Private Sector Credit Research Articles

Government's excessive spending and private sector's access to bank credit: Evidence from the Republic of North Macedonia

Due to the crucial role of credit in the economic activity of a country, there is a growing empirical literature examining the determinants of domestic credit to the private sector, which may be demand-side or supply-side factors. It is commonly held that excessive domestic debt reduces private sector credit, raise bank lending rates, and shrink output as the Government competes with the private sector for private savings. For this reason, the aim of this paper is to determine whether persistent budget deficit in the Republic of North Macedonia negatively affects the private sector's access to bank credit, and hence slowing down the economic activity. The analysis considers both, short-run and long-run relationship between domestic credit to private sector provided by banks and budget balance in North Macedonia, as endogenous variables, but also it takes into account the influence of several other exogenous factors. The methodological approach is consisted of visual inspection of the data, correlation analysis, co-integration and causality tests, as well as estimation of the impulse response function and variance decomposition. Based on the estimated VECM model, the results show statistically significant long-run relationship between the endogenous variables, and no short-run causality in any direction.

The Dynamics of Public and Private Debt in Ghana

Abstract This paper explores the dynamics of public and private debt in Ghana for the past 32 years. Ghana’s total public debt stock to Gross Domestic Product (GDP) ratio has remained above the 60.0% sustainability threshold recommended by the West Africa Monetary Zone (WAMZ) since 2013. Implemented bank reforms in the country show an upward trend for domestic credit to private sector by banks as a percentage of GDP. Using exploratory review approach, the paper identified fiscal dominance, cost of borrowing, deterioration in export earnings, ineffective fiscal, monetary and debt management policies coordination as factors responsible for changes in total public debt stock. On the other hand, increased domestic borrowings by government from the banks, and Deposit Money Banks’ (DMBs)’ adverse selection in private sector credit allocation affect changes in domestic credit to the private sector by banks. Of these causes, fiscal dominance is the major determinant of public and private debt in Ghana. The study, therefore, recommends that government should pursue fiscal operations that are necessary to put public debt on a declining path. In addition, effective coordination of fiscal, monetary and debt management policies need to be strengthened together with the autonomy of the Bank of Ghana in the use of its monetary policy instruments.

Oil booms and inequality in Iran

AbstractWe study the response of income inequality to positive per capita oil and gas revenue shocks in Iran. Using historical data from 1973 to 2016 and vector autoregression (VAR) as well as vector error correction (VECM) model‐based impulse‐response functions, we find a positive and statistically significant response of income inequality to oil booms. We also explore possible channels through which oil booms may increase inequality, including private sector credit growth, construction investment, international trade (imports) and real economic output. We find that following an oil boom, higher imports, private sector credit growth, and real economic output can explain the increased income gap to a certain degree in Iran's oil‐based economy. Our analysis can help policymakers evaluate and accommodate the possible positive or negative effects of inequality in Iran resulting from the 2016 lifting of the embargo against the country.

Effect of Financial Sector Deregulation on Economic Growth of Nigeria

The study investigated the effects of financial sector deregulation on economic growth of Nigeria using annual data spanning from 1970 to 2015. Real Gross Domestic Product (RGDP) were made as a function of Credit to Private Sector (CPS), Financial Sector Deepening (FDP), Real Interest Rate (RINTR), Real Exchange Rate (REXGR) and Financial Policy Shift (FPS). Data for the study were sourced from various issues of Central Bank of Nigeria Statistical Bulletin, National Bureau of Statistics. The data were analyzed using Co-integration for the existent of long-run relationship and Vector Error Correction Mechanism (VECM) for short-run dynamic of the model. Results derived from the Ordinary Least Square (OLS) indicated that real interest rate and real exchange rate are positive and insignificant, credit to private sector exhibit significant (prob < 0.05) relationship while financial sector deepening and financial policy shift are negatively related to gross domestic product. The long run model derived from the co-integration test revealed that there exists a long-run relationship between the variables. CPS, FDP and RINTR are negatively related to RGDP while REXGR and FPS are positively related to RGDP. The study concluded that the gain from financial sector deregulation in Nigeria has remained low in spite of the various reforms and institutional changes put in place by the monetary authorities. The study thus recommended an enhancement of private sector investment through financial sector credits and through a combination of macroeconomic stabilization policies which would surely enhance the performance of economic growth in Nigeria.

