Credit theories: classification of theories, characteristics, description, development history and functions

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

During the long history of lending, banks have created various systems of grouping loans based on certain criteria in order to improve the efficiency of credit management. Accordingly, the client can receive a loan in various forms, depending on the situation and conditions.

Evolution of credit theories

The theoretical justification for loans branches into two main areas. This classification is represented by naturalistic and capital-creating theories.

Naturalistic theory

The beginning of the naturalistic theory of credit was laid by A. Smith and D. Ricardo, who considered loans as one of the forms of turnover of productive capital. The main aspects of this theory include the following points:

• In the role of the object of the loan are natural material goods.
• Loan capital is identified with productive capital.
• Banks act as an intermediary in the movement of capital, and a passive role is assigned to credit,providing a turnover of productive capital.
• Credit as an independent financial unit does not generate real value.
• Demands arising from the process of capital turnover limit the scope of credit development.
• Profit generated as a result of the turnover of productive capital is the source of loan interest - income from invested capital.

Capital Creation Theory

In the middle of the 19th century, the leading position in the economy was taken by the capital-creative theory of credit, characterized by the following ideas:

• The reproduction process does not affect credit.
• The main factor in the development of the economy is credit.
• Banks are structures involved in the "production" of loans.
• Credit is productive capital as it acts as a source of profit.

The ideas of this theory of credit were formulated by the Scottish financier and economist J. Lo and the English economist G. McLeod. The German banker A. Gan, the English economists J. M. Keynes and R. Hawtrey, and the American economist E. Hansen at the beginning of the 20th century continued to develop the capital-creative credit theory in their works. Scientists have introduced the following provisions into the methodology of this theory:

• The leading role in the economy belongs to banks.
• Active operations are the basis of banking.
• Credit is a source of bank capital as it creates deposits.
• Credit is a factor of economic growthand expanded production, as it is a source of capital.

Money capital, which is released in the process of turnover of commercial and industrial capital, and financial savings, formed in the process of movement of funds of the population, together form loan capital. Lending is possible only on the basis of the listed resources. Credit can become an inflationary factor limiting economic growth.

Credit limits

In the economy, the scale of credit transactions is limited. According to the general theory of money and credit, the boundaries of bank and commercial credit are distinguished.

Commercial credit limits

What determines the boundaries of a commercial loan? This indicator is due to the manifestation of the following criteria:

• The purpose of using the loan is to serve the circulation and production of goods and products, that is, to meet the need for working capital.
• Direction of use - the parties to such a loan are characterized by economic ties.
• Term limit for a commercial loan that fits within a normal production cycle.
• The possibility of expanding a loan based on bill circulation does not cancel the restrictions on the amount.

Bank credit limits

According to the theory of finance and credit, the boundaries of a bank loan are determined by the following criteria:

• The resource base of each loan is based on liabilities, from whichdepends on the maximum loan amount.
• The loan portfolio of a banking organization must comply with the principles of liquidity, which makes it impossible to issue loans to certain categories of borrowers. The system of economic regulations is responsible for such regulation.
• Business needs limit the maximum need for loans.

Classification of scientific schools researching credits

The fundamental factor in the systematic study of theories of credit is the classification of scientific schools that are not tied to a specific educational and pedagogical activity. There are four main scientific schools, taking into account the credit paradigm - a specific model for posing problems and their solutions that affect the socio-economic significance of credit:

1. Nihilistic. Credit corrupts the socio-economic system, having a negative impact on it.
2. Capital-creating. Credit has a positive impact on the socio-economic system, ensuring unlimited and continuous economic growth.
3. Naturalistic or neutral. Credit is neutral with respect to the system, as it redistributes existing resources.
4. Investment and financial. According to this theory, credit is an integral part of the formation of the flow of investment financing in the economic system.

Modern theories

In the theory of credit before the economic crisis of 1929-1933years, the following representations were considered the main ones:

• Credit expansion of the banking system. It is carried out by lowering the cost of credit, simplifying its conditions, provokes and allows you to support the rise of the industry.
• The amount of money supply in the state limits the credit expansion of banks in terms of exchanging banknotes for gold.

The practice of cyclical development of a market economy has gone against the above provisions, since at specific phases of the cycle the inflationary nature of unlimited lending has a negative impact on the crisis, exacerbating it.

The provisions of the capital-creative theory of credit in modern conditions play the role of the methodological basis of the concepts of monetary regulation of the economy - monetarism and neo-Keynesianism, which imply credit expansion and credit restriction as anti-crisis measures. On the basis of the capital-creative theory, the concept of a credit or deposit multiplier has been developed, which is widely used in the financial and credit policy of central banks. A reflection of real banking practice and the possibility of forming a number of deposits based on a similar amount in the course of a credit operation is the model of multiplier deposits.

Western economists in their research work are currently focusing not on the characteristics of credit relations, but on the features of their functioning in practice, respectively, their activities are of an applied nature.

Until the 90s of the XX century inthe domestic economy adopted the only credit theory of Karl Marx, based on the following provisions:

• Real capital is formed only in the process of production, but not created by credit.
• Cash savings of citizens and the state, as well as temporarily free and pre-mobilized money capital act as sources of loan capital.
• The growth rate of real capital is inferior to the growth rate of loan capital. This is due to the increase in state and private sector revenues, the constant development of the credit system and other factors.
• In the process of lending, banks form money capital by lending to customers by opening deposits without first collecting funds. This is required to ensure the turnover of commercial and industrial capital. The demands of the real capital recovery process limit the ability of banking institutions to form deposits and accumulate cash capital.

The studies mentioned above in the works of Western and domestic economists, affecting the theory of credit, today are mainly applied in nature.