Determinants of Bank Credit in Small Open Economies: The Case of Six Pacific Island Countries

Abstract

This paper examines the changes in bank credit to private sector across six economies in the South Pacific. An extensive time-series and cross-country panel data allow us to draw new and broader lessons compared to existing research, which have tended to focus mostly on single countries with shorter time periods. Results show that rising average lending and inflation rates may be detrimental to credit growth, and that deposit and asset size contribute positively to credit growth. Results also indicate that stronger economic growth leads to higher credit growth. A number of policy implications emerge and are also discussed.

Factors Affecting the Bank Credit: An Empirical Study on the Jordanian Commercial Banks

“…This result differs from what is expected and from what was found by several studies such as Sharma and Gounder (2012). This result can be explained by the lack of the effect of the interest rate of loans on the proportion of credit facilities extended by the Jordanian commercial banks, so the higher inflation rates may lead to an increase in the nominal interest rates on loans, but it does not affect the demand for loans.…”

“…As it is evident in the table, the coefficient ratio of the deposits to the total assets (DEP/TA) was positive but not statistically significant, which means that the proportion of deposits does not affect the ratio of credit facilities granted by the commercial banks in Jordan. This result differs from what is expected and what is fund by the previous studies in this field, such as Sharma and Gounder (2012) and Olokoyo (2011), which indicated that the deposits have a positive impact on the volume of the bank credit. The reason for this result might be resulted from the high liquidity of the Jordanian commercial banks; therefore, they can fund the loans by reducing the portion of the high liquidity.…”

“…5;2015 Furthermore, the results indicated that the financial health and liquidity in banks play a vital role in determining the credit, and the good economic conditions induce banks to increase the volume of credit provided to the private sector. Sharma and Gounder (2012) examined the change in the bank credit provided to the private sector in six economies in the South Pacific during the period 1982-2009. The study used the credit granted to the private sector as a dependent variable, while the independent variables included the average interest rate on the loans, the rate of inflation, the ratio of deposits to the GDP, the size of the banks' assets of output, a dummy variable reflecting the existence of a financial market, and the GDP.…”

“…Based on the previous studies on the determinants of the bank lending especially Imran and Nishatm (2013), Sharma and Gounder (2012), Olokoyo (2011) and Guo and Stepanyan (2011), a group of factors and variables were extracted to develop a standard model record through which we can test the factors affecting the bank credit provided from the commercial banks in Jordan. The independent variables that have been adopted in this study included three main groups which are the internal variables related to the banks, the variables related to the monetary policy and the macroeconomic variables.…”

“…The rate of inflation (INF): several studies such as Sharma and Gounder (2012) have indicated that the inflation rate had a negative impact on the rate of growth in credit because the growth in the volume of credit may be due to the high rates of inflation and not because of the increase in the real value of the facilities granted. On the other hand, the high inflation rates usually lead to an increase in the nominal interest rates on loans, which cause the decline in the demand for loans.…”