Concept:
- Credit helps development only when it is used for a productive purpose, because then the loan generates the income out of which it is repaid.
- Following the money through different kinds of borrower shows how the effect spreads across the economy.
Step 1: Follow the money in the hands of a manufacturer.
A small producer takes a large order but has no cash to buy materials or pay wages. Credit fills the gap, the order is delivered on time and the payment received covers the loan and leaves a bigger profit than he would otherwise have had.
Here credit turned an opportunity into income.
Step 2: Follow it in the hands of a farmer.
Farming has a long gap between spending and earning. Seeds, fertiliser and irrigation must be paid for months before the crop is sold, and a crop loan carries the farmer across that gap.
Step 3: Follow it in the hands of a small business.
A weaver who buys a better loom or a shopkeeper who stocks more goods can serve more customers than before. The extra earning repays the loan, and the enlarged business gives work to others in the locality.
Step 4: Note the condition on which all of this depends.
The rate of interest decides whether credit helps or harms. At a low rate the borrower keeps most of the gain, but at the very high rates charged by informal lenders the repayment can exceed the income and pull the family into a debt trap.
Cheap and affordable credit is therefore crucial for the development of the country.
Final Answer: Wherever credit is used productively it raises the earning of the borrower and repays itself out of that gain. Manufacturers, farmers and small businesses all produce more with it, which is why cheap credit drives economic development.