing Php 1 million for loans
to the farmers credit cooperatives.
American Era (Continuation)
• Philippine National Bank – established in 1916 to remedy the shortcomings
of the credit system. It extended long-term loans to agriculture 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 unfair share in the
harvest
• The negative attitudes of the borrowers toward their debts influenced their refusal
to settle their financial obligations.
• They considered their loans as another form of doleouts and therefore they did not
feel the responsibility of paying the government lending institutions.
Under the Republic
• July 4, 1946 – The Philippines became a republic. A period of
reconstruction and rehabilitation
• October 29, 1946 – Rehabilitation Finance Corporation was
established and later on became the Development Bank of the
Philippines in 1958
• 1949 – Establishment of the Central Bank of the Philippines.
• 1952 – The Agricultural Credit and Cooperative Financing
Administration and rural banks were established for the benefit of the
farmers and other low-income groups in the rural areas.
Basic Concepts of Credit
• Credit came from the Latin word “creditum” which means trust.
• Credit refers to the ability to acquire something of value, such as
goods, services, securities or money, at the present time in return for
a promise to pay at some future time.
• Two parties involved in a credit transaction:
• Creditor
• Debtor
• Credit refers to a person or institution to whom future payment is to
be made whereas debt refers to the person or institution who is
obliged to pay in the future.
Basic Concepts of Credit (Cont.)
• Credit Instrument – The paper which contains in writing the obligation
of the debtor and the right of the creditor.
• Credit System – This includes credit, credit instruments, credit
institutions, laws and customs on credit lending and collection.

• A good credit system should be responsive to the needs and welfare

of the poor who constitute a great majority of our population.
Elements of Credit
• Trust – it implies that the creditor has faith in the ability and
willingness of the debtor to fulfill his obligations.
• Time of payment – borrower has an obligation to pay his debt in a
definite time or date.
• Risk – uncertainty that an unfavorable event may occur
Bases of Credit
• Character – refers to the personal integrity of the borrower
• Capacity – the managerial ability to use wisely and efficiently his loan
and pay it
• Capital – refers to the resources owned by the borrower
• Collateral – a safety measure for the payment of loans
• Condition – refers to the factors which affect the ability of borrowers
to pay their financial obligations
Sources of Credit Information
• Internals records – data which are in the files of the bank
• Applicant’s information
• Business references – upon request, financial institutions give
information among themselves regarding the credit standing of loan
applicants.
• CB Credit Information System
Users of
Suppliers of Credit
Credit
• Consumers • Banks
• Businessmen • Credit Cooperatives
• Government • Pawnshops
• Unlicensed Money Lenders
• Other institutions
Functions of Credit
• Economic Function
• Through credit, more goods and services are acquired.
• Social Function
• People enhance their standing through their economic resources, such as
money, land, cars, houses and other prestigious properties.
Advantages of a Credit Economy
• It is more convenient, economical and effective type of money.
• Permits the business firm to make liquid or spendable non-liquid wealth
• It becomes easier for dynamic enterprising men to enter into business.
• Provides security and more income to wage earners.
• Government projects can be financed through bonds and loans.
• It accelerates production, employment, income, consumption, etc.
• It allows consumers to enjoy the consumption of goods and services
sooner
Disadvantages of a Credit Economy
• Heavy borrowings by the government may lead to inflation.
• Borrowing by the government may likely lead to extravagance and inefficiency.
• Goods would be repossessed in case of failure to fulfill promise to pay.
• The ability to fulfill financial obligations may be difficult at the time when
payment is due.
• Business errors in the application of credit funds have chain effects on the whole
economy.
• Excessive loans from other countries by the government may likely be a burden
to the future generation, unless these are wisely invested in the economy.
• In some cases, credit reduces the future consumption of debtors.