Purpose and Functions of Bank Loans, Definition of Examples

Purpose and Functions of Bank Loans, Definition of Examples

Definition of Credit. Credit comes from the Italian word credere which means trust, namely the trust of the creditor that the debtor will return the loan and the interest in accordance with the agreement of both parties. This means that the creditor as the creditor believes that the credit will not be bad.

Some of the meanings of credit include:

Credit is the provision of money or claims, based on an agreement or loan agreement between a bank and another party that requires the borrower to repay the debt after a certain period of time with interest.

Credit is all types of loans that must be repaid with interest in accordance with the agreed agreement.

Credit is the right to receive payment or the obligation to make payments when requested or at a future time due to the delivery of goods now.

Purpose of Bank Loans

Banks have different goals in providing credit facilities to the public. The purpose of providing credit through certain programs with targets in accordance with the mission and vision of the bank.

The main objectives of providing credit facilities are:


Profit is the purpose of granting the credit. The profits are obtained in the form of interest received by the bank as remuneration and credit administration fees charged to customers.

The profit from this interest is the funds used for the continuity or operation of the bank’s business activities. If the bank experiences continuous losses, it does not rule out the possibility that the bank’s activities will be liquidated or closed.

Customer Business Development.

Banks can encourage community businesses by providing credit facilities. The credit disbursed can be in the form of credit for investment funds or funds for working capital.

Credit received by customers, both individuals and institutions, can be used for business development and expansion.

Economic Improvement.

Credit has an influence on the country’s economy. With the distribution of credit can increase development in various sectors.

Investment credit and working capital will expand the business which has an impact on increasing the demand for labor. This means that credit can reduce unemployment.

Disbursed loans can increase consumption of goods and services. This means that there is an increase in gross domestic product.

Function of Bank Loans.

In addition to having a purpose, the provision of credit facilities has the following functions;

Improved Usefulness of Money.

Credit distribution is the transfer of the status of immovable or passive money into movable or active money. This means that the money in the bank does not produce any useful goods or services, here it is not passive.

When money is channeled through credit, the money becomes active. Money from credit can be used to produce goods and services. The use of goods and services is carried out through buying and selling transactions involving money.

At the time of a transaction, money moves and moves actively from one hand to another, money will migrate from one account to another, money moves from one place to another.

Increased Circulation and Traffic of Money.

Money from the distribution or granting of credit will circulate from one place to another. Money moves from one area to another. Money from credit can increase the circulation of money in cash-strapped areas.

When an area gets credit facilities, the area will get additional money. The money can also circulate to other areas.

Improved Usefulness of Goods.

Credit provided by the bank can be used to process goods to have a higher usability, so that the goods have a selling value and are more useful.

Small business credit recipients can use their money to increase value added goods. An example of using organic waste into fertilizer. Or

Improved Goods Circulation.

Credit disbursement from banks can increase or facilitate the flow of goods from one region to another. So that the number of goods circulating from one region to another increases.

Increased Business Motive

Credit given to customers who really need it (or lack capital) will have a huge impact on business motivation. With his motivation, customers can increase or develop their business activities.

Increased revenue.

Credit channeled to industrial communities, or the production or investment sector will be able to increase the demand for labor. Overall, the absorption of this workforce will increase the income of the general public.