Credit growth and its impact on profitability and liquidity in the local banking industry of South Africa and the United Kingdom

Pillay , Melissa Dianne
Journal Title
Journal ISSN
Volume Title
The study aims to review the impact of credit growth on local bank profitability and liquidity in both South Africa (SA) and the United Kingdom (UK) between 2015 and 2020. A quantitative approach is used in the study, using descriptive statistics and panel regression analysis. The sample data were extracted from The Banker database; this is a key source of data and analysis for the world’s banking sector, South African Reserve Bank (SARB), Statistics SA, and Trading Economics. Explanatory variables for profitability in the panel regression analysis include return on average assets (ROAA), return on average equity (ROAE), total assets, equity assets, loan assets, costto-income, Gross Domestic Product (GDP) growth rate, Herfindahl-Hirschman Index (HHI), consumer price index (CPI), the interest rate on loans, interest rate margin (IRM), unemployment rates, and credit growth. Explanatory variables for liquidity in the panel regression include ROAE, total assets, equity assets, GDP growth rate, CPI, interest rate on loans (IRL), IRM, unemployment, and credit growth. The findings indicate that credit growth is insignificant for bank profitability and liquidity in SA and the UK, so no relationship exists. The main issue is not credit growth per se but the combination of high credit growth, low provisioning, and looser lending. Based on the findings, a negative relationship exists between cost-to-income and bank profitability, reflecting that a higher cost-to-income ratio does decrease bank profitability in both SA and the UK. Other variables for SA were statistically significant: equity assets, total assets, the cost-to-income ratio, and GDP growth rate. In the UK, the following other variables were statistically significant: loan assets, total assets, cost-to-income, GDP growth rate, HHI, ROAE, CPI, and IRM. Further research can focus on expanding the period and the countries reviewed to assess credit growth in more depth.
A research report submitted partial fulfilment of the requirements for the degree of Master of Commerce to the Faculty of Commerce, Law and Management, Wits School of Accountancy, at the University of the Witwatersrand, Johannesburg, 2022