In the world today, people obtain goods and services by buying them for cash, credit or by borrowing from their friends. Different countries in the world can obtain goods and services from other countries through offering them credit facilities then later on demanding for their repayment after a specified period of time. Credit refers to the money that is borrowed from the financial institutions or from friends so as that the purchaser of the goods and services may obtain them and later on pay back all the money that has been borrowed at a given period of time. A person is said to have a good credit history when he can honor credit repayment agreements as per the agreements that have been made.
A contemporary economy addresses the economic problems that affect the operations of an organization that are in various parts of the world through using the following methods such as the theoretical and empirical perspectives. The economic policies and reform are implemented within an organization so as to solve the economic problems that may occur within an organization.Incase there is increased usage of the international currencies by the countries when carrying out their transactions then economic policies can be implemented so as to prevent the problems from happening in the future.
On the other hand financial crises that can affect the good governance of an organization and its macroeconomic discipline that result to its instability in the global and systematic world should be addressed so that they can be solved through implementing the economies policies within this organizations that are geared towards ensuring that the operations of an organizations are implemented effectively.
The link of the international credit to the money market and credit market
Money market refers to the market that deals with the short term debt instruments that are highly liquid and mature after a period of one year. Some examples of the money market instruments are certificate of deposit, commercial papers and the banker’s overdraft. The persons who use these instruments incurs some risks that are known as default risk that hinder the operations within an organization to take place effectively. Credit markets are the markets that are associated with financial instruments that incur credit risks that emanate from the uncreditworthiness of the borrowers of finances.
The link between international credits to the money market is that the investors can access and be in a position to purchase goods and services from other international countries since they can access credit facilities from the money market that can allow them to make transactions within the stipulated period of time. The credit markets are important markets since they enable the management to evaluate their customer’s creditworthiness so as to avoid incurring of risks that involve the default of the customers to honor their obligations as they arise.
The investors that carry out trade with the international organization can easily carry out their transactions since the money markets have instruments that mature for only one year therefore transaction activities can take place within the organizations within the stipulated period of time.
Trading partners may come from different countries therefore they use different currencies to conduct their affairs.The money market thus facilitates quicker clearing of credit facilities so that a common currency denomination can ease transaction processes between trading partners.Where are there increased uncertainties about the markets in the economy the investors may fail to supply international credit facilities to the customers and this may result slow development process within a country ( Aizenman ,J. and Marion, N. 2008).
Origins of international credit
International credit arise due to the fact that people from all walks of life keep on travelling from one place to another so that they can obtain goods and services that they do not produce. They therefore exchange their money into currencies that suit their trading partners. In order for the investors to can carry out those activities they should have a credit history that indicates whether they can be in a position to meet their obligations as they arise.
The American patriot Mr. Robert Morris from the United states of America was the first person to understand the usefulness of credit since he knew English and how the securities markets worked in the economy.Lydians were the first people in history to mint,gold,silver,electrum that is the mixture of gold and silver while the early coin designers of gold and silver who were known as germ carvers used the furnace to melt metal until one could be in a position to weigh coins and mint that were made of anvil and die piers.
Credit cards were first invented in the year 1800s where one would pick an item that was commensurate with their needs and desires and by the year 1858 consumer debt had increased by $1.5 billion in the United States and after a period of 32 years it had increased by $11 trillion. During that time account numbers were not been used this is because credit cards and tokens were been used to serve the purpose of paying up the debts owed.
Mr. John Biggins of the Flash bush National Bank of Brooklyn New York was the first person to invent the credit cards. The merchants deposited their sales slips in the bank and later on gave the customers the bill to settle their obligations through using the charge –it programs.
The British Mr. Banker Lawrence Childs was recognized as the first person to develop the first printed checks that assisted in developing and elaborate system for routing, account numbers, watermarks and other identifiers that facilitated quicker delivery of services to the customers.Another document that was invented was that of the modern word check that was used to examine and to check the bill of exchange of customers who had bank accounts that enabled them to meet all cash and debt obligations of their customers at specified periods of time.
Prerequisites of the rise of the international credit
It was recorded that in order for a person to obtain international credit they had to have a good credit history so, as to make any transactions within the country that they had migrated into. In United States a credit card was issued on the basis of customers’ credit history since the government had considered it to be a compulsory requirement that had to be fulfilled by all people who lived in that state. It was noted that most of the residents of the country did not own assets since their credit history was not known therefore could not access financial facilities as they could not borrow money that could be used to develop themselves.
Prerequisites of the rise of the international credit are; Customers were usually instructed to fill in applications for credit from various banks in they were shareholders, store or the credit card companies that contained international credit information that was later on forwarded to the credit bureaus. The role of the credit bureaus was to match the names, addresses, and other identifying information of the applicant and their information that would be kept in the bureaus files for future references. The information was usually kept properly in order to assist the lenders of money to determine the creditworthiness of the individual or companies that want to borrow money from those institutions.
