Credit Gap Research Articles

Nexus between Renewable Energy, Credit Gap Risk, Financial Development and R&D Expenditure: Panel ARDL Approach

In the study, we investigate the relationships between renewable energy consumption sub-indicators of G-8 countries and financial development, credit gap risk, and R&D expenditure from 1996 to 2018. The relationships among the variables in the study are analyzed by employing the Panel ARDL method and the Dumitrescu–Hurlin panel causality test. The cointegration relationships between the variables have been analyzed using the bounds test approach, and an unrestricted error correction model has been established. Contrary to previous studies in the renewable energy literature, this study employed the variable of credit gap risk. Therefore, we believe that this study will fill the gap in the literature and attract the attention of researchers and policymakers. The results indicate that increases in total demand for renewable energy positively affect the financial development of countries. Moreover, R&D expenditures increase as the demand for hydro energy and solar energy increases. This result indicates that wind power consumption has a short-term impact on R&D expenditure, and such an impact ceases to exist in the long run. According to the empirical research findings, the rise in demand for renewable energy may be a factor mitigating the credit gap risk of countries. In other words, the credit gap risk, which is considered a leading indicator of systemic banking crises, can be mitigated by the rise in the demand for renewable energy.

Do FinTech Mortgage Lenders Fill the Credit Gap? Evidence from Natural Disasters

AbstractAfter exogenous demand shocks caused by natural disasters, FinTech lenders are more responsive to increased demand for reconstruction mortgages than traditional banks and non-FinTech shadow banks. Both FinTech and traditional banks increase credit supply, but FinTech supply is more elastic without increases in risk-adjusted interest rates or delinquency rates. Comparing lending supply channels, banks respond to regulatory incentives to lend to damaged areas, whereas FinTech lenders supply more credit when traditional banks rely more on balance sheet financing and physical branch networks. Compared to traditional banks, FinTech lenders increase supply elasticity more aggressively in response to local competitive pressure.

Disparity of agricultural credit in India: field data evidence from farmers across social groups

PurposeThis work aims to examine the access and disparity of institutional agricultural credit for small and marginal farmers across various social groups from three Indian states.Design/methodology/approachField data on socio economic variables were collected using multi-stage stratified random sampling and purposive sampling through a structured questionnaire by interviewing about 400 cross sectional small and marginal farmers belonging to various social groups such as general caste, other backward caste, scheduled castes and scheduled tribes. Disparity of agricultural credit across different social groups is assessed using measures such as credit access, credit adequacy ratio, credit gap and newly constructed Agriculture Credit Disparity Index (ACDI).FindingsThe credit access, credit access ratio and newly constructed ACDI suggest that, by and large, farmers belonging to socially advantaged groups have better access to institutional agricultural assistance than farmers belonging to socially disadvantaged groups.Practical implicationsThe agricultural credit policy of the government needs to incorporate measures to eliminate credit disparity primarily by correcting the poor socio-economic profile (especially lower asset ownership and higher illiteracy) of socially disadvantaged farmers compared to the farmers' counterparts.Originality/valueThis study contributes to the existing work by providing fresh evidence from the field across social groups for both kharif and rabi crops using recent survey data from small and marginal farmers which have important policy implications.

Credit behavior and financial stability in an emerging economy

One relevant issue for the management of financial stability is the monitoring of the credit market. In this sense, Basel III proposed the credit gap as the most appropriate measure to anticipate financial stability issues. However, the adoption of the credit gap has been criticized, especially for emerging markets. Through panel data analysis, this study investigates the effect of the credit gap and the credit growth rate on financial stability in Brazil, which represents a relevant emerging economy. For this purpose, we use a set of financial stability measures traditionally found in the literature: the z-score, regulatory capital and credit risk. The results suggest that the credit gap and credit growth rates are adequate metrics to indicate the sustainability of credit growth in Brazil. However, credit growth rates are more attractive, since they indicate a threshold for credit growth in the Brazilian economy concerning financial stability.

Mind the Basel gap

The Basel credit gap, the difference between a country’s credit-to-GDP ratio and its estimated long-term trend, is used as a basis for setting countercyclical capital buffers under the Basel III regulatory framework. Using international data from the BIS, we show that the Basel credit gap, estimated by a one-sided HP filter, is nearly equivalent to a naive 16-quarter change in the credit-to-GDP ratio and performs equally well in terms of predicting banking crises. We demonstrate that the near-equivalence between deviations from trend and simple changes occurs when the one-sided HP filter is applied to a unit-root process. The goal of this paper is not to evaluate the performance of the Basel credit gap as an early-warning-indicator, but rather to demonstrate that its estimation method is unnecessarily complicated.

Informal Finance: A Boon or Bane for African SMEs?

