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COMESA Monetary Institute

Central Bank of Sudan

Assessing the Bank Lending Channel of Monetary


Transmission Mechanism in Sudan using Panel Data
Analysis

By, Elwaleed A. Talha


Eissa A. Trayo

12th October 2017

Bank Lending Channel of Monetary Transmission Mechanism in Sudan 1

Abstract:
The study empirically probes Bank Lending Channel (BLC) of the monetary policy
transmission in Sudan using bi-annual bank-level panel data for the period 2010-2016. In
essence, the paper tests a couple of hypothesis to figure-out whether there is existence for the
BLC of the monetary policy transmission mechanism in Sudan, In addition to whether there is a
homogenous response across all banks to monetary policy shocks. Hence, it assumes that the cost
of finance as a proxy for the nominal interest rate has a pass-through effect to the domestic
prices. It also assumes that the reserve ratio as a policy variable influences the real sector of the
economy through banking credit. The preliminary findings indicate that there is evidence that the
BLC as a monetary policy transmission, exist in Sudan. The paper also figures out that the
response of individual banks to the monetary policy shock is not always the case to be
homogenous across banks. Most importantly, the findings of this paper have some policy
implications; any policy adopted by the central bank has a positive impact on economic growth
during the study period. However, the question still remains, does the current monetary policy
regime appropriate for the CBOS, or there is a need to shift to the inflation targeting regime. The
paper ends up with some policy recommendations.

Key words: BLC, monetary policy, modes of finance, cost of finance, inflation, liquidity, credit

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1.1 Introduction
The monetary policy transmits through various channels such as Interest Rate, Asset Prices,
Exchange Rate, and Bank Lending Channels. In other words, Monetary Policy Transmission is
the way in which a monetary policy action influences the price stability through the financial and
real sectors. In actual fact, it is expected that there would be a time lag for the impact of each
channel on the aggregate demand and ultimately price levels, as well as the sensitivity to any
supply or demand shock might potentially hit the economy.

To avoid any potential negative shock, the Central Bank of Sudan CBOS adopts policies that
maintain price and exchange rate stability to achieve the positive economic growth together with
the Ministry of Finance. In its pursuit to achieve the above mentioned macroeconomic
objectives, the CBOS manages the liquidity to meet the requirements of the economic activity
without creating inflationary pressures.

To achieve the ultimate goal of the CBOS, there are some serial stages that the monetary policy
formulation passes through. In Sudan, to get the policy formulated, the CBOS firstly begins by
the “Diagnostic Phase” or sometimes called the Situation Analysis, where the research
department conducts policy-oriented diagnostic “Thematic Papers” to identify the problematic
issues in the financial market in general and money market in particular. Moreover, the CBOS
investigates the policy-related challenges.

Subsequently, the CBOS undertakes the “Policy Formulation Phase” where the policy
recommendations are discussed extensively on different levels. In the pre-final step, the CBOS
announces its monetary policy to be applied by money market participants, namely commercial
banks. Finally, the Evaluation Phase comes over, for the CBOS to figure out by how much the
actual performance of the policy indicators deviates from its target.

Moreover, In Sudan, the monetary policy operation tends to be uniquely different from other
countries, in the way that it is profoundly depending on the Exchange Rate and Bank Lending
Channels. Due to the fully Islamic banking system, Interest Rate and Asset Price Channels are
less likely to be taken over by the Central Bank of Sudan (CBOS)

The Monetary Policy Framework in Sudan can better be presented through the link between the
total liquidity, total deposits, and banking credit. In other words, it puts up on the link between
the initial money creation which is stated on the CBOS’s balance sheet and the eventual money
created by market participants (commercial banks) in the form of deposits and credit. Hence, it is
recommended to examine the balance sheet of the central bank and the commercial banks
separately in order to have a better understanding and distinction between the base money and
the broad money.

To the best of our knowledge, there is some sort of limitation regarding the number of studies
carried out on the Monetary Transmission Mechanism in Sudan. Nevertheless, there is a dozen of

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relevant works of literature done in other sub-Saharan African countries (see the literature part
below). More broadly, we investigate and assess the existence of the monetary transmission
mechanism through Bank Lending Channel (BLC) in Sudan using commercial banks data as
well as some macroeconomic variables.

1.2 Literature views:


There is a numerous set of literature investigating the Bank Lending Channel (BLC) of the
monetary policy transmission in a pair of Sub-Saharan African countries. For instance, (Sichei
and Njenga 2012), (Sichei 2005), (Matousek and Solomon 2015), (Abuka, et al. 2015), (Simpasa,
Nandwa and Nabassaga 2014), (Walker 2013), and (Kiptui 2014).
In Kenya, for example, Sichei and Njenga (2012) use annual bank-level panel data for the period
2001-2008 using a modified IS/LM model with bank lending in the spirit of Bernanke and
Blinder (1988). Sichei (2005), on the other hand, examines the bank-lending channel (BLC) of
the monetary policy in South Africa using quarterly bank-level data for the period 2000_Q1 –
2004_Q4 (Sichei 2005).
Matousek and Solomon (2015) investigate the presence of the Bank Lending Channel (BLC) in
Nigeria using dynamic panel estimation on a sample of 23 banks in Nigeria for the period 2002-
2008 (Matousek and Solomon 2015). Moreover, Simpasa, Nandwa, and Nabassaga (2014)
examine the effect of the monetary policy on lending behavior of commercial banks in Zambia.
(Simpasa, Nandwa and Nabassaga 2014). More broadly, (Walker 2013) employs a panel data set
on bank lending and balance sheet to investigate the transmission efficiency of the monetary
policy, through the Bank Lending Channel, in five east African countries: Burundi, Kenya,
Rwanda, Tanzania, and Uganda.

