Real deposit rate and credit supply nexus in ECOWAS

Abstract

The relationship between real deposit rate and credit supply is interrogated with panel data (1980–2015) from ten Economic Community of West African States (ECOWAS) using dynamic common correlated effects mean group (DCCE-MG) and pooled mean group (PMG) estimators. The results show that real deposit rate has a linear positive long-run impact on credit supply for the full and sub-samples of Communauté Financière d'Afrique (CFA) and non-CFA franc countries, while at country levels, the relationship is mixed with varying signs. Similarly, the Dumitrescu–Hurlin non-causality (2012) test shows that real deposit rate Granger-causes credit supply in the long run. Overall, the findings support the McKinnon (Money and capital in economic development, 1973) and Shaw (Financial deepening in economic development, 1973) hypothesis that interest rate is an essential ingredient in the intermediation role of the financial system and suggests that depositors are incentivised to give up present consumption by saving at high deposit rates.