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Commercial Banks' Investment in Capital Market and Its Impact on Private Sector Credit

Author

Listed:
  • Iqbal , Kazi

    (Research Fellow, Bangladesh Institute of Development Studies (BIDS))

  • Islam, Mir Ariful

    (Head of Research, Prime Finance Asset Management, Dhaka)

Abstract

The period 2007-2010 is marked by boom and bust in the stock market, greater capital market investment by banks, higher profits of the banking sector and fall in growth of credit to the private sector in Bangladesh. In this backdrop, using bank level data for the period 1990-2009, the study examines the impact of banks’ greater investment in capital market on the expansion of private sector credit. Descriptive statistics shows that medium sized banks have much higher investment in capital market than the small and large banks. The investment in capital market is also higher for the 2nd generation banks and banks with merchant banks and brokerage houses. Both OLS and fixed effect results provide strong indication that banks’ greater investment in the capital market crowded out private investment during 2000-2009. The results show that 1 per cent increase in banks’ capital market investment is associated with 0.006 per cent to 0.007 per cent decrease in banks’ credit to the private sector. This crowding out effect is found to be more pronounced for the banks having merchant banks and brokerage wings

Suggested Citation

  • Iqbal , Kazi & Islam, Mir Ariful, 2014. "Commercial Banks' Investment in Capital Market and Its Impact on Private Sector Credit," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 37(3), pages 51-77, September.
    • Handle: RePEc:ris:badest:0575
    as

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    References listed on IDEAS

    as
    1. M. Shahe Emran & Subika Farazi, 2009. "Lazy Banks? Government Borrowing and Private Credit in Developing Countries," Working Papers 2009-09, The George Washington University, Institute for International Economic Policy.
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    More about this item

    Keywords

    Banking Sector; Capital Market Investment; Private Sector Credit;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

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