The aim of this study was to ascertain what can be done by the informal finance sector to close the credit gap in order to improve access to finance by SMEs. SMEs are the backbone of many economies as a result of generating employment and improving GDP. Despite playing such a major role in African economies, SMEs have been excluded from the financial systems. The informal finance sector plays a vital role by providing finance to small businesses. The study employed a literature survey with a primary focus on empirical studies that have been conducted in the African context. The study found that, generally, there are two circumstances under which most small businesses depend on informal finance. Firstly, informal finance is used as a last resort by SMEs that fail to access credit from the formal finance sector, owing to, among other issues, information asymmetry, lack of collateral security and perceived high default rates. Further, low financial literacy and the absence of credit bureaus in developing countries also contribute to the failure to access finance from formal institutions. Secondly, some entrepreneurs opt for informal finance even if they are eligible for formal finance as a result of its flexibility, convenience and simple administrative procedures. Notwithstanding the above benefits of informal finance, informal lenders are regarded as exploiting the clients by charging high interest rates. In addition, this sector suffers from limited resources; hence, it fails to fully service SMEs that require larger funding and are not eligible for formal finance. Invariably, all the studies that have been carried out confirm that access to finance is a major obstacle to the growth and development of SMEs. The development and empowerment of SMEs cannot be ignored as an important driver of the developmental agenda of most economies globally. The main policy recommendations that flow from this study, based on the policy syndrome of improving access to finance (financial inclusion) by the SME sector, include (1) the establishment of a suitable regulatory framework which will nurture the informal finance sector while promoting consumer protection, and (2) linking the formal and informal sector. On the other hand, SMEs should improve their risk management practices and also embrace FinTech platforms in order to access credit.

Countercyclical capital regulation in a small open economy DSGE model

AbstractWe examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium-scale Dynamic Stochastic General Equilibrium (DSGE) model. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations originating in the housing market and fluctuations caused by foreign demand shocks. The trade-off disappears if the regulator responds to house prices instead. It turns out that the welfare-maximising simple CCyB rule implies responding to house prices only and not to the credit gap. Such rule also leads to significant welfare gains compared to the no CCyB case.

Measuring credit procyclicality: A new database

Today, the data available to estimate the credit cycle involve a trade-off between country coverage and frequency. In addition, there are pending methodological issues to estimate credit trend and cyclical components. To address these limits, we build a new database on credit metrics that relaxes the trade-off and includes credit procyclicality measures along three alternative methods- HP filter, the modified HP filter and basic SSA. The credit gaps in our database are statistically consistent with bank credit gaps estimated with BIS data and they have the advantage of being available for 163 countries instead of 43 countries. Armed with this new and expanded data, we investigate classic empirical questions in the literature with a comparative perspective across countries by income level.

The Post Covid-19 Consumer Buying Behaviour in The Nigerian Banking Industry: Issues, Challenges and Benefits

The purpose of this paper was to explore the issues of post COVID-19 consumer behaviour in the Nigerian banking sector. Customers and employees of five top commercial banks in Nigeria (Zenith Bank, Access Bank, Guarantee Trust Bank, First Bank and United Bank for Africa) were interviewed via the telephone. This study adopted the exploratory research design with qualitative analysis of respondents’ views. It is important to note that changing consumer behaviour patterns, shift in customers’ expectations and attitude and perceptions differences were the major issues. However, some of the challenges include; huge business uncertainty, high illiteracy rate vs. technological advancement in banking as well as space engagement. On the other hand, some of the benefits identified were; improved technological applications and seamless banking procedures, reduced credit gap, and increased banking opportunities with the growing rate of Fintech. However, short term actions and long term transformation were adequately highlighted as proposed mitigants to the challenges facing the Nigerian banking sector with respect to managing changing customers’ behaviour amid post COVID-19 pandemic. An area recommended for further studies is consumer behaviour and post COVID-19 pandemic in other developing economies, with the use of empirical approach to further validate the findings of this study.

Examining the effect of credit on monetary policy with Markov regime switching: Evidence from Turkey

This paper analyses the effect of credit on monetary policy responses for different regimes in Turkey. To do so, the Taylor rule augmented with the credit gap is estimated by using a Markov regime switching model from January 2006 to December 2019. The empirical findings identify two regimes: the low- and high-interest rate regimes. The prevalence of the former indicates policy authorities’ growth priorities. Furthermore, differing responses across the regimes reflect that the Central Bank of the Republic of Turkey has an asymmetric policy stance. In the low-interest rate regime, the monetary policy only significantly responds to inflation. In the high-interest rate regime, both inflation and credit have significant positive impacts on interest rate setting. This indicates that credit conditions affected the tightening of the monetary policy stance in Turkey despite the use of macroprudential tools after the global financial crisis.