DOMESTIC MACROECONOMIC DRIVERS OF INDUSTRIALIZATION IN NIGERIA: STATUS AND PROSPECTS FROM THE MANUFACTURING SUB-SECTOR

While most advanced economies are in the process of de-industrializing their economies, efforts by successive governments to transform the economy of Nigeria, from a commodity-driven to an industrialized one, has not yielded much fruit despite several industrial policies and reforms. In Nigeria, the problem of industrialization is not the difficulty in attaining economic growth but the predicament of the extent to which attention is paid to infrastructure, human capital, private sector credit, technology, foreign direct investment, domestic price and exchange flexibility as determinants of the manufacturing sub-sector’s utilization capacity rate and its productivity index. Based on the United Nations/World Bank success yardsticks with theoretical framework rooted in the Prebisch-Singer Hypothesis and the endogenous growth model, this study utilizes the K-class estimation procedure on Nigeria’s time series between 1990 and 2016. The result obtained indicate that infrastructural development, appropriate moderate institutional frameworks, bank credit, foreign direct investment, electricity, a stable exchange rate, low inflation and economic diversification are key drivers of industrialization. The findings also confirm that unless the Nigerian economy achieves improved infrastructure delivery and institutional framework as well as stable domestic and currency prices, the efforts towards economic diversification may be counterproductive. It is therefore expedient that Nigeria focuses on building strong macroeconomic fundamentals that would accentuate its take-off to industrialization.

Empirical Assessment of Selected Financial Indicators and Nigeria Gross Domestic Product

This study undertook an overview of the financial sector and considered the contributions of some selected financial indicators to the gross domestic product (GDP) in Nigeria. Data were obtained from the statistical bulletin of the Central Bank of Nigeria (CBN) for the period, 1990-2016. The variables considered include: Lending rate (LR), Real Interest rate (RIR), Money Supply (M 2 ), Credit to Private Sector (CPS), Inflation rate (IR). Multiple regression analysis method was used to analyze the data. From the analysis, it is observed that credit to private sector (CPS) has a positive relationship with the GDP whereas the rest had negative relationship with the GDP. Further analysis using analysis of variance (ANOVA) showed that one of the factors (CPS) is significant. From the result obtained, it is recommended that the private sector should be given more access to credit. This will help in improving the economy since it has shown to have a positive relationship with the GDP. Keywords: Inflation; Lending rate; Money supply; Gross Domestic Product JEL Codes: E43, E60, O40

The Impact of Directed Credit Policy on Bank Credit to the Private Sector in Ethiopia: Case of Government Bill Purchase Directive

In April, 2011, National bank of Ethiopia (NBE) has introduced an explicit directive called 27% NBE Bill purchase directive that forces private banks to invest 27% of their every new loan disbursements in Governments securities for five years at a very low interest rate, 3%. The major theme of this study was to examine the effect of this directed credit policy on the Commercial banks’ credit to the private sector. The study used unbalanced panel data of eight years of eight banks for years from 2007 to 2014. The study finds that directed credit policy has negative but insignificant effect on the banks’ credit to the private sector. However capital and deposits were found to be significant determinants of private sector credit in Ethiopia. Thus the claim by private commercial banks, IMF and WB does not look strong and factual and hence it was conclude that the Bill purchase directive in Ethiopia does not have any significant crowding out effect on the private sector. Thus it would be recommended herewith that emphasis shall be given on capitalizing commercial banks. Moreover commercial banks shall introduce innovative and branchless channels for deposit mobilization for deposits were found to be the most significant determinants of private sector credit in Ethiopia.

