Data show rise in domestic credit in developing countries

Access to finance, availability of credit, and cost of service are all key to financial development.  Credit finances production, consumption, and capital formation, which in turn lead to economic activity. The availability of credit to households, private companies, and public entities shows the worldwide growth of the banking and financial sector.

In this Q&A blog post, we examine domestic credit data trends as compiled in the World Development Indicators 2014, and what the data reveal about the changing financial landscape in developing countries.  

Q: What is "domestic credit provided by the financial sector"?
A: Domestic credit provided by the financial sector is credit that is extended to various sectors. The financial sector includes monetary authorities such as the central bank (the entity which controls the supply of a country's currency), deposit money banks (commercial "main street" banks), and other financial institutions.  In a few countries, governments may hold international reserves as deposits in the financial system rather than in the central bank.  Since claims on the central government are a net item (claims on the central government minus central government deposits), the figure may be negative, resulting in a negative figure for domestic credit provided by the financial sector. 

Q. What is "domestic credit to the private sector"?
A. Domestic credit to the private sector refers to financial resources provided to households and businesses by financial corporations in the form of loans, purchases of non-equity securities, trade credits, and other accounts receivable.  Additionally, in some countries, credit to the private sector may sometimes include credit to state-owned or partially state-owned enterprises.

Q. What are some of the patterns in domestic credit activity by region?
A. The chart below illustrates the relative size of total domestic credit and credit to the private sector as percentages of GDP in low- and middle-income countries in the World Bank's six regions.  In comparison with other regions, we see that the East Asia and Pacific region has provided the most domestic credit to the economy and private sector, at 141% and 122%, respectively, of its GDP. 

Q: What is the new credit indicator you've added in the WDI database and how is it different from the other two?
A: This year we've added a new indicator: domestic credit to the private sector by banks. This indicator captures the resources that domestic banks provide to private firms. The data complements the overall domestic credit provided by the financial sector (% of GDP) and domestic credit to the private sector (% of GDP) indicators.  However, for developing economies that are still at an early stage of financial development, the credit data by banks are almost the same as the data for total private credit. This is because banks are the dominant component of the financial sector, especially in places where there's a nascent or still-in-the-works stock market.  On the other hand, financial deepening (the expansion of financial services) and the corresponding changes in financial landscapes have changed this scenario in a growing number of countries, such as Thailand, Indonesia, Bolivia, Mexico, and Romania.  As a result, private credit provided by other financial institutions is increasing. 

Q: Is there one country where the data for domestic credit to the private sector by banks data was particularly informative?
A: Thailand's data exemplifies the changing financial landscape that is taking place there and in other developing countries in recent years.  It's a country where the total amount of credit provided by the financial sector was about 170% of GDP in 2012, with the amount provided to the private sector about 148% of GDP. Credit by banks to the private sector, though, was about 116% of GDP—a more than 30% gap, illustrating the recent rapid development of other financial institutions, such as credit card companies, leasing establishments, and personal finance enterprises.

The source for the domestic credit data is the International Monetary Fund (IMF)'s International Financial Statistics Database.

The IMF is soon planning to issue a combined Monetary and Financial Statistics Manual and Monetary and Financial Statistics Compilation Guide aligned to the 2008 System of National Accounts and the sixth edition of the Balance of Payments and International Investment Position Manual.  For the latest information, manual, and guidelines, visit the IMF website.

Q: Where can I go to see more data on domestic credit?
Below are the indicators we used in this blog post, along with their codes.  You may also browse the World Development Indicators (WDI) 2014, or go directly to the WDI online tables 5.1 and 5.5 to view these data.

Indicators and codes used in this post:

• Domestic credit provided by financial sector (% of GDP) FS.AST.DOMS.GD.ZS
• Domestic credit to private sector (% of GDP) FS.AST.PRVT.GD.ZS
• Domestic credit to private sector by banks (% of GDP) FD.AST.PRVT.GD.ZS