Relation between Sectoral Distribution of Commercial Bank Credit and Economic Growth in Sri Lanka

Abstract

This study investigates the impact of sectoral distribution of commercial bank credit on economic growth in Sri Lanka based on data from 2005 to 2017. The Auto-regressive Distributed Lag (ARDL) model is used to investigate short and long run impact of sectoral distribution of commercial bank credit on Gross Domestic Product (GDP). The findings of the ARDL Error Correction model indicate that the commercial bank sectoral credit distribution is significantly explaining the short run economic growth. Moreover, ARDL long run form and bounds test shows that there is a long run relation between the variables. The industrial sector has a long run positive relationship with GDP while the other sectors are insignificant in explaining long run economic growth. According to the results, the government can motivate banks to distribute credit facilities to the industry sector to boost GDP in the long-run. This is the first study that discusses the sectoral distribution of commercial bank credit on economic growth of Sri Lanka as per the best of the authors‟ knowledge. Keywords Commercial bank, Credit, Economic growth, Gross Domestic Product

Which Sector-Based Bank Lending Facilities can Contribute to Long-Term Economic Growth? : Indonesian Study

“…Loans extended to the manufacturing sector have a significant negative impact on Indonesia's economic growth in the long term. However, in Sri Lanka (Muthusamy et al, 2018), Saudi Arabia (Alzyadat, 2021), and Nigeria (Paul, 2018) credit in the manufacturing sector tends to increase growth in these three countries. The manufacturing sector is considered to play an important role in terms of the level of aggregate output because it does not have a productivity, so it is not surprising that the coefficient of influence is positive.…”