Determinants of Banks Private Sector Credit Supply in Tanzania

Abstract

What determines the supply of private sector credit is an issue of policy and
research interest in Tanzania. Using the Autoregressive Distributed Lag (ARDL)
framework, this paper examines relevant factors influencing the supply of private
sector credit by banks after the liberalization of the financial sector in Tanzania.
The results revealed that a model with real private sector credit as the dependent
variable was superior to the alternative model, and real short term lending rate
was statistically a superior regressor compared to the real overnight bank
lending rate. Moreover, it was found that bank deposits is an unimportant
determinant of private sector credit, and that growth and inflation respectively
had positive and negative effects on bank credit supply. The results also
suggested that real bank credit growth was co-integrated with its determinants
over the long run. The results from the analysis imply that policy should focus on
policy interventions which promote economic growth, healthy bank balance
sheets, and reasonable spread as motivating factors for banks to enhance supply
of private sector credit in the country.