Determinants of private sector credit extension in South Africa: a demand and supply side approach

Abstract

The study examined factors that influence credit extension to the private sector in South Africa between 1990 and 2021. Over the past two decades, South Africa has experienced changes in macroeconomic conditions and regulations. Developments such as the introduction of the National Credit Act of 2005 have had a considerable impact on the extension of private sector credit. The South African Reserve Bank (SARB) ascribed the 2008 sub-prime crisis to the deterioration in private sector credit extension, which led to more stringent lending criteria being imposed on lending institutions. Although several studies on the determinants of private sector credit extension have been conducted in the international community, sub-Saharan Africa, and a few in South Africa, most of the studies analysed the determinants from either the demand or the supply side. It is against this background that this study contributed to literature by examining the determinants of private sector credit extension from the demand and supply sides, using the autoregressive distributed lag (ARDL) bounds testing technique. The empirical findings of the demand side revealed that inflation and public sector credit are negatively related to private sector credit extension, while property prices and real wage rate were found to be positively related to private sector credit extension in both the long run and short run. Interestingly, the results further revealed that the short-run impact of property prices is seen in its second and third lags, while the impact of real wage rate is seen in its first, second and third lags. Lastly, the impact of public sector credit is only seen in its second lag. The empirical findings of the supply side revealed that gross domestic product (GDP) and bank deposits are positively related to private sector credit extension in both the long run and short run. Therefore, we recommend virtual simulation courses at the tertiary level of education to increase skills and labour productivity, thereby improving real wage rate. We also recommend policy makers formulate policies to enhance the functioning of the economy to foster economic growth. Lastly, we recommend policies to improve financial literacy and inclusion to enhance the deposit taking by banks.