Bank Lending and Economic Growth in Malaysia

The trends in globalization, the impending liberalization and the recent Asian financial crisis, has brought renewed interest on the importance of bank credit and their impact on economic growth. In this context, this paper analyzes the role of commercial bank lending on economic growth in Malaysia focusing particularly on the issue of causality between commercial bank credit and economic growth. To this extent, the study attempts to answer the following question, “Does economic growth influence the extent of commercial bank lending or does commercial bank lending influence economic growth?” The findings indicate that an increase in commercial bank loans to the private sector has a direct effect on real income.