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Short and Long Term Determinants of Bank Credit Growth in Sri Lanka

Author:

P. D. C. S. Dharmadasa

University of Kelaniya, LK
About P. D. C. S.
Department of Economics, Faculty of Social Sciences
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Abstract

The Purpose: The aim of this paper is to identify the determinants of credit growth of commercial banks in Sri Lanka during the period from 2008 to 2019.

 

Design/ methodology/approaches: The analysis consists of macro-level data collected from monthly basis including bank-specific, macroeconomic, and monetary policy variables that affect credit growth. Co-integration test is conducted using Autoregressive Distributed Lag (ARDL) approach to determine the long-term determinants of credit growth.

 

Findings: The results revealed that growth of money supply, non-performing loan ratio, lending rate, and inflation rate and efficiency ratio have a strong link with credit growth compared to other bank-specific variables, and therefore they can be considered as long term determinants of commercial banks’ credit growth in Sri Lanka. The findings further revealed that growth of GDP and credit growth tend to have a relationship which supports the ‘demand following’ hypothesis of finance-growth theory. All other bank specific variables indicated marginal impact on the credit growth in the short-run.

 

Policy implications: The results suggested that the government should prioritize all growth promoting policies, because, low economic growth disturbs aggregate demand in the country. To achieve a desired growth, continuation of expansionary monetary and fiscal policies is necessary with a close coordination between them. Continuation of the monetary targeting framework of the CBSL is also necessary since money supply growth influences credit growth in the country.

 

Originality: This research is expected to be a pioneering work in the field as studies focusing especially on credit growth are relatively limited in the Sri Lankan setting.

How to Cite: Dharmadasa, P. D. C. S. (2021). Short and Long Term Determinants of Bank Credit Growth in Sri Lanka. South Asian Journal of Finance, 1(1), 1–15. DOI: http://doi.org/10.4038/sajf.v1i1.24
Published on 01 Jun 2021.
Peer Reviewed

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