Domestic Credit

Domestic credit is comprised by the loans or credit that a country’s central bank makes to private borrowers. This means that the private sector has access to financial resources including loans, as previously mentioned, and non-equity securities, bonds for example. The higher the percentage of domestic credit to the gross domestic product (GDP), the healthier the economy. This is because there is more opportunity for private sector growth and development. This article takes a look at countries with the highest percentages of domestic credit per GDP.

　　

Countries with Most Private Loans Relative to GDP

At the top of the list is Cyprus, where domestic credit equates to 250.8% of the national GDP. This country has been working to overcome the 2012 to 2013 financial crisis. Since requesting bailout money from the European Central Bank and the International Monetary Fund, the biggest domestic banks have managed to increase capital. These monies are being invested in large scale development projects that will hopefully continue to prompt economic growth.

　　Hong Kong is second on the list with a domestic credit level of 207.6% relative to its GDP. The financial infrastructure here is strong, stable, and efficient. The country is known to have faster than average access to credit and has developed a system that allows banks to use liquidity with ease. In the last decade, banking institutions have increased their loans to private entities as well. Since loans are relatively easy to obtain, thanks to an efficient credit reporting system, people have now started borrowing to finance vacations, cars, and homes, and to consolidate debt.

　　The third country is Japan, with a 194.3% domestic credit level as compared to its GDP. Lending practices saw a large decline from 2000 to 2001, but the rates have been gradually increasing over the last decade or so. They have yet to reach the levels seen in 1998 and 1999. Borrowers can obtain personal loans at traditional banks or through consumer credit companies. Demand has been increasing over the last few years, particularly due to an increasing interest in auto loans.

　　Other countries with high domestic credit relative to GDP are the United States (190.4%), Switzerland (174.1%), and Denmark (174%),

　　

Positive Effects

As previously mentioned, a positive relationship between high levels of domestic credit and economic growth exists. Utilizing domestic credit to finance growth can be more beneficial than borrowing funds internationally as it keeps interest revenues within the country. Business investments and development projects also provide jobs that help to generate tax income and business transactions. While domestic credit and loan availability may have significantly positive outcomes in the national economy, it is also associated with some negative results.

　　

Negative Effects

The high percentage of domestic credit per GDP is beneficial, but only up to a certain point. After reaching that threshold, the economic benefits begin to take a downturn. Making an excessive level of credit available can actually discourage personal savings and promote riskier business ventures which, when unsuccessful, result in decreased investment practices. The hinders economic growth which affects job opportunities and contributes to poverty. Additionally, the faster private loans grow, the slower the economy grows. Another important point for countries to consider is to whom are these loans being made available? Often, the people who might most benefit from a loan or credit line are not receiving them due to poverty constraints. This allows middle class and upper class individuals to continue advancing their financial and socioeconomic situations, all the while leaving those who need the most help falling ever farther behind.