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What Is Domestic Credit?

Alex Newth
Alex Newth

Domestic credit is a type of credit that is only given to entities within the same country or region, and it cannot be used for importing or exporting purposes. Any of several different entities can issue this type of credit, including a government, a national bank or a commercial bank. Businesses, the government and commercial banks commonly use this credit to fund projects when they do not have another adequate source of money. If commercial banks take out domestic credit, then special restrictions are applied to those banks, including additional transparency and controls. This credit has an interest rate attached to it, but it is considered a discount rate and may affect other interest rates.

Only certain entities are able to give out domestic credit: commercial banks, national banks and governments. All these entities can give out credit to business owners, but commercial banks and governments cannot give credit to one another. If a commercial bank or a government requires credit, then each must go through its national bank. The credit given, regardless of who receives it, can only be used for internal debt.

Man climbing a rope
Man climbing a rope

There are three major entities that obtain domestic credit: business owners, governments and commercial banks. Business owners receive credit cards or loans to use for business-related expenses, as long as the money does not go to external financial institutions. The government may require credit for a project or to pay internal debts that would be inconvenient to pay otherwise, and the credit is normally in the form of bonds or a short-term loan. If a commercial bank runs low on funds or wants to expand its brand, then it can receive credit.

If a commercial bank gets domestic credit from its national bank, then there are certain stipulations to qualifying for the credit. This tends to show the bank is weak, so the commercial bank must be transparent about most of its financial dealings if it receives domestic credit. Strict controls are placed on the bank, which can be inconvenient. This means a commercial bank will typically apply for this credit only if absolutely necessary.

Like most other forms of credit, domestic credit carries an interest rate, but it is a discount rate. Compared to other interest rates, the discount rate is typically much lower, mostly because the entities that can borrow this credit are considered trustworthy. Some financial institutions may base interest rates on the discount rate, especially if they are already borrowing domestic credit.

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