Tag Archive for: Bank Credit

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.