Abstract

Bank credit constitutes a single vital source of financing for private sector firms in an economy. Its availability makes it relatively easy for entrepreneurs to obtain financing to start a new business and for established businesses to purchase new equipment and technologies to expand their operations. Private sector credit is also one of the main counterparts to the monetary liabilities in the consolidated balance sheet of institutions in the banking sector. Thus, bank credit may contain useful information for analysing and forecasting both a country’s fiscal and monetary developments. Most of the work on bank credit to the private sector has largely focused on aggregate time-series evidence from developed economies and of the few that have attempted to study the same in under developed countries; none has been conducted on Malawi so far. Deviating from the usual time series modelling, this study adopts panel data analysis techniques for a more refined modelling of the behaviour of credit demand. The study, therefore, carried out a cross-sector panel analysis of the determinants of bank credit demand by the private sector in Malawi using data for the period 1980 to 2004. Its main objective was to analyse the determinants of bank credit demand by the private sector firms and its implications on the country’s level of employment and hence economic growth. Empirical results from the study indicate that real cost of bank credit, level of economic activity, level of firms internal financing and liberalisation policies have a significant impact on bank credit demand by the private sector in Malawi. However, the results also show that the real cost of alternative external sources of credit has an insignificant impact on bank credit demand by the private sector in Malawi. The overall policy implication from the findings is that, on its own, a monetary policy focusing on real lending rates alone will not be the most effective way of stimulating bank credit demand by the private sector in Malawi.

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School	: School of Law, Economics and Government
Issued Date	: 2007

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