Bible History

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What is "historical-cultural background" in regards to Biblical interpretation?
What is the significance of this material in interpreting the Bible properly?

The second question is really answered throughout.

This is not all that different from the literary context. Literary context is the manifestation o a broader historical background. Culture, to a great extent, is literary at its root. We spoke of the use of words, symbols and concepts of having tremendous depth that for the ancient mind is not an issue. For the modern, nominalist and empiricist mind, seems mystifying. The entire method of seeing the world has radically changed.

Think of it like this: the ancient mind, in general, saw manifestations, particular objects, as part of a larger whole. It had a meaning in use, a meaning for moral interpretation, a historical meaning and, given the object, a manifestation of divine energy. All was connected in a network of meaning. Symbols were connected to other symbols. A symbol was not some empty design, it was a point of intersection between the heavenly and earthly realms. Symbols were needed because the truths of heaven (think of Plato's Forms) were not communicable in human language, which developed to describe earthly things.

One quick example: psalm 50, 18-21,

For if thou hadst desired sacrifice, I would indeed have given it: with burnt offerings thou wilt not be delighted. A sacrifice to God is an afflicted spirit: a contrite and humbled heart, O God, thou wilt not despise. Deal favorably, O Lord, in thy good will with Sion; that the walls of Jerusalem may be built up. Then shalt thou accept the sacrifice of justice, oblations and whole burnt offerings: then shall they lay calves upon thy altar.

This is one of the most common psalms. The prophets have condemned Israelite sacrifices because a) they were often done for the sake of gain, b) they were not done in the spirit of repentance, c) they were done mechanically. In fact, in the book of Amos, he says that god "hates" your offerings as they are "stench" to me.
What God wants is a crushed heart. The "heart" was not merely the organ in our chest. It was deeper than the intellect, and was a synthesis of thought, feeling, memory and identity. It was infinite. It was used more than the concept of soul. So your whole being had to be humbled, not just your mind. But as soon as this is done, God forgives. THEN the old liturgical services can be done properly.
Today, this is manifest in the requirement that communion be preceded by permission from your spiritual father and that all past sins have been rectified. Without that, receiving communion will become a deadly sin.

Modernity destroyed all of this. Objects do not exist in modern epistemology, since of course, an object is really a bunch of smaller objects held together. You eventually get down to energy, and the object itself ceases to exist. Under some interpretations, all you end up with is Nietzsche's flux. This is another way of saying that the decomposition of the object (and that includes the self, our will and history) leads to meaninglessness. There is nothing stable enough to provide meaning.

What is a brief understanding of the process of "contextualization."

It is what I did above with psalm 50. Since this is poetry, words are chosen for their cultural-symbolic value. Not knowing the symbols, these are just words. The worst thing to do is to read these passages as if one were reading a magazine. The words, even in translation, often do not mean what modern people normally consider their meaning. Love, heart, sin, death, Hades, prostitution, etc. are all used very symbolically. Prostitution and adultery are used by the prophets all the time. It refers to several things, a) the pagan use of ritual prostitution prior to entry into the temple, b) pagan temples were also banks, money was considered a talisman, and the prostitute became a symbol of its power, c) adultery and whoring are used by all the prophets for those who run after other gods for the sake of gain.

For example, Israelites began to worship the Tyrian god Moloch the Devourer of Children because Tyre was a commercial trading city (its people founded Carthage and Venice). The domination of money required the sacrifice of children to ensure success. Death was a place, as well as a state. Hades was the place of the dead, and is not Hell. It is a place of semi-existence. Death could also mean the separation of soul from the body. People who live solely for material pleasures were dead. Actual, physical cessation of breathing was not as signification as these other concepts of death.
It never ends.

How can I explain contextualization to a new believer that wanted to learn more about the historical-critical background of the Bible?

I've spent my life doing just this. It's a painful process, since you have to break the commonplace usage of words. That is difficult. Making matters worse are the ...