Domestic Private Credit Research Articles

The Determinants of Monetary Policy in Malaysia: Impact on Economic Activity

The overnight interbank rate is a key tool for central banks to influence economic activity and maintain financial stability. It represents the rate at which banks lend and borrow short-term funds from one another, often overnight, and plays a crucial role in monetary policy transmission. Changes in this rate can affect borrowing costs and credit availability, which in turn impacts consumption, investment, and economic activity. Bank Negara Malaysia (2021) highlights that overnight transactions in the interbank market operate alongside the Kuala Lumpur Interbank Offered Rate (KLIBOR). This study analyzes time series data from 1991 to 2021 to identify relationships between the overnight interbank rate and macroeconomic variables using the ordinary least square (OLS) method. The analysis focuses on unemployment (UR), domestic private credit (DGR), gross domestic product (GDP), foreign exchange reserves (FER), and inflation (I), with data sourced from the World Bank and the Federal Reserve Bank (FRED). The results show that unemployment and inflation significantly impact monetary policy. High unemployment suggests underused resources, often prompting lower interest rates to stimulate investment and economic growth. In contrast, rising inflation typically leads central banks to increase interest rates to slow spending, while falling inflation may result in rate cuts to spur economic activity.

Determinants of Bank Stability in Nigeria

The paper examines the determinants of bank stability in Nigeria over the 2000 to 2021 period. The analysis was conducted using the ZSCORE as the measure of bank stability in Nigeria alongside the regulatory capital ratio, cost-to-income, non-performing loans, loan-to-deposit, bank concentration, and the share of domestic private credit to GDP as the determinants of bank stability. The model was estimated using the time-series ordinary least square regression method. The results show that the regulatory capital ratio, cost-to-income, non-performing loans, loan-to-deposit, bank concentration, and the share of domestic private credit to GDP are all significant determinants of bank stability in Nigeria. More specifically, regulatory capital ratio, cost-to-income ratio, non-performing loans, and domestic private credit are negative measure of bank stability, while loan-to-deposit ratio and bank concentration are positive determinants of bank stability in Nigeria.

Information and communication technology and poverty alleviation in Nigeria

There is a disconnect between the abundant resources at the national level and the severe poverty at individual and household levels in Nigeria. Information and communication technology is an efficient tool that the Asian economies have used to alleviate poverty. Information and communication technology is regarded as a tool which helps create an information and communication technology-based economy. This quantitative study examined how Nigeria can use information and communication technology to alleviate the enormous poverty levels. Data were sourced from the World Bank and International Telecommunication Union, for the period 1992–2020. In terms of the research methodology, the Autoregressive Distributed Lag model was employed in the research. The empirical findings showed that information and communication technology can have a projected 50% positive effect in reducing poverty. Foreign direct investment had a positive effect on reducing income inequality. Primary research findings depicted that information and communication technology, economic growth, foreign direct investment and private domestic credit were key tools for reducing poverty in Nigeria. Concerning policy recommendations, it was suggested that private domestic credit and foreign direct investment should be channelled to the information and communication technology sector to have a greater impact on poverty alleviation.

FINANCIJSKI RAZVOJ I POTROŠNJA ENERGIJE U NIGERIJI

The study examined the effect of financial development on energy consumption in Nigeria from 1990 to 2020. The study made use of secondary data and the data was analyzed using the Non-linear Autoregressive Distributed Lag Model (NARDL). Domestic credit to the private sector was used to measure financial development, while fossil fuel energy and renewable energy consumption were used to measure non-renewable and renewable energy respectively. Other variables included Gross domestic product, interest rate, and inflation. The study revealed that domestic private credit had a significant and negative impact on non-renewable energy only in the short run while changes in domestic credit had a significant and positive impact on renewable energy in Nigeria. This shows that the efforts of the financial sector so far in Nigeria have encouraged the consumption of renewable energy which therefore translates that the financial sector in Nigeria has a significant role to play in achieving Goal 7 target agenda of affordable and clean energy of the sustainable development. The study, therefore, recommends proper mobilization of funds from the financial sector towards investment in renewable energy considering the growing need for alternative energy sources in Nigeria. Also, policies that will discourage the use of non-renewable energy sources but encourage the use and affordability of renewable energy in Nigeria should be considered so that a reduction in environmental pollution, as well as improved health status, can be achieved.

