Impact of bank lending on economic growth of nepal

This study examines the effect of bank lending on economic growth in Nepal. Real gross domestic product growth and gross fixed capital formation are the dependent variables, while inflation, money supply, lending interest rate, government expenditure, domestic credit to private sector, and total deposits are selected as the independent variables. The main sources of data include Quarterly Economic Bulletin published by the Nepal Rastra Bank and Economic Survey published by the Ministry of Finance. The study is based on the secondary data which are collectedfor the period of 27 years from 1990 to 2016. The time series data analysis technique has been used to analyse the relationship between bank lending and economic growth.

The study reveals that there is long run co- integrating relationship between bank lending and economic growth in Nepal. The study shows that lending interest rate has long run negative relationship with real gross domestic product and gross fixed capital formation. This indicates that higher lending interest rate, lower would be real gross domestic product and gross fixed capital formation. This study also finds that domestic credit to private sector have long-run positive relationship with real gross domestic product. This indicates that higher the credit to the private sector, higher would be the economic growth. Similarly, money supply and government expenditure have positive relationship with gross fixed capitalformation. It indicates that higher the money supply and government expenditure, higher would be gross fixed capitalformation.However, the result shows that government expenditure has negative relationship with real gross domestic product growth in the long-run.The estimates of error correction model show that beta coefficients are negativefor lending interest rate, inflation and total deposit whereas the beta coefficients are positivefor money supply and domestic credit to private sector. However, the coefficients are significant onlyfor money supply, total deposit and credit to private sector at 5 percent level of significance.