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Decem: Financial Alternatives For Development Aid (5)

Written on June 1, 2007 by Max Oliva in Development

J.Pozuelo-Monfort, MSc candidate in economic development at LSE.
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The value chain of credit
Credit, a method of paying for goods or services at a later time, usually paying interest as well as the original money1. Credit is an abstract concept, as well as practical and necessary. Abstract because it consists of an agreement between two parties whereby the first will lend an amount of money to the second over a time interval in exchange for a compensation usually known as interest. Practical because it allows for the acquisition of goods in exchange for the borrower’s engagement of reimbursing interest and principal payments at a future date. Necessary because without the ability of borrowing money, or similarly of leveraging, the capitalist world of the beginning of the XXI century would not exist as we know it today.
Think of your daily life. Think of the extent to which it is credit-driven and you will realize how difficult it would be to get rid of it. In a basic example the application for a mortgage has become a very common procedure among those who would like to purchase real estate. A mortgage is nothing else than a loan requiring the borrower to make future payments during a predetermined amount of time. Future payments on a mortgage consist of principal and interest. Principal is simply the original price of the purchased good, whether it is real estate or an automobile. Interest incorporates the compensation paid to the lender (individual or entity) for having at one’s own disposal a certain amount of money. Interest rates are a reflection of how money depreciates as time passes by. A dollar today is worth more than the same dollar in a year’s time, because of a phenomenon called inflation, which not surprisingly, inflates prices as time passes by.
As a result the possibility of applying for a loan is important not only to individuals, but also to firms. Corporations often have to borrow to undertake a project requiring financing. A corporate project could involve the opening of a branch abroad, or the construction of a factory. In any case, credit only makes possible today’s life as we know it, both to individuals and corporations.
Continue reading Decem 05
1. According to the definition provided by the Cambridge dictionary.

Comments

Manuel Rincon June 13, 2007 - 4:33 am

What a great opportunity to introduce microfinance for poverty alleviation! ESCAP’s survey 2005 (UN Year of Microcredits) includes a great introduction (15 pages). Mohamed Yunus made a difference in understanding credit. Thanks, Manuel.

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