Private Sector Credit Research Articles

Financial Development and Private Investment

This paper finds that financial sector growth is key to boosting private investment in Pakistan. Banks, as financial intermediaries, enhance private investment by lowering risks and supporting decision-making through strong accounting standards. A broader financial system—measured by the ratio of commercial bank assets—positively impacts private investment. Financial deepening, or increasing liquid liabilities, also plays a critical role, as a developed banking system reduces transaction costs and improves fund access. Increasing private sector credit drives investment, so aligning the credit system with Pakistan's investment needs is essential. Strengthening financial intermediaries, enforcing contracts, and managing risks are necessary steps to support Pakistan’s financial sector growth and stimulate investment.

Effects of Interest Rate Change on Private Sector Investment, Evidence From Pakistan

This study examines the effects of lending rates, inflation, and exchange rate fluctuations on private sector credits (PSC) in Pakistan from 1961 to 2017. The analysis shows that lending rates have a minimal impact on PSC, with an insignificant relationship. However, inflation and exchange rates show significant negative effects, indicating that rising prices and currency depreciation reduce private sector borrowing by increasing costs and uncertainty. These findings suggest that while interest rate management remains important, policymakers should prioritize strategies for stabilizing inflation and exchange rates to support private sector investment. Consequently, fostering macroeconomic stability may mitigate the indirect effects of the crowding-out phenomenon, promoting a favorable investment environment conducive to private sector growth.

FINANCIAL DEEPENING AND ECONOMIC GROWTH: EVIDENCE FROM BANGLADESH

The present study investigated the causal impact of financial deepening on economic growth in Bangladesh for the period of 1990 to 2022 applying cointegration analysis. The ratio of broad money to GDP, private sector credit to GDP and stock market capitalization to GDP used as proxies for financial deepening indicators in this study. Using Johansen co-integration test, the result of the study explored a positive and statistically significant relationship in the long run among the broad money to GDP, private sector credit to GDP, stock market capitalization to GDP and economic growth. Moreover, the error correction term supported the long-run association, and the variables adjust to their long-run equilibrium. The findings suggested that policymakers should promote policies that increase the money supply and market capitalization and ensure the private sector credit is channeled to the more productive sector which would help to support and boost economic growth in Bangladesh.

Long-run Relationship between Power Consumption and Manufacturing Sector Output in Nigeria

Power remains the engine of growth of every economy while the manufacturing sector remains the key driver of a transformed modern economy. Despite several power sector reforms, Nigeria’s manufacturing sector continued to underperform. This study focused on examining the long-run relationship between power consumption and manufacturing sector output in Nigeria. We estimated an ARDL model based on the bounds-testing approach to cointegration. Our results indicate that manufacturing sector output and electricity consumption are cointegrated and that short-run deviations from equilibrium are corrected up to 83 per cent annually. The result showed that power consumption is positively related to manufacturing sector output. This implies that improved power sector will stimulate manufacturing sector growth. Our result also showed that capital formation, labour force and private sector credit are positively related to the manufacturing sector while the monetary policy rate is negatively related to the manufacturing sector. Given our findings, we recommend that the government should implement a sustainable power sector reform that prioritizes the manufacturing sector. This will stimulate growth, reduce the cost of energy and indirectly reduce price of manufactured products. We equally recommend creating a conducive environment for investment in the manufacturing sector through favourable monetary policy rates to allow manufacturers access to credit.

Effects of Transmission Mechanism of Monetary Policy Channels on Economic Growth in Ethiopia: Cointegration and Causality Analysis Approach