Financial Deepening and Deposit Mobilization of Commercial Banks in Nigeria: A Time Variant Model

The purpose of this study was to examine the effect of financial deepening on customer deposit of Nigerian commercial banks. Time series data was sourced from Central Bank of Nigeria Statistical Bulletin, from 1981-2017. Percentage of total customers’ deposit to total assets was used as dependent variables while percentage of narrow money supply, broad money supply, money market development, money outside the bank and private sector credit to gross domestic product was used as independent variables. Multiple regression with ordinary least square properties of cointegration, augment Dickey Fuller unit root test, Granger causality test and vector error correction model was used to examine the relationship between the dependent and the independent variables. The regression result found that narrow money supply and money market development have negative effect on total customer’s deposit of commercial banks while private sector credit, broad money supply and money outside the bank have positive effect on customer’s deposit of commercial banks in Nigeria. The unit root test shows that the variables are stationary at first difference; the cointegration test validates the existence of long run relationship while the causality test found no causal relationship. The study concludes that financial deepening has significant impact on total customer deposit. We recommend that policies should be deepened to enhance the performance of the Nigeria financial market.&#x0D;

Private Sector Credit and Inflation Volatility

This paper investigates the effect of inflation volatility on private sector credit growth. The results indicate that private sector credit growth is positively linked to the one period lagged inflation volatility. Given that past monetary policy actions continue to affect the targeted variables due to the substantial lags in the transmission mechanism, the positive response of private sector credit growth to past inflation volatility suggests a credible monetary policy regime in Uganda, which has led to a reduction in the level of macroeconomic uncertainty and the restoration of favorable economic conditions and prospects, thus increasing the demand for credit. Further, the study finds that the lagged private sector credit growth, nominal exchange rate, and inflation have a statistically significant effect on private sector credit growth while financial innovation, interest rates, and GDP growth appear not to be important determinants of private sector credit growth. The robustness of our findings is confirmed by sensitivity checks.

Determinants of interest rate in emerging markets

PurposeThe purpose of this paper is to investigate the determinants of interest rate in emerging markets, focusing on banking financial institutions in Uganda.Design/methodology/approachUsing the net interest margin model, interest rate was estimated by applying a panel random effects regression method on 24 banks, while controlling for bank-specific factors, industry and macroeconomic indicators. Data were drawn from annual reports provided by Bank of Uganda Depository Corporation survey from 2008 to 2016.FindingsThe results indicate that liquidity, equity capital, market power and reserve requirement have a positive effect on interest rate. The study further finds that operational efficiency, lending out ratio, concentration, public sector borrowing and private sector credit have a negative effect on interest rate. However, credit risk does not influence interest rate.Research limitations/implicationsStudied banks are grouped in one panel data set; future studies would focus on the differences in banks and establish how these differences affect interest rate. Future study would also focus on how the determinants of interest rate in Uganda are compared with those of other banks in other emerging market countries.Practical implicationsBank managers need to take interest in equity mobilization because it is a reliable and cheaper source of funding bank operations. Banks should emphasize efficient operations to reduce on the cost of doing business. Government should utilize funds borrowed from banks in efficient ways to improve economic growth. The central bank should minimize the use of reserve requirement as a means of controlling money in circulation.Originality/valueThis is the first paper that uses annual report data from several banks and periods to investigate the determinants of interest rate in an emerging country.

Monetary Policy Transmission and Industrial Sector Growth: Empirical Evidence From Nigeria

The goal of this study is to assess the industry effects of monetary policy transmission channels in Nigeria within the period 1981-2014. Techniques of analysis employed in the study are the Johansen cointegration and the error correction model (ECM). Our regression estimates reveal that the private sector credit, interest rate, and exchange rate channels have negative effects on real output growth, both in the long run and in the short run. The results further show that, relatively, the degrees of the established effects are higher in the long run than in the short run. We employed the Johansen cointegration approach to determine the nature of relationship that exists between our dependent variable and the independent variables. The results show that, in the Nigerian case, monetary policy transmission channels jointly have a long-run relationship with real output growth of the industrial sector, and disequilibrium in the system is corrected at the speed of 72.2% annually.