Bank Credit and SMEs Financing in Nigeria

This study examined the extent SMEs are funded by deposit money banks in Nigeria. This was done through extensive descriptive, graphical and empirical analysis of Bank credit to SMEs data. The study generated and analyzed Bank credit to SMEs gap. It further explored Nigeria’s “financing gap” which measures the need of external funds for the corporate sector. Bank credit to SMEs was found to be decreasing over the period covered (i.e. 1992 – 2020). Bank Loans to SMEs as percent of Total Bank Loans reached a maximum of 47.7% in 2003 from where it had continued to decline to 0.56% in 2019 ended. Loans to Small Scale Enterprises as a percentage of Total Credit to the Private sector had been on the decline from a maximum of 27.04 % in 1992 to 0 0.54% in 2019. The analyzed SMEs Credit Gap shows that by 1992, SMEs Credit Gap was N113.664 million but by 2009, the SMEs Credit Gap has grown to N4261.46 billion and N7725.51 billion in 2016. The SMEs Credit Gap as at 2019 ended stood at N7565.51 billion. For the corporate sector, the financing gap is alarming as results reveal a financing gap of N3, 176,147,942,428.47 trillion in 2019. Thus, policies and actions aimed at reversing the downward trend in credit to SMEs as well as closing the financing gap should be intensified. Deposit money banks not just Microfinance banks should be encouraged to lend more to SMEs and remove all obstacles (hidden charges that increase the interest rate) while providing more technical assistance to SMEs. Keywords: SME Financing, Financing Gap, Bank Credit, SME contribution to GDP, Nigeria DOI: 10.7176/JESD/12-14-04 Publication date: July 31 st 2021

Credit access, macroprudential rules and policy interventions: Lessons for potential first time buyers

Given the increased popularity of macroprudential measures in the aftermath of the great financial crisis (GFC), a key policy question to arise in certain mortgage markets is whether a significant access to credit issue exists amongst prospective homeowners because of these new policies. In this paper we assess whether such a problem arises in the context of the Irish mortgage market – a market particularly adversely impacted by the GFC. We use a microsimulation model to estimate the level of latent credit demand that could be serviced by the market given prudent credit risk assessment and the current macroprudential regulations. We then compare this demand to current market provision to explore whether a credit gap exists. Finally, we simulate how a public mortgage credit scheme or equity “help-to-buy” type instrument may help credit access. We find both instruments to be effective but would lead to somewhat higher house prices.

Manufacturer encroachment with capital-constrained competitive retailers

With the development of e-commerce, manufacturers now have the opportunity to compete with existing retail channels by introducing their direct channels. Encroachment weakens the strength of retail channels, which may affect the manufacturer's decision on whether to provide trade credit financing to retailers. This study investigates the strategic interaction between manufacturer's encroachment and retailers’ financing choices (trade credit financing or external financing) in a supply chain consisting of a manufacturer and two capital-constrained retailers. We find that only encroachment cost below a certain threshold will make the manufacturer encroach on the market, while manufacturer encroachment is harmful to capital-constrained retailers. Surprisingly, these retailers can expand the ratios of equity financing in anticipation of manufacturer encroachment, which is a new strategic role of equity financing. In addition, the more intense the channel competition (the larger the credit gap between the two retailers) is, the less (more) likely the manufacturer will be to encroach. Further, we find that retailers prefer trade credit (external) financing at a low (high) bank loan interest rate in a non-encroachment scenario, while they prefer external financing in an encroachment scenario. However, the manufacturer always prefers the case that both retailers choosing external financing. Finally, there are financing choice conflicts between the manufacturer and retailers in the non-encroachment scenario. A high-credit retailer choosing trade credit financing may make all members achieve a Pareto improvement when the credit gap between two retailers is large; otherwise, both retailers choosing external financing is a Pareto improvement.

Analysis of extent of credit access among women farm-entrepreneurs based on membership in table banking (TB)

PurposeInadequate finance is considered a major factor limiting the growth of small-scale women-owned farm enterprises in Sub-Saharan Africa. Women empowerment programs such as table banking (TB) and women enterprise fund were initiated in an attempt to curb the credit gap affecting women in agribusiness. This paper determines the factors influencing the extent of credit access among women farm-entrepreneurs who are either members or nonmembers of TB groups in Kenya.Design/methodology/approachThe study was conducted in Kericho County using a sample of 384 respondents. Factor analysis was used to generate three indicators of entrepreneurial orientation which were included as explanatory variables in the regressions. Double hurdle econometric model was employed to analyze the factors influencing the decisions on credit uptake and amount of borrowed loan. Separate models were estimated for members and nonmembers of TB groups since they differed in volume and source of loan accessed.FindingsResults reveal that age of the woman and innovativeness negatively influenced credit access, whereas education level, participation in off-farm activities, number of farm enterprises, perception on interest rate, extension contacts and financial knowledge positively influenced the decision to access credit. On the other hand, participation in off-farm activities, risk-taking behavior, total land size, extension access and financial knowledge were statistically significant with positive correlation on the amount of loan borrowed. Significant factors differ between members and nonmembers of TB groups implying divergence in underlying credit access challenges once one has joined such groups.Research limitations/implicationsThe study did not consider supply-side factors affecting the amount of loan accessed by women farm-entrepreneurs.Originality/valueTo the best of the authors’ knowledge, this paper is one of the pioneer studies using the double hurdle model to analyze factors influencing the extent of credit access specifically among women farm-entrepreneurs and carrying out the analysis by membership in TB groups.