Kiptui (2014) usefully analyzes the role played by banks and industry-specific factors as well as
macroeconomic variables in the determination of interest margins in Kenya’s banking sector.
Decomposition of the spread using income and balance sheet of the banking sector as a whole
and panel data analysis of 39 commercial banks yielded consistent results which highlight the
significant role played by banks and industry-specific factors and macroeconomic variables in
interest rate spread determination. (Kiptui 2014). In Columbia, however, Interest rate pass-
through appears to be incomplete and seems to respond to the varying importance of the credit
channel and the general state of the economy. (Vargas 2007) .

The literature also highlights some of the policy implications for some papers conducted on Bank
Lending Channel. Nearly all, provide strong evidence that BLC does exist in the examined
countries. For instance, (Sichei and Njenga, Does Bank Lending Channel Exist in Kenya: Bank
Level Panel Data Analysis 2012) proofed that the existence of the BLC in Kenya based on bank
liquidity and capitalization. In particular, banks with less liquid balance sheets and low total
capital to risk-weighted asset ratios are hit most by monetary policy, which has asymmetric
effects on banks and borrowers in Kenya. (Matousek and Solomon 2015) On the other hand,
finds that The BLC exists in Nigeria, where the sensitivity of the supply side for the loan-able
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fund to the change in the interest rate is pretty high, also the supply of loan tends to be
responsive to the liquidity only when the central bank adjusts the money supply. More precisely,
Abuka's findings are fully consistent with Matousek & Solomon’s one that the increase in
interest rates is associated with a reduction in the supply of bank credit both on the extensive and
intensive margins. However, the coefficient magnitudes indicate a moderate degree of
transmission compared to advanced economies (Abuka, et al. 2015).
The study reveals that Ghanaian banks lending behaviors are affected significantly by the
country’s economic activities and changes in money supply. The results of this study also
support previous studies, which point out that the central bank’s prime rate and inflation rate
negatively but statistically insignificantly affect banks lending. (Amidu 2006)

From the perspective of the cross-country analysis, Walker finds that there exists a Bank
Lending Channel of monetary policy transmission in five east African countries Burundi, Kenya,
Rwanda, Tanzania, and Uganda. (Walker 2013). Abuka (2015) points out those banks with
higher capital buffers transmit changes in the monetary policy stance significantly less than other
banks (Abuka, et al. 2015). While, Walker (2013) finds strong evidence that the lending
behavior of less well-capitalized banks and smaller banks is more sensitive to interest rate
changes than that of better-capitalized banks and larger banks; moreover, this effect is found to
be economically significant. (Walker 2013). Another study finds that small banks are more
sensitive to contractions in monetary policy rates than banks with bigger assets. (Aban 2013). On
the other hand, Simpasa, Nandwa, & Nabassaga (2014) reveal that the effect of monetary policy
on medium-sized banks is moderate while it is virtually non-existent for smaller banks. And
more importantly, the findings suggest that the ability of monetary policy to generate large
distributional effects also depends on whether or not it impacts the reserves of large-sized banks.
(Simpasa, Nandwa and Nabassaga 2014).

There is also a wide range of independent literature on the monetary policy transmission
mechanism. Peter N. Ireland (2005), investigates how aggregate output and employment respond
to the change in the nominal stocks and the policy rate as they are described by the monetary
transmission mechanism (Ireland 2005). Another paper examines the transmission mechanism of
the monetary policy in the Colombian economy (Hernando 2007). Aaron & Rishab (2010)
examine the transmission mechanism of New Zealand monetary policy and describe the
sequence of events that lead from a change in the expectations of future policy changes to
eventual inflation outcomes (Aaron and Rishab 2010). Benjamin & Lydia (2010) examines the
empirical question of how monetary policy is transmitted in Kenya. Using quarterly data to
estimate a Bayesian Vector Autoregressive Model (BVAR) (Benjamin and Lydia 2010). On the
other hand, Guinigundo (2012) studies the transmission of monetary policy in the Philippines
and points out to the direct and indirect instruments that have to be considered in evaluating the
transmission mechanism of the monetary policy (Guinigundo 2012).

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In Sudan, there is a shortcoming in terms of researches done on the Monetary Policy
Transmission Mechanism, except the IMF country report published in 2013 which contains some
information on the monetary policy framework in general, and the channels of the transmission
mechanism in particular (IMF 2013). Other sources have explicitly includes some information
relevant to the monetary policy transmission in Sudan such as (Ibrahim 2012) (AMF-BIS
2015).To avoid any misperception and to have well-credible information, the paper relies on the
Annual Monetary and Credit Policy released by the Central Bank of Sudan (2010-2016).
1.3 BLC in Sudan: an Islamic Perspective
One of the most prominent characteristics of the Sudanese banking sector is that it is a fully
Islamic system works in conformity with the regulations and directives approved by the CBOS.
It has undergone numerous developments since its inception and has so far created a relatively
advanced banking system and one of the leading systems in the application of Islamic banking
principles. Some scholars have highlighted the distinguishing experience of the Islamic banking.
(Magda 2005) (Babiker, et al. 2011) (KHALEEFA 2010) And (Elhiraika 2003).
Islamic banking system has a long history in Sudan, as it goes back to mid-1970, when two
Islamic banks operated in the country for the first time, funded mainly by private Saudi capital1.
(Onour and Abdalla 2013). According to (Babiker, et al. 2011), the idea of the Islamic banking
was initially brought up by the Islamic University of Omdurman, which introduced an article on
Islamic Economics as a major subject in the Department of Economics.
The idea soon later being applied on the ground under the initiative of Prince Mohammed Al-
Faisal Al Saud in February 1976 for the possibility of creating an Islamic Bank in Sudan during
the meeting held with the Sudanese President Gaafar Nimeiri. As a result, the Faisal Islamic
Bank was officially registered in 1977 (Babiker, et al. 2011). An IMF paper also points out that
the Islamic banking in Sudan had been introduced in 1984 and adopted for the country’s entire
financial system in 1992, is one of very few countries in the world with its financial system built
completely on Islamic principles. (Kireyev 2001).

