Credit Extension Research Articles

Regulation and Bank Lending in South Africa: A Narrative Index Approach

ABSTRACTThe extension of affordable credit is a key component of financial inclusion but it could reduce the stability of the financial sector. Prudential policies, on the other hand, are designed to mitigate financial sector risk. Thus, policies aimed at the extension of credit and prudential regulations may be in opposition. This study estimates and contrasts the impact of these potentially contradictory regulations on the bank lending volumes of South Africa's largest banks. We find that announcements of prudential regulation are associated with an increase in secured lending, while the implementation of prudential regulation is associated with an increase in unsecured lending. Despite tighter implementation of prudential reforms, we observe an increase in unsecured lending that is driven by unsecured lending to corporates. Our results also indicate the contractionary effects of prudential regulation on mortgage lending. Furthermore, the estimated effects of efforts aimed at extending credit to households have no impact on bank lending to households but increase secured lending to corporates. The two regulatory approaches overlap with regard to lending to corporates.

Dissemination of climate-smart agriculture practices in the Upper West Region of Ghana: insights from local stakeholders and institutions

ABSTRACT Limited empirical evidence exist on local-level institutions’ innovations and experiences in facilitating climate-smart agriculture (CSA) adoption. Qualitative interviews with farmers and local institutions supporting agriculture in Nandom, Ghana, were conducted. We found that local-level institutions employed (1) farmer-field schools (FFS) for capacity building to provide relevant knowledge for managing CSA practices; and (2) credit extension packages to reduce financial barriers to accessing inputs and technologies for CSA. We also found that sociocultural, financial, logistical, and technological constraints are the most important barriers hampering local-level institutions` ability to effectively facilitate CSA adoption. Furthermore, we observed that to encourage the uptake of CSA practices, particularly among vulnerable groups such as women, social power dynamics surrounding resource access and utilization must be addressed. For practice, the findings (1) serve as a case for learning different innovations that can be adapted in different contexts; and (2) give insights on how to overcome social barriers to CSA adoption and facilitation. We recommend that governmental institutions such as the Ministry of Food and Agriculture allocate resources and design policies that builds the of implementers. Training institutions must tailor contents to the needs and assimilation levels of target communities. Additionally, development partners should establish long-term funding mechanisms beyond grant cycles to provide sustainable financial support for CSA upscale.

Guaranteed Wealth?

Wealthy parents have found an ingenious way to magnify their children’s assets without paying gift tax. Rather than transfer assets to the children directly, a parent may encourage her children (or trusts for the children’s benefit) to borrow funds as needed to make investments. The parent stands behind that debt by making a personal guarantee, assuring the lender of repayment and thereby allowing the children to borrow and invest far more than they otherwise could. The Internal Revenue Service clearly believes that such guarantees should be treated as gifts but has hesitated to press that position or develop a framework for doing so. This Article provides that framework, drawing on analogous corporate tax cases to show the way. For gift tax purposes, when a person guarantees a loan to a related party, the loan would be recharacterized as a loan from the lender to the guarantor, followed by a second loan on the same terms from the guarantor to the ultimate borrower. Each loan would then be tested under existing doctrines to see whether it should be respected as debt. In most cases, the second deemed loan (from the guarantor to the ultimate borrower) would not be respected as debt, because the ultimate borrower lacks the income or resources to justify the extension of credit. As a result, the second deemed loan would be recharacterized as a gift to the ultimate borrower rather than a loan. This framework would severely curtail the use of guarantees to grow dynastic wealth.

Turning land into assets: local government borrowing through land assetization in China

ABSTRACT Local governments use state-owned land to raise massive funds to finance urban development in China. However, how is land formed and calculated as a financial asset? We aim to unpack the political-economic dynamics underpinning the phenomenon of turning land into a financial asset. Based on practices in Shanghai, Nanjing, and Jiaxing, this study provides a concrete account of how state-owned land is mobilized to secure funds by urban development corporations (chengtous) and the state itself through land reserve bonds. In either approach, the state manipulates asset formation and calculative techniques to achieve a favorable quantification of asset value. Therefore, the land is not a standard type of collateral but an extension of state credit. We contribute to the geography of assetization by arguing that land is turned into assets through state actions beyond being colonized by financialized techniques.