FINANCIAL ACCESS AND VALUE ADDED IN SUB‐SAHARAN AFRICA:

This research assesses the importance of financial access on value added in three economic sectors in 25 countries in Sub‐Saharan Africa using data for the period 1980–2014. The empirical evidence is based on the Generalized Method of Moments. Financial access is measured with private domestic credit, while the three outcome variables are: value added in the agricultural, manufacturing, and service sectors, respectively. Enhancing financial access does not significantly improve value added in the agricultural and manufacturing sectors, while enhancing financial access improves value added in the service sector. An extended analysis shows that, in order for the positive net incidence of enhancing credit access on value added to the service sector to be maintained, complementary policies are required when domestic credit to the private sector is between 77.50 percent and 98.50 percent of GDP. Policy implications are discussed.

Financial Access and Productivity Dynamics in Sub-Saharan Africa

ABSTRACT The purpose of this study is to investigate whether enhancing financial access influences productivity in Sub-Saharan Africa. The research focuses on 25 countries in the region with data for the period 1980–2014. The adopted empirical strategy is the Generalised Method of Moments. The credit channel of financial access is considered and proxied by private domestic credit while four main total factor productivity (TFP) dynamics are adopted for the study, namely: TFP, real TFP, welfare TFP and real welfare TFP. It is apparent from the findings that enhancing financial access positively affects welfare TFP whereas the effect is not significant on TFP, real TFP and welfare TFP. Policy implications are discussed. The study complements the extant literature by engaging hitherto unemployed dynamics of TFP in Sub-Saharan Africa.

The Effectiveness of Transmission Mechanisms of Monetary Policy in Sierra Leone

Studies on the effectiveness of transmission mechanisms of monetary policy are crucial for an economy. It is essential to understand how effective are the channels of monetary transmission in directing economic activities in Sierra Leone. In this case, particular focus is on the interest rate, exchange rate, and credit channels. The analytical methods used are unit root tests, cointegration test, Granger causality test, impulse responses and variance decomposition. Central to this investigation is the use of the Vector Autoregression (VAR) approach to estimate time series annual data from 1980 to 2012. The cointegration test result revealed that cointegration exists. The Granger causality test showed that gross capital formation Granger causes exchange rate and real interest rate. The impulse response function showed that output responded positively to monetary shocks, as interest rate increased. For exchange rate and private domestic credit, output showed that even in the long run, the effects of the shocks might not be transitory in order to converge towards a steady state. The variance decomposition indicated that fluctuations in gross domestic product per capita (GDPPC) were attributed to itself. While the total contribution of the real interest rate (RIR) and exchange rate (ER) was relatively insignificant. The error forecast of RIR was attributed by itself with an insignificant contribution of GDPPC and none by ER and private domestic credit (PDC). Fluctuations in forecasting ER were greatly attributed to itself and trivial contributions by the other variables. As the trend fell, there was a slight increase in the contribution of the other variables. The results provided evidence of ineffective channels in the Sierra Leone economy.

Financial Access and Productivity Dynamics in Sub-Saharan Africa

The purpose of this study is to investigate whether enhancing financial access influences productivity in Sub-Saharan Africa. The research focuses on 25 countries in the region with data for the period 1980-2014. The adopted empirical strategy is the Generalised Method of Moments. The credit channel of financial access is considered and proxied by private domestic credit while four main total factor productivity (TFP) dynamics are adopted for the study, namely: TFP, real TFP, welfare TFP and real welfare TFP. It is apparent from the findings that enhancing financial access positively affects welfare TFP whereas the effect is not significant on TFP, real TFP and welfare TFP. Policy implications are discussed. The study complements the extant literature by engaging hitherto unemployed dynamics of TFP in Sub-Saharan Africa.

