Abstract
The Purpose: The aim of this paper is to identify the determinants of credit growth of commercial banks in Sri Lanka during the period from 2008 to 2019. Design/ methodology/approaches: The analysis consists of macro-level data collected from monthly basis including bank-specific, macroeconomic, and monetary policy variables that affect credit growth. Co-integration test is conducted using Autoregressive Distributed Lag (ARDL) approach to determine the long-term determinants of credit growth. Findings: The results revealed that growth of money supply, non-performing loan ratio, lending rate, and inflation rate and efficiency ratio have a strong link with credit growth compared to other bank-specific variables, and therefore they can be considered as long term determinants of commercial banks’ credit growth in Sri Lanka. The findings further revealed that growth of GDP and credit growth tend to have a relationship which supports the ‘demand following’ hypothesis of finance-growth theory. All other bank specific variables indicated marginal impact on the credit growth in the short-run. Policy implications: The results suggested that the government should prioritize all growth promoting policies, because, low economic growth disturbs aggregate demand in the country. To achieve a desired growth, continuation of expansionary monetary and fiscal policies is necessary with a close coordination between them. Continuation of the monetary targeting framework of the CBSL is also necessary since money supply growth influences credit growth in the country. Originality: This research is expected to be a pioneering work in the field as studies focusing especially on credit growth are relatively limited in the Sri Lankan setting.
Highlights
Credit exchange relations in the marketplace, according to Karl Marx, take two forms, namely, commercial credit relation and the monetary credit relation
The results revealed that growth of money supply, non-performing loan ratio, lending rate, and inflation rate and efficiency ratio have a strong link with credit growth compared to other bank-specific variables, and they can be considered as long term determinants of commercial banks’ credit growth in Sri Lanka
The findings further revealed that growth of GDP and credit growth tend to have a relationship which supports the ‘demand following’ hypothesis of finance-growth theory
Summary
Credit exchange relations in the marketplace, according to Karl Marx, take two forms, namely, commercial credit relation and the monetary credit relation. The former explains buying commodities against a promise to pay, and the latter explains lending money with a view of earning interest. Banks provide a significant amount of capital to both public and private sectors in the form of loans and the status of banks credit indicates the collective health of the markets and the economy. Since credit given to individuals and institutions is often converted into capital, and thereby used for productive economic activities, the growth of the credit market may indicate growth of productive economic activities. Some economies enhance credit growth as a catching-up strategy because easier access to credit paves the way to achieve their developmental targets (Bayoumi and Melander, 2008)
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