Loan capital is property transferred to the borrower by the owner. Moreover, the transfer is not of capital itself, but only of the right to its temporary use.
Capital is a kind of product, the value of which is determined by the possibility of its use by the borrower and the provision of profit, part of which can be directed to the payment of loan interest.
The form of alienation of loan capital is specific, since its transfer to the borrower is extended in time, in contrast to the usual transaction: the sold goods are paid instantly, credit resources are returned after a certain period. Unlike commercial and industrial capital, credit exists only in cash.
Definition
According to K. Marx, loan capital is capital-property, not capital-functions. The difference between the first and the second is the complete circuit in the organizations of the borrower and profit. The formation of credit capital is accompanied by its bifurcation: for the money capitalist, it is property that returns to it at the end of the loan term with interest, and a function for the commercial and industrial capitalist who invest it in their own enterprises. In the financial market, loan capital acts as a commodity whose value is reflected in its ability to function and make a profit. Interest - part of the profit - pays for the ability of capital to satisfy the need for consumer value.
Features of capital
Being one of the historical forms of capital, loan capital is a reflection of capitalist production relations, expressed in a separate part of industrial capital. Funds released during the reproduction process are the main sources of credit capital.
Its characteristics:
- The loan or credit capital, being a certain property, is transferred to the borrower by the owner for a specific fee for a limited time.
- The profit brought to the borrower as a result of the use of capital determines its use value.
- The process of alienation of capital is characterized by a payment mechanism torn in time.
- The movement of capital is carried out only in cash and is reflected in the formula "DD", since it is provided on loan and repaid in a similar form, but with interest.
Credit capital formation
Sources of loan capital are considered financial resources attracted by state credit organizations, individuals or legal entities. Given the evolving system of cashless payments, in which credit organizations act as intermediaries, the funds released as a result of the turnover of trade and industrial capital can become a source of capital. Such means are:
- Depreciation of funds.
- The share of working capital released as a result of the sale of goods and the costs incurred.
- Profit spent on the main activities of organizations and enterprises.
Cash is accumulated in the accounts of credit organizations and other institutions. The economic role of the market for loan capital lies in the accumulation in certain segments of the economy of monetary funds available for a specific period of time.
The difference between the type of loan capital from commercial and industrial capital is that the owners of enterprises do not invest it in the activities of companies, but transfer it to business entities for temporary use to obtain loan interest.
Supply and demand
Factors on which supply and demand for credit capital depend:
- The scale of growth of the productive economic sector.
- The amount of savings and savings owned by organizations, enterprises and households.
- The size of government debt.
- Cycles of economic development.
- Seasonal production conditions.
- Exchange rate change.
- The intensity of inflationary processes.
- The state of the world market for loan capital.
- Balance of payments status.
- State policy of the economy and financial policy of the issuing bank.
Sources of capital
The main source of loan capital are considered funds that accumulate in themselves money capital and released in the process of reproduction:
- Depreciation aimed at restoring fixed capital.
- Profit designed to upgrade and expand production.
- Capital released from circulation due to mismatch in the timing of receipt of revenue and payment of costs.
The second source is rentier capital, capitalists whose activities are aimed at making profit from issuing loans to the state or other capitalists and obtaining loan interest, provided that the initial capital is returned.
The third source, which forms loan capital and loan interest, is associations of lenders who invest their own savings in credit organizations. These include a pension fund, insurance companies, incomes of various institutions and classes, temporarily free finances of the state budget.
Sources of capital can be free cash generated as a result of the turnover of commercial and industrial capital, the accumulation of the state or the personal sector.
Structure and market participants
The market for loan capital is a specific area of relations in which the money capital provided for the loan acts as an object of the transaction. From a functional point of view, a credit capital market is understood to mean a system of market relations that accumulate and redistribute capital in order to ensure lending to the economic system. From an institutional point of view, the capital market is a set of credit and financial organizations and other institutions through which the movement of loan capital is carried out.