Magda provides a practical overview of the Islamic Banking System in Sudan and points out to
the reasons behind its contribution to converting all existing banks into interest-free banks
(Magda 2005).

The starting point of the Sudan’s Islamic banking experience dates back to the mid-1970s dually
with conventional banks till 1983. The 1984 Civil Transactions Act CTC requires all financial
institutions operating in Sudan to fully comply with the Islamic laws. As a result, the entire
financial system including branches of foreign banks (such as Citi Bank) started to adapt it.
Over the period (1989-2005), the Islamic banking in Sudan was further deepened and integrated
with a wide range of Islamic financial products. The Comprehensive Peace Agreement with the
South Sudan in 2005 established the dual banking business. After the secession of the South
Sudan in June 2011, all banks and financial institutions in Sudan are working in compliance with
the Sharia Laws. (Elzubair 2013).

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1.4 The Finance Provided by Islamic Modes
Financing activities in Sudan according to modes of finance that complies with sharia (Islamic
law). Some of these modes are based on sharing profit and loss such as Mudarabah, Musharaka,
while others are not such as Ijara (leasing), free loan, deferred sale, and Murabaha.
Figure (1)
Islamic Modes Of Finance
Name of Mode Overview
Murabaha is considered the most common mode of finance used by banks and other financial
institutions operating in Sudan. In Murabaha transaction, the buyer knows the price at which
Murabaha the seller obtained the object to be financed, and agrees to pay a premium over that initial
price. More importantly, the Islamic bank or financial institution must own the item at the
time the customer buys it from them with a specified profit margin (Cost of Finance).
Musharaka mode of finance is based on sharing profit and loss between different parties. The
Musharaka transactions under Shari’a are more often for partnerships in trading transactions
Musharaka such as acquisition and sale of commodities, real estate or other similar goods. It is worth
noting that the risk weighting assigned to these assets varies depending on the type of asset.
In Mudaraba, the main rule governing the transaction is that losses are to be incurred by the
provider of funds, (the lender) i.e. the banker. The borrower does not bear any portion of the
Mudaraba loss unless the loss was due to misconduct or negligence on his/her part. A second basic rule
is that the user of the fund, i.e. the customer, does not guarantee the principal except in the
case of the misconduct or negligence.
Salam contracts are normally used to finance the purchase of agricultural products and thus
may be subject to different interpretations. For example, in Sudan, banks assign credit risk
weighting according to the period length before the realization into cash by the banks.
Salam
The cycle of the Salam contract is composed of three stages:
and • Cash disbursement of the finance to the customer.
Parallel Salam • Delivery of the commodity by the customer to the bank in settlement of the finance, i.e. in
kind settlement.
• Realization of the commodity into cash by the bank.
This mode of Islamic finance requires specific treatment of assets acquired for the purpose of
leasing out on the basis of (hire – purchase). Under Shari’a law, during the lease period
Islamic banks cannot transfer substantial risks and rewards of ownership to the lease.
Ijarah Therefore, during the term of the lease, these assets must be included in the balance sheet of
(hire-purchase) the Islamic bank. This is further evidenced by the fact that if the assets are impaired during
the lease period, the Islamic bank is liable to pay to the leaseholder any amount in excess of
the fair rental value.
Source: an internal study undertaken by Policy & Research Department of the Central Bank of Sudan, 2013. It was presented in
the Islamic Banking Conference held in Djibouti, 2013.

It should be noted that prohibiting the interest rate reinforces the fair distribution of the money
within the economy which strengthens the overall social welfare. In addition, it reduces the
prices of the goods that are continuously inflated by the value of the interest. Similarly, sharing
profits and losses contributes to minimizing the risk and facilitating its absorption by distributing
the risk between the two parties i.e. debtors and creditors.
It is worth mentioning that the Islamic banking does not allow for reselling the debt with another
debt even if the two debts have the same value. This is stemmed from Sharia’s view of the

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lending as a lenient contract and should not be for the sake of making the profit. Furthermore, the
Sharia does not assign a greater weight to the current value of the money.
1.5 The Structure of Banking Sector in Sudan
The inception of the Sudanese banking sector back to the early of the 19th century when there
were a couple of international banks opening e.g. Barclays Bank 1903. In general, the financial
sector in Sudan consists of three main institutions, banking, semi-banking, and non-banking
institutions. Due to the paper-specified issue, which the bank lending channel, the analysis would
concentrate mainly on the banking financial institutions (commercial banks) in the sense that
they are solely considered as the main channel of the monetary policy actions.
Historically, the banking sector in Sudan passes through various stages of reforms, from legal-
based to adjustment positions in-favor of commercial banks. As a result, the CBOS has
embarked on a set of adjustment programs in anticipation of improving the performance of the
banking sector in Sudan; legal framework has also been given a close attention in areas such as
risk management. Moreover, restructuring processes are also in progress to enhance the financial
conditions of banks. Over the past decades, there has been some sort remarkable modifications
applied on the banking system in Sudan such as the engagement in a variety of new-fashioned
activities related to microfinance, real estate project, and entrepreneurship.
The banking financial institutions, in which the credit channel works, are regulated by Central
Bank of Sudan CBOS, which is established in 1960 as a Monetary and regulatory authority of
the banking system. In 1991, the Banking Regulation Act BRA was introduced to give extra
powers to the central bank to regulate and supervise the banking financial institutions and the
other institutions that perform semi-banking business.
As it can be seen on Table (1) the banking sector in Sudan consists of 37 banks, including 8
foreign banks and one government-owned bank. However, public banks dominate the sector and
account for around 50 percent of total banking sector assets. These banks are composed of
various combinations of ownership and nature of activities and specialization.
One of the most prominent characteristics of the Sudanese banking sector is that it is a fully
Islamic system in accordance with the regulations and directives approved by the Central Bank
of Sudan. It has undergone several developments since its inception and has so far created a
relatively advanced banking system and one of the leading systems in the application of Islamic
banking principles.
The banking sector in Sudan has undergone significant changes over the last decades through
restructure, and considerably increased capitalization, with good loans to deposits ratios and low
exposure to loans, as a result of robust financial regulation, including high reserve and liquidity
requirements for banks. As a result of this, the role of the banking sector has increased
significantly in the recent years, the number of banks’ branches almost doubled to about 650 in
2017, and banks engaged in a range of new activities, such as financing the real sector projects,
and provide microfinance services to small enterprises especially in rural areas, which have
previously been out of their reach.