Exploring the Impact of Financial Development on Inequality: Evidence from Three Asian Countries

The broad objective of the present study is to investigate the impact of financial development along with some other variables namely GDP per capita, inflation rate, human capital, and trade openness for three developing Asian countries- Bangladesh, India and Pakistan. Annual time series data during the period 1980-2014 have been used for empirical investigation. After employing appropriate tests and estimation techniques, it is found that the financial development is statistically insignificant for all three countries, it implies that yet these developing countries are not efficiently allocating domestic private credit to poor segments of population. The results also reveal that inflation impedes income inequality for Bangladesh and India. GDP growth rate is insignificant for India and Pakistan however it is significant for Bangladesh having statistically positive relationship with income inequality. It means that GDP growth rate is linked with growth of income of elite class rather than bottom segments of population. National income improves inequality for Bangladesh but have insignificant affect on income inequality for India and Pakistan. Similarly, trade openness is insignificant for India and Pakistan, however it is significant for Bangladesh having statistically positive relationship with income inequality, which indicates that there is increasing unemployment in these countries due to lesser employment opportunities for skilled and unskilled labour. Empirical results of human capital shows insignificancy for India and Pakistan where as it is significant for Bangladesh; hence revealing that these countries failed to optimally utilize their resources in educational sector.

Complementarity Between Foreign Aid and Financial Development as a Driver of Economic Growth in Selected Emerging Markets

This paper studied whether the complementarity between financial development and foreign aid promotes economic growth in selected emerging markets using the panel Fully Modified Ordinary Least Squares (FMOLS) approach, with data ranging from 1994 to 2014. Although (1) aid‑growth and (2) finance‑growth studies have been conclusively dealt with, the role of financial development in the aid‑growth nexus has been hardly researched. Is financial development a channel through which foreign aid positively influences economic growth? The current study seeks to address these issues using selected emerging markets as a case study. The complementarity between foreign aid and financial development (domestic credit provided by the financial sector, domestic private credit provided by banks, outstanding domestic private debt securities and stock market turnover) resulted in a significant positive impact on economic growth. The study, therefore, urges selected emerging markets to implement policies which deepen the financial sector in order to allow foreign aid to positively contribute towards economic growth.

An ARDL Bounds Testing Approach to the Relationship between Financial Development and Output Growth in Nepal

This paper examines the relationship between financial development and output growth in Nepal over 42 years of period from mid- July 1975 to 2017 using ARDL bounds testing approach to co-integration. The study uses natural logarithm of per capita real GDP as a proxy of output growth and means removal average of broad money (M2) to GDP ratio and domestic private credit to GDP ratio as a proxy of financial development indicator. The results of ARDL bounds test show that financial development and output growth in Nepal is co-integrated over the study period. The study results demonstrate that financial development in Nepal leads to output growth in the long-run. However, the study fails to detect any impact of financial development on output growth in Nepal over the short-run. Based on long run results of this study, it can be concluded that development of financial sector in Nepal can stimulate long-run output growth. Thus, considerable efforts should be paid on promoting the development of the financial sector that contributes significantly to achieve long-run output growth.

Private Savings: Trend Analysis and Determinants

This paper examines the evolution of private savings and its components that is household savings in physical assets, financial household savings and corporate savings since 1991 in India. The study is an attempt to measure the impact of government initiatives to encourage household savings, specifically on financial household savings. It further examines the effect of changing economic conditions on private savings. The trend in private savings is checked from 1991–1992 to 2015–2016. This sample period is divided into three phases thatis from1991-1992 to 2000–2001, from2001-2002 to 2007–2008 and from 2008–2009 to 2015–2016. Interactive dummy model is used to analyse the trend. The growth in private savings and financial household savings is observed to be stagnating in the second phase whereas dwindling significantly in the third phase. Increase in private corporate savings is offset by decrease in household savings in physical assets in the second phase whereas both decreased in the third phase. Multivariate regression is applied to determine if macroeconomic variables like inflation rate, real interest rate, dependence ratio, per capita income and private domestic credit affects private savings significantly. Per capita income, real interest rate and inflation rate have been observed to be significantly affecting private savings.

