Directions of banks lending and Malaysian economic development: an empirical study

This study investigates the effects of the sector-wise commercial banks lending on Malaysian economic development. The results confirm the presence of a long run relationship among real income and sector-wise classification of commercial bank's financing. In long run, bank financing on general commercial, manufacturing, and housing is significantly promoting economic activity. Financing on agriculture and real estate, however, yields negative effect on economic activity. The study suggests that commercial banks should act as an efficient financial intermediation devoted to allocating resources to the most productive uses in country's development. Introduction The present study aims to investigate the productivity of bank's sector-wise financing on Malaysian economy development by estimating its elasticity. The results of the present study provide a support to supply-leading hypothesis (finance development led growth) in a small open economy, Malaysia. The findings of this study are also useful for monetary policymakers, who intended to sustain Malaysian economic development. The financial intermediation in Asia nations has been seen as one cause of rapidly economic growth (Bosworth, 1998). The role of financial institutions is to encompass lending-out of money, and other financial services, which include extension of credit, promotion of small and medium industries, developmental role, role in corporate recovery, financial and investment advisor. For commercial banking system, it is basically to serve the production process by supplying loans or deposits to the public on demand (Panagopoulos and Spiliotis, 1998, p. 652). To some extent that credit flows reflect expectations about investment opportunities. The Bank Negara Malaysia (Malaysian central bank) exerts a strong influence on the availability and cost of funds to the banks, bank credit and money. It not only influences bank interest rates and the flow of credit, but can also direct the flow of credit to priority sectors of the economy. Thus, selective control of credit extension is among the most effective measures available to the Bank Negara Malaysia in regulating the volume and direction of credit such as credit controls are specific and targeted at only certain sectors (Bank Negara Malaysia, 1994, p.433-4 and 133). Data and Method The real economic activity is proxied by real Gross Domestic Product (LnRGDP). The sector-wise classification of commercial banks lending (explanatory variables) used in this study are on agriculture (LnARG); mining and quarrying (LnMQ); manufacturing (LnMF); general commerce (LnGC); building and construction (LnBCON); real estate (LnRE); housing (LnHOU); transport, storage and communications (LnTSC); financing, insurance and business service (LnFIN); and miscellaneous (LnMISC)- restaurants, hotels, and boarding house; purchase of stocks and shares; consumption credit and other. Ln is natural logarithm. Some explanatory variables are excluded for analysis due to its unavailability for long sample period - the data on electricity sector are only available since 1980. Thus, the sample period used in the study covers annual data from 1971 to 1997. The raw data are taken from Monthly Statistical Bulletin (various issues), Bank Negara Malaysia. …