The credit worthiness of the customers is evaluated by taking into account how the customers honored the past payments that had been issued to them by the lenders who preferred to have their debts paid on a monthly basis or the specified periods of time. Income of the companies and individual borrowers was used to determine whether they were legible to be obtaining credit from the bank, if a customer had a higher income he or she was legible to obtain more credit from the bank. Bankers or the lenders made the final decision on whether to extend credit or give credit to the customers through considering factors such as their ability to repay the debts and their past history credit history report of paying up their credit on time.
The consumer credit report was a very useful document that was used to show details of the applicants’ credit. It was also used to show the public reports such as civil rights judgements, bankrupticies, tax liens and collection accounts that were applied within a country although they varied from one country to another since they differed due to the structure of the countries companies. International business credit report was used to show information that was similar to that of consumer report as it focused on business and ownership. It showed how a company would handle its financial affairs and how to scrutinize the creditors who were in the overseas in order to enable obtain resources that were necessary to carry out their activities effectively.
Nature and necessity of international credit
The necessity of the international credit can be to enhance effective business practices between parties in various parts of the world that produce different kinds of goods and services and to facilitate effective delivery of services to the customers. It is also used to enhance the ease of clearing balances that occur due to the fact that different banks trade together therefore facilitates effective recording of books of accounts among the banks.
Forms of international credit
It was reported that most banks in the world carried out their payment transactions using the documentary credit. Documentary credit refers to the way a bank honors its obligation of paying the buyer a definite sum of money within a stipulated period of time after a transaction has taken place. It’s also used to depict the way nominated banks makes payments in case of timely presentation of the appropriate documents that certify shipment of cargo and fulfillment of their terms of credit.
It was applied in the international trade relations transactions since it was considered to be a safe payment method therefore could be used by the exporter and importer while they were providing shorter financing to their customers. The documentary credit is applied in the domestic and foreign economies relations so as to facilitate quicker delivery of services to the customers (Zambakhidze, T 2002).
Transferable credit is the credit facility that would be used by the beneficiary to request the nominated bank to supply credit to be made available to another beneficiary so that it can assist them in accomplishing the tasks that have been assigned to them.
The debit card is a plastic card that is used to allow a person to purchase goods and services and then later on to make payments instead of using cash. It is used to deduct the customers savings balance so that they can meet their expenses when they arise. If a person has a good credit history then it is ease for him to obtain credit card from the country’s they have migrated into, therefore they can purchase houses, conduct businesses, or even rent an apartment hence be in a position to improve on their living standards.
It was also reported that the financial institutions in United States and Canada did not allow they non-residents to access funds due to the fact that most of them credit history was not known since they did not have documents that would act as prove that they were financially stable. The effects of not having a credit history led to their financial difficulties and also the local economy was affected since most of its residents did not participate in productive activities that could generate income to the economy of those countries they were living in (American Metro Bank, 2004).
Credit cards are the plastic cards that are issued to the customers so that they can make purchases instead of using cash to make the transactions. It enables the customer to obtain credit from their banks that later on demands them to pay money they have borrowed at specified interest rates and principal amount.
The Credit history or report is also used to determine whether the individuals or the company in their previous years were committed in paying money that they had borrowed from the financial institutions and also contains information about whether there were the late payments that were made by the borrower that could have hindered them from been given other kinds of credit facilities. The information concerning the borrower helps the lenders to understand and evaluate whether they should offer the services to their customers, if a customer does not meet the requirements that have been assigned to them then they cannot be offered the credit facilities by the financial institutions (James, B.2003).
Relative significances of each form
Documentary credit is useful to due to the fact that it diverse and it enables parties to take into account the circumstance that determine the payment process in the international market, therefore the user can be in a position to select the factor that are relevant that can lead effective service delivery within the organization.
The advantages of the transferable credit are that it enables the exporter to make payments to the suppliers directly through sending out money that should be received as credit although it doesn’t consist of any additional expenses information that may affect the transactions to take place effectively (Howell, N. and Hughes, J. 2005).
Functions of each form of international credit
Documentary credit is used to serve as the function of payment since it acts as an instrument that is used to ensure that the payment obligations that are fulfilled within the stipulated period of time.
Economic agents and institutions that participate in international credit markets
Sound financial markets are used by the management of organizations to foster economic development not only for mobilizing savings to finance investment, but also for their contribution to economic efficiency through selecting and monitoring the investment projects of an organization that can facilitate their growth and development. Financial institutions such as the world bank and the International Monetary Fund (IMF) contributes to the economic development of a country by providing finances to the customers so they can be in a position to run their operations effectively.
The qualities of the international monetary trade are that they improve on the capacity and statistics of the organization since they provide the required resources to the countries that require financial assistance. For instance countries that experience huge debts and poor infrastructure due to political instability they get help from the international bodies.
The Non-Governmental organization group together with the World Bank share diverse views, approaches and motivations about how to improve on their performances and they regularly meet with the bank directors, administration so that they could address the issues that would be related to institutions socio-economic and financial policies that enhance effective service delivery for their customers(Campbell S. 2008)..
Impact of international credit on the domestic economies
The impact of the international credit on the domestic economies is that it provides a good environment in which trade can be carried since it offers the necessary services to the customers that require them.