The effectiveness of monetary policy in small open economies

This paper examines the relative effectiveness of the use of direct and indirect monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago, by estimating a restricted Vector Autoregressive model with Exogenous Variables (VARX). The model captures the dynamic interaction of the key sectors in the economy and it accounts for the fact that the banking system in those countries is characterized by high levels of excess reserves. Also, the study assumes that the central bank conducts monetary policy using a Taylor-type rule, and it evaluates the effects of a reserve requirement policy. The results show that although a positive shock to the policy interest rate has a direct effect on commercial banks’ interest rates, there is a weak transmission to the real variables. Furthermore, an increase in the required reserve ratio is successful in reducing private sector credit and excess reserves, while at the same time alleviating pressures on the exchange rate. The findings therefore indicate that central banks in small open economies should consider using reserve requirements as a complement to interest rate policy, to achieve their macroeconomic objectives.

Export Diversification and Growth in Pakistan: An Empirical Investigation from 1972 to 2015

This paper addresses three issues (a) it attempts to estimate whether product and geographical export diversification has contributed to GDP growth during the 1972-2015 period, (b) identify the determinants of export diversification during this period and (c) ascertain whether a structural break in the export diversification-GDP growth relationship has occurred after 2000, since when policy of liberalization has been pursued. We find a significant though modest positive association between export diversification and GDP growth during 1972-2015 and some evidence that this relationship though remaining statistically significant, however, it somewhat weakened during the liberalization period 2000-2015. We also find that private sector credit and human capital growth and favorable movements in Pakistan’s aggregate terms of trade are negatively associated with product export diversification. Export diversification is currently a policy priority; however, the government’s emphasis has been geographical – not product – export diversification. Our estimations show no positive significant relationship between geographical export diversification and GDP growth. We therefore suggest that incentives should be provided to induce Pakistani exporters to attempt to penetrate global value chain in product areas in which they already have a presence by linking their business strategies to carefully selected leading global market players.

Government Domestic Debt, Private Sector Credit, and Crowding Out Effect in Oil-Dependent Countries

Banks are more liquid, better capitalised, and more profitable in oil-dependent countries. However, bank credit to the private sector is relatively low as a percentage of GDP. The low level has been blamed, amongst other reasons, on governments’ reliance on the banking sector to finance fiscal deficits. This study examines the crowding out effect of government domestic borrowing using a panel data model for 28 oil-dependent countries over the period 1990-2012. We estimate the model, using both fixed effects and generalised method of moments estimators and find that a one percent increase in government borrowing from domestic banks significantly decreases private sector credit by 0.22 percent and has no significant impact on the lending rate banks charge to the private sector. This finding suggests that government domestic borrowing has resulted in the shrinking of private credit and works through the credit channel and not the interest rate channel.

Financial Intermediation and Economic Growth: Evidence from Rwanda

The relationship between financial intermediation and economic growth has been under investigation for decades. Some studies have been conducted using panels of countries with or without similar characteristics while others have been carried out on individual countries. In less-developed countries, the evidence about the link between financial intermediation and economic growth is particularly deficient. This study attempts to empirically investigate the possible cointegration and causal link between financial intermediation and economic growth in Rwanda, using quarterly data spanning from 1996Q1 to 2010Q4. A Structural Vector Autoregressive model is used to analyse the short-run dynamics between variables of interest. Findings of the study show evidence of a cointegrating relationship between financial intermediation and economic growth in the country. It is further observed that a shock to domestic private sector credit accounts for the largest proportion of fluctuations in real output growth, while the shock to potential liquidity comes second. This supports the supply-leading hypothesis in the intermediation link between financial sector development and economic growth in Rwanda, which suggests that the country can achieve significant economic growth if it reinforces incentives to attract businesses that can easily make use of the present financial services.

Assessing sovereign default risk: A bottom-up approach

This study assesses sovereign default risk of individual U.S. states utilizing information about default risk at the company level. We link integrated risk factors of the private sector to the overall sovereign risk of state governments in conjunction with additional financial variables. Using data on Moody’s KMV expected default frequencies (EDFs) on corporate default risk, we derive credit risk indicators for different industries. Building on these measures, we then develop state level credit risk indicators encompassing industry compositions to explain the behaviour of credit default swap (CDS) spreads for individual states. We find that market-based measures of private sector credit risk are strongly associated with subsequent shifts in sovereign credit risk premiums, as measured by CDS spreads. The developed credit risk indicators are highly significant in forecasting sovereign CDS spreads at weekly and monthly sampling frequencies. Overall, our findings suggest a strong predictive link between market expectations of private sector credit quality and expectations of sovereign credit quality - a connection that is not directly discernible from scoring models.