The study aimed at investigating and analyzing factors those effects of transmission mechanism of monetary policy channels on economic growth in Ethiopia using a 36 years’ time series data. To this end, variables such as economic growth (dependent variable), and other regress variables such as real lending rate, real effective exchange rate, credit for private sector, consumer price index, trade of opens, gross capital formation, and money supply are considered. An empirical model linking the real GDP to its theoretical effects is then specified. This study had employed the co-integration and vector error correction model (VECM) analysis with impulse response and variance decomposition analysis to provide robust long run effects and short run dynamic effects on the real GDP. All variables under consideration are integrated of order one I (1) and also co-integrated. Vector Error Correction Model/VECM/ results show that real GDP was positively and significantly affected by the real effective exchange rate, money supply, gross capital formation (investment), credit for private sector, trade of openness over a period of long-run; while real leading interest rate and consumer price index (inflation) have significant negative effect. The estimate of the speed of adjustment coefficient found in this study indicates that about a 31 percent of the variation in the real GDP from its equilibrium level is corrected within a year. The study suggests that lowering the lending interest rate can encourage more private investment because it will encourage private investors to borrow more, which will increase investment in Ethiopia. Since investment is one of the factors that determine the gross domestic product, this will result in an increase in the GDP.

Impact of Financial Development on Economic Growth of Nepal

This study examines the impact of financial development on economic growth of Nepal. The dependent variables are real gross domestic product and per capita income. The independent variables are money supply, stock market capitalization, private sector credit, financial access and net foreign direct investment inflows. The study is based on time series data for the period by Ministry of Finance and Central Bureau of Statistics of Nepal. The correlation coefficients and regression models are estimated to test the significance and importance of financial development on economic growth in Nepal. The study showed that stock market capitalization has a positive impact on real gross domestic product and per capita income. It indicates that higher the stock market capitalization, higher would be the real gross domestic product and per capita income. Similarly, there is a positive impact of private sector credit to GDP on real gross domestic product and per capita income. It indicates that increase in private sector credit leads to increase in real gross domestic product and per capita income. In addition, broad money supply has a positive impact on real gross domestic product and per capita income indicating that higher the broad money supply, higher would be the real gross domestic product and per capita income. Similarly, financial access has a positive impact on real gross domestic product and per capita income. It indicates that increase in financial access leads to increase in real gross domestic product and per capita income. Likewise, net foreign direct investment inflow has a positive impact on real gross domestic product and per capita income. It indicates that increase in net foreign direct investment inflow leads to increase in real gross domestic product and per capita income of Nepal.

Relationship Between Financial Deepening Indicators and Stock Market Performance in Kenya

The purpose of this study was to find out the relationship between financial deepening indicators and the stock market performance in Kenya. The selected financial deepening indicators were; financial savings, private sector credit, broad money supply and intermediation ratio on the stock market performance. Johansen cointegration test was done indicating that the variables co-move towards a long-run equilibrium, a multivariate vector error correction model was run and the estimates obtained. The error correction term was also computed. Empirical results showed that all variables are adequately explained by their own lags and the lags of the other variables, the coefficients are also significant. The error correction model indicated that an increase in private sector credit by one unit in the previous quarter causes the stock market performance to increase by 48% in the current quarter. Variance decomposition tests and impulse response functions indicated how other variables respond to shocks in the other variables and the forecast errors for each of the predicted quarters. The implication of this study is that the policy makers who are; the Government, the Central bank of Kenya and the Capital Markets Authority ought to make policy decisions while considering the effect of the full market. This study concluded that private sector credit is the financial indicator variable that affects the stock market performance the most with a bidirectional relationship.

Inflation and Stock Market Performance in a Developing Country: The Bangladesh Outlook

This research adds empirical evidence from a developing country to the research topic: how does inflation impact stock market performance? Stock market performance is measured by the all-stock index (DSEX) of the premiere bourse in Bangladesh – Dhaka Stock Exchange (DSE). A multivariate regression model is used to investigate the relationship between inflation and stock market performance in Bangladesh. Evidence from previous literature exists of positive and negative relationships between these two variables. By examining monthly data from June, 2012 until March, 2024. It is found that inflation is negatively related to stock market performance in Bangladesh. The research paper also uses three control variables: private sector credit growth, remittance, and exchange rate. Two of them are negatively related to the stock market index, and the other is positively related.

