Institution and bank credit allocations in emerging market economies: public or private sector?

Abstract

The extent literature has documented the determinants of bank credit allocation, but they focus on credit allocation within private sector, while ignore the effects of institutions. This study fills the gap by using annual data of 35 emerging economies in the period of 2002 - 2013 to investigate the effects of institutions on bank credit allocation between private and public sector. Notably, this study examines effects of the 2008 global financial crisis and the associations between institution with external factors including inward FDI and trade openness on bank credit allocation. Applying system GMM estimator for unbalanced panel data, we find the positive effects of government effectiveness, regulatory quality, and rule of law on bank credit allocation toward private sector, while the control of corruption has negative effect. We also discover that the bank credit allocation is moved toward the public sector in the 2008 global financial crisis, and the improvement in institution also simulates the bank credit allocating toward public sector. More precisely, we highlight that the institution has strong associations with external factors on bank credit allocation between private and public sector in emerging economies.