How international capital inflows and domestic financial institutional development affect domestic credit: Evidence from developing countries

Abstract

This study examines the effects of international capital flows segmented by borrower type (i.e., banks versus other types of financial institutions) and the development of domestic financial institutions on the level of domestic credit in 74 developing countries between 2005 and 2017. Through dynamic panel data estimation, this study yields four main findings. First, domestic credit is closely associated with international capital inflows to the banking sector, although the increase of foreign capital inflows to financial institutions other than banks harms domestic credit. Second, the development of domestic financial institutions is essential for increasing domestic credit in developing countries. Third, increasing international capital inflows to the banking sector will stimulate the level of domestic credit in countries with less developed domestic financial institutions and vice versa. Fourth, greater uncertainty in global economic and financial market conditions suppresses domestic credit in developing countries.

Keywords

• international capital inflows
• development of financial institutions
• domestic credit
• developing countries