Real interest rate, income and bank loans: panel evidence from Egypt

Abstract

Purpose This paper aims to examine the effectiveness of monetary policy on bank loans in Egypt using generalized method of moments (GMM) model. Also, it investigates the impact of bank level variables, namely, total assets, liquidity, capital and income on bank loans. It develops the equation of loans, which is introduced by Ehrmann et al. (2002) using bank level variables such as income and the interaction between income and interest rate. Design/methodology/approach This paper examines the impact of monetary policy shocks on bank loans in Egypt by applying the GMM technique and panel data from 1996 to 2014. Findings The results reveal that real interest rate has a significant impact on bank loans, which indicates that the bank lending channel is effective in Egypt. Furthermore, the bank level variables, namely, banks’ size, liquidity and income have significant effects on bank loans in Egypt, which sustains the heterogeneous effect of monetary policy on bank loans. Therefore, the Central Bank of Egypt (CBE) can adjust interest rate to influence the bank loans and total demand. Research limitations/implications It does not examine the effect of monetary policy on small and large banks in Egypt. Practical implications The policy implications from this paper indicate that the monetary authority in Egypt should adjust interest rate to stabilize the bank loan supply. By stabilizing the bank loans, the monetary authority is able to stabilize investment, consumption and total demand. Social implications The relevance of bank lending channel indicates that the role of commercial banks is very important in transmitting monetary policy shocks to the real sector. Originality/value It is important for the CBE, banks and people because it shows the effectiveness of bank lending channel and the effect of global financial crisis on the Egyptian economy.

Effects of Monetary Policy Shocks on Domestic and Foreign Banks Lending in Tanzania

“…A lower domestic price induced by a negative monetary policy shock causes the real exchange rate to depreciate promoting the country's exports and decreasing its imports and thereby improving the trade balance followed by an appreciation of the real exchange rate. The findings are consistent with previous studies by (Amidu & Wolfe (2008: Shokr & Al-Gasaymeh, 2018: Shokr et al 2019: Shokr, 2020) who found out a significant relationship between monetary policy and banks' lending. However, the findings of the study are contrary to Ogunyomi (2011) who found out that monetary policy was ineffective for increasing the volume loans and advances.…”

“…Civcir and Varoglu (2019) investigated the effect of monetary policy in the United States and the Euro area and found out that inflation, domestic industrial production interest rates real effective exchange rates respond to change in monetary policy. Shokr (2020) in his study on monetary policy effect confirms a significant impact of real interest rates on bank loan supply in Egypt, which highlights the essence of the bank lending channel in Egypt. Shokr and Karim (2021) examined the impact of international monetary policy shocks on bank loans and other macroeconomic indicators in Egypt and found out that foreign monetary policy shocks significantly affect loans, inflation, interest rates, and output in Egypt.…”

The heterogeneous effects of macroeconomic and financial factors on financial deepening in Africa: evidence from a method of moments quantile regression analysis

“…Nguyen et al (2018) showed that trade openness significantly and negatively impacts domestic credit after analysing 33 emerging countries (including three African countries) from 2002 to 2015, also using the system GMM. Shokr (2020) found that real interest rates had a significant and negative effect on bank loans in Egypt when the GMM technique was applied to panel data during the period of 1996-2014. Modugu and Dempere (2022) reported similar results: an increase in monetary policy rates reduced bank lending in 20 SSA countries from 2010 to 2019 using the system GMM.…”