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The secession of South Sudan in 2011 posed substantial challenges to Sudanese bank reform
efforts as a result of the loss of oil revenues, combined with the resulting depreciation of the
Sudanese Pound and a high inflation rate.
Recently the Authorities have embarked on a series of reforms in attempts to strengthen the
financial system and improve the performance of the banking sector. Supervisory, legal, and
institutional frameworks have been improved, particularly in the areas of corporate governance,
risk management, and provisioning. Restructuring processes are also underway for many banks
to improve their financial position.
Table (1) shows that the number of banks operating in Sudan is 37 banks distributed in different
states and has 732 branches. Sudan banking assets recorded an increase of 97.8% on average
during the period (2005-2016), while credit average growth is 22.9% during the same
period.(CBOS, 2016)
Table (1)
The Structure of the Banking System in Sudan

Item 2015 2016


A. Specialized Banks 6 5
Joint 1 2 1
Government 4 4
B. Commercial Banks 31 32
Joint 22 24
Government 1 1
Foreign 8 7
Grand Total (a) + (b) 37 37
Sources: Central Bank of Sudan – Banks Affairs Dept. *

1
Joint Banks are the Banks in which the local sectors (Governmental or Private) and the foreign

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1.6 Monetary Policy Framework in Sudan:
Central Banks around the world follow different Monetary Policy regimes that vary based on the
over-all structure of their economies. Exchange Rate Targeting Regime (ERT) for example, is
likely to be adopted by most of the developed and transitional economies that have a huge
reserve of foreign currency. In such a regime, the central bank set a target and allows the
exchange rate to fluctuate around this target or within a narrow target band. Yet, the ERT is less
possibly to be taken-up by central banks of developing countries due to the impossible trinity.
There is also, the Inflation Targeting Regime IT, where central banks set a target for the inflation
rate, and adjust the base of money to hit that end, nonetheless, a couple of prerequisites need to
be met to have a very successful IT regime such as Transparency and Accountability and more
importantly central bank independency. The Quantitative Easing QE, on the other hand, is
another common regime followed by Central Banks of advanced economies such as the Bank of
Japan and Bank of England, it happens when a Central Bank issue securities to the market
participants (commercial banks) through repurchase agreements. Monetary Aggregate Regime is
commonly used among central banks of developing countries.
There is some sort of limitation on the literature view provided on the monetary policy
framework for Sudan. However, (Coats, 2007) provides a tremendous description on this issue,
which can better be presented through the link between the total liquidity, total deposits, and
banking credit. In other words, it puts up on the link between the initial money creation which is
stated on the CBOS’s balance sheet and the eventual money created by market participants
(commercial banks) in the form of deposits and credit. Hence, it is useful to examine the balance
sheet of the central bank and the commercial banks separately in order to have a better
understanding and distinction between the base money and the broad money.
Figure (2): Monetary Policy Framework in Sudan

Intermediate Operating Monetary Policy


Final Targets
Target Targets Instruments

Reserve Legal Reserve


Inflation Money Supply
Money Requirements

Economic Open Market


Growth Operations

The monetary policy framework in Sudan is the result of the structural reform initiated by the
Central Bank of Sudan in the early 1990s, and reflects the CBOS’s mandate, putting emphasis on
price and financial stability. In 1991, the Banking Regulation Act BRA was introduced, followed
by an Adjustment Position Program (APP). During 1998-1999, The APP was underpinned by a

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Comprehensive Banking Policy Program over 1999 – 2000. All these programs together aimed
to give extra powers to the central bank to regulate and supervise the banking and Non-banking
financial institutions and the other institutions that perform semi-banking business. (CBOS,
2013).

1.7 Monetary Policy Operation in Sudan:


In this part, the paper discusses the general framework of the monetary policy in Sudan, and how
it is formulated in accordance with Islamic principles. Subsequently, with a broader overview,
the paper sheds light on the transmission mechanism of the monetary policy from an Islamic
point.

In general, there are some serial steps that the monetary policy formulation passes through. In
Sudan, to get the policy formulated, the CBOS firstly begins by the “Diagnostic Phase” or
sometimes called the situation analysis, where the research department conducts researches
“Thematic Papers” to identify the problematic issues in the money market and financial market.
Additionally, the CBOS is likely to analyses the challenges the monetary policy has been
encountering or is expected to encounter in a year ahead

Subsequently, the CBOS undertakes the Policy Formulation Phase where the policy
recommendations constructed from the diagnostic phase are expected to be discussed extensively
on different levels. In the pre-final step, the CBOS announces its monetary policy in order to be
applied by money market participants. Finally, the Evaluation Phase comes over, for the CBOS
to figure out by how much the actual performance of the monetary policy deviates from its target
set on the formulation phase.

Monetary Policy and Regulatory Initiatives


In this part, the paper highlights the major inventiveness accomplished by the CBOS in the
Islamic banking to further improve the monetary policy stance in Sudan. The CBOS has proudly
made several strategic developments in its pursuit to overcome the challenges facing the conduct
of monetary policy and assuming its supervisory roles. These original initiatives can be outlined
in Figure (5) below.

