Unraveling the nexus: Credit facilities and economic growth

We persist in our analysis to explore the correlation between credit facilities and economic growth: Does an expansion in credit facilities result in economic advancement? We abstain from delving into economic theory, recognising the diversity of perspectives among adherents of various theories, including well-established ones like Keynesian theory, monetarist theory and modern monetary theory.

In the context of Jordan, empirical studies have consistently shown a positive correlation between the expansion of credit facilities extended by banks to the private sector and the growth of real GDP. For instance, one study revealed that a one million Jordanian dinar increase in credit facilities corresponds to a 70,000 Jordanian dinar increase in GDP.

Historical data has shown that when the Jordanian economy was growing at a real rate of 8 per cent during the period from 2004 to 2007, which was one of the golden periods of the Jordanian economy, credit facilities were growing at rates ranging between 15.7 per cent and 26.1 per cent. This means that when credit facilities provided to the private sector increase, GDP growth rates also tend to rise. Conversely, when credit facilities provided to the private sector decrease, GDP growth rates also tend to decline. This relationship exists because loans provided to the private sector can help stimulate economic activity and accelerate growth. When companies and individuals have access to credit, they become able to invest and purchase goods and services, which can contribute to comprehensive economic growth. Additionally, credit can help companies expand and hire more workers, which can also contribute to economic growth.

However, this relationship may not be causal or direct, as other factors like government policies, technological innovations, or global economic conditions also influence GDP growth. Studies suggest a reciprocal relationship between private sector credit and GDP growth, implying that each can affect the other. While increased credit can stimulate economic activity and accelerate growth, prolonged rapid credit expansion may signal early warning signs of a future financial crisis. Hence, international regulatory bodies have issued accounting standards, such as International Financial Reporting Standard IFRS9, requiring banks to make financial provisions at the time of loan origination rather than upon default, after conducting sound creditworthiness studies for customers applying for loans. This standard has been implemented in Jordan’s banking sector since the start of 2018.

Based on our past and present analysis, it could be argued that there is a pressing requirement to rejuvenate the Jordanian economy. This could be achieved by reallocating resources to sectors with higher contributions to GDP growth, enhancing access to credit in various provinces through incentives and communication of economic prospects to banks. Additionally, conducting financial literacy campaigns in remote areas would raise awareness about banking services and their significance, thereby motivating individuals to utilise available credit opportunities.