Non-financial lenders and borrowers

It is highly improbable that the savings of (non-financial) economic units will be matched by desired investment. Some economic units will find that their savings out of income will exceed their planned investment, while others will find themselves in a situation where their savings are insufficient to meet desired internal investment. The former are referred to as surplus economic units or ultimate lenders, and the latter as deficit economic units or ultimate borrowers.

Gurley and Shaw created these terms in the 1960s2. They showed that each of the sectors of the economy conform to the following identity (notation amended):

Income (I) minus expenditure (E) is equal to the change in the holding of financial assets (FA) less the change in borrowing (debt or equity - DE). Therefore if E > I, the difference is made up by either reducing holdings of financial assets or increasing debt (or a combination). For example, if I = LCC 50 000 and E = LCC 70 000 in a particular month, I - E = -LCC 20 000. This is equal to either -LCC 20 000 in FA or +LCC 20 000 in DE, or, say -LCC 10 000 in FA and +LCC 10 000 in DE. AFA - ADE therefore equals -LCC 20 000 [-LCC 10 000 - (+LCC 10 000)].

Similarly, if I > E, then the economic unit has a choice of increasing FA or decreasing DE or combining +FA with -DE. It follows that there are three budget conditions:

• Deficit unit = E > I; therefore ADE > AFA, meaning that the economic unit is a net borrower of funds.

• Surplus unit = I > E; therefore AFA > ADE, meaning that the economic unit is a net lender of funds.

• Balanced unit = I = E; therefore AFA = ADE, meaning that the economic unit is neither a net borrower of funds nor a net lender of funds.

It is important to remember here that the net ultimate lenders are non-financial economic units that generate funds that are available for investment, i.e. we exclude the financial economic units (financial intermediaries) here (because they are to a large degree the recipients of the surplus funds). By the same token, the net ultimate borrowers are non-financial in nature (they borrow from the financial intermediaries and the ultimate lenders).

The ultimate lenders can be split into the four broad categories of the economy: the household sector, the corporate (or business) sector, the government sector and the foreign sector. Exactly the same non-financial economic units also appear on the other side of the financial system as ultimate borrowers. This situation arises as different members of the four categories, or even the same members at other times, may be either surplus or deficit units. An example is government: the governments of most countries are permanent borrowers (usually long-term), while at the same time having short-term funds in their account/s at the central bank and the primate banks (pending spending).

sectors of lenders & borrowers

Figure 5: sectors of lenders & borrowers

Figure 53 expands the financial system illustration presented earlier in Figure 1 to include the four economic sectors. These four sectors (and the financial intermediaries) form the framework of the so-called National Financial Accounts (= flow of funds per annum) produced by central banks. For purposes of these accounts, central banks usually define these four sectors as follows4:

Household sector: consists of individuals and families, but also includes private charitable, religious and non-profit bodies serving households. It includes unincorporated businesses such as farmers, retailers and professional partnerships, as the transactions of these businesses cannot be separated from the personal transactions of their owners.

Corporate sector: comprises all companies not classified as financial institutions and therefore covers business enterprises directly or indirectly engaged in the production and distribution of goods and services.

Government sector: consists of the central government, provincial governments (where they exist), local authorities, and non-financial public enterprises.

Foreign sector: comprises all organizations, persons and assets resident or situated in the rest of the world.


The financial sector or system can be dissected into six essential elements:

• Non-financial lenders and borrowers.

• Financial intermediaries.

• Financial instruments.

• Creation of money.

• Financial markets.

• Price discovery.

In addition, there are also allied participants / players / entities in the system, without which the system would not function efficiently. They are:

• Brokers and dealers (collectively: broker-dealers).

• Fund managers.

• Credit rating agencies.

• Financial exchanges.

• Financial regulators.

There are four sectors of the economy that constitute the non-financial lenders and borrowers:

• Household sector.

• Government sector.

• Corporate sector

• Foreign sector.

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