1.8.1 Monetary Policy Initiatives


As a central bank operating under full-fledged Islamic banking system, the CBOS faces two
main challenges in pursuing its monetary policy. These challenges represent in the lack of short-
term securities as well as the shallow capital and financial markets which negatively affect the
liquidity management in the banking system and the economy in general. To overcome these
challenges, the CBOS established and developed the following bodies and monetary policy
instruments See Figure (3):

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Figure (3) Monetary Policy Initiatives and Tools in Sudan

Overview Objectives
The year 2014 witnessed the establishment of an important The LMF aims at improving the banks’ liquidity
Shariah-compliant policy instrument that serves as a management through collaborative redistribution
vehicle to provide liquidity to the banks and promote of liquidity surpluses to finance banks with
Liquidity interbank market. This unique Islamic banking product is liquidity shortages. More importantly, it
Management known as the Liquidity Management Fund (LMF), which is minimizes the CBOS interventions so as to ease
Fund (LMF) originally established by the CBOS. Through the LMF, the the inflationary pressures resulting from such
CBOS allows commercial banks to borrow and lend among interventions.
them self and then turn to the Central Bank and as a lender
of last resort.
SFSC was found in May 1998 as a result of joint venture Since its inception, SFSC has been taking the
between the Central Bank of Sudan CBOS owning 99% of responsibility of managing and supervising all the
the total capital and the Ministry of Finance and National operational aspects related to the securities’
Sudan Financial Economy (MFNE) owning 1% of the capital. the company auctions in the primary market along with
Services was registered at the Registrar of Companies Chamber in marketing Islamic financial securities in the
Company (SFSC) accordance with the Companies Act 1925. secondary market. The establishment of SFSC was
the first step towards developing innovative
Islamic securities to be used afterward by the
Central Bank of Sudan in OMO operations.
The GMCs introduced in 1999 as a monetary policy tool The issuance of these certificates achieves the
aims at managing liquidity, financing budget deficit, following objectives:
attracting national savings, encouraging investment, and • Managing liquidity on both macro. and micro.
increasing financial awareness. More broadly, GMCs are levels through open market operations (OMOs).
equity–based financial securities allow their owners to • Covering part of the budget deficit while keeping
share the profits or losses resulting from the operations of the level of seigniorage to the minimum, and
Government all government companies and corporations whose equity hence easing inflationary pressures resulting from
capitals constitute the fund from which these certificates the increase in the money supply.
Musharaka were issued. The CBOS employs GMCs in favor of the • Attracting national savings and encouraging
Certificates monetary policy conduction through OMO. The maturity of investments as well as increasing financial
(GMCs) GMCs varies from 3 months to one year maturity. awareness among Sudanese.
It is worth noting, that GMCs are traded by various market
participants, such as banks, financial institutions, private
and public sector companies and individuals.

Government Investment Certificates (GICs) are medium- The GICs are used for financing the development
term Shariah-compliant securities, based on various projects and they succeeded in providing financial
contracts financed by the Ministry of Finance and National resources for these projects.
Economy Sudan via the Istisna’, Murabaha and Ijara It is worth noting that the GICs represent one of
tools. Issuance of the GIC Sukuk is considered analogous the most important instruments used by the CBOS
to the conventional securitization, where the Ministry of in managing the liquidity on the aggregate level
Finance acts as the originator. More precisely, the GICs and it is also used by the government in financing
Government are based on a limited Mudharaba, which means that the the budget deficit and attracting national savings.
investment raised funds are invested solely in the projects stipulated in
the original contract.
certificates
(GICs)

Ijara certificates of the Bank of Sudan (CICs) are backed CICs have been primary designed to manage
Central Bank of by the buildings owned by the Central Bank of Sudan. banking system’s liquidity and they are proven to
Sudan Ijara These certificates use asset-backed securities based on be quite effective for adjusting liquidity and
Certificates Ijara mode of financing, the issuance is limited by the stock achieving the targeted levels.

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(CICs) of CBOS buildings. The CBOS assets are evaluated at the
end of each term by independent evaluators.
In 1991 the Central Bank of Sudan established a Since its early year of establishment, the
specialized consortium fund for agricultural finance, to consortium was considerably successful in
which all banks were obliged to subscribe. The main realizing its objectives, which later encouraged
Consortium objective of that fund was to overcome many problems banks to voluntarily establish a number of
Financing associated with the finance of agriculture, beside provide consortiums to finance some of priority sector
finance on commercial basis away from unduly utilized projects.
subsidy, and reduce the budgetary burden resulting from
efficient government finance to agriculture.
Source: Central Bank of Sudan (CBOS)

2.1 The Methodology And Data

As the core objective is to investigate the existence, if any, of the Bank Lending Channel
(BLC) of Monetary Policy Transmission in Sudan. We use micro-bank level data for 30
commercial banks using bi-annually data for 2000 - 2016. To get this task done, the paper
follows a framework similar to that one adopted by Osman Nymongo (2016) which in turn is
constructed from Kashyap and Stein (2000) and Walker (2013) who exploit the heterogeneous
nature of commercial banks to establish whether or not the BLC exists in Kenya.

The paper initially gives a theoretical overview about the fixed effect estimators based on what is
described by (Wooldridge 2009), it also discusses the random effect estimator which seems an
appropriate technique when the unobserved effect is uncorrelated with all the explanatory
variables (Wooldridge 2009).

Fixed Effect Estimator:

In order to estimating the BLC in Sudan, The most appropriate econometrics model used in this
study is based on the panel data estimation by (Baltagi 2015) , (Arellano and Bond 1991),…et

𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝑋𝑋𝑖𝑖,𝑡𝑡 + 𝜀𝜀𝑖𝑖𝑖𝑖 (1)

Where 𝑦𝑦𝑖𝑖,𝑡𝑡 denotes to dependent variable, is observed for all cross sections (i= 1, 2…. N), over
time t, (t-1, 2 …T). 𝛽𝛽1 𝑋𝑋𝑖𝑖,𝑡𝑡 is the independent variable while 𝜺𝜺𝒊𝒊𝒊𝒊 is the error term. The model
allows for fixed effect across banks, as indicated by the banks- specific intercept.

