Factors Influencing Domestic Credit to Private Sector in Malaysia: Application of Vector Auto-Regressive Method

Abstract

The private sector is the engine of economic growth for a country, especially for developing economies like Malaysia. The post-pandemic recovery will need to be more strongly supported by the private sector due to the medium-term fiscal space being limited. This study makes some important contributions in analyzing and deepening understanding of the determinants of credit to private sector in Malaysia. The main objective of the study is to investigate the factors that influence domestic credit to private sector in Malaysia over the period of 1960 to 2020 by applying Johansen cointegration and Vector Auto-Regression method. It is revealed that gross capital formation and broad money have a negative relationship with domestic credit to the private sector. The long-run relationship does not exist among the variables. This study also found that general government final consumption expenditure is an important factor to fuel the financial strength of domestic banks in providing credit facilities to the private sector. The findings provide valuable insights for guiding the policymakers in strengthening the private sectors as a key driver of economic growth. Further research should be done to investigate the implications of credit to private sector on economic growth.