Is commercial bank lending in South Africa procyclical?
| DOI | https://doi.org/10.1108/JFRC-09-2016-0073 |
| Date | 14 May 2018 |
| Pages | 203-226 |
| Published date | 14 May 2018 |
| Author | Foluso Abioye Akinsola,Sylvanus Ikhide |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Is commercial bank lending in
South Africa procyclical?
Foluso Abioye Akinsola
Department of Economics, University of Lagos, Akoka, Nigeria and
University of Stellenbosch Business School, Cape Town, South Africa, and
Sylvanus Ikhide
University of Stellenbosch Business School, Cape Town, South Africa
Abstract
Purpose – This paper aims to examine the relationship between commercial bank lending and business cycle
in South Africa. This paper attempts to know whether commercial bank lending in South Africa is procyclical.
Design/methodology/approach – The model assumed that the lending behaviour is related to the
business cycle. In this study, vector error correction modeling (VECM) is used to capture the relationship between
bank lending and business cycle to accurately elicit the macroeconomic long-run relationship between business
cycle and bank lending, as some banks might slow down bank lending due to some idiosyncratic factors that are
not related to the downturn in the economy. This paper uses data from South African Reserve Bank for the
period of 1990-2015 using VECM to understand the extent to which business cycle uctuation can affect credit
crunch in the nancial system. The Johansen cointegration approach is used to ascertain whether there is indeed
a long-run co-movement between credit growth and business cycle.
Findings – Results from the VECM show that there are signicant linkages among the variables, especially
between credit to gross domestic product (GDP) and business cycle. The inuence of business cycle is seen
vividly after a period of four to ve years, where business cycle explains 20 per cent of the variation in the
credit to GDP. South African banks tend to change their lending behaviour during upturns and downturns.
This result further conrms the assertion in theory that credit follows business cycle and can amplify credit
crunch. The result shows that in the long run, uctuations in the business cycle can inuence the credit
growth in South Africa.
Research limitations/implications – The impulse analysis result shows that the impact of business
cycle shock is very persistent and lasting. This also demonstrates that the shocks to the business cycle result
have a persistent and long-lasting impact on credit. This study nds that commercial bank lending in South
Africa is procyclical. It is suggested that the South African economy needs forward-looking policies that will
mitigate the ow of credit to the real sector and at the same time ensure nancial stability.
Originality/value – Most research papers rarely distinguish between the demand side and supply side of
credit procyclicality. This report is presented to develop an econometric model that will examine demand side
procyclicality. This study adopts more realistic and novel methods that will help in explaining the
relationship between bank lending and business cycle in South Africa, especially after the global nancial
crisis. This report is presented with a concise and detailed analysis and interpretation.
Keywords Business cycle, Credit procyclicality, Real sector
Paper type Research paper
1. Introduction
In the past two decades, there has been a development in the theoretical literature
highlighting the relationship between theories of credit and how they can enhance the
understanding or the “mechanism in the business cycle” (Kiyotaki, 1998, p. 18). Theoretical
JEL classication – G21, E32, G28
Commercial
bank lending
203
Journal of Financial Regulation
and Compliance
Vol. 26 No. 2, 2018
pp. 203-226
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2016-0073
The current issue and full text archive of this journal is available on Emerald Insight at:
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literature on how shocks in the macroeconomy can accentuate nancial frictions was
extensively discussed by Bernanke et al. (1999). However, after the global nancial crisis of
2008-2010, there has been an added dimension to the debates by policymakers and
researchers on how disruption in the credit and nancial market can stimulate crisis in the
real sector (Kiyotaki and Moore, 1997; Borio, 2012; Goodhart, 1996; IMF, 2013). Financial
systems are implicitly procyclical; therefore, any change in credit growth, asset prices or
leveraging can amplify nancial frictions and prolong business cycle. The exact nature of
the relationship between nancial crises, business cycle and credit has not been established
in the literature. (Borio, 2012; Goodhart, 1996; Liu and Seeiso, 2011).
The general equilibrium model (GEM) used by Bernanke, Gertler and Gilchrist (BGG,
1999) and Liu and Seeiso (2011) has a major problem of incorporating unrealistic
neoclassical assumptions, such as constant return to scale and assuming a perfectly
competitive market. GEM has also been criticised for underestimating the role of money and
nancial institutions. For instance, Markovic (2006) argued that nancial intermediaries,
which are assumed in the Bernanke, Gertler and Gilchrist (BGG) model, can only function as
deposit receivers, as the model assumes that the level of deposit is equal to the level of loans
in the banks. This assumption is very unrealistic and undermines the functions of a bank in
the rst place. Zhang (2009) also criticised the BGG for not incorporating an interaction
between borrowers and lenders such that both can share a common “systemic risk” where
contractionary aggregate shocks in the system can affect a rm’s balance sheet and net
worth negatively. This study adopts a more realistic methodology that will help explain the
relationship between bank lending and business cycle. First, this study also makes an
important contribution to the discussion on credit crunch and business cycle in developing
countries. Second, most studies combine the supply-side credit (banks and regulators)
procyclicality and demand-side credit (household and investors) procyclicality. However,
this study has gone further to delineate these two schools of thought and establish the link
between business downturn and credit downturn in South Africa. We use private credit to
gross domestic product (GDP) as a proxy for credit growth because it signals nancial
resources and loans to the private sector of any economy, which is a good indicator of credit
growth, whereas business cycle is dened as the composite coincident index.
Against this backdrop, it will be very interesting to investigate how periods of credit
growth or crunch are associated with recession periods, especially in a developing economy
context. What role do shocks to the real sector play in amplifying nancial imbalances
through the credit market in South Africa? To answer these questions, this study uses data
from the South African Reserve Bank (SARB) using vector error correction modelling
(VECM) from 1990 to 2015. The rest of this chapter is organised as follows: the theoretical
foundation of business cycle and credit growth is presented in Section 2, Section 3 offers an
empirical overview of credit growth in South Africa, the methodology and results are
discussed in Sections 4 and 5, respectively, and Section 6 concludes the article.
2. Business cycle and credit growth theoretical framework
There are two strands of literature that explain the nancial cycle and business cycle. One
strand of research looked at the amplication of nancial accelerators on the nancial cycle
and the real sector. These researchers believe that shocks or changes in nancial assets and
collateral can affect access to loans to the real sector (Bernanke, 1993; Gertler and Gilchrist,
1993; Kashyap and Stein, 1994; Bernanke et al., 1999; Walsh, 2003). Another school of
thought examined the lender’s balance sheet and cash ow and their relationship with
banks’ capital. This school argues that banks’ regulation constrains most banks’ balance
sheet, retards their credit growth and affects their macroeconomic function of enhancing
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