To eliminate the fixed effect, sometimes, among many ways, economists use the first
differencing method or the fixed effect transformation which works better under certain
assumptions. (Wooldridge 2009) Let us assume a model with a single explanatory variable, for
each 𝑖𝑖.

𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛽𝛽1 𝑥𝑥𝑖𝑖,𝑡𝑡 + 𝑎𝑎𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖 (2)

Where t = 1, 2,….., t, now, for each𝑖𝑖, average this equation over time, we get

𝑦𝑦�𝑖𝑖 = 𝛽𝛽1 𝑥𝑥̅𝑖𝑖 ,𝑡𝑡 + 𝑎𝑎𝑖𝑖 + 𝑢𝑢�𝑖𝑖𝑖𝑖 (3)

12
Where y� i = T −1 ∑ti=1 yit 1 because 𝑎𝑎𝑖𝑖 is fixed over time it appears in equation (2) and
equation (3)

By subtracting equation (3) from equation (2), for each t , we wind up with

𝑦𝑦𝑖𝑖𝑖𝑖 − 𝑦𝑦�𝑖𝑖 = 𝛽𝛽1 (𝑥𝑥𝑖𝑖𝑖𝑖 − 𝑥𝑥̅ 𝑖𝑖 ) + 𝑢𝑢𝑖𝑖𝑖𝑖 − 𝑢𝑢�𝑖𝑖𝑖𝑖 , 𝑡𝑡=1,2,….,𝑇𝑇, (4)

Or

𝑦𝑦̈ 𝑖𝑖 = 𝛽𝛽1 𝑥𝑥̈ 𝑖𝑖,𝑡𝑡 + 𝑢𝑢̈ 𝑖𝑖𝑖𝑖 𝑡𝑡 = 1,2, … . 𝑇𝑇 (5)

Where 𝑦𝑦̈ 𝑖𝑖 = 𝑦𝑦𝑖𝑖,𝑡𝑡 − 𝑦𝑦�𝑖𝑖 is the time-demeaned data on 𝑦𝑦𝑖𝑖𝑖𝑖 and similarly for 𝑥𝑥̈ 𝑖𝑖 ,𝑡𝑡 𝑎𝑎𝑎𝑎𝑎𝑎 𝑢𝑢̈ 𝑖𝑖𝑖𝑖 .The fixed
effect transformation is also called the within transformation or the within estimator. Adding
more explanatory variables to the equation causes few changes, consider the original unobserved
effect model as follow,

𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛽𝛽1 𝑥𝑥𝑖𝑖𝑖𝑖1 + 𝛽𝛽2 𝑥𝑥𝑖𝑖𝑡𝑡2 + … + 𝛽𝛽𝑘𝑘 𝑥𝑥𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑎𝑎𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖 𝑡𝑡 = 1,2, … . , 𝑇𝑇, (6)

𝑦𝑦̈ 𝑖𝑖 ,𝑡𝑡 = 𝛽𝛽1 𝑥𝑥̈ 𝑖𝑖𝑖𝑖1 + 𝛽𝛽2 𝑥𝑥̈ 𝑖𝑖𝑖𝑖2 + … + 𝛽𝛽𝑘𝑘 𝑥𝑥̈ 𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑢𝑢̈ 𝑖𝑖𝑖𝑖 𝑡𝑡 = 1,2, … . , 𝑇𝑇, (7)

2.1.1 Random Effect Estimator:

In terms of the random effect, the paper assume that each intercept as the result of a random
deviation from some mean intercept , or to estimate parameters describing the distribution from
which each bank’s intercept is drawn .

𝑦𝑦𝑖𝑖𝑖𝑖 = 𝛽𝛽0 + 𝑋𝑋𝑖𝑖𝑖𝑖 𝛽𝛽 + 𝑍𝑍𝑖𝑖 𝛾𝛾 + 𝛼𝛼𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖 (8)

We begin our discussion in this part by equation (7), where we explicitly includes an intercept so
that we can make the assumption that the unobserved effect,ai , has zero mean . We would
usually allow for time dummies among the explanatory variables as well. In using fixed effects
or first differencing, the goal is to eliminate 𝑎𝑎𝑖𝑖 because it is thought to be correlated with one or
more of the explanatory variables. (Wooldridge 2009) In case that ai is uncorrelated with each
explanatory variable in all time periods. Then, using a transformation estimator tends to be
insufficient.

𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝑥𝑥𝑖𝑖𝑖𝑖1 + 𝛽𝛽2 𝑥𝑥𝑖𝑖𝑖𝑖2 + … + 𝛽𝛽𝑘𝑘 𝑥𝑥𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑎𝑎𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖 𝑡𝑡 = 1,2, … . , 𝑇𝑇, (9)

Equ (6) becomes a random effect model when we assume that the unobserved effect 𝑎𝑎𝑖𝑖 is
uncorrelated with each explanatory variable as follows:

𝐶𝐶𝐶𝐶𝐶𝐶(𝑥𝑥𝑖𝑖𝑖𝑖𝑖𝑖 , 𝑎𝑎𝑖𝑖 ) = 0 𝑡𝑡 = 1,2, … . , 𝑇𝑇; 𝑗𝑗 = 1,2, … . , 𝑘𝑘

The ideal random effect assumptions include all of the fixed effects assumption plus the
additional requirement that 𝑎𝑎𝑖𝑖 is independent of all explanatory variables in all time periods. In

13
case the composite error term is defined as vit = ai + uit . Equation (9) can be rewritten as
follows

𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝑥𝑥𝑖𝑖𝑖𝑖1 + 𝛽𝛽2 𝑥𝑥𝑖𝑖𝑖𝑖2 + … + 𝛽𝛽𝑘𝑘 𝑥𝑥𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑣𝑣𝑖𝑖𝑖𝑖 , (10)

Because 𝑎𝑎𝑖𝑖 is in the composite error in each time period, the 𝑣𝑣𝑖𝑖𝑖𝑖 are serially correlated across
time.