From risk to reward: Unveiling the multidimensional impact of financial risks on the performance of Ghanaian banks

From risk to reward: Unveiling the multidimensional impact of financial risks on the performance of Ghanaian banks

From carry trades to trade credit: Financial intermediation by non-financial corporations

From carry trades to trade credit: Financial intermediation by non-financial corporations

Firm-level political risk and the firm’s trade credit extension

This paper investigates the influence of firm-level political risk on the firm’s supply of trade credit. Using a novel measure of firm-level political risk developed by Hassan et al. (2019), we find that firm-level political risk has a positive impact on the firm’s trade credit extension. We also demonstrate that our results are not driven by macro financial and political events, firm-level political sentiment and non-political risks, and macro-level economic and political factors. Our result continues to hold after addressing the potential endogeneity concern. Additionally, we find that the positive impact of political risk on trade credit extension is more pronounced for firms selling differentiated goods and services. Furthermore, we demonstrate that extending trade credit enhances firm value when a firm faces higher political risk. This paper highlights the importance of considering firm-level heterogeneity in political risk. It also contributes to the literature on the determinants of trade credit extension and deepens our understanding of the relationship between political risk, trade credit, and corporate performance.

The Implications of the Countercyclical COVID-19 Policy on the Performance of Rural Banks and Sharia Rural Banks in Indonesia

This study investigated the impact of the Indonesian government policies implemented through POJK No. 11/POJK.03/2020 on the banking performance of Rural Bank (BPR) and Sharia Rural Bank (BPRS) after the implementation of countercyclical policies to stimulate the country's economy affected by the COVID-19 pandemic in Indonesia between March and December 2020. Mixed method approaches were applied to analyze the contributing factors to different performances between seven Rural Banks and seven Sharia Rural Banks in West Sumatra that were randomly selected through purposive sampling based on proportionate assets. The quantitative data were financial statements sourced from the OJK 2021 Publications, and the qualitative data were collected from in-depth interviews with eight Directors of Rural Banks and Sharia Rural Banks selected from the snowball sampling. Analyzing Indonesian government policies embodied in the countercyclical policy, we found that banking policies in Sharia Rural Banks outperformed those of conventional Rural Banks, as reflected by the average ROA (1.16% vs 1.33%), ROE (0.09% vs. 0.08%), and NPL (6.67% vs. 6.82%). The contributing factor to this gap was the different internal policies of each institution to translate the countercyclical concept based on the operational principles, such as the interest rate of Rural Bank and margin of Sharia Rural Bank despite the fact that both banks shared practice in the principal deferment and credit extension.

Trade credit and the stability of supply chains

We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier due to an operating shock. Affected firms extend more trade credit when their customers have lower switching costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit extension. However, when financial constraints at the affected firms and their suppliers prevent the increase in trade credit, customers sever their relationships with the affected firms, and the sales of the affected firms and their suppliers drop, suggesting that trade credit enhances production network stability.

Presidential economic approval rating and trade credit

Presidential economic approval rating and trade credit

Credit access and housing insecurity: Evidence from winter utility shutoff protections

Credit access and housing insecurity: Evidence from winter utility shutoff protections

Private Sector Investments: The Implication of Deposit Money Banks’ Credits in Nigeria

Reported in this article is the empirical effect of deposit money banks’ credits on Nigeria’s private sector’s investments. The study was evaluated empirically over a period of forty-one years, from 1981 to 2021. Deposit money banks’ credits is proxied by bank credits, with interest rate and money supply moderating regressors while private sector investments is measured as private investments. Utilized for analysis are sourced secondary data from the Central Bank of Nigeria statistical bulletin and the applied methods of analysis include descriptive statistic technique, Augmented Dickey-Fuller’s Unit Root test, Auto regressive Distributed Lag technique. The findings obtained showed clearly that private investments and banks’ credits were stable at levels, as cost of credit (interest rate) and money (liquidity) supply were stationary at first difference. In addition, banks’ credits had direct and significant effects on the regress and (private investments) in Nigeria, cost of credit had negative but significant bearing on private investments while money supply had positive and significant effects the independent variable. Lastly, there exists long-run equilibrium rapport among private investment, banks’ credits, interest (credit) rate and money supply at 5 percent critical level. Sequel to these findings, it is therefore concluded that deposit money banks’ credits had significant-positive effects on private sector investments in Nigeria in both short run and long run. It is thus, recommended among others that deposit money banks need encouragement to expand credit extensions to private sector operators for sustainable enhancement of investments in this sector of the economy.

