Government Domestic Borrowing and Private Credit in Nigeria: Testing the Lazy Bank Hypothesis

Abstract

This study investigates the effect of government public domestic borrowing on credit to the private sector in applying the lazy bank model in Nigeria. The study utilises the Central Bank of Nigeria data covering the period between 1980 and 2019 and deploys the Autoregressive distributed lag (ARDL) model for analysis. The study results show that domestic government borrowing has the most dominant effect on credit to the private sector in a negative and significant impact. Also, the effect of interest rate and inflation are negative and significant on the credit to the private sector. However, the effect of real GDP on credit to the private sector is minimal and positive. The strong negative effect of domestic government borrowing confirms the application of the lazy bank hypothesis in Nigeria. In addition, the negative effect of interest rate suggests that the crowding-out hypothesis applies in Nigeria. Therefore, the study recommends that the government reduces borrowing from the banking sector and implement coordinated macroeconomic policies to minimise the adverse fluctuations in interest rate and inflation while taking concrete steps to ensure that more credit is available to the private sector.

Keywords:Government Domestic Borrowing, Credit to the Private Sector, Domestic Financial Markets, Lazy Banks, Crowding Out.

JEL Codes: E52, H63, G21

DOI: 10.7176/JESD/13-7-07

Publication date: April 30^th 2022