Does Financial Development Lead to Poverty Reduction in China? Time Series Evidence

The impact of financial development on poverty reduction has received attention in the literature recently. While the connection between financial development and poverty may appear straight forward in theory, in empirics it may be much complicated. This study attempted at empirically assessing the causal links between financial development and poverty reduction in China for the period 1985–2014. The study used the Toda-Yamamoto causality test to avoid pretesting bias that has featured majority of the existing studies. The study utilized two standard proxies for financial development, namely: the domestic private credit by banks as percentage of GDP, and money supply (M2) as percentage of GDP; and a standard proxy for poverty reduction namely: the household final consumption expenditure per capita growth (annual percentage). The study found a bidirectional causal flow between financial development and poverty reduction, implying that the causal flow between these important variables is independent of the proxy for financial development. This means that financial sector reforms and poverty reduction programs are more of “win-win” strategies in the case of China. Therefore policymakers in China should continue to implement robust financial sector reforms and poverty reduction strategies.

Does Financial Development Lead to Poverty Reduction in China? Time Series Evidence

The impact of financial development on poverty reduction has received attention in the literature recently. While the connection between financial development and poverty may appear straight forward in theory, in empirics it may be much complicated. This study attempted at empirically assessing the causal links between financial development and poverty reduction in China for the period 1985–2014. The study used the Toda-Yamamoto causality test to avoid pretesting bias that has featured majority of the existing studies. The study utilized two standard proxies for financial development, namely: the domestic private credit by banks as percentage of GDP, and money supply (M2) as percentage of GDP; and a standard proxy for poverty reduction namely: the household final consumption expenditure per capita growth (annual percentage). The study found a bidirectional causal flow between financial development and poverty reduction, implying that the causal flow between these important variables is independent of the proxy for financial development. This means that financial sector reforms and poverty reduction programs are more of “win-win” strategies in the case of China. Therefore policymakers in China should continue to implement robust financial sector reforms and poverty reduction strategies.

Who Is Who in Knowledge Economy in Africa?

This study assesses the knowledge economy (KE) performance of lagging African countries vis-a-vis their frontier counterparts with regard to the four dimensions of the World Bank’s knowledge economy index (KEI). The empirical exercise is for the period 1996-2010. It consists of first establishing leading nations before suggesting policy initiatives that can be implemented by sampled countries depending on identified gaps that are provided with the sigma convergence estimation approach. The following are established frontier knowledge economy countries: (i) For the most part, North African countries are dominant in education. Tunisia is overwhelmingly dominant in 11 of the 15 years, followed by Libya which is a frontier country in two years while Cape Verde and Egypt lead in a single year each. (ii) With the exception of Morocco that is leading in the year 2009, Seychelles is overwhelmingly dominant in ICT. (iii) South Africa also indomitably leads in terms of innovation. (iv) While Botswana and Mauritius share dominance in institutional regime, economic incentives in terms of private domestic credit are most apparent in Angola (8 years), the Democratic Republic of Congo (3 years) and Tanzania, Sierra Leone and Malawi (each leading in one year).

