The Effect of Household versus Enterprise Credit on Economic Growth in Turkiye

Abstract

The motivation of this study is the significant growth of the Turkish economy in credit volume over the past two decades. Although theoretical predictions suggest distinct impacts of household and enterprise credit on the economy, the empirical literature has predominantly relied on aggregate indicators of total bank lending to the private sector. Only a few studies have examined the impact of credit composition on economic growth concerning the credit source. Despite the significant expansion of credit volume, this specific issue has not been previously investigated in the context of Türkiye. Therefore, this study aims to empirically assess the effects of total bank credit on the private sector as well as enterprise (or business) and household credit markets on economic growth. The empirical study is based on a time series approach called ARDL cointegration to reveal the long and short-run relationships between related variables. An annual time series data from 1986 to 2021 is applied for Türkiye. Empirical results show that enterprise credit has a positive impact on economic growth, whereas household credit does not affect economic growth. The findings also show that the total amount of banking credit given to the private sector does not affect economic growth. Furthermore, it is presented that there is a two-way causality for enterprise credit and economic growth in the short and long-run. The lending structure determines how much financial development impacts economic growth. Our findings explain that it is not relevant how much money financial institutions lend, but to whom and for what purposes it is lent is quite significant in Türkiye.