Definition of Credit

Encyclopedia of Banking and Finance describes the origin and defines credit as,
Credit derived from Latin word credo means I believe, and usually define as the ability to
buy with a promise to pay, or the ability to obtain title to, and receive goods for enjoyment in
the present although payment is deferred to a future date.

Report of the Committee on Consumer Credit, (Vol. Cmnd. 4596, HMSO, London, 1971,
Para.1.2.2) defines credit and explains its function in this way,
Credit is the provision of financial accommodation to a person, in return for a promise to
repay it at some future date. It may be extended as cash, or supply of goods or services. The
former type of credit is called lender credit and later is referred as vendor credit. Whatever the
classification may be, the economic function of credit is, it enables a person to spend in
excess of his/her actual means in present.

In an economy there exist two units. One is a surplus unit and other is a deficit unit. The
normal characteristics of credit is that, the surplus unit in the economy, it may be an
individual, a corporate body or a governmental institution, has surplus money but denies
himself the immediate use of money already in his possession. On the other end, the deficit
unit in the economy has an immediate need for the use of the money. Surplus unit makes this
money available on a temporary basis to deficit unit in the economy. This kind of transfer of
purchasing power from savers (the lenders) to users (borrowers) termed as credit and it paces
the economic activities and supports maximum growth and development in the economy
(Stals 1998, 1).