The impact of bank lending on economic growth in Malta

Abstract

Credit is an important determinant of economic growth, highlighting the importance of a healthy financial sector that serves its crucial role of channelling funds from savers to borrowers, thereby transforming saving into investment. In this respect, the relationship between credit and economic growth has been extremely debatable in the literature, especially following the financial crisis. Thus, this study investigates how bank lending impacts the level of economic growth in Malta by analysing time-series data for real gross domestic product and real total bank credit quarterly between 2000 and 2016. The result of the Engle-Granger test suggest that a long-run relationship exists between GDP and total bank credit. It was also evident that a bi-directional relationship exists as evident by the application of the Granger Causality test, meaning that both variables have a significant and positive impact on each other.