Definition of Credit Money, its Types and Characteristics
Credit money
Fiduciary money is defined as securities that have no material value and do not represent something of value like gold, but rather a means of payment instead of paper money and gold based on trust between the two parties.
The grantor of credit money (such as a bank) takes money in return for granting credit money to people or companies, and then undertakes to return this money in the form of gold, paper money, or a specific commodity in the future.
One of the most applications in the field of credit money; Checks are fiduciary money, as they are accepted as a means of payment on the basis of trust, and not on the basis of any order from the government,[1] and the origin of fiduciary money goes back to the Latin word (Fiducia) which means trust.
Types of credit money
There are several aspects and types of credit money, which are as follows:
Debt securities
Debt bonds (in English: Debenture) are bonds that cover debt that does not contain collateral, and it is clear from this that the bonds do not have physical assets of gold, commodities, or paper money, and therefore they depend on creditworthiness; Any reputation of the source for support or trust.
Both companies and governments often issue bonds to raise capital or cash to cover their expenses and projects.
Debt securities are sold on the basis of the ability to repay by the issuer of the bonds with obtaining the interest of the debt, and these bonds are subject to sale and purchase, and debt securities are credit money because of their value represented in trust on the basis of payment without physical guarantees.
bond
Bonds are securities issued by companies and governments as debt to finance their investment projects. When sold, the entity that issued these bonds becomes indebted to the holders of these bonds, and bond holders benefit from the fixed interest all the time without affecting the value of the bond until the maturity date of the bond. ; Any payment of the value of the bond.
In general, bonds can be sold, bought and traded, and bonds help hedge against the risks of more volatile investments such as stocks, and can provide a steady stream of income while preserving individual savings.
As the concept of bonds is based on trust without covering the debt with tangible and material guarantees with negotiability, therefore the concept of fiduciary money applies to them.
Money markets
Money markets (in English: Stock Exchange) are also known as the Stock Exchange, and it is a place where securities such as bonds and stocks are traded, through which companies and governments can offer all kinds of bonds and shares to sell to investors, and there are regulated and transparent laws for buying and selling.
These securities include; Stocks and bonds issued by public companies listed on the stock exchange as required, and bonds issued by the government, public companies, municipal and port credit agencies, and based on the foregoing, financial markets are based on reliability without reference to direct physical assets.
Credit money
Trust funds are funds managed by one person or a group of people for the benefit of another person or a specific entity such as companies, and most trust funds include three parties and they are; The trustee, the trustee, and the beneficiary.
In some cases, the trustee is also the trustee or beneficiary, and the trustee or grantor creates funds for trust by giving ownership to the trustee, and the trustee can own or invest in the money for the benefit of the beneficiary.
Others allocate credit funds for the benefit of children or for the benefit of other people who cannot manage the property themselves, and some individuals or institutions use trust funds to invest in several areas.
It is worth noting that most credit funds are managed by credit departments or banks, or by institutions called credit companies, which in turn regulate the credit process on funds.
Bank deposits
A bank deposit (in English: Deposit) is a transaction that involves the transfer of ownership of something such as gold to another party for safekeeping, and in the field of banking, a deposit may be an amount of money that is kept or placed in a bank account in order to obtain interest.
Bank deposits may also refer to a part of the funds used as a guarantee for the delivery of a product or the completion of certain works as per the agreed contract.
There are several types of bank deposits, but there is a type to which the concept of fiduciary money applies, namely Certificates of Deposit (CD) ; It is a deposit with a bank or credit union for a specified period of time and for a predetermined amount of interest to be earned on that money.
The deposit can be recovered in addition to the interest upon the return of the certificates of deposit and the expiration of the agreed time period.
Credit card loans
Credit card loans (in English: Credit Card Debt) are money granted by the company or the bank through purchases that are made by credit card, and in exchange for the money spent being paid at a later time, as credit cards are a form of credit money.
Credit card debt is a current liability, which means companies must pay it off within the card’s activation cycle (usually less than 12 months), and credit card loans tend to have higher interest rates.
Credit card loans are a suitable source of short-term credit because it allows companies to make small purchases immediately, and interest charges are accrued monthly, and payment of this interest is mandatory, and credit card debt is not covered by any kind of physical guarantee, but is based on trust for the owner credit card.
Characteristics of credit money
The characteristics of credit money share with other types of money as follows:
General admission
General acceptance Money is accepted by all as a medium of exchange, and thus has general acceptance, becoming a recognized and negotiable money and a standard for buying and selling.
Durability
Money in all its forms must be stable and not easily perishable.
Transportable
They are easy to transport and handle while in use, without much effort or cost.
divisible
They are divisible according to the requirements and the goods and services provided against them.
Limited quantity
They are quantitative in order to preserve their value, and they are determined by governmental and financial agencies.
Consolidation of criticism
Money should be standardized in terms of purchasing power.
Credit money is based on trust, which is a requirement that a party cannot cover or support the value of this money with real capital or a physical commodity. It facilitates commercial movement and making investments without starting with a large capital.
Through credit money, the money required for projects can be prepared by trusting to pay at a later time, and its applications are evident in large and government projects.