𝜎𝜎𝑎𝑎2�
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶(𝑥𝑥𝑖𝑖𝑖𝑖 , 𝑣𝑣𝑖𝑖𝑖𝑖 ) = (𝜎𝜎𝑎𝑎2 + 𝜎𝜎𝑢𝑢2 ), 𝑡𝑡 ≠ 𝑠𝑠, Where 𝜎𝜎𝑎𝑎2 = 𝑉𝑉𝑉𝑉𝑉𝑉(𝑎𝑎𝑖𝑖 ) and 𝜎𝜎𝑢𝑢2 = 𝑉𝑉𝑉𝑉𝑉𝑉(𝑢𝑢𝑖𝑖𝑖𝑖 )

To eliminate the serial correlation in the errors requires sophisticated matrix algebra but the
transformation itself is simple, which is between zero and one.

2
𝜎𝜎
λ = 1 − � 𝑢𝑢�(𝜎𝜎 2 + 𝑇𝑇𝑇𝑇 2 ) � 1/2 (11)
𝑢𝑢 𝑎𝑎

Then, the transformed equation turns out to be

𝑦𝑦𝑖𝑖𝑖𝑖 − λ𝑦𝑦�𝑖𝑖 = 𝛽𝛽0 (1 − λ)𝛽𝛽1 (𝑥𝑥𝑖𝑖𝑖𝑖1 − λ𝑥𝑥̅𝑖𝑖1 ) + ⋯ + 𝛽𝛽𝑘𝑘 (𝑥𝑥𝑖𝑖𝑖𝑖𝑘𝑘 − λ𝑥𝑥̅𝑖𝑖𝑘𝑘 ) + (𝑣𝑣𝑖𝑖𝑖𝑖 − λ𝑣𝑣̅𝑖𝑖 ), (12)

Where the over-bar again denotes the time average. This is very interesting equation, as it
involves quasi-demeaned data on each variable. The fixed effects estimator subtracts the time
averages from the corresponding variables, while the random effects transformation subtract a
fraction of that time average, where the fraction depends on σ2u and σ2a and the number of time
periods, T. (Wooldridge 2009)

To choose between the random and fixed effects, we will use the Hausman Test to inspect
whether the model is appropriately specified as a random effect model; the paper will be using
the Housman Test to check the validity of the random effect if it is uncorrelated with the
explanatory variable, as follows:

𝐸𝐸[𝑢𝑢𝑖𝑖 /𝑋𝑋𝑖𝑖 ] ≠ 0 …………………………fixed effect

𝐸𝐸[𝑢𝑢𝑖𝑖 /𝑋𝑋𝑖𝑖 ] = 0 ………………………… Random effect

Due to many variables used in this study are dynamic in nature, the panel data approach allow
the better understand the dynamics of adjustment, Balestra and Nerlove (1966), Baltagi and
Levin (1986) , Arellano and Bond (1991) .

𝑦𝑦𝑖𝑖𝑖𝑖 = 𝛾𝛾𝛾𝛾𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽𝑋𝑋𝑖𝑖𝑖𝑖 + 𝛼𝛼𝑖𝑖 + 𝛼𝛼𝑖𝑖 + 𝑍𝑍𝑖𝑖 𝛾𝛾 + +𝑢𝑢𝑖𝑖𝑖𝑖 (3)

14
Arellano and Bond (1991) argue that additional instruments can be obtained in a dynamic panel
data model if one utilizes the orthogonality conditions that exist between lagged values of 𝑦𝑦𝑖𝑖𝑖𝑖
and disturbances 𝑣𝑣𝑖𝑖𝑖𝑖 as follows:

yit = φyi,t−1 + vi + uit


vi ~iid(O , σ2v )

uit ~iid(O , σ2u )

The study empirically probes Bank Lending Channel (BLC) of the Monetary Policy
Transmission in Sudan using bi-annual bank-level panel data for the period 2010-2016. In
essence, the paper examines two core questions, for each question, the paper set-up hypothesis to
answer the following questions:

- Does bank lending channel of monetary policy transmission exists in Sudan?


- Are there important cross-sectional differences in the way that banks, with varying
characteristics, respond to monetary policy shocks?

The null would be examined against the alternative for each of the hypothesis below:

𝐻𝐻0 : 𝛽𝛽0 = 0, 𝛽𝛽1 = 0, … … … … , 𝛽𝛽12 = 0

𝐻𝐻1 : 𝛽𝛽0 ≠ 0, 𝛽𝛽1 ≠ 0, … … … … , 𝛽𝛽12 ≠ 0

The paper assumes that there would be a time lag for the credit channel to have its impact on the
aggregate demand, and the inflation rate ultimately.

Higher Cost of Finance Reduces the Banking Credit to the Market and Increase Inflation
Rates. To test this hypothesis, there is a need to incorporate a mixture of macroeconomic
variables and financial indicators as well as some ratios, if needed, such as the Cost of Finance
CF, Banking Credit BC, Non-Performance Loan, Inflation Rates (change in CPI) , GDP growth,
Total Assets, Return on Equity, and Total Liquidity. More importantly, there would be a time lag
for the cost of finance to have its impact first hand on the price levels eventually.

According to this hypothesis the monetary policy transmission through bank lending in Sudan
can be schematically presented as follows:

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑓𝑓(𝐶𝐶𝐶𝐶𝐶𝐶 −, 𝑁𝑁𝑁𝑁𝑁𝑁−, 𝑇𝑇𝑇𝑇+, 𝐿𝐿𝐿𝐿𝐿𝐿 −, 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 +, 𝜋𝜋 −)

𝐻𝐻0 : 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 = 0

𝐻𝐻1 : 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 ≠ 0

15
The null hypothesis 𝐻𝐻0 indicates that the cost of finance as a proxy for the short-term interest
rate does not have a pass-through effect to the prices levels, while the alternative 𝐻𝐻1 indicates
that it does.

