Credit: Economic Foundations and Legal Instruments

Credit: Economic and Legal Framework

Economic and Legal Concepts of Credit

1. Economic Concept

   Trust allows one party (the creditor or lender) to provide money or resources to another party (the debtor or borrower). The borrower does not reimburse the lender immediately, generating debt, but instead promises to repay or return those resources at a later date. Credit encompasses any form of deferred payment. The borrower receives something of value now and agrees to repay the lender at some later date, typically with interest.

2. Legal Concept

   Credit is defined as a promise of payment formalized through a contractual agreement between the debtor and creditor. In this agreement, the debtor has the obligation to pay, and the creditor holds the right to claim payment. Credit serves as a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.

3. Legal Definition (Mexico)

   Credit instruments are executive documents issued to be negotiated. They must fulfill all legal formalities essential for the owner to exercise the literal and autonomous right contained within. (Art. 5 LGTOC - Ley General de Títulos y Operaciones de Crédito)

Parts of a Formal Legal Definition

Credit instruments are writings that create the unconditional order to pay a fixed amount of money. The essential components include:

1. Written instruments
2. Unconditional nature
3. Order to pay
4. A fixed amount
5. Money (as the medium of payment)

Legal Purposes of Credit

Credit instruments serve several vital legal and economic functions:

1. Credit constitutes an option to comply with obligations at a later date with full legal certainty.
2. They are useful and flexible documents because the law protects their content and does not require any other warranty or additional instrument.
3. The uniformity of legislations and international treaties that govern these instruments grant certainty and security to the subscribers.
4. The credit economy provides the opportunity to obtain present wealth in exchange for future wealth, facilitating transmissibility and negotiability.
5. Credit has significantly contributed to the growth of exchange in the modern economy.

Intermediate Theories of Credit Instruments

Various legal theories attempt to explain the nature and function of credit instruments, including:

1. Bona Fide
2. Property
3. Issuance
4. Legal Appearance
5. Unilateral Act
6. Pending Right
7. Documental Business Perfection and Effectiveness