Definition----Credit

• Bank credit is the total amount of funds a person or business can

borrow from a financial institution.

• Credit as an arrangement in which the borrower borrows money

from the lender and then pays back the lender the money along
with interest.

• Credit approval is determined by a borrower's credit rating,

income, collateral, assets, and pre-existing debt.

• Bank credit may be secured or unsecured as well as funded and

unfunded
 key roles of bank credit in the economy

• Bank credit is essential for fueling economic growth.

• The availability and cost of credit influence economic activity

and play a significant role in shaping the overall health and
performance of the economy by:
– supporting businesses and consumers,
– facilitating trade and commerce,
– promoting investment in infrastructure,
– maintaining financial stability,
– reducing income inequality,
– fostering innovation and entrepreneurship.
 key roles of bank credit in the economy

1. Supporting Consumer Spending:

– Bank credit enables individuals to make large
purchases, such as homes, cars, education, and
other goods and services, through loans and credit
cards.
– Consumer spending accounts for a significant
portion of economic activity, and access to credit
allows consumers to smooth out their
consumption patterns over time.
 key roles of bank credit in the economy

2. Facilitating Trade and Commerce:

– Bank credit facilitates domestic and international
trade by providing trade finance services, such as
letters of credit, trade guarantees, and export
financing.
– Businesses can use these financial instruments to
mitigate risks, finance imports and exports, and
expand their trading activities, thereby promoting
economic integration and globalization.
 key roles of bank credit in the economy

3. Financing Investment and Business

Expansion:
– Bank credit provides businesses with the
necessary funds to invest in new projects, expand
operations, purchase equipment, and innovate.
– Entrepreneurs and businesses often rely on bank
loans to fund their growth initiatives, which in
turn stimulates economic activity and creates
employment opportunities.
 key roles of bank credit in the economy

4. Promoting Investment in Infrastructure:

– Banks play a vital role in financing infrastructure
projects, such as roads, bridges, railways, airports,
and utilities.
– Infrastructure investment contributes to long-term
economic growth by enhancing productivity,
reducing transportation costs, and improving
access to essential services.
 key roles of bank credit in the economy

5. Stabilizing Financial Markets:

– Bank credit helps stabilize financial markets by
providing liquidity and acting as a lender of last
resort during times of financial distress.
– Central banks use various monetary policy tools,
such as open market operations and discount
window lending, to manage liquidity conditions
and support the functioning of financial markets.
 key roles of bank credit in the economy
6. Promoting inovation,Entrepreneurship and Small Business
Growth:
• Bank credit supports innovation and entrepreneurship by providing funding to
startups, small and medium-sized enterprises (SMEs), and technology ventures.
• Entrepreneurs can access bank loans, venture capital, and angel investments to
develop new products, services, and technologies that drive economic progress
and competitiveness.
– Bank credit plays a vital role in fostering entrepreneurship and supporting
the growth of small and medium-sized enterprises (SMEs).
– Small businesses often rely on bank loans and lines of credit to start or
expand their operations, invest in equipment and inventory, hire employees,
and innovate.
– Access to credit enables entrepreneurs to pursue their business ideas, create
jobs, spur innovation, and contribute to economic dynamism and
competitiveness.
– Banks also provide specialized services and support to SMEs, such as
business advisory services, mentoring, and networking opportunities, to help
them thrive and succeed in the marketplace.
•
 key roles of bank credit in the economy

7. Alleviating Income Inequality:

– Access to bank credit can help individuals and
households improve their economic well-being by
providing opportunities for education,
homeownership, entrepreneurship, and asset
accumulation.
– Affordable credit can empower marginalized
communities and reduce income inequality by
promoting financial inclusion and social mobility.
 key roles of bank credit in the economy