Intersecting Dynamics: The Influence of Macroeconomic Factors and Financial Development on Interest Rate Spreads in Uganda

The study investigates the factors influencing interest rate spreads in Uganda's banking sector, focusing on inflation, GDP, Real Effective Exchange Rate (REER), private sector credit, and financial development. Using an Autoregressive Distributed Lag (ARDL) model on data from 2001 to 2022, it examines short and long-term dynamics between these variables and interest rate spreads, within the liquidity preference theory framework. In the short run, inflation and GDP have marginally significant positive impacts on interest rate spreads, indicating that initial increases may widen spreads due to heightened liquidity demand and economic activity. Conversely, in the long run, these factors exhibit significant negative effects, suggesting a stabilizing influence of monetary policy and increased market efficiency. The REER's short-term impact reflects currency value fluctuations affecting risk premium adjustments, which diminish in the long run as markets adapt. The study also explores the interaction between inflation and financial development, represented by private sector credit, on interest rate spreads. Short-term results show a non-significant negative moderation by financial development, while long-term analysis suggests a potential amplification of inflation's effects as the financial sector matures, requiring nuanced financial development policies. Policy recommendations stress the importance of stabilizing inflation and exchange rates to control interest rate spreads in the short term. Long-term strategies include enhancing banking sector efficiency and promoting competitive practices to mitigate the negative effects of economic growth on interest rate spreads.

Impact of agricultural credit on coffee productivity: An analysis of the perceptions of smallholder farmers

Low coffee productivity has been linked to farmers’ limited use of agricultural financing due to credit rationing motivated by moral hazard and information asymmetry. As an intervention, the Kenyan government (GoK) established the Commodity Fund to provide financing to coffee growers to increase coffee productivity, alleviate poverty, and promote economic development. Despite this intervention, credit acceptance remains low; for example, agricultural credit made up only 4.3 percent of total private sector credit in 2016 and 3.62 percent in 2018. This low adoption of agricultural financing raises an important question: does the perception of credit’s influence on coffee output shape the current dismal trend in coffee production? As a result, this study aims to fill a research gap by exploring the impact of agricultural financing on coffee productivity in Kiambu County, Kenya. Primary data was gathered through farmers’ group discussions (FGDs) with twelve farmers’ cooperatives and fifteen key informants from five coffee value chain actors. A subsequent survey of 174 smallholder coffee farmers was conducted. Phenomenological explication and a logistic regression model were used to analyze data from key informants and focus group discussions. According to the study’s findings, farmers perceived agricultural credit as having a positive impact on demand for coffee inputs and returns while having a negative impact on demand for labor and coffee productivity efficiency. As a result, this study recommends that the GoK examine Commodity Fund policies to catalyze credit in order to stimulate increased coffee productivity and economic transformation among coffee producers.

The Role of Public Development Banks During the Pandemic: Impact Evaluation of BICE's Innovative Credit Response

ABSTRACT The global COVID-19 pandemic triggered a renewed impetus for the countercyclical role of development banks, marked by widespread adoption of diverse instruments to mitigate its impact. Argentina's development bank (BICE, Banco de Inversión y Comercio Exterior, specialized in loan for long term investment, responded to the 2020 health and economic crises implementing a working capital loan program. Amidst a lack of substantial evidence on the efficacy of similar counter-cyclical interventions, we employed a quasi-experimental methodology, incorporating Propensity Score Matching (PSM) and Fixed Effects (FE) estimations, to evaluate the program's impact. Our results demonstrate that firms benefiting from the loan maintained employment levels, in stark contrast to a nearly 6 per cent decrease for those without it. The program effectively mitigated the employment impact of the transient shock. Robustness checks, along with falsification tests, bolster our identification strategy. Complementary findings emphasize that the program's success lies in providing credit during adverse conditions, when private sector credit contracts. This insight, rather than the exceptional terms of the credit, offers a crucial lesson for the future.

