Determinants of bank credit to the private sector: The case of Albania

This discussion paper focuses on identifying and evaluating the long run determinants of bank credit to the private sector in the case of Albania by employing a Vector Error Correction Mechanism (VECM) approach based on demand and supply indicators. Estimations show that an adjustment mechanism exists bringing bank credit back to equilibrium. The results imply that lending is positively linked to economic growth. Further, banking and financial intermediation, as well as financial liberalisation would stimulate higher lending demand. In addition, lower cost of lending, diminishing government domestic borrowing and a more qualitative bank credit would create further lending incentives. At the same time, the exchange rate is found to pick up some demand valuation and consumption smoothing effects.