8. Funding Education and Human Capital Development:

– Bank credit supports education and human capital
development by providing student loans, educational
financing, and training programs.
– Access to educational credit enables individuals to pursue
higher education, acquire new skills, and invest in lifelong
learning, enhancing their earning potential and employability.
– Investment in human capital contributes to economic growth,
productivity gains, and social mobility, as well as fosters
innovation and competitiveness in the knowledge economy.
 key roles of bank credit in the economy

9. Crisis Management and Economic Recovery:

– During economic downturns or financial crises, banks play a
crucial role in providing credit to stabilize the economy and
facilitate recovery.
– Banks may increase lending to businesses and households to
stimulate demand, support job creation, and revive investment.
– Government interventions, such as liquidity support, loan
guarantees, and credit easing measures, often rely on banks to
channel credit to sectors most in need of assistance.
– Bank credit helps mitigate the adverse effects of economic
shocks, restore confidence in financial markets, and pave the
way for sustainable growth and recovery.
 Common types of bank credit available in Pakistan:

• In Pakistan, banks offer various types of credit facilities to

meet the financing needs of individuals, businesses, and the
government. Here are some common types of bank credit
available in Pakistan:
1. Consumer Credit:
– Consumer credit includes personal loans, auto loans, and credit
card financing provided to individuals for personal expenses, such
as purchasing consumer goods, vehicles, or funding vacations.
– These credit facilities allow individuals to access funds quickly and
repay them over time with interest.
 Common types of bank credit available in Pakistan:
2. Business Loans:
– Banks offer business loans to companies and entrepreneurs for various
purposes, including working capital financing, expansion projects, purchasing
equipment, and meeting operational expenses.
– Business loans may be secured or unsecured and come with flexible repayment
terms based on the borrower's cash flow and creditworthiness.
3. Trade Finance:
– Trade finance facilities, such as letters of credit (LCs), bank guarantees, and
documentary collections, support international trade transactions by providing
payment security and financing options to importers and exporters.
– Banks facilitate trade finance transactions to mitigate risks and facilitate smooth
trade flows between buyers and sellers.
4. Agricultural Credit:
– Agricultural credit is extended to farmers and agribusinesses to finance crop
cultivation, livestock farming, purchase of agricultural inputs, and investment in
farm infrastructure.
– Specialized agricultural financing schemes, such as crop loans, livestock loans,
and farm machinery loans, are offered to support the agriculture sector.
 Common types of bank credit available in Pakistan:
5.Home Financing:
– Banks provide home financing facilities, including home loans and mortgage
financing, to individuals for purchasing or constructing residential properties.
– Home financing options may include fixed-rate or variable-rate mortgages with
long-term repayment periods tailored to the borrower's financial situation.
6. Export Financing:
– Export financing facilities support exporters by providing pre-shipment and post-
shipment finance to fulfill export orders, cover production costs, and manage
working capital needs.
– Export credit schemes, export refinance facilities, and export refinance certificates
(ERCs) are available to exporters to promote export-led growth and foreign
exchange earnings.
7. Microfinance:
– Microfinance institutions (MFIs) and banks offer microcredit and microenterprise
loans to low-income individuals, small businesses, and entrepreneurs in
underserved areas.
– Microfinance initiatives aim to alleviate poverty, promote financial inclusion, and
empower marginalized communities through access to credit and other financial
 Common types of bank credit available in Pakistan:
8. Government Credit Programs:
– Government-sponsored credit programs, such as Prime
Minister's Youth Loan Program, Kamyab Jawan Program, and
agricultural credit schemes, provide subsidized loans and credit
guarantees to targeted sectors and beneficiaries.
– These programs aim to promote entrepreneurship, job creation,
and socio-economic development by increasing access to credit
for priority sectors and segments of the population.
• These are some of the main types of bank credit available in
Pakistan, catering to the diverse financing needs of individuals,
businesses, and sectors of the economy. Each type of credit facility
comes with its own terms, conditions, and eligibility criteria, which
may vary depending on the bank's policies and regulatory
requirements.