CREDIT

Credit a term that originated from the Latin word 'credo' (Sanskrit Latin 'crad') meaning one's confidence in another. Credit is the sale of money or goods on trust and it increases the purchasing power of the debtor. Most credit arises out of money lending transactions in which creditors surrender money at one point of time in exchange for promises from debtors to pay back later with interest. The term credit is also used to mean the acceptability of one's promise to pay his debt, i.e. creditworthiness.
Credit has a long history. At first in farming and barter exchange, surplus farmers, upon request by deficit farmers, used to give them food stuff and seeds, subject to the condition that they would return the goods with some extra after the next harvest. The system of buying and selling of goods on credit spread with monetisation of the economy and replacement of the barter system by exchange in COWRIE, metallic coins etc. Later, the cash credit system started to evolve abreast of consumer and trade credit in different forms in line with changing needs and demand of individuals, professionals, traders, industrial producers, etc., and involvement of various types of banks and other financial and NON-BANK FINANCIAL INSTITUTIONS in trading in credit. But the evolution process of the credit system was accelerated primarily because of the increased participation of moneylenders, goldsmiths, and the merchant class.
There are various ways and bases of classifying credit among which the nature of the debtor and creditor, purpose of credit, and time length are very common. Depending upon the nature of the debtor, various types of credits, such as individual credit, business or trade credit, and government credit. Types of credit include consumer credit, production or productive credit and speculative credit; short-, medium- or long-term credit; monetised and non-monetised credit; trade credit, mercantile credit, and financial credit; commercial credit, investment credit, foreign trade credit; or, industrial credit, and agricultural credit. Credit is also classified as urban and rural, depending upon the area or regions in which they are sanctioned and utilised irrespective of purposes. Rural INFORMAL CREDIT  is in effect part of society and cannot be seen as a purely economic phenomenon. Major institutional suppliers of rural credit are rural branches of commercial banks, co-operative banks and societies, NON-GOVERNMENT ORGANIZATIONS and other micro-finance institutions. Informal credit providers in rural areas are friends and relatives, local professional moneylenders, local rich people and farm families, surplus shop-keepers and households, business agents, bargamaliks and neighbours. Informal borrowings nowadays carry higher rates of interest. However, parts of the informal credit do not carry any interest. Interest free loans in the form of raw materials are supplied to ARTISANS, or provided by landowners to tenants, but of course may involve obligations instead of interest. Some small informal credits, provided for subsistence, may be given as karja or haolat loans in the Islamic tradition. Rural informal credit is used in financing consumption costs, accumulation of retail capital, repaying old debts and financing costs of socioeconomic needs such as marriage ceremonies, medical treatment, buying clothes, and building dwelling houses.
Credit system in Bangladesh in ancient time-
Although there is no formal evidence of organised credit transactions in ancient Bengal, people of that period had experience in credit and extra payment (interest) thereon. Koutilya's Artha Shastra stated that banking on a limited scale was practiced in the Vedic era in the form of borrowing and lending on and for interest. These activities were centred mainly in temples and other religious places. But borrowing and lending activity took shape as banking during the period of Manu, a famous saint of ancient India, who advised people to deposit their money with a person bearing good moral character, well conversant with law, and surrounded by respectable and rich relatives. The MANGALKAVYA of ancient Bengali literature also indicates the existence of moneylending and indebtedness in both cash and kind side by side with usury in ancient Bengal.
The credit system in the sub-continent was further consolidated during the Mughal period, when different types of gold coins were in circulation motivating people of different classes to engage in monetary transactions and profit-motivated credit-giving activities. Local moneylenders, capitalists, bankers, BANIANS (commercial class) and other professionals participated in trading in FINANCE during the Mughal era and contributed substantially to the growth process of the credit system. One of the old systems of credit is the DADNI system under which TANTIs (weavers), local farmers, and industrial producers took advance money from foreign merchants and companies to supply a particular amount of goods within a particular period. The credit system gained momentum in 1700 through the establishment of the Hindustan Bank in CALCUTTA, the first modern bank in this sub-continent. Famous among the moneylenders and other traders in credit in Mughal Bengal was the JAGAT SHETH family, whose establishment had branches at important business centres such as Hughli, DHAKA, and MURSHIDABAD. Manikchand, the founder of the great Jagat Sheths, came to Dhaka from Patna in the early eighteenth century, and established a firm here. In the early eighteenth century, mahajans advanced money to cultivators before the season for marketing grains. They accepted repayment in kind and stored the grain for the market. The interest rate charged by Jagat Sheths at DINAJPUR, Purnia, and other districts varied from two to four percent per month. But private moneylenders charged interest at an exorbitant rate.
