Monetary and credit policies

First: Monetary policy:
Monetary policy is the policy taken by the financial authority of a country to control current interest rates and the money supply with the aim of influencing the economy. The objectives of monetary policy are to control inflation to ensure price stability and the stability of the national currency. These goals are achieved by changing interest rates and managing the money supply. There are two main types of monetary policies:

Expansionary policy:

• It aims to stimulate the economy by providing a more generous economic environment.
• It involves lowering interest rates to encourage borrowing and investment.
• Increasing the money supply in the market with the aim of enhancing spending and supporting economic growth.
• It can lead to improved employment opportunities and lower unemployment rates.
• Contractionary monetary policy:
• It aims to reduce inflation rates and ensure price stability.
• It includes increasing interest rates to encourage saving and reduce spending.
• It aims to reduce the money supply to reduce aggregate demand and inflation.
• It may cause increased unemployment rates and reduce economic growth.

Countries must employ these policies with caution, as a balance must be achieved between stimulating economic growth and ensuring price stability.

Monetary policy objectives:

Monetary policy is characterized by the main objectives it seeks to achieve, which include the following:

• Achieving price stability:
  Achieving price stability is a fundamental goal of monetary policy, which is pursued with the aim of maintaining inflation rates at a moderate economic and social level. This goal requires careful monitoring of the effects of monetary policies on price levels and taking the necessary measures to maintain their stability.
  
  
• Achieving monetary and economic stability:
  This goal includes adjusting the money supply in proportion to the level of economic activity, with the aim of maintaining the stability of the monetary value and promoting economic stability.
  
  
• Achieving balance in the balance of payments:
  Monetary policy seeks to achieve balance in the balance of payments, by influencing the value of the national currency and controlling external trade operations.
  
  
• Ensuring an adequate level of production and utilization and achieving full employment:
  Monetary policy aims to stimulate economic activity, ensure full utilization of production, and achieve adequate levels of employment. This includes directing policies towards stimulating investment and providing an appropriate environment for economic growth.
  
  
• These goals constitute a basic framework for monetary policy and direct the efforts of financial authorities towards achieving comprehensive stability and improving economic conditions.

Monetary policy tools:

• Mandatory Reserves Policy:
  This relates to determining a proportion of the cash reserve that commercial banks must maintain with the central bank out of the volume of deposits. In periods of inflation, the central bank raises the statutory reserve ratio, which reduces banks' liquidity and reduces their lending capacity, while it reduces it in recessions to stimulate lending.

These tools are used to adjust liquidity in the economy, thus influencing the level of economic activity, inflation and employment.

Second: Credit policy

Credit policy is known as an integral part of monetary policy, and it is linked to the reality of economic growth, as the demand for bank credit increases with increasing economic growth. It deals with it by establishing the foundations for granting credit, identifying the targeted economic sectors, and providing an assessment of the creditworthiness of customers and acceptable guarantees. It is concerned with determining the purposes of dealing with economic sectors, clarifies the creditworthiness of customers and the guarantees that can be accepted by the bank, and can also determine the value of loans. The success of banking supervision in most countries depends on the principle of balancing the liquidity of the banking system with the size of its needs. Indirect bank credit can be controlled by regulating reserve growth. As there is fluctuation in the money multiplier, the role of credit policy in monitoring commercial banks increases, especially in developed countries. Credit policy becomes an essential part of monetary policy in these countries, as commercial banks create money, and in countries still in financial development stages, monetary policy deals mainly with issuance policy. The characteristics of credit policy are manifested in:

• DocumentationEvery bank must explain its credit policy in writing.
• trust: This requires establishing trustworthy relationships between management and bank employees, while maintaining flexibility and speed in customer service.
• Regulatory indicators: It depends on the amount of money available for lending and the staff structures who have the right to make lending decisions.
• Suitability: Related to the compatibility of credit policy with external economic and financial conditions in the country and the world.

Credit policy is an essential part of the supervision of commercial banks, and plays a major role in controlling banking activity and ensuring the sustainability of the financial system.