Determinants of bank credit in Ghana: A bounds-testing cointegration approach

Abstract

Using the Autoregressive Distributed Lag (ARDL) framework, this paper examines the relevant factors influencing allocation of bank credit to the private sector in the Ghanaian economy for the period 1970 to 2011. The results show that broad money supply, bank assets, real lending rate, and bank deposits are significant determinants of bank credit in both the short and long-run. Inflation also exerts significant positive impact only in the short-run. The study infers the lack of successive governments’ commitment to pursue policies that boost the supply of credit to the private sector. Our findings further reveal that increases in deposits mobilization by banks does not necessarily translate into supply of credit to the private sector. A plausible deduction from the findings is that reduced government’s domestic borrowing, lower cost of borrowing, and lower central bank reserve requirements for commercial banks in Ghana are needed to stimulate higher lending and credit demand.

Keywords: Bank credit; ARDL cointegration; Real lending rate; Bank deposit; Ghana.