Demand for Bank Lending by the Private Business Sector in Pakistan

Abdul Qayyum


This study estimates the demand for bank lending by the
private business sector in Pakistan. For the purpose of analysis a
three-step methodology is applied, that is, univariate analysis,
multivariate cointegration analysis, and error correction mechanism. It
is found that the individual series are difference stationary, and there
is a long-run stable relationship between the variables. The preferred
model, obtained by the application of the general-to-specific
methodology is also found to be stable throughout the study period. The
study shows that the output of business sector is an important
determinant of the demand for bank credit in Pakistan, implying that to
achieve the objective of monetary policy the behaviour of the output of
business sector must not be ignored. Furthermore, the study shows that
the rate of interest on bank advances is an important determinant of the
demand of credit by the business sector. It implies that monetary
authorities can move the flow of bank credit to the private sector while
changing the interest rate charged on bank lending. The analysis has
important implications: a tight monetary policy implies a high rate of
real interest; a high rate of interest on bank lending negatively
affects the demand for bank credit by the business sector (and the
investment), which in turn leads to low aggregate demand and lower
output. That is what has happened in Pakistan in the last

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