Remittances and Financial Development: Evidence from Sub‐Saharan Africa

AbstractThis paper uses 5‐year non‐overlapping panel data for the period 1970–2013 to study the effect that remittances have on financial development in sub‐Saharan Africa (SSA). The paper further examines whether and how democratic institutions mediate the effect that remittances have on financial development. The panel estimates yield that remittances are significantly positively associated with financial development. The baseline estimates indicate that a 10 percent increase in remittances increases domestic private credit by 0.43 percent and the cumulative effect is around 1.84 percent. Democratic institutions do not significantly mediate the effect that remittances have on financial development in SSA. These results inform debates over remittances’ role as an important source of development finance in SSA and suggest that policymakers can exploit the advantages of remittances by pursuing measures to ease the flows of remittances to the region.

Causality between credit depth and economic growth: evidence from 24 OECD countries

Causality between the ratio of domestic private credit to GDP and growth in real GDP per capita is investigated in a country-by-country time-series framework for 24 OECD economies over the period 1980–2013. The proposed threefold methodology to test for causal linkages integrates (1) lag-augmented VAR Granger causality tests, (2) Breitung–Candelon causality tests in the frequency domain, and (3) testing for causal inference based on a fully modified OLS (FMOLS) approach. For 12 of 24 countries in the sample, the three tests yield uniform results in terms of causality presence (absence) and direction. Causality running from credit depth to economic growth is found for the UK, Australia, Switzerland, and Greece. The findings lend no support to the view that financial development shifts from a supply-leading to demand-following pattern as economic development proceeds. The aggregate results mesh well with the current discussion on “too much finance” and disintermediation effects. However, idiosyncratic country determinants also appear significant.

Lessons and Implications from the European Sovereign Debt Crisis

The European sovereign debt crisis entered into the stage of contagion in the late 2010 as it spread first from Greece to Ireland, and then to Portugal and Spain. The European sovereign debt crisis truly resulted from a combination of various factors, some as more precipitating causes while others as more fundamental or deep-rooted causes. They include easy credit expansion during the 2003-2007 period, the global financial crisis and subsequent global recession of 2008-2012, fiscal and trade imbalances of the European countries involved in the crisis, and inherent structural problem of the EMU. From the experience of the European sovereign debt crisis, we could confirm some early warning indicators of a crisis such growth of domestic private credit and public borrowing, worsening government balances as well as external balances. Long-term interest rate spreads and an increase in fees charged by investment banks for bond issuance would be precipitating or concurrent warning indicators for a crisis. Implication from the European sovereign debt crisis for the euro area or potential economic and financial integration of East Asia is not necessarily to disband, break up or abandon a monetary union. Instead, a better alternative is to remedy problems and shortcomings exposed by the current crisis and to move toward a deeper integration.

Small Firms and Domestic Bank Dependence in Europe's Great Recession

The paper studies the role of small businesses (SME) in the transmission of the Eurozone crisis to member countries and whether regions or countries with many SMEs were less able to share risk. Our analysis draws attention to domestic bank dependence—defined as the share of domestic private credit originated by domestic banks—as a key variable modulated the impact of shocks on bankdependent SMEs and thus on the real economy. We argue that Eurozone banking integration in the years after the creation of the single currency was lopsided in the sense that, until 2008, cross-border lending between banks increased markedly while foreign banks’ lending to the real sector stayed relatively flat. Hence, SMEs remained very dependent on domestic banks for credit, in spite of high levels of banking sector integration between Eurozone countries. Our results suggest that domestic bank dependence made countries, regions, and sectors with many SMEs more vulnerable to global banking sector shocks and, at the same time, provided little risk sharing.

Financial Development, Human Capital Accumulation and Economic Growth: Empirical Evidence from the Economic Community of West African States (ECOWAS)

Recently, much attention is given to financial-growth nexus, but largely via the physical capital accumulation channel. This study differed by examining this nexus, via the human capital accumulation channel in the ECOWAS region. It employed panel cointegration approaches as well as the FMOLS, DOLS. The results revealed that bank private credit and domestic private credit contribute significantly to economic growth in the ECOWAS, both directly and through their influence on human capital accumulation. These results imply that providing access to credit to both enterprises and individuals, through appropriate financial policies, will encourage economic growth in the ECOWAS region.