The Impact of Interest Rates on Business Loans Demand in The Gambia

Abstract

The main goal of this paper is to empirically examine whether there is a relationship between interest rates and the demand for business loans in the Gambia using monthly time series data ranging from January 2010 to December, 2020. We first test for stationarity of the variables to avoid spurious regression, using the Augmented Dickey Fuller Test and the variables were held stationary and test for Cointegration among the variables was done using the Johansen trace statistics test. Secondly we present and VECM to determine short-run and long run causalities on Business Loans demand that is derived from the independent variables and an OLS regression to determine the long-run relationship among the variables in the model. The OLS results shows that business loans demand in the long-run, has a negative relationship with real interest rates, and a positive relationship with real gross domestic product but both are statistically insignificant while Inflation and Exchange rate are negatively and positively related to Business Loans Demand respectively and statistically significant at the 99% confidence interval. The Johansen Cointegration Test reveals the existence of a long-run equilibrium relationship between business loans demand, real gross domestic product, real interest rates, inflation and nominal exchange rate. Furthermore, the results from the VECM shows that there exist a long term causality of 6.95% on Business Loans demand that is derived from GDP, Interest rate, Inflation and Exchange rate while there exist no short term relationship on business loans demand that is derived from the explanatory variable and no short run relationship derived from also the lag of private business loans itself.