United States currency is used a standard currency in which various countries in the world base their performance on. It was reported that United States faced devaluation of it currency due to political instability that led to financial difficulties to most countries in the world. It was reported in Russia that its residents faced pressure from the domestic stock market that was as a result of capital flight of the real economy due to the tightened credit condition.
In the Russian manufacturing industry there was rapid slowdown thee was as a result of an internal demand that slowed down development. Inflation was also experienced due to the fact that there was cost competitiveness of the imported products that were replaced by the home produced products. If the international credit was not properly managed then the performance of a country was adversely affected.
International credit crunch and business fluctuations
Credit crunch refers to the period whereby there is reduction in the finances from the banks and financial institutions particularly for the small busineses.It usually occurs when there is recession or tough economic periods. It is experienced when the bank’s lending policies are impracticable such that they can be affected by financial duress that leads to reduced profitability for an organization. It was reported that the monetary policy could not be used to solve the problem of the credit crunch within an organization, although the application of flexible loan regulations could have been applied within the country so as to solve the problem of the credit crunch (Campbell S. 2008).
It was noted that the financial institutions and the industry leaders were not in a position to eliminate poverty due to United States problems such as the sub-prime loans fiasco that were coupled by currency fluctuations ,ever increasing oil prices that sent shock waves across the international markets. There were some credit crunch causalities in the global market such as the United States business class airline Eos that became bankrupt in the year 2008 and also a Silver jet United Kingdom all business airline that operated its flights in between London Luton and Newark Liberty International Airport in the United States and Dubai International airport that was in the United Arabs Emirates businesses that collapsed at that time due to financial difficulties.
The reasons why the credit crunch occurred was because of the increased perception of risk that the lenders had , imposition of credit controls and the sharp restriction imposed when supplying to the economy. The other reason was that the risk perception was high due to the credit crunch since the lenders could not easily establish whether borrower were creditworthy enough to be trusted to repay back their loans on time. (Shailaja and Manoj, K. 2007).
The reasons why the lenders may doubt the creditworthiness of their lenders is that they may not be certain whether they can get back their money within a stipulated period of time.For instance the subprime mortgages in the United states were fearful since their lenders were not sure whether borrowers would honor their obligations, later on banks stated that they experienced the worst credit crunch in the inter-bank markets. Credit crunch not only affected the borrower and lenders of money , but also the financial markets and the economy since there was slow implementation of new investment policies that could generate income for the country organizations therefore the needs and desires of the consumer could not be easily fulfilled within the stipulated period of time (Campbell S. 2008).
International credit regulation
These are the International relations that are usually regulated by the normative acts of certain states such as the Custom and the practices in the business dealings. The Uniform Customs and Practice is used to serve as the relevant and recognized national legislation that most countries in the world use so as to facilitate quick credit payment process. The international relations define what is credit and also determines the type, run, and means of its application, obligation and the liabilities of the banks that offer services to the customers.
Uniform Customs Practice shows the documents that are presented in form of credit as well as the rules of their presentation that are important when carrying out business transactions. If a bank applies it then it’s considered to be following the provisions that have been stipulated by the bankers and the clients.
Consumer credit regulations was implemented due to the fact that there was increased demand for consumer credit since the number of the credit producers and credit products were increasing in the market.It was noted that its growth was continuing rapidly and this posed a great challenge to the policymakers, industry participants and the consumer organization to implement it so as to meet the demands of the customers. The biggest challenges that the organization faced was that of ensuring that the legislative and regulatory frameworks were supplied with the relevant information and were adequate to run the operations of the organizations effectively (Howell, N. and Hughes, J. 2005).
The temporary foreign tax credit regulation was issued on the basis of a structured passive investment arrangement, regulations compulsory for the payment of foreign taxes and for treating taxes as been attributable to certain highly structures arrangements that are not compulsory. The temporary foreign tax credit regulations do not allow the entities that are owned 80% by the United States Corporation, citizens or the resident aliens to apply for the transactions, but they allow transaction that have existed between entities and those that are related by sharing ownership or those owned by the foreign persons or for parties that were related to applied by the concerned parties.
It is important for organization to carry out extensive research concerning the best international credit practices that should be applied within an organization so the companies can generate the revenue that can enhance its growth and development.
References
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American Metro Bank, 2004, “Remarks by Man VIen.” Presented at the Federal Reserve Bank of Chicago’s Financial Access for Immigrants Conference.
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James, B.2003, 3,000 Reasons A Day Why Immigrants Pose Opportunity.” American Banker 168:147.
Howell, N. and Hughes, J. (2005) Centre for Credit and Consumer Law Consumer credit Regulation: an international overview Background Paper. Web.
Shailaja and Manoj, K. 2007. Ask Mint | what causes credit crunch in financial markets? Credit crunch is a situation in which the wheel of lending gets jammed leading to A sudden decline in lending, that is, credit Real Simple |. Singhted: 12:27 AM IST
Zambakhidze, T. (2002). Georgian Law Review 5-1Documentary Credit – An Advantageous Form of International Payment. Web.
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