A study of the nexus between economic development and deposit funded bank loans issued to private-public entities

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Abstract

We scrutinized bank deposits and loans issued to private-public sectors and its nexus with economic development in a developing country over the period 1970-2016. This study adopts per capita income as the proxy for economic development, while loans to private sectors, loans to government sectors, money supply, and lending interest rate were the financial deepening variables. We use the Ng-Perron and Augmented Dickey-Fuller Breakpoint Unit Root Tests to check the presence of unit root, and in determining the order of integration of the variables– I(d) in the presence of structural break for each variables respectively, while the T-Y augmented Granger non-causality test is used to reveal how causal effects flow in this study. Hence, taking into account the effect of structural breaks, we found that bank loans to government sectors and lending interest rates were stationary series as p < 0.01. We also found from the T-Y Granger non-causality results in its overall sense that the feedback hypothesis by contrast to prior studies holds in the developing country context. The feedback hypothesis establishes that bank loans and economic development Granger cause each other. In this paper, we recommended among other things that the monetary authorities should regulate the activities of bank deposits to ensure that they gear up the growth of loans to private sectors by examining factors, such as lending interest rate which can possibly undermine lending to these sectors; considering their role as key engine of economic growth in any developing economy.

Keywords: Bank Credits, Economic Development, Toda-Yamamoto Augmented Granger non-Causality, Deposit Money Banks, Feedback Hypothesis, Nigeria

JEL Classification: B26; G21; O1; O16

Received: 06.04.2018

Accepted: 16.06.2018

Published online: 23.06.2018

How to cite this paper: Kolapo, F. T., Oke, M. O., & Olaniyan, T. O. (2018). A study of the nexus between economic development and deposit funded bank loans issued to private-public entities. Corporate Governance and Organizational Behavior Review, 2(1), 40-51. https://doi.org/10.22495/cgobr_v2_i1_p4