Abstract
The South African retail banking sector plays a pivotal role in financial intermediation, with credit extension serving as a key driver of economic growth and stability. However, the factors influencing banks’ lending behaviour in this emerging market context have not been fully understood. This dissertation addresses that gap by examining both bank-specific determinants (i.e., profitability, efficiency, and risk indicators) and macroeconomic influences (i.e., interest rates and economic growth) on credit extension. The study is motivated by recent economic disruptions and regulatory changes, including the 2007–2009 Global Financial Crisis, and the COVID-19 pandemic, which underscored the need for resilient credit provision in South Africa’s economy.
A quantitative research design was adopted, employing panel data regression techniques on a dataset of South Africa’s major retail banks over the period 2007–2023. The analysis incorporated Pooled OLS, Fixed Effects, and Random Effects models to identify significant predictors of the total credit extended by banks. Key variables included bank-specific metrics (i.e., net interest margin, non-performing loan ratio, return on assets, leverage, and size) and macroeconomic indicators (prime lending rate, GDP per capita, inflation), along with dummy variable(s) for crisis periods. Model diagnostic tests (i.e., heteroskedasticity, autocorrelation, cross-sectional dependence, and normality) ensured the robustness of results.
The empirical results reveal that bank-specific financial health and efficiency are crucial to credit extension, whereas broader macroeconomic conditions play a more nuanced role when controlling for bank-level factors. In particular, higher profitability (i.e., return on assets) is associated with significantly greater credit extension, supporting the view that well-capitalised, profit-rich banks have more capacity and willingness to lend.
Net interest margin showed a significant negative relationship with lending, when interest rate spreads widen (often reflecting tighter monetary policy), banks tend to curtail credit growth, whereas a low-interest-rate environment stimulates lending.
The analysis also found that systemic shocks markedly affect credit extension – during the Global Financial Crisis, banks’ lending volumes contracted sharply despite controls for other factors, highlighting the impact of heightened risk aversion and stricter...