Credit to private sector in Southern Africa Development Community (SADC): Determinants and the role of institutions

Abstract

The study used annual panel data (1996-2010) for eleven SADC countries to establish the determinants of credit to private sector; the possibility of a crowding out effect of government debt and the contribution made by institutional quality. The study used both the fixed effects and dynamic model based on GMM estimations. There is strong evidence suggesting that financial development, economic growth, trade openness and domestic credit by banks were important in explaining growth in credit to the private sector. Government debt was insignificant while institutional factors play a complementary role. Extension of financial resources to the private sector is enhanced by keeping low levels of corruption, improving government effectiveness as well as the regulation quality. Reduction in the risk profile for investments allows banks to release more financial resources to the private sector. Monetary policy initiatives like favorable credit rationing policies play a key role in developing financial markets.

Keywords: Panel Data, Credit to Private Sector, Institutions, SADC, Economic growth, Financial development