The effect of private credit on economic growth: evidence from sub-Saharan Africa

Abstract

Private credit is emphatically infused with potential for the economic growth process of a particular country, yet literature on the effect of private credit on economic growth in the case of Sub-Saharan Africa is presented with inconclusive and mixed findings. Using Feasible Generalized Least Squares (FGLS), this study examines the effect of private credit on economic growth in Sub Saharan Africa using panel data obtained from World Development Indicators of the World Bank and the International Monetary Fund for a period, 2000 to 2021. The study finds private credit with a strong and significant positive effect on economic growth. Specifically, a 1 percentage change in private credit results into a positive change in economic growth by 0.0348%. Also, the study found that 1% change in Gross Capital formation leads to a 0.01348 increase in Economic growth while inflation rate exhibited a negative and significant effect on economic growth with 0.0200%. Thus, the study recommends strengthening financial institutions, promoting financial inclusion, improving credit infrastructure, addressing collateral constraints to boost both private credit and Gross Capital Formation. Yet importantly, the study recommends the Sub-Saharan African countries governments are encouraged to increase efforts for domestic resource mobilization so that individuals embrace a savings culture, which is assumed to enhance economic activities in the long run which can increase gross domestic savings.

Keywords: Private Credit; Economic Growth; Feasible Generalized Least Squares; Sub Saharan Africa