He Effect of Bank Loans on Sectoral Growth in Ghana

Abstract This paper applies the Barro-regression model on data obtained from 2008 to 2014, to assess whether bank loans affect sectoral growth. This is to test whether finance has an impact on growth as proposed in literature. Sectoral Distribution of Credit is the independent variable while the Value added by Sectors represents the dependent variable. Inflation, Monetary Policy Rate, USDGHS exchange rate, Balance of Payment and Gross Domestic Product are control variables in the analysis. The independent variable was instrumented using Money Supply (M2) to eliminate the problem of endogeneity resulting from reverse causality. This paper finds that bank loans distributed to the sectors have a significant effect on the growth of the sectors. Bank loans to Agriculture and Industry have a positive effect on the growth of the respective sectors. While bank loans to the Services sector has a negative and small effect on the growth of the Services sector. These results suggest that there may be firms in the Services sector that are not bank loan dependent and hence why the coefficient value is low. Firms here may be better developed than others and able to raise funds through other mediums like equity and debt. The government should focus on encouraging these alternative sources of finance. They can invest in training programmers for Agriculture and Industry and implement favorable policies like lower lending rates to benefit the sectors. Investors can also buy debt and shares within companies in the Services sector as they may benefit from improved profits.