The term credit is derived from the English word credit, which we find originating from the Latin “credo” which means, “to place trust”: “cred” meaning “trust” and “do” meaning “to place”.
Credit revenues are defined as: “the services provided by which the state or institutions are provided with the necessary funds, provided that the debtor undertakes to pay those funds and their accrued interests in one payment or in installments on specific dates according to the contract.”
The concept of public loans:
Public loans are considered extraordinary revenues that the state undertakes in exceptional circumstances to achieve its public policies and overcome some transient crises. It is defined as the cash amounts that the state (or any public legal person) borrows from others (individuals, banks, private, public, and international bodies, and other countries) with a pledge to return them and pay interest on them in accordance with the terms of the loan contract.
The most important international public loan organizations
International Monetary Fund: (IMF): The Fund helps countries affected by crises by providing financial support that allows them to take a breather until they finish implementing corrective policies that restore stability and growth to the economy. The fund also provides preventive financing that helps prevent crises. Lending instruments are constantly being modified to meet the changing needs of member countries.
The World Bank: It was established to finance reconstruction after World War II, and is now involved in hundreds of projects around the world to solve the problem of poverty, education, health, and others in developing countries. It is a United Nations agency and 187 countries contribute to it.
Types of public loans
Public loans are divided into several sections that differ according to the criterion on which the division is based. In terms of scope, loans are divided into internal and external, and in terms of freedom of subscription, they are divided into optional and compulsory, and in terms of their maturity, they are divided into unlimited and temporary, and in terms of duration of loan enjoyment, they are divided into medium and long-term loans and short-term loans.
1. Internal and External Loan:
Internal loan: If it is subscribed by individuals or entities within the borrowing country, and this requires the availability of national savings, which exceed the investment need of the local market, by an amount equal to or more than the value of the loan.
External loan: If it is subscribed by individuals or entities outside the borrowing country, the state resorts to this when the national savings are not sufficient to cover the value of the loan.
Transfer of loans: The internal loan may turn into an external loan if the ownership of the loan bonds is transferred to another country, and the opposite may happen, i.e. the external loan will turn into an internal loan when citizens buy loan bonds from abroad.
Internal loan: Usually this loan does not lead to an increase in national wealth, but rather transfers part of this wealth from individuals who subscribed to the loan to the state, that is, it is a redistribution of part of the national wealth for the benefit of the state.
External loan: This loan leads to an increase in national wealth by transferring part of the wealth of other countries that have subscribed or whose citizens have subscribed to the loan to the state.
Internal loan: It does not decrease the national wealth, but rather transfers part of it from the state to individuals who have previously subscribed to the loan.
External loan: the payment of its installments and interests decreases the national wealth, as part of it is transferred from the state to the other state or its affiliated individuals who have subscribed for the loan.
Internal loan: The contract or the payment of its installments and interest has no effect on the exchange rate or the balance of payments.
External loan: At the time of obtaining the loan, the exchange rate and the balance of payments condition of the borrowing country improve, and the opposite occurs when it is repaid.
Internal loan: the national economy bears the burden of saving that it represents, that is, the burden of deprivation of consumption, which constitutes a physical burden on the present generation.
External loan: exempts the present generation from the burden of this savings.
Internal loan: the possibility of individuals, groups, or companies interfering in decisions, laws, and procedures to serve their own interests.
External loan: It may lead to the risk of interference by foreign lending countries in the internal affairs of the country, especially if the borrowing country is weak and has not fulfilled its obligations.
2- Voluntary loans and compulsory loans:
Optional loans: The basic principle in public loans is that individuals have the freedom to subscribe to loan bonds or not to subscribe to them, according to their personal, financial, and economic considerations...
Compulsory loan: The state sometimes resorts to extending the maturity of existing loans or forcing individuals to subscribe to loan bonds, in cases of inflation and the deterioration of the value of money.
Transfer of loans: the loan may start voluntarily and then be transferred compulsorily after that when the state postpones the date of its repayment without obtaining the approval of the lenders. This often happens with short-term loans.
3- Unlimited Loans and Temporary Loans:
Temporary or consumable loan: The state is obligated to repay it at a specific time and in accordance with the rules agreed upon in the issuance law. The state is free to choose the most financially convenient time to repay the loan between the two specified dates.
Unspecified or permanent loan: The loan is permanent if the state does not commit to paying it within the specified period, but with its commitment to pay its interests until it is fulfilled. It may at any time repay the loan without any objection and request its continuation and the collection of its interest. Its disadvantage is that it tempts the state not to settle it, which leads to an increase in its financial burden.
4- Medium and long-term loans and short-term loans: They are loans issued by the state to fill a temporary cash deficit. In the form of bonds called treasury bills, the term of which is three months.
t to two years.