SME Financing: A UAE Entrepreneur Perspective

This research is an investigation into the motivating factors driving choice of bank for SME entrepreneurs in the United Arab Emirates (UAE). The study aims to highlight the challenges and suggest solutions in addressing the credit gap between the cash flow needs of SME entrepreneurs and the finance policies of UAE banks. The data collected was generated from a sample of SME owner-managers in three emirates: Abu Dhabi, Dubai and Sharjah. A structured research questionnaire was distributed and the convenience sampling method resulted in 380 completed responses. These were analyzed using appropriate statistical tools. The results of the study will enable banks to better understand and analyze the key determinants that impact the SME entrepreneurs’ attitude in bank selection and the products and services this particular group values. Research findings are also envisaged to be of particular interest to scholars and practitioners of Islamic Banking specifically, inspiring further studies across the MENA region.

A century of gaps: Untangling business cycles from secular trends

Was the US economy overheating prior to 1929 and did financial factors play a similar part across the century? Did the housing boom and bust of mid 1920s play the same role as in the build up and subsequent crisis of 2007? We tackle these questions using a Bayesian macroeconometric trend-gap decomposition of U.S. output. Our analysis is presented in the tradition of comparative historical studies of the 1929 and 2007 crises. Results confirm the essential role of financial factors as conditioning variables estimating output gaps. Accounting for credit dynamics, U.S. potential output has been steadily expanding at roughly 2% since the beginning of 1980. The elasticity of output gaps with respect to credit gaps exhibits substantial time-variation.

Alternative frameworks for measuring credit gaps and setting countercyclical capital buffers

This paper complements the standard Basel countercyclical capital buffer framework by suggesting four additional measures for credit gaps that can be used to measure the financial cycle and to decide on countercyclical capital buffers for banks. The new measures behave similarly to the gaps calculated with the standard Basel one-sided Hodrick-Prescott filter in long samples, but they have the properties desired for countries with relatively short historical samples. While the standard Basel credit gaps have been deep in negative territory for many European Union countries since the Great Recession the new gaps are close to zero and the buffers suggested are more in line with the countercyclical capital buffer ratios that were in place in 2018.

Model-based indicators for the identification of cyclical systemic risk

The credit-to-GDP gap, as proposed by the Basel methodology, is the reference measure for the activation of the Countercyclical Capital Buffer. However, most of the countries implementing this instrument in recent years are not following its signals due to the large downward biases that it is presenting after the last financial crisis that do not reflect properly the current macrofinancial environment. In this context, credit gap measures that incorporate economic fundamentals may provide more accurate signals of cyclical systemic risk. We propose two alternative model-based indicators that account for these factors. We assess their performance using time series data from the 1970s for six European countries and compare them to the Basel gap. We find that our proposed models provide more accurate early warning signals of the build-up of cyclical systemic risk than the Basel gap, as well as lower biases after rapid changes in fundamentals. Furthermore, we identify the model specifications that are optimal for each of the countries considered. Our flexible approach can easily accommodate national specificities, which are key to maximize the performance of the models.

Impact of Credit Gap for Turmeric Farmers in Erode District, Tamil Nadu

Impact of Credit Gap for Turmeric Farmers in Erode District, Tamil Nadu

Optimizing Credit Gaps for Predicting Financial Crises: Modelling Choices and Tradeoffs

Credit gaps are good predictors for financial crises, and banking regulators recommend using them to inform countercyclical capital buffers for banks. Researchers typically create credit gap measures using trend-cycle decomposition methods, which require many modelling choices, such as the method used, and the smoothness of the underlying trend. Other choices hinge on the tradeoffs implicit in how gaps are used as early warning indicators (EWIs) for predicting crises, such as the preference over false positives and false negatives. We evaluate how the performance of credit-gap-based EWIs for predicting crises is influenced by these modelling choices. For the most common trend-cycle decomposition methods used to recover credit gaps, we find that optimally smoothing the trend enhances out-of-sample prediction. We also show that out-of sample performance improves further when we consider a preference for robustness of the credit gap estimates to the arrival of new information, which is important as any EWI should work in real-time. We offer several practical implications.