The subjects of the capital market are intermediaries, primary investors and borrowers. Free financial resources belong primarily to primary investors. The role of specialized intermediaries is played by credit and banking organizations, attracting funds and investing them as loan capital. Borrowers are individuals and legal entities, as well as government agencies. The modern credit capital market is characterized by two features: temporary and institutional.
Signs and objectives of the market
On the basis of a temporary attribute, a capital market — long-term and medium-term resources — and a short-term loan market are distinguished. On an institutional basis, the market is classified into the securities market or capital and borrowed capital.
The action of the securities market is aimed at providing a mechanism for attracting investments by establishing contacts between investors and those who need financial resources.
The securities market creates conditions for two types of attracting resources:
- In the form of loans with the expectation that they will be repaid in the future by borrowers. Such conditions imply that the borrower will pay interest on the right to use the money for a certain period of time. The commission is represented by regular payments, calculated as a percentage of borrowed funds.
- The borrower may use property rights to an enterprise or company as collateral. A repayment of the borrowed funds is not expected, as the borrower provides the new owners of the company with the opportunity to participate in profit.
Classification of loan markets
The securities market is divided into primary, secondary, over-the-counter and stock. Under primary understand the market for primary securities, in which investors place them initially. Securities previously issued in the primary market are traded on the secondary market, and securities already in circulation are issued. Primary and secondary markets can be stock and over-the-counter.
The stock market is an institutionally organized market represented by a set of stock exchanges where high-quality securities are traded and all operations are carried out by professional market participants. The professional, trading, and technological core of the securities market is stock exchanges.
Securities transactions performed outside the stock exchange are covered by over-the-counter markets. Most of the new securities are placed through the OTC market. On its sites, there is also a trade in securities not eligible for stock quotes. Computer-based securities trading systems can be created based on over-the-counter transactions. The criteria by which participants of such trading systems are selected and securities are allowed to enter the market differ.
Market Functions
The following functions are characteristic of the securities market:
- Raising funds in the turnover of entities.
- Pooling finances to cover debts and budget deficits at different levels.
- Consolidation of capital to create various market structures - companies, exchanges, investment funds.
The functionality of the borrowed capital market is distinguished by:
- Service turnover of goods using credit.
- The accumulation of financial resources in economic entities.
- Converting accumulated savings into a form of loan capital.
- Increasing the range of capital investment opportunities in order to service the production process.
- Ensuring the receipt of temporarily free finance at the disposal of the owners.
- Concentration and centralization of money in order to form corporate structures.
There are a number of factors affecting the level of development of the loan capital market:
- The level of development of the economy.
- Traditions and signs of the functioning of the state financial market.
- The degree of development of other market sectors.
- Level of savings.
- The level of accumulation of production.
International loan capital market
The international market is an international type of credit system, the essence of which is the provision of repayable loans by banking institutions, national governments and companies. Creditors may be international banking organizations that issue loans to governments, enterprises, and banking institutions of other states.
World loan capital is a powerful mechanism for efficiently distributing free capital between borrowers and lenders with the possibility of attracting intermediaries. Such relationships are built on the supply and demand of capital.
Types of international markets
On the world capital market, large credit-type transactions between countries are made. It is divided into two types:
- Foreign loan market, in which transactions are concluded with persons who are not residents of the country.
- The European market in which deposit and loan transactions are made outside the issuing country and in foreign currency.
The structure of international markets
The components of the global market are as follows:
- The money market, in which it is represented by short-term transactions for the provision of loans servicing working capital.
- The stock market where securities operations are conducted.
- Capital market. It is formed from short-term and long-term loans aimed at servicing fixed assets.
- The mortgage market. It is formed on the basis of aggregate credit transactions concluded in the real estate market.
Market functioning
The international market operates on the basis of the following principles:
- Urgency. Loan repayment terms are always negotiated upon conclusion of agreements.
- Returnability. The borrower receives funds for a certain period of time.
- Paid. Making a loan is possible only at interest.
The main function of the international market is the movement of loan capital and its conversion into borrowed funds, that is, the intermediary role between the borrower and the lender.