The term “domestic credit” refers to lending or credit that a country or territory’s central bank makes available to borrowers within the same territory. This may include commercial banks and even involve the government itself.
Oftentimes, a government, whether this be on a local, municipal, or national scale, has to borrow money in order to fund its projects and offer services to its constituents. It therefore incurs known as government debt. This may either be external debt, which is that owed to external financial entities, or internal debt, which is owed to lenders within the same country. Of course, domestic credit falls under the second category.
A country’s central bank, which has the authority to lend currency to the government involved, may also extend credit to commercial banks. However, such banks usually turn to the central bank as a last resort. For both governments and banks, a certain interest rate is charged. This is known as a discount rate, which may serve as basis for interest rates imposed by other financial institutions and is usually seen to be quite competitive.
Despite this, banks may be highly reluctant to take out a loan from the central bank, as this entails the imposition of stricter transparency measures and more stringent controls. At the same time, this may give the impression that the bank is financially weak, since banks usually only borrow from the central bank during times of economic crisis.
In the case of the United States, the Federal Reserve offers domestic credit to the United States government through government bonds. When necessary, short-term loans are also issued to local banks.