Deposit Money Banking Financing And Its Effect On Real Sector Output In Nigeria: Evidence From Trade And Agricultural Sectors

This study examined the effects of deposit money banks financing on real sector output in Nigeria. The study specifically assessed the effect of private sector credit, interest rate spread, deposit mobilization and banks’ holding of treasury bills on trade and agricultural sectors outputs in Nigeria. The data for the study were source from the CBN statistical bulletin for the period 1984 to 2015. The exploratory design was combined with the ex-post facto research design; the data collection method was desk survey. The study used the Vector Error Correction Mechanism (VECM) for data analysis. Findings showed that jointly, deposit money banks financing have a long term significant effect on the trade sector but does not have any long run effect on the agricultural sector in Nigeria. Also, it was revealed that there is no short run causality running from PSC, DMB, DTB and INTS to agricultural sector output; however only INTS has short run causality with trade sector output. Lastly, interest rate spread has an inverse effect on the trade sector output but a positive effect on the agricultural sector output in Nigeria. The study therefore recommends that Deposit money banks should in addition to granting loans to farmers; monitor the use of such funds to avoid loan diversion and consequently poor agricultural sector performance. Also, Banks should employ research staff to conduct researches on modern approaches to effective real sector production and investments and should use the research findings to train her loan customers on the best production techniques as this will go a long way to enhance the real sector output. Lastly, the spread between lending and deposit rates should be narrowed to trigger savings and enhance banks’ loan supply and real sector loan demand which consequently will boost productivity in the real sector.

Sustainable Financial Obligations and Crisis Cycles

The ability to distinguish between sustainable and excessive debt developments is crucial for securing economic stability. By studying US private sector credit loss dynamics, we show that this distinction can be made based on a measure of the incipient aggregate liquidity constraint, the financial obligations ratio. Specifically, as this variable rises, the interaction between credit losses and the business cycle increases, albeit with different intensity depending on whether the problems originate in the household or the business sector. This occurs 1–2 years before each recession in the sample. Our results have implications for macroprudential policy and countercyclical capital-buffers.

Financial mediation and its impact on the Albanian economy

This article aims to present the importance of financial intermediation to real economic growth in the case of Albania. The article analyses the main indicators of financial intermediation and through the application of statistical and econometric methods gives their impact on economic growth. Findings show that there is a mutual relationship between economic growth and private sector credit growth. Also, the effect is a chain, because the positive impact that one indicator gives on another indicator is associated with a positive effect on the indicator itself that gave this effect earlier. On the other hand, besides the positive performance of financial intermediation indicators in Albania, as a result of the growth of lending to the economy, deposits in the Albanian banking system have increased throughout the period of study. The recent financial and economic crisis had its negative impact mainly on the growth of problem loans but not on the deposit market that continued to grow.

An Examination of the Relationship between Financial Development and Economic Growth in Nigeria: Application of Multivariate Var Framework

This study examined the relationship between financial development and economic growth in Nigeria using annual data for the period 1981-2014. The study employed multivariate VAR framework approach to co-integration to evaluate the long-run relationships between financial development and economic growth. Three financial indicators were used: deposit money bank assets as percentage GDP, ratio of liquid liabilities to GDP and ratio of private sector credit of deposit money banks to GDP. The result found that real gdpc and financial development variables have at least one common stochastic trend driving their relationship. Through VECM granger causality framework, the result found that there is long run unidirectional causality running from economic growth to liquid liability and deposit money bank assets while deposit money bank assets have little significant influence on real gdpc especially at long run. We found feedback effect between private sector credit of deposit money banks and economic growth at the long run. The findings in this study have some important policy implication. To promote the financial system and at the same time promote economic growth, monetary authorities must ensure that banks provide necessary funds to the real sector of the economy.Key Words: financial development, economic growth, liquid liability, causality, vector error correction