Modeling the Macroeconomic Determinants of Bank Credit in Saudi Arabia

Bank credit mechanisms play a crucial role in conditioning how the macroeconomy responds to underlying economic disturbances. Thus, the transmission of monetary policy and the propagation mechanism of business cycle shocks depend heavily on bank credit. Given its importance in this context, bank credit has received particular attention after the global financial crisis in recent decades. The purpose of this chapter is to examine the relationship between bank credit and the major macroeconomic variables of Saudi Arabia during the period from 1993 to 2019. An autoregressive distributed lag (ARDL) method was employed to estimate the short- and long-run effects of the major macroeconomic variables on bank credit. The study revealed that the real exchange rate and money supply have positive long-run effects on bank credit compared with the negative effects of inflation on bank credit. Gross domestic product (GDP) has a negative effect on total bank credit, which conflicts with the Keynesian view. In the short-run, the effect of GDP on bank credit is negative, whereas inflation has a positive influence on bank credit. Based on the results, the study recommends a number of expansionary fiscal and monetary policies, including lowering borrowing costs and raising asset prices, increasing spending and lowering taxes to create budget deficits that stabilize the financial system, and raising national income to encourage steady and sustainable growth in bank credit. Some financial and monetary measures are required in light of the development policies to diversify the production base and not rely on oil as the sole source of income, taking into account the major economic transformations at the local and international levels, in order to achieve the goals of Saudi Arabia’s 2030 development vision.