Financial Development and Its Effect on Inclusive Growth in Kenya 2000 – 2022

Purpose: In the past decade, Kenya’s economy registered an average real GDP growth rate of 4.63 percent. Despite this growth, many people have been locked out of social and economic opportunities, with 19.1 percent of the Kenyan population living in poverty. This has intensified the need for inclusive growth, a growth model that promotes shared prosperity. Several studies have shown that financial systems that function well play a great role in the economy through the provision of key financial services that drive growth. However, there is a lack of substantial inquiry into financial development and inclusive growth in Kenya. This study sought to examine this relationship for the period 2000-2022. Methodology: The study employed a causal research design and used time series data that was collected from various databases. The level of inclusiveness in Kenya was analyzed using an inclusiveness matrix. An inclusive growth index was constructed, which was then used to empirically test the effect of financial development on inclusive growth. The data was presented in tables and figures. Findings: The inclusiveness matrix shows that despite positive economic growth rates, there is a low rate of equity growth, which shows that Kenya has a low level of inclusivity. The empirical results show that bank deposits and private-sector credit have a positive and statistically significant effect on inclusive growth. A 1% increase in bank deposits leads to a 0.074% increase in inclusive growth. When private-sector credit increases by 1%, inclusive growth expands by 0.070%. Bank return on assets has a positive but insignificant effect on inclusive growth. The study confirms that financial depth and access to financial services are the most conducive to inclusive growth in Kenya. Other determinants of inclusive growth include initial income, human capital development and macroeconomic stability. The overall findings suggest that financial development can be used to create economic opportunities for poor people in Kenya, thus reducing income disparities. Unique Contribution to Theory, Practice and Policy: The study has contributed to the ongoing conversation on inclusive growth, specifically on its measurement. The empirical results on the finance-inclusiveness nexus provide evidence-based policy interventions that can help in reducing income disparities and enhancing shared prosperity. The findings imply that policymakers and practitioners need to focus their attention on promoting financial access and financial depth in marginalized regions to create a significant impact on inclusive growth in Kenya.

Monetary policy transmission tools and private sector performance – the Nigerian experience

Credit to private sector is considered vital for the stimulation of domestic investment, job creation, economic growth, and general improvement in the standard of living of the people. This is because the economic activity in the private sector significantly complements governments’ efforts in attaining macroeconomic objectives, globally. However, as laudable as the benefits of credit to private sector has been in catalyzing private sector performance in developed economies, the situation in most transitioning economies, particularly, Nigeria has been far from satisfying. Several studies in academic literature have identified political instability, poor institutional framework, absence of fiscal transparency, macroeconomic factors and frequent policy changes as having significant constraining influences on credit availability in Nigeria with plausible recommendations to private sector performance. However, the absence of noticeable improvement over the years, and its accompanying growth-retarding multiplier effects on domestic investment and productivity in Nigeria has instigated more concentrated studies on the direct impact of monetary policy framework in the determination of the performance of private sector through credit availability. Therefore, this study empirically evaluates the impact of key monetary policy toolkits on the availability of private sector credits and performance in Nigeria. To this end, annual time series secondary data from 1993 to 2023 were sourced from National Bureau of Statistics and Central Bank of Nigeria Statistical Bulletins for various years within the study period. The study adopts Autoregressive Distributed Lag (ARDL) estimation technique after carrying out pre-diagnostic tests such as ADF unit root test and Bound Cointegration test. Our result reveals that money aggregates (MAG) is positive and significant in explaining variations in private sector credit and performance. Further results reveal that monetary policy rate (MPR), open market operations (OMO) and inflation rate (INR) impacted negatively on the performance of private sector in Nigeria within the study period. Therefore, the study concludes that the performance of the private sector in Nigeria will improve with increased credit availability, which is positively influenced by systematic increase in money aggregates and efficiently expanded monetary policy framework. The study recommends adoption of a harmonious blend of a more relaxed monetary policy framework with purposeful compliant-based regulation that will free up liquidity for increased private sector credits and performance. Keywords: Credit to Private Sector, Monetary Policy Rate, Open Market Operations and Money Aggregates.