Delayed crises and slow recoveries

Delayed crises and slow recoveries

The role of Fintech financing in correcting ecological problems caused by mineral resources: Testing the novel ecological deficit hypothesis

The role of Fintech financing in correcting ecological problems caused by mineral resources: Testing the novel ecological deficit hypothesis

Commonality without convergence: An analytical framework Accounting for variegated financialisation in emerging economies

Financialisation is not a homogenous but a variegated process. However, the question along which categories this variegation happens is currently unanswered. We identify four variegation categories: financial sector structure, productive structures, the role of the state, and the growth model. We apply these categories to two seemingly similar emerging-economy contexts which have produced different financialisation experiences: Colombia and South Africa. Financialisation in South Africa is much more market-based, meaning it is led by the financial sector unfolding through financial markets and banks’ activities visible in their much larger size, activity, and international interconnectedness, than in Colombia. Hence, South African credit extension, bond markets, domestic pension funds, and stock market capitalisation are substantially larger than Colombia’s, while the Rand has experienced strong internationalisation since 2000. Nevertheless, there is evidence financialisation processes have been unfolding dynamically in both countries over the past two decades, reinforcing the view of variegated financialisation as a common tendency with significant heterogeneities across countries.

Trade credit provision and stock price crash risk

Trade credit provision and stock price crash risk

Executives' horizon and trade credit

AbstractUsing executives' decision horizon as a measure of internal governance, this study examines the association between customer's internal governance and supplier's extension of trade credit. Suppliers may extend more trade credit to customers with strong internal governance because of their lower operational risk, higher firm performance, and better information environment. However, firms with better internal governance may have easier access to other sources of financing, and thus may need less trade credit. Using a sample of US listed firms between 1992 and 2021, we find that suppliers extend more trade credit to customers with strong internal governance. We also find that the association between internal governance and trade credit is more pronounced for financially, and informationally constrained firms. Our results are robust to alternative measures and specifications. Incremental to prior studies, we show that effectiveness of customers' internal governance affects suppliers' lending decisions.

Dynamics of Trade Credit, Bank Credit Extension, Sustainable Economic Growth, and Imports: Evidence from the European Non-Financial Sector

This study investigates the relationship between trade credit and sustainable economic growth, bank credit extension, and imports in the context of 15 European non-financial sectors spanning 2005Q1 to 2019Q2. Furthermore, it attempts to unveil the nonlinear relationship between trade and bank credit extension. To achieve these aims, balanced panel data are constructed and second-generation panel data are used to analyze Panel AMG Estimation, and an improved panel causality test for heterogeneous panels is employed. To enhance the robustness of the study, the results are scrutinized on a country-specific basis. The findings revealed a positive relationship between trade credit and both sustainable economic growth and imports, whereas a negative correlation was found with bank credit extension. These divergent outcomes at the country level were thoroughly discussed. Finally, a bilateral causality is identified between trade credit and economic growth, bank credit extension, and total manufacturing production, whereas a unidirectional causality is found with import activities.

Agricultural Cooperative and Rural Poverty Reduction among Members in Ekiti State, Nigeria

This study investigated the link between agricultural cooperative and rural poverty reduction among members in Ekiti State. Primary data from the 330 copies of the questionnaire were distributed to rural farmers in the study area. Data obtained were analyzed using descriptive statistics, spearman correlation and paired sample T-Test to test the formulated hypotheses of the study at the 5% level. Results from the data analyzed shows that the correlation matrix between the variables (cooperative marketing, cooperative credit extension and cooperative farm input supply) revealed positive coefficient values of 0.111, 0.151 and 0.372 respectively. The implication of this is that there exists a significant positive relationship between the dependent and independent variables in the study area. This also explains that cooperative marketing, cooperative credit extension and cooperative farm input supply will help in reducing poverty in the study area. The study recommended that government should improve on the road infrastructure in the rural areas to create easy transportation of agricultural produce to city centers to further enhance rural income, government and relevant agencies are advised to make prompt and low interest rate credit facility available for farm business and should provide farmers with the needed input to boost farm business which can aid employment creation and also provide the farmers with the technical know-how through trainings and seminars on the use of implements/inputs that can be helpful to their farming.

Robust Optimal Monetary Policy in a Forward Looking Structural Vector Autoregression Model for the Kingdom of Eswatini

The purpose of the study was to establish the optimal monetary policy to influence inflation, credit extension to the private sector, and real GDP in the right direction in the Kingdom of Eswatini. Based on the three estimated models of the Structural Vector Autoregressive (SVAR) using monthly data for the period 2000 to 2019, the results indicate that the discount rate is optimal/ superior over the reserve requirement and liquidity requirement. Monetary policy shocks to the reserve requirement and liquidity requirement are not effective to stimulate economic growth and bank credit to the private sector, which indicates that the three instruments do not complement each other. The results of the variance decomposition show that the discount rate’s contribution is 0.62% on real GDP, 3.25% on inflation, and 3.31% on bank credit in month twenty-four, which is significant. The study also recommends that the Central Bank of Eswatini should consider a policy mix of 5.60% for the discount rate, 4.30% for the reserve requirement, 13.29% for the liquidity requirement to influence inflation, bank credit to the private sector and economic growth in the right direction.