Question

Why is credit important for economic development? Explain.

Hint:

Show how credit meets the working capital needs of production, helps complete work on time, carries farmers through the season, and why the rate of interest decides whether it helps or harms.

Answer 1

Concept:

• Credit means an agreement in which the lender supplies money, goods or services to the borrower in return for a promise of payment later.
• It becomes important for development when it is used for a purpose that increases the income of the borrower.

Step 1: Credit supplies the working capital that production needs.
Production cannot wait until money has been collected from earlier sales. Raw materials have to be bought and wages paid before the goods are ready.
Credit meets these ongoing expenses of production so that work can begin on time.

Step 2: It allows producers to complete work on time and earn more.
Consider a shoe manufacturer who receives a large order. He obtains credit to buy leather and pay his workers, completes the order within the agreed time, delivers the shoes and receives payment.
After repaying the loan he is left with a larger profit than before.

Step 3: It carries the farmer through the crop season.
A farmer needs money at the beginning of the season for seeds, fertilisers, pesticides and water, but earns only after the harvest. A crop loan bridges that gap and is repaid from the sale of the crop.
Without it, much land would go uncultivated for want of cash.

Step 4: Cheap credit must reach everyone for development to follow.
Cheap and affordable credit is crucial for the development of the country. Where the poor have to depend on informal lenders charging very high interest, borrowing leads to a debt trap instead of growth.
This is why the expansion of formal credit and of self-help groups matters so much.

Final Answer: Credit is important because it provides the working capital that production requires, lets producers and farmers complete their work on time and earn more, and, when it is cheap and available to all, allows even small borrowers to invest and raise their incomes.