Effect of foreign capital inflows on domestic credit to the private sector in sub‐Saharan Africa

Abstract

AbstractThis study examines the effect of foreign capital inflow on domestic credit to the private sector in sub‐Saharan Africa (SSA). Estimates based on the system‐generalized method of moments, Pooled Mean Group and fully modified OLS estimators using panel data on 33 SSA countries from 1996 to 2019 establish the following results. First, foreign direct investment (FDI) positively affects domestic credit in the short and long run. Second, the effect of official credit on domestic credit is negative in the short and long run. Third, the US Treasury Bill rate negatively relates to domestic credit to the private sector in the short and long run. Improving policies to enhance the favourable effect of FDI on domestic credit may reduce borrowing from official sources to eliminate its undesirable effect.