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CREATION OF CREDIT WITH FOREX MERCHANT ACCOUNTS

Creation of credit is one of the important functions of a modern bank. A bank has sometimes been called a factory for the manufacture of credits. Banks create credit in two ways for merchant accounts. One of the ways is by purchasing advance loans and the other way is by purchasing securities. A bank deposit is created entirely by the banking system. Every advance made by the bank creates a corresponding deposit. In fact the two things happen simultaneously. In order to start a business, a merchant has to depend upon the bank for applying loans.

The granting of loan results in creation of deposit. It is an open secret that the banks do not keep any reserve against deposits in order to meet the demands of the merchants. The bank is not a cloak room where you can keep your currency notes or coins and claim those very notes or coins back when you desire. It is generally understood that deposits received by the banks are meant to be advanced to others.

A depositor has to be satisfied with the bank’s promises or undertaking to pay him whenever he makes a demand. Thus the banks are able to do with a very small reserve, because all the merchants do not come to withdraw money simultaneously; some withdraw, while others deposit at the same time. Thus the bank is enabled to erect a vast super structure of credit on the basis of small cash reserves. The bank is able to lend money and charge interest without parting with cash. The bank loan creates a deposit, as we have seen above or it creates a credit for the borrower. Similarly the bank buys securities and pays the seller with its own cheque which again is no cash; it is just a promise to pay cash. A merchant requires loans and advances to run his business. In the same manner he also has to deposit cash into the merchant account in whichever bank he holds an account. It is also like a give and take policy.

The cheque is deposited in some bank and a deposit is created or credit is created for the seller of the securities. This is credit creation. Also, when bank discounts a bill of exchange, it is seldom that the amount is paid in cash; instead the customer’s account is credited with the amount. This is creating credit. Thus every time the bank acquires an earning asset whether by advance or investment, it creates a deposit (or credit) in the name of the merchant or his firm from whom the asset has been acquired. The term “credit creation” implies a situation, to use Ben ham’s word, when “a bank may receive interest simply by permitting customers to overdraw their accounts or by purchasing securities and paying for them with its own cheques, thus increasing the total bank deposits”. All merchant accounts are governed by a set of rules made by the bank. The creation of credit in merchant account is done with the help of the bank.

Contact one of our helpful account representatives to assist you in the setup of a high risk merchant account or offshore merchant account for a high risk merchant.