Mughal rulers patronised the banking business of Jagat Sheth and other mercantile communities and traders, including moneylenders, moneychangers, village merchants and shopkeepers. During the eighteenth century, money and credit transactions in Bengal were concentrated in the hands of Seths, SARRAFs, mahajans, and potdars. The credit voucher issued by lenders/bankers were known as hundis, which enabled the drawee to transfer money from one place to another and also facilitated payments between merchants of different places. Bankers normally charged commissions for these financial transactions. Hundi was widely used as the main credit instrument and issued by indigenous bankers. A hundi is a written order made by one person on another for the payment, on demand or after a specified time, of a certain sum of money to a person named therein. It served as an instrument to raise short-term credit to be drawn by a merchant and repayable at another place.
During the eighteenth century, merchants requiring money in various towns to buy goods for Surat could obtain it from local bankers by giving them a two months bill on Surat and paying a high rate of interest. Interest rates on these bills were fixed according to the risks involved and time and condition in Dhaka, Patna, and Murshidabad. Banking houses in the early eighteenth century used to give loans to the governments in the form of either ways-and-means accommodation or long-term financing of military expeditions or other ventures. According to English records, the Jagat Sheths lent more than 5 million rupees to Mir Jafar to meet his expenses as well as to keep the promises he made to the English after the battle of  PALASHI. The interest rates charged by bankers and moneylenders on government loans were comparatively lower than the rates charged for ZAMINDARs. In the late eighteenth and early nineteenth century, the average interest rate they charged zamindars varied from 10 to 12 percent per year.
The English and Dutch East India Companies and Asian merchants engaged in exporting goods from Bengal to various other markets in Europe and Asia provided local producers with short-term advances to increase the production of exportable goods. Such dealings increased the flow of funds to the Bengal economy. The farmers and artisans were also dependent on local and foreign moneylenders for credit support to finance their costs of production. In 1720-21, English companies owed Rs 2.4 million to moneylenders, merchants and banker in Bengal. The Dutch EAST INDIA COMPANY's debt to Kashimbazaar merchants with interest in September 1724 was Rs 1.5 million. In March 1754, total Dutch borrowing in Bengal was Rs 2.83 million. In the three years between 1755 and 1757, the Dutch debt to the House of Jagat Sheth was Rs 2.386 million while the French owed Rs 1.5 million. Loans were given on mutual trust, sometimes without a document, or even a witness.
Moneylenders, mercantile communities, and other traders in money and credit, including the famous Jagat Sheth family, suffered heavy losses after the occupancy of Bengal, Bihar and orissa by the East India Company. The decline in informal banking in Mughal Bengal caused serious instability in different sectors of the economy. To protect the economy and to stimulate trade and commerce, the British established several English Agency Houses in Bengal.
Credit system in the Bangladesh region started taking formal shape during the late eighteenth century and improved to a remarkable extent during the British period. Such institutions in the region during the British regime included at least 14 banks or bank offices and 17 loan offices.
Following the Partition of Bengal in 1947, Pakistan inherited a banking and credit structure from the British regime consisting of 631 branches and offices of both local and foreign banks. The State Bank of Pakistan established in 1948 undertook many initiatives to strengthen the country's credit system through setting up of commercial banks and other types of credit institutions. In addition to the progress made in commercial banking, other credit institutions were established to satisfy the need for medium and long-term credit for trade, AGRICULTURE, INDUSRTY in the 24 years between 1947 and 1971. Among them, the Agricultural Development Bank of Pakistan, Industrial Development Bank, Pakistan Industrial Credit and Investment Corporation, and the House Building Finance Corporation set up branches in East Pakistan.
Bangladesh inherited a formal credit system in 1971 that had only 1,130 branches of 12 commercial banks. The non-formal segment comprised local moneylenders and merchants, shopkeepers, and other types of lenders whose role remained insignificant during the early years of independence due to the limited loanable funds in their hand.