The Role of Domestic Credit to the Private Sector in Promoting Economic Growth

Abstract

Finance is a fundamental pillar of economic growth, with domestic credit to the private sector serving as a vital tool to stimulate investment, enhance productivity, and expand economic activity. In the Arab context, a critical question arises regarding the effectiveness of this type of financing in driving development, especially amid structural challenges faced by financial and banking systems in many countries of the region. This thesis aims to study the impact of domestic credit to the private sector on economic growth in a sample of ten Arab countries over the period 1990–2023, employing panel data econometric methods. Statistical analysis and model estimation were performed using R software. Gross Domestic Product (GDP) was used as the growth indicator alongside explanatory variables including investment, inflation, government spending, and unemployment. The results show a weak and statistically negative effect of domestic credit on economic growth, contradicting traditional hypotheses. The study emphasizes that fostering economic growth in Arab countries requires not only expanding credit volume but also comprehensive institutional and financial reforms to ensure financing is directed toward high value-added economic activities.