Abstract :

It is widely accepted among economists, policy makers and central bankers that the main objective of macroeconomic policy is to achieve a high and sustained economic growth rate while maintaining a low inflation rate. It is also generally believed that high inflation is detrimental to medium and long-run economic growth. This study thus aims at bridging these gaps in literature by examining empirically the determinants of credit to the private sector based on supply and demand factors over the period 2006Q1-2019Q4 by using ARDL model. This study is to investigate the determinants of CPS using the Autoregressive Distributed Lags model due to its several advantages. Both the demand and supply factors influencing bank credit in a single equation over a longer time period. Finding from the autoregressive distributed lag (ARDL) framework reveal that in the long run, banking deposits constitute the major determinants of CPS. A 1 percent increase in banking deposits will result into a 1.3% increase in CPS. Government domestic borrowing has been significant with expected sign but with a low coefficient. If GCCB increase by1%, CPS declined by 0.08% in the long run. This low coefficient may be explained by a low share of government domestic borrowing in total bank assets (8.4%). The study also revealed that, Non-performing loans ratio has been found insignificant in the long run over the period under review. Interest rate spread also explained CPS changes with a low coefficient in the long run. When IS increases by 1 percent CPS declined by 0.02%. The low coefficient of interest rate spread is basically explained by credit constrained borrowers, lack of financial literacy, credit information asymmetry, low bank competition which results into the rigidity in lending rate and maintain the spread relatively high in Rwanda.

---

Keywords :

Bank Credit, Determinants, Private Sector, Rwanda

---

References :

1. Abuka A. Charles and Egesa A. kenneth (2007), An assessment of private sector credit evolution in the East African Community, The candidates for a region wide reform strategy for the financial sector
2. Adabowale M. Adelake & Olabanji B. Awodumi (2018), Abound testing analysis of bank credit supply determinants in Nigeria, Department of Economics, University of Ibadan, Oyo State, original scientific paper
3. Alessandra Calza, Christine gartner and Joao Sousa (2001), Modelling the demand for loans to the private sector in the euro area, European Central Bank Working Paper series, Working Paper No.55
4. Balaze Egert, Peter Backe and Tina Zuma (2006), Private-Sector Credit in Central and Eastern Europe (11 CEE): New (Over) Shooting Stars, William Davidson Institute Working Paper Number 852 Nov. 2006
5. Boris Hofman (2001), The determinants of private sector credit in industralised countries: do propert prices matter? BIS Working Papers No. 108
6. Chebet Sarah & Muriu W. Peter (2016), Factors influencing the demand for credit by the private sector in Kenya, School of Economics, University of Nairobi, European Scientific Journal June 2016 edition vol.12
7. Claudiv T. Albulescu (2009), Forecasting credit growth rate in Romania: from credit boom to credit crunch, Universite de Poitiers, MPRA Paper Number 16740 posted on 11 Aug.2009
8. Gerti Shijaku & Irini Kalluci (2013), Determinants of bank credit to the private sector: The case of Albania, Research and Supervision Departments, Bank of Albania, MPRA Paper No. 79092 posted on 15 May 2017
9. Gideon Baoko, Isaac A. Acheampong & Muazu Ibrahim (2017), Determinants of Bank credit in Ghana: A bounds – testing co-integration approach online, African Review of Economics & Finance Vol. 9 Issue 1
10. Kai Guo and Vahram Stepanyan (2011), Determinants of Bank Credit in Emerging Market Economies (38 emerging market economies), IMF working paper WP/11/51, European Department
11. Karangwa Mathias and Gichondo Ananias (2016), An assessment of the impact of the sectoral distribution of commercial bank credit on economic growth in Rwanda, BNR Economic Review Vol.8, February 2016
12. Kashif Imran and Mohammad Nishat (2012), Determinants of Bank Credit in Pakistan: A Supply Side Approach, 2nd international conference on Business management (ISBN: 978 -968-9368- 06-9)
13. Mbulawa Strike (2015), Credit to private sector in South African Development Community (SADCA): Determinants and role of institutions, Journal of poverty, investment and development, ISSN 2422-846X, An international Peer-reviewed Journal, Vol. 15, 2015
14. Million Assefa (2014), Determinants of growth in bank credit to the private sector in Ethiopia: A supply side approach, Research Journal of Finance and Accounting, ISSN 2222-1697
15. Mitchell A. Petersen and Raghuran G. Rajan (1994), The benefits of lending relationships: Evidence from small business data, the Journal of Finance, Vol. XLIX, N0.1
16. Mohammed Amidu (2014), What influences bank’s lending in Sub-Saharan Africa? University of Ghana Business School, Legon, Accra, AERC Research paper 267, African Economic Research Consortium, Nairobi, March 2014
17. Mukuku M. Fortune (2018), Macro-economic determinants of domestic private sector credit in Sub-Saharan Africa, Graduate School of Business, University of Cape town, Development Finance Centre (DEFIC)
18. Nampewo Dorothy Grace. Tinyinandi, Duncan R. Kawooye & George W. Ssoko (2016), Determinants of private sector credit in Uganda: The role of mobile money, Financial innovation, vol. 2, article No. 13 (2016),
19. Olokoyo Felecia Omowunmi (2011), Determinants of commercial Bank’s lending behavior in Nigeria, International Journal of Financial Research, Vol.2, No.2, July 2011
20. Reinhart, C.M., Rogoff, K.S., 2011. From financial crash to debt crisis. Am. Econ. Rev. 101 (5), 1676–1706(PDF) Determinants of credit risk in the banking system in Sub-Saharan Africa. Available from: https://www.researchgate.net/publication/327124098_Determinants_of_credit_risk_in_the_banking_system_in_Sub-Saharan_Africa [accessed Apr 26 2022].
21. Senei Molapo and Moeti Damane (2017), An econometric approach to private sector in Lesotho, Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), and Central Bank of Lesotho, Lesoth0, The Journal of Business in Developing Nations, Vol. 15, 2017
22. Pesaran and Shin (1998) An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis Econometric Society Monographs.
23. Pesaran, Shin and Smith (2001) Bounds Testing Approaches to the Analysis of level relationships, Journal of Applied econometrics
24. Emeka Nkoro et al (2016), Autoregressive Distributed Lag (ARDL) cointegration technique: application and interpretation Journal of Statistical and Econometric Methods, vol.5, no.4, 2016, 63-91 ISSN: 1792-6602 (print), 1792-6939 (online) Scienpress Ltd, 2016