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Why don't banks lend to Egypt's private sector ?

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  • Herrera, Santiago
  • Hurlin, Christophe
  • Zaki, Chahir

Abstract

Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth. Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by 1) presenting stylized facts regarding the evolution of the banks'sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and 2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10 percent of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70 - 80 percent of the estimated total decline. Reduced economic activity contributed around 15 percent of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54 percent of the estimated fall, while demand factors accounted for a similar percentage.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6094.

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Date of creation: 01 Jun 2012
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Handle: RePEc:wbk:wbrwps:6094

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Keywords: Economic Theory&Research; Banks&Banking Reform; Debt Markets; Currencies and Exchange Rates; Markets and Market Access;

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  1. Sealey, C W, Jr, 1979. "Credit Rationing in the Commercial Loan Market: Estimates of a Structural Model under Conditions of Disequilibrium," Journal of Finance, American Finance Association, American Finance Association, vol. 34(3), pages 689-702, June.
  2. Laffont, Jean-Jacques & Monfort, Alain, 1979. "Disequilibrium econometrics in dynamic models," Journal of Econometrics, Elsevier, Elsevier, vol. 11(2-3), pages 353-361.
  3. Ralph Chami & Raphael A. Espinoza & Adolfo Barajas & Heiko Hesse, 2010. "Recent Credit Stagnation in the Mena Region," IMF Working Papers 10/219, International Monetary Fund.
  4. Fair, Ray C & Jaffee, Dwight M, 1972. "Methods of Estimation for Markets in Disequilibrium," Econometrica, Econometric Society, Econometric Society, vol. 40(3), pages 497-514, May.
  5. Laroque, Guy & Salanie, Bernard, 1997. "Normal estimators for cointegrating relationships," Economics Letters, Elsevier, Elsevier, vol. 55(2), pages 185-189, August.
  6. King, Stephen R, 1986. "Monetary Transmission: Through Bank Loans or Bank Liabilities?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(3), pages 290-303, August.
  7. Adolfo Barajas & Enrique López & Hugo Oliveros, . "¿Por qué en Colombia el Crédito al Sector Privado es tan Reducido," Borradores de Economia 185, Banco de la Republica de Colombia.
  8. Maddala, G S & Nelson, Forrest D, 1974. "Maximum Likelihood Methods for Models of Markets in Disequilibrium," Econometrica, Econometric Society, Econometric Society, vol. 42(6), pages 1013-30, November.
  9. Laffont, Jean-Jacques & Garcia, Rene, 1977. "Disequilibrium Econometrics for Business Loans," Econometrica, Econometric Society, Econometric Society, vol. 45(5), pages 1187-1204, July.
  10. Kim, Hyun E., 1999. "Was the credit channel a key monetary transmission mechanism following the recent financial crisis in the Republic of Korea?," Policy Research Working Paper Series 2103, The World Bank.
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