Determinants of bank credit in Pakistan: A supply side approach

a r t i c l e i n f o This study empirically identifies the factors which explain the bank credit to the businesses in varying financial environments and emerging global challenges. With the major focus on supply side this study uses the ARDL econometric approach using annual data from the period 1971 to 2010 for Pakistan. The empirical results indicate that the foreign liabilities, domestic deposits, economic growth, exchange rate, and the monetary conditions are significantly associated with bank credit to the private sector in Pakistan, particularly in the long run. Whereas the inflation and money market rate does not affect the private credit. Moreover, in the short run the domestic deposit does not influence private credit. The results also infer that the financial health and liquidity of the banks play a significant and vital role in the determination of loan. Results also indicate that the long run relationship is stable and any disequilibrium formed in the short run will be temporary and get corrected over a period of time with a high speed of 53.5% per year. This study does not statistically distinguish the behavior of bank credit during non-financial (1971–1989) and financial reform periods (after 1990) in Pakistan. The finance is a backbone of every business, as business grows; it needs more capital to assist its various operational and non-operational activities. To finance such activities any organization has two main sources; internal and external. The loan from financial institutions like banks is a key source among the major external sources for a business. In order to fulfill their financial needs, businesses mostly don't build their capital structure entirely with their internal funds, especially small firms which have inadequate sources of raising capital (White and Cestone, 2003; Galor and Zeira, 1993). The existing literature shows that the availability of bank credit plays a crucial role to boost up the economic growth, especially in emerging markets. So to find the determinants of bank credit is a more important issue to discuss because of the growing trend of using bank loan in the world economies. A strong financial system and developed economy interchangeably support to each other to grow. A well developed business and economic growth demanded more credit and cause to credit growth. The mild monetary conditions and a vigorous banking sector tend to enhance more credit. The underlying financial market imperfections create borrowing constraints, hence lower economic …