IMPACT OF CREDIT, INTEREST RATE AND INFLATION ON SMALL AND MEDIUM ENTERPRISES PRODUCTIVITY IN NIGERIA

This study sought to evaluate the impact of credit, interest rate and inflation on Small and Medium Enterprises Productivity in Nigeria, using annual time series data from 1986-2023. The data for the study was sourced from the World Development Indicator (WDI) and the Central Bank of Nigeria (CBN) statistical bulletin. The data collected were gross domestic product (GDP) which is the dependent variable while commercial bank total credit to private sector (CPS), small and medium enterprises contribution to GDP (SMEC), inflation rate (INFL) and interest rate (INT) are the independent variables. Descriptive, inferential statistics and Error Correction Model (ECM) were used to test the long run relationship of the variables. The results of the regression show that credit to private sector and small and medium enterprises contribution to gross domestic product is positive and significant to economic growth. The results further revealed that inflation rate and interest rate have a negative and insignificant effect on gross domestic product. The study recommends that government should put more efforts to curb inflation to give more confident to investors and should implement measures (low interest rates) that would broaden the borrowing base to improve financial capacity of SMEs, thus lead to an increase in the contribution of SMEs to nations GDP. KEYWORD: SME, Interest rate, Inflation, GDP.

Effect of Private Sector Credit on Economic Growth in Nepal

This study aims to examine the key economic indicators with private sector credit and economic growth in Nepal. Commercial banks and other financial institutions lend money to businesses and individuals for investment and consumption. This study aims to analyze key economic indicators in Nepal, including Real Gross Domestic Product (RGDP), Private Sector Credit (PSC), and Gross Capital Formation (GCF), spanning from 1975 to 2022. Employing a quantitative methodology, econometric techniques such as time series analysis, regression modeling, and hypothesis testing were utilized to examine the long-term relationships among these variables, with a particular focus on the impact of Private Sector Credit on Economic Growth (EG). The findings, derived from comprehensive econometric analyses including co-integration tests and vector error correction models, reveal significant insights into Nepal’s economic performance and financial system. Results indicate that Private Sector Credit plays a crucial role in stimulating economic growth, with approximately 40.07% of the previous year’s imbalance influenced by the long-term elasticity of independent variables. These findings offer valuable insights for policymakers, businesses, and investors, facilitating informed decision-making to promote sustainable economic development in Nepal. Further research is recommended to explore the correlation between the diversification of Private Sector Credit types and economic growth more comprehensively.

Моделирование суверенного кредитного риска с учетом экологической эффективности

This study contributes to the evaluation of the role of the eco-efficiency factor in explaining sovereign credit risk. The purpose of the study is to develop a model of sovereign credit risk taking into account the environmental efficiency factor. The sample includes the following countries: Argentina, Belgium, China, China, Egypt, Germany, Greece, Nigeria, Pakistan, Portugal, Spain. 58 % of the world’s countries are categorized as investment grade, indicating that more than half of the countries have high and very high solvency. Using the multiple regression method, the factors affecting the sovereign credit rating are identified: GDP per capita, annual change in inflation, international reserves, private sector credit, total public debt, and environmental performance. The results show a strong positive relationship between credit rating and GDP per capita, private sector lending volume, indicating that countries with better GDP per capita have lower credit risk. To prove the relationship between environmental and credit risk, two multiple regression models were constructed: without and with the environmental factor. The results show that including the environmental factor in modeling a country’s credit rating is appropriate because it improves the quality of the model. According to the two comparison criteria, the model including the environmental factor had better results; the coefficient of determination was larger and the approximation error was smaller. Countries have different environmental situations and different degrees of environmental policy management. There is a relationship between environmental and credit risk of countries, but the environmental situation of a country is not the only determinant factor affecting credit risk. If a country has a high environmental performance index value, it may have an average sovereign rating and vice versa. The scientific usefulness of the study lies in the fact that the constructed model can be used by investors, creditors, rating objects to calculate their own values of sovereign credit ratings.

Policy Modernization and Novel Economic Indicators Coxswaining Nation on Growth Path

India as a nation witnessing the continuous modernization of Monetary and Fiscal Policies. In the previous subsequent budgets, the allocation of funds on the national development which is gauged on the scales of infrastructure, production and manufacturing index, farming and allied farming index, supply chain and logistics, health, education, employment, rural and women empowerment and national governance has seen considerable progress. On looking at the larger picture, the total expenditure stated in the budget and its impact on the economic growth considering the factor Like GDP, GVA, NR, Per Capita Income, is evident. However, to create a profound understanding and awareness about the policy, changes and implementation of policy, and how its roads to the growth of the nation, we need to prove it with the less revealed, less used economic indicators like, to name a few, Government Debt to GDP, Government Revenue to Spending, Government spending to GDP, PMI to Private sector Credit, Youth Unemployment Rate to Jobless Claims, Labor Force Participation rate, NPA to Loans to Private Sector, Capital flow to Capacity utilization, Business Confidence index, Composite PMI to corporate profits, ZEW Economic Sentiment Index, etc. This research would provide all the hidden spots, blind spots to the leaders who can guide the nation to prosper.

