PHINMA – Cagayan de Oro College

College of Management and Accountancy

FIN 012 – CREDIT AND COLLECTION

Chapter 1 Nature and Functions of Credit

In the various stages of economic development, not a few former underdeveloped nations have achived
higher levels of stability and growth in both economic and social endeavors. It is most evident that the
credit system, among other things, has been instrumental in the development and progress of nations.
Needless to say, that he rate of economic growth pf a country depends on the availability of sufficient
credit, and of course the proper use of credit.

The Development of Credit

The credit system reflects in many ways the degree of economic and social values and institutions
pervading in a particular society at a given point in time. Credit being a tool of development and
progress of people and society, has, since ancient times to the present, served the specific and relevant
needs of the economy.
Pre- Spanish Time
The Philippines has been trading with the foreign countries such as China, Japan, Sumatra, India, Arabia,
Siam, Borneo, Java, the Moluccas and other East Indian island, when the Spanish conquerors arrived. The
barter system then 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 foreigners, like
porcelain, silk, ivory, etc.
Spanish Time
During the initial years of Spanish rule, free trade was encouraged. The goods of the Far East were
marketed to America through Manila and then Acapulco, Mexico. Manila was still a center of trade and
commerce in the orient.

A product of mercantilistic policy in the Philippines was the Galleon Trade. This was the Manila-
Acapulco trade. It was called galleon trade because it was carried on by transpacific galleons. Such trade
was government monopoly.

Most of those who participated in the galleon trade secured their loans from the obras pias.This were the
fore-runners of the banking institutions in the Philippines. The funds of the obras pias were donated by
the religious orders.

The credit systems were only a chosen few.

American Era
The American administrators introduced a better banking and credit system to promote economic
development, especially in the rural areas.
1908 – the first agricultural bank for the benefit of the farmers.

1915- The Rural Credit Law was enacted to complement the agricultural bank.

1916- Philippine National Bank was established, to remedy the short coming of credit system.

Under the Republic

July 4, 1946- Philippines became republic

October 29, 1946 – The Rehabilitation Finance Corporation was established, to provide credit facilities
for the rehabilitation of agriculture, commerce and industry. It also provide in the reconstruction of war-
damaged properties.

1949 – establishment of the Central Bank in the Philippines.

1952 – the Agricultural Credit and Cooperative Financing Administration (which later became
Agricultural Credit Administration whose functions have been taken over by Land bank in 1982)

1958 –the Rehabilitation Finance Corporation became the Development Bank of the Philippines

Basic Concepts of Credit

The word “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 a future time. There are 2 parties:

1. Creditor – who provides the thing borrowed

2. Debtor- who received it and assume the obligation to pay.

Obligation: Debt vs. Credit

Credit if it refers to a person or institution to whom the future payment is to be made.

Debt if it refers to a person or institution who is obliged to pay in the future.
Credit Instrument – refers to 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.

Elements of Credit

Trust – implies that the creditor or banker has faith in the ability and willingness of the debtor to fulfill
his obligations, be it an individual, corporation or government.
Time of payment – the borrower has an obligation to pay his debt I a definite time or date.
Risk – the ability of the borrower to fulfill his promise to pay may be reduced by circumstances beyond
his control such us natural calamities and personal misfortune.
Bases of Credit

Character – refers to personal integrity of the borrower.

Capacity – this can be measured by the managerial ability of the borrower, that is, his ability to use
wisely and efficiently his loan.
Capital – this refers to resources owned by the borrower, such as properties.
Collateral – usually, the title of a land is required as a security of loan.
Condition – the conditions affecting the geographical location, the enterprises and the general economy.

Sources of Credit Information

Internal Records – data which are in the files of the bank.

Applicant information – the best source of information is the applicant himself.
Business reference – upon the request financial institutions give information among themselves
regarding the credit standing of loan applicants.
CB Credit information system - Central Bank of the Philippines provides credit information to banks
(except rural banks) who which to obtain information about their applicants.
Other sources – business magazines, trade journals, government business reports and other business
section of the news paper are used by financial institution to supplement their credit information.

Users of Credit

Consumers – Many people borrow money, especially the poor, for the purchase of essential goods and
services like food, shelter, heath and education.
Businessmen – most businessmen, if not all, finance their investments through credit.
Government – poor and developing nations lack sufficient funds to finance their numerous development
programs.

Suppliers of Credit

Banks – the banking system provides loans to individuals, firms, and government.
Credit cooperatives – these credit associations grant loans to their members for productive and
providential purposes.
Pawnshops – many financial problems of students, poor housewives and small employees are saved or
reduced by pawnshops.
Unlicensed money lenders – this type of creditors have become popular since ancient times to the
present.
Other Institutions – this are other financial institutions which supply credit.

Functions of Credit

Economic function – through credit more goods and service acquired.

Social function – people enhance their social standing through their economic resources, such as money,
land, cars, houses and other prestigious property.

Prepared by:

Ms. Metonia S. Martinez

Instructor