Medium-term loans: These are called proven loans and are issued to finance economic development projects or to finance military expenditures, and their term ranges more than two years and does not reach twenty years.
Long-term loans: They are also called fixed-term loans, with a term of up to 30 years, and they have the same objective as medium-term loans.
Issuance of public bonds:
IPO:
The state itself undertakes to offer public loan bonds for subscription directly to all-natural and legal persons who so desire, specifying the start and end date of the subscription, the terms of the loan, and the benefits granted to subscribers.
Its advantages: providing the sums that may be paid to intermediaries in the event of issuing loans through the sale. It is also characterized by imposing state supervision and control over the issuance process, and preventing speculation on bonds when they are lacking.
Disadvantages: The possibility of not covering the entire value of the loan, and the lack of complete knowledge of the state of market conditions.
2- Selling to banks:
The loan in this case is issued by the state selling to a bank or a group of banks or financial institutions all the loan bonds for a certain amount and leaving the banks the freedom to resell the bonds to the public directly or in the stock market at the price set by the banks.
Its advantages: that the state quickly gets the full amount that you want to borrow.
Disadvantages: The state sells bonds at a low price so that the banks can make a profit.
3- Selling in the stock market:
The state undertakes the process of issuing the public loan similar to what the private companies do. It offers the loan bonds for sale on the stock market and sells them at the appropriate market price.
Its advantages: Following up on fluctuations in stock prices and taking advantage of the opportunity to sell bonds at the most appropriate time.
Disadvantages: The state cannot offer a large number of bonds at one time to avoid a fall in prices.
financial bonds
A bond is a security that represents part of a debt owed by the state when borrowing from the public, as the bondholder enjoys a periodic return as a percentage of its value regardless of whether the issuer makes profits or not, and he can recover the value of the bond at the end of the bond's life.
Example: The state has written a $100 bond with a 10-year life and an annual interest rate of 10%.
At the end of each year, the state will pay an interest rate of $10. At the end of the bond's life (ten years), the full value of the bond, ie the $100, will be redeemed.
Release terms:
General loan amount:
Fixed-value loan: The loan is of definite value if the state determines the amount to be issued in advance and issues bonds within the limits of this amount only, whereby subscription is closed as soon as it is covered or the specified period for subscription expires.
The loan is of unlimited value: the state sets a specific period during which all subscriptions will be accepted, and this happens in the case if the state is in need of a lot of money or if you fear that the loan amount will not be covered if it sets it, the public credit and trust in the state will be affected and in such a case accept All subscriptions, regardless of their amount, if submitted within the specified period.
Form of issue bonds:
1. Nominal Bond:
The bonds are nominal if they include the name of their owner. In this type of bond, the state places a special register for the debt in which the names of the subscribers of the public loan are recorded and kept in the Treasury (Finance) and the ownership of these bonds is not transferred unless the data in the record is changed. The interest of the bond is only paid to the person in whose name the property is restricted.
Its advantages: These bonds protect their owners against the risk of theft or loss.
Disadvantages: Low flexibility in trading.
2. Bearer Bonds:
In this form, the names of the bondholders are not registered with the loan administration, but the bondholder is considered its owner, and hence its ownership is transferred by hand delivery.
Its advantages: Bearer bonds are characterized by facilitating their trading, freeing them from formal procedures.
Disadvantages: Failure to protect its owner against the risk of theft or loss.
3. Mixed Bonds:
It takes an intermediate form between the nominal and bearer bonds, as it is nominal in relation to the subscribed amount, and the names of the subscribers are entered in a special register, and their ownership is transferred only by changing the fixed data in this register. And it is for the holder in connection with the collection of interest, as it is accompanied by vouchers or "coupons", each of which relates to the interest that is paid on a specific date. The interest is paid to those who submit the voucher and does not require identity verification procedures.
Issue price:
The state may issue the bond at its face value, and here the loan has been issued at the par value price.
If it is issued for less than the face value, it is issued at less than the parity price (Discount Price).
If it is issued at a price greater than the face value, it is issued at a premium price.
It is preferable to issue at the parity price if the funds required through the loan are available in the financial markets, but in cases where there is fear of low turnout for subscription, the loan can be issued at less than the parity price to encourage the public to subscribe.
Nominal value: It is the value written on the bond, according to which the periodic return is calculated, and it is also the value that the bondholder recovers from the state at the end of the life of the bond.
Issue value: It is the actual value that the bondholder pays to purchase, and is often less than the refundable value.
A bond of $100 (the face value) can be purchased for only $95 (the issue value), i.e. at a price lower than its face value. You can also buy a $100 bond at $110, at a price above its face value.
If the market interest rate is greater than the interest rate on the bond; The issue value is less than the face value, because the state is trying to entice people to lend it to him instead of investing elsewhere.