An Empirical Analysis of the Monetary Policy Transmission Channels in Sierra Leone

This empirical study investigates Sierra Leone's monetary policy transmission channels using a VAR model from 2011Q1 to 2021Q4, emphasising the interest rate, exchange rate, and credit channels. Rigorous pre-estimation tests and variable transformations were applied to enhance result robustness and credibility. The research evaluates the impact of recent monetary policy and financial sector reforms in Sierra Leone and unveils insights into the dynamics of each of the three transmission channels. Notably, the interest rate channel revealed a delayed and transitory impact of policy rate changes on inflation and economic activity. The exchange rate channel underscored the importance of exchange rate stability in managing inflation, particularly in an import-dependent economy. Furthermore, the credit channel highlighted the challenges of private sector credit expansion amidst substantial government borrowing, urging a balanced approach. Overall, the study contributes to a better understanding of Sierra Leone's monetary policy transmission channels, emphasizing the positive influence of recent institutional, operational, and legal reforms adopted by the Bank of Sierra Leone. More precisely, it presents the need to strengthen the interest rate, credit and exchange rate channels for more effective policy transmission. A key policy recommendation is for the Bank of Sierra Leone to continue its reform agenda, with a focus on enhancing these channels to better achieve its policy objectives.

Trade Openness, Market Capitalization and Entrepreneurial Ventures: Implications for Business and Industrial Growth of Pakistan

The activities of entrepreneurs, market capitalization and trade openness have a significant impact on accelerating the process of industrialization in Pakistan. Economic integration is promoted by trade openness by giving access to new markets and technological advancements to local companies that increase competition, productivity and efficiency. The attractiveness of the business environment and the confidence of investors are gauged by market capitalization. A strong market capitalization gives access to funding for growth and innovation by drawing in both domestic and foreign investment. Entrepreneurship drives innovation, employment opportunities and diversification by infusing the economy with validity and invention. Pakistan can unlock its full potential and open the door to sustainable business and industrial growth. The study aims to seek the effect of trade openness, market capitalization and entrepreneurial ventures on industrial value added or industrial growth in Pakistan by taking the time series data over the period 2000-2022. The study has used the Autoregressive Distributive Lag Model (ARDL). The results point out that lending interest rates and taxes have a negative impact on industrial value added while inflation, trade, market capitalization, secondary school enrollment, private sector credit, and energy consumption show a favorable influence on industrial value added. The study has suggested that policymakers need comprehensive strategies for the expansion of the industry, with fiscal policies to manage inflation, foster competitiveness, and promote trade openness and market capitalization.

NEW EVIDENCE CONCERNING THE INEQUALITY – FINANCIAL DEVELOPMENT NEXUS IN ROMANIA. A COINTEGRATION APPROACH

This paper revisits the ambiguous effect of financial development on income inequality in emerging countries by investigating the presence of cointegration between concepts in Romania. Since financial deepening seems to be beneficial in the income-disparities fight in advanced countries, opposite findings are found in the case of less developed or transition ones. Therefore, we employ a time-series model that accounts for inequality, financial deepening and economic growth as the main variables spanning more than 30 years of Romanian history. On average, a higher degree of financial development harms income distribution in the long term, while economic productivity manifests a non-significant influence on inequality. These outcomes are robust to other novel measures of finance that account for the global dimension of financial development: financial institutions, markets and private sector credits. To control for the potential bias of inequality’s transmission channels, we include a proxy for inflation in our specification. By capturing the impact of financial expansion on inequality in the presence of inflationary pressure, our results reflect the sensitivity of the low-income groups to this phenomenon. In this regard, policymakers should pay attention to inflation-targeting strategies to support the condition of poor individuals who often cannot take advantage of the benefits of financial development.