Determinants of Bank Credit Growth in Macedonia

Abstract

The subject of this paper is the credit growth in the Republic of Macedonia and the way in which it contributes to the financial development process. Two types of approach are used in the paper in order to estimate credit growth in the Republic of Macedonia. The first is the statistical approach, based on deviations of the Credit/GDP ratio series in their long-term trend. The second is the econometric approach based on using an error correction model in order to explain the level of credit growth as a function of economic fundamentals. The basic purpose of this paper is to explore the two-way relationship between the sustainability of credit growth and key developments in macroeconomic and financial fundamentals. According to the obtained results the paper provides suggestions for maintaining sustainability of the credit growth in the Republic of Macedonia which would result with a positive impact on the financial sector development. Our findings show that the Macedonian banking sector has not experienced credit booms, even though a rapid credit growth and a deviation of the Credit / GDP indicator from its long-run trend in the period before the last financial crisis have been detected.