If the market interest rate is lower than the interest rate on the bond; The issue value will be greater than the face value. The state can borrow from another side, and resort to raising the value of the bond
to make up the difference.
It is preferable to issue at the parity price if the funds required through the loan are available in the market, but if there is a fear of low turnout for subscription, the loan can be issued at less than the parity price to encourage the public to subscribe to it.
Coupon Rate
In setting the interest rate, the state often takes into account a set of considerations, the most important of which are:
financial market stability
Country credit status
loan amount
loan term
The right of the state (borrower) to redeem the bond
The right of the investor (lender) to return the bonds
General loan benefits and guarantees:
Payment rewards, which mean the state's obligation to return amounts greater than those actually paid.
Draw prizes are paid in a limited number of bonds drawn by lottery among the bonds whose value is paid each year according to the lottery payment system.
Exemption of bonds and their interest from taxes.
Lenders may be allowed to pay the value of the bonds in multiple installments for the purpose of encouraging small savers.
Insurance of lenders against the risk of devaluation of money (inflation) by linking the interest rate to the general level of prices.
Expiry of public loans:
It is meant to get rid of the financial burden represented by the obligations that the state incurs due to these loans towards the lenders, which is the interest that the state pays and the principal amount borrowed that it has to return when its due date. There are four ways for public loans to expire: fulfillment, fixation, exchange, and amortization
General loan fulfillment:
It means paying it in one go by returning the nominal value of the bonds to their owners, especially short-term loans. As for long- and medium-term loans, the state resorts to amortizing them over several years.
In the case of a permanent loan, where the state does not specify a date for its expiry, it can fulfill it whenever it wants, and it may waive it whenever it finds it in its interest.
In the case of a temporary loan, the basic principle is that it should be paid on its due date in accordance with the conditions stipulated in the loan contract.
Installing a general loan:
It means the conversion of a short-term public loan "any walking debt" when it is due to be repaid into a medium or long-term loan "permanent or temporary".
The fixation is done by the state issuing a medium-term loan with the same amount as the short-term loan while allowing the holders of the latter’s bonds to subscribe to the new loan by offering treasury bills they hold, and this is optional, so the state resorts to providing new advantages and raising the interest rate.
However, the state may resort to compulsory installation in the event of its inability to return the value of the loan, which damages its reputation, so it does not resort to it except in cases of extreme necessity.
General loan exchange:
It means that the state replaces a high-interest debt with a new low-interest debt, which will result in easing the burden of debt servicing on the public treasury. The process of switching in this way leads to changing the debt itself by taking out a new loan and fulfilling the existing loan at the same time.
The purpose of the switch is to ease the debt burden on the public treasury. The switch does not apply only to the proven debts, whether they are perpetual, long-term, or medium-term. As for the remaining debt, it is subject to fixation and not a replacement.
Voluntary switch: The state gives the holders of the loan bonds to be exchanged the right to choose between keeping their previous bonds and accepting to subscribe to the new loan bonds with a lower interest in return for additional benefits.
Compulsory switching: the state obliges holders of high-interest public loan bonds to accept new low-interest debt securities without regard to their desire, which makes the process of obtaining new loans difficult.
Compulsory switch: The state offers the holders of the loan bonds to be exchanged a choice between two things:
Acceptance of new bonds for a new loan that provides for a lower interest.
Forcing bondholders who do not want to accept the bonds of the new debt to redeem the value of the bonds.
4- Amortization of the general loan:
It means the process of gradually repaying the public loan in successive installments over a specified period
Terms of loan issuance. Starting this consumption process results in not only decreasing amounts
that the state is obliged to return in order to repay the value of the loan but also a decrease in the interest amounts determined for
to it, a decrease proportional to the percentage of the depreciated bonds of the loan.
General loan amortization methods:
Depreciation in specific annual installments: The state annually pays bondholders a portion of their original value in addition to the interest due on them, until the loan bonds are consumed.
Depreciation by lottery: the state takes out a certain percentage of bonds each year through the lottery,
Pay the value of the bonds to their owners, and this process is repeated until all the loan bonds are consumed.
Depreciation by buying from the stock exchange: The state may resort to buying loan bonds from the stock exchange like any other buyer, especially when the price is less than the face value.
Managing loan amortization resources:
Deduction from budget revenues: The source of this is the surplus resulting from the increase in revenues.
Debt Consumption Fund: The establishment of this fund guarantees the independence of the public debt from the will of the executive and legislative authorities. Usually, an annual amount of public revenues or certain taxes are allocated to finance this fund.
The new monetary issuance: the state, while consuming its public loans, may resort to the new monetary issue, which leads to an increase in the amount of money in circulation, to an increase in inflation, and a decrease in the purchasing power of the currency.