Determinants of Domestic Bank Credit to Private sectors in Bangladesh: An Empirical Investigation

Abstract

This article examines the key determinants of domestic bank credit the private sectors receive in Bangladesh by using annual time series data over the period from 1974 to 2018. The ARDL (autoregressive distributed lag) model has been applied to identify the variables that contribute to the changes in domestic credit to private sectors from banks over time in Bangladesh. Empirical results reveal that broad money (M2), gross domestic product (GDP), real interest rate (RI), trade openness (TO), gross capital formation (GCF), and exchange rate (ER) have a significant impact on the amount of credit flowing to the private sectors from banks in Bangladesh, particularly in the long run. The findings also confirm that the long run relationship among the relevant variables is robust and stable. Any disequilibrium found in the short run seems to be eliminated with a speed of 40.96% per year. The findings of the research suggest that a stable growth of money supply, an increase in real interest rate, sustainable growth in GDP, and high degree trade openness are crucial for the growth of bank credit to private sectors. Gross capital formation and local currency depreciation, on the other hand, negatively influence bank loans to the private sector in Bangladesh. The significance of the study lies in the fact that it paves the way for a better understanding of the functionality of domestic bank credit flow in Bangladesh. The policy implications of the findings suggest that authorities pay special attention to stable money supply growth, expansionary monetary policy, and trade liberalization to strengthen the financial market in Bangladesh.