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