The sluggish growth in bank credit to the private sector

Abstract

This paper examines the marked slowdown in bank credit to the private sector in Maldives since 2008. The paper documents the developments in bank credit during 2004-2014 and explores if a credit boom preceded the current slowdown as experienced by other regions of the world. It also explores how bank balance sheets have changed in the credit boom and the slowdown period and uncovered the role played by bank funding (external borrowing slowed considerably) and bank-level fundamentals (deteriorating loan quality) in explaining the differences in credit growth during the two periods. Although initially caused by a cut back in external funding, the prolonged slowdown in credit was largely contributed by increasing strains on banks’ balance sheet which reduced the willingness to lend by banks.