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Q- 4. Explain different advantages and Disadvantages of Credit.

Ans: Credit is the base of banking systems and is one of the most effective
tools of frequent and healthy economic activities. Credit is providing a lot of
benefits to economies. Though dangers are also there but it is benefitting the
economies as:
Advantages of Credit:
1- Economy in the Use of Metal: Credit transactions and system of credit
in the country has reduced the use of metal for issuance of money. Metal
is used for making coins or is kept as reserves against the issued notes.
Credit money created by banks does not involve use of metal.
2- Availability of Working Capital: Shortage of funds can badly affect the
workings and routine operations of any industrialist. He can meet the
needs of funds by having credit facility from any bank or financial
institution. He need not to sale fixed assets for making payments for raw
material, salaries or other routine expenses.
3- Issue of Debentures: It is a tool of obtaining funds from general public.
When funds are required by firms, funds can be borrowed from any bank
or even from general public. Funds are borrowed from general public
against issuance of bonds or debentures. These funds are refunded with
interest at some future date. During the period of credit organizations
can easily arrange the payments of interest and also the principal
amount.
4- Case of New Enterprises: Threats of failure are preventing many
investors from taking bold steps in early days of their businesses. It can
also be said that people behave in more conservative way in starting
days. Credit facilitates these young firms to develop resources at a rapid
speed.
5- Large Scale Production: Large capital makes it possible to enjoy the
economy of large scale. To accumulate capital funds are borrowed from
individuals and institutions. When operations are carried on large scale
per unit costs are reduced. Quality of products is also increased by
operating at large scale. Large scale production requires accumulation of
large amounts of capital which is met by obtaining credit.
6- Use of Funds for Productive Purposes: Banks and financial
institutions are converting idle funds kept in the form of savings into
capital. Banks are getting savings of people in form of deposits and are
creating loans and are advancing loans to businessmen who are in needs
of funds. Credit system makes it possible to shift idle funds to more
productive hands.
7- Increased Transactions: Credit is not available just to businessmen
even it is provided for consumption purposes. Banks are providing loans
for the purchase of consumer goods like vehicles, refrigerator, washing
machines, air conditioners etc. This credit facility for consumption goods
has increased the number of transactions and also the volume of

Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura.
Contact: 0334-6988867, 0321-7990028, 0301-4817282
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business of manufacturers of such goods. Such development might have

not possible at this pace without credit.
8- International Payments: Payments are deferred for imports and
exports and bills of exchange and other credit instruments are used for
making payments and international level. Now there is no need to
accumulate gold or other metallic reserves for making international
payments.
9- Availability of Funds to Governments: Governments in developing
countries like Pakistan are greatly facilitated by credit system. As in the
days of needs funds are borrowed from both local and foreign sources.
Disadvantages or Dangers Associated with Credit:
A rosy picture of credit facility and credit system has been portrayed
above. No doubt credit system is a great facility to everyone and is the major
cause of revolutions in business world. But it is also clear that it has dangerous
potentialities. If it is not used with care and attentiveness then it can cause
dangers which are as under:
1- Over Issue of Credit: Over issuance of credit is one of the big
disadvantages of credit facility. General Price level is closely related to
the quantity of money in any economy. If money is issued in excess by
banks then prices will go up and purchasing power of people will suffer a
lot.
2- Bad Debts: In the countries where monetary systems are influenced by
politicians, bad debt losses have created hurdles in the development of
economy, individual business concerns and banks. People get loans and
then theses loans are never refunded. Capital and funds which
3- Inefficient Business Concerns: It is also observed that facility which is
provided to new entrants in the business world by credit system has
brought some inefficient concerns into existence. Such inefficient
business concerns create problems for all the persons and institution
when they go into liquidation. Liquidation affects each and every person
dealing with that concern.
4- Monopolistic Exploitation: Due to availability of capital to some
concerns only, it might happen that such concerns may become able to
develop powers to control the whole market and enjoy monopoly. In the
absence of capital it is relatively difficult to accumulate the large capital
to get undue advantage of sole supply or manufacture.
5- Borrowing by Governments: It has become a practice of governments
in many developing countries to obtain short and long term loans to meet
the financing requirements. Instead of generating funds from other
effective operations governments are using credit as a resort in the days
of need. Interest and principal payments are causing problems for
developing countries as a consequence of credits.

Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura.
Contact: 0334-6988867, 0321-7990028, 0301-4817282