Liberalization of the Financial Sector and Access to Credit by the Micro and Small-Scale Enterprises: Conintergration Analysis

Abstract

The financial system of sub-Sahara African countries had long been shackled with extensive imprudent regulations operated on inefficient grounds. This paper estimates the impact of macroeconomic factors on credit to the private sector with emphasis on micro and small-scale enterprises in a regime of financial sector liberalization in Ghana. The paper demonstrates the predicaments of Ghana’s inability to liberalize its financial sector and the consequent limitations imposed on access to financial services by the micro and small-scale enterprises. We used the Augmented Dickey Fuller (ADF) test for unit root and the Johansen-Juselius multivariate approach to cointegration to test for stationarity and a long-run relationship among the variables in the model. Error correction model (ECM) was used to estimate the short-run impacts. The results indicate that variations in credit to the private sector in a liberalized financial sector are explained significantly by the variables in the model in both the long-run and the short-run. An indication of a large percentage of financial deepening is demonstrated by the study, which leads to an expansion of the volume of institutional credit to enterprises including the micro and small-scale enterprises after the financial sector liberalization in Ghana.

Keywords: Cointegration, Stationarity, ADF Test, Error Correction Model, Micro and Small-Scale enterprises