Lower Reserve Requirement Reduces the Inflationary Pressure Through the Banking
Credit. This hypothesis assumes that the Reserve Ratio has a significant statistical relationship
with inflation rate and assumes that there would be a time lag to have its impact on the inflation,
this time lag accompanied with uncertainty.

𝐵𝐵𝐵𝐵𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑓𝑓(𝑅𝑅𝑅𝑅 −/+, 𝑇𝑇𝑇𝑇 +, 𝐿𝐿𝐿𝐿𝐿𝐿 +, 𝑀𝑀𝑀𝑀 +, 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 +, 𝜋𝜋 −)

𝐻𝐻0 : 𝛽𝛽𝑅𝑅𝑅𝑅 − 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 = 0

𝐻𝐻1 : 𝛽𝛽𝑅𝑅𝑅𝑅 − 𝛽𝛽𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝛽𝛽𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 ≠ 0

The null hypothesis 𝐻𝐻0 : 𝛽𝛽𝑅𝑅𝑅𝑅 = 0 indicates that the reserve ratio as a policy variable does not
have a pass through effect to the domestic prices, while the alternative H1 : βRR ≠ 0 indicates that
it does.According to this hypothesis the pass through effect of the CBOS policy stance to the
inflation rate and output can be presented as follows:

The sensitivity of individual banks to the Monetary Policy shock is not homogenous. This
hypothesis assumes that there is heterogeneity across banks. Therefore, we assume that the
response to a monetary policy shock is not expected to be the same across banks on the
aggregate level. However, it is more likely to vary from bank to another. For instance, when the
central bank increases the reserve requirements, some banks are not affected by this hike, they
keep lending in spite of the increase in RR.

𝐻𝐻0 : 𝛽𝛽𝐶𝐶𝐶𝐶𝐶𝐶 = 0 𝑎𝑎𝑎𝑎𝑎𝑎 𝛽𝛽𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ℎ =0

𝐻𝐻1 : 𝛽𝛽𝐶𝐶𝐶𝐶𝐶𝐶 ≠ 0 𝑎𝑎𝑎𝑎𝑎𝑎 𝛽𝛽𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ℎ ≠0

The null hypothesis indicates that the response to the monetary policy action does not vary a
cross banks, while the alternative indicates to the homogenous response from all banks. This
hypothesis will answer the question of, Does bank lending channel of monetary policy
transmission exist in Sudan? It would be tested throughout the monetary policy variables in the
model e.g. Reserve Ratio (RR) and Banking Credit (BC).

To test whether the model is appropriately specified as a random effect model, the paper will be
using the Housman Test to check the validity of the random effect if it is uncorrelated with the
explanatory variable, as follows:

𝐸𝐸[𝑢𝑢𝑖𝑖 /𝑋𝑋𝑖𝑖 ] ≠ 0 …………………………fixed effect

𝐸𝐸[𝑢𝑢𝑖𝑖 /𝑋𝑋𝑖𝑖 ] = 0 ………………………… Random effect

16
2.2. Model Set-Up
To get this task done, the paper follows a framework similar to that one adopted by Osman
Nymongo (2016) which in turn being constructed from Kashyap and Stein (2000) and Walker
(2013) who exploit the heterogeneous nature of commercial banks to establish whether or not the
BLC exists in Kenya.
n
∆ ln( Li ,t ) = β1∆ ln( Li ,t −1 ) + β 2 ∑ IRt −n + β 3 log(Sizei ,t ) + β 4 Liqi ,t + β 5 KAPi ,t + β 6 X t + β 7 Dit + vi + ε i ,t
n =0
Where; ∆𝐼𝐼𝐼𝐼(𝐷𝐷𝑖𝑖,𝑡𝑡 ) is the change in total lending by bank i at time t; IR is the monetary policy
variable, usually interest rate at t; log⁡(𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡 ) is a measure of size of bank i at time t; 𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖,𝑡𝑡 is a
measure of liquidity of bank i at time t; 𝐾𝐾𝐾𝐾𝐾𝐾𝑖𝑖,𝑡𝑡 is the total liquid assets to total assets of bank i at
time t; 𝑋𝑋𝑖𝑖,𝑡𝑡 is a vector of macroeconomic variables which may affect the operating environments
for banks; 𝐷𝐷𝑖𝑖,𝑡𝑡 is a various qualitative characteristics of commercial banks such as private or
public; domestic or foreign; 𝑣𝑣𝑖𝑖,𝑡𝑡 is the time invariant error component; 𝜀𝜀𝑖𝑖,𝑡𝑡 is the error term with
the usual properties.

To some extent, the paper introduces some variables that are note internalized in Nymongo’s
model such as the cost of finance (CF) , growth of money supply (Mg), and spread rate 2, the
paper is also eager to include some macroeconomic variables that varied a cross time and fixed a
cross banks such as, exchange rate, inflation rate, growth of money supply. Thus, our model
would take the following form:
n
∆TC i ,t = β 1 ∆ log(TC i ,t −1 ) + β 2 ∑ cf t − n + β 3 log(sizei ,t ) + β 4 Liq i ,t + β 5 NPLi ,t + β 6TAS i ,t + β 7 inf i ,t −1 +
n =0 (14)
β 8TDi ,t + β 9 M 2 i ,t −1 + β10 RRi ,t + β11 X t + β12 Dit + vi + ε i ,t

Where; ∆ 𝐼𝐼𝐼𝐼(𝑇𝑇𝑇𝑇𝑖𝑖,𝑡𝑡 ) indicates to the change in credit by bank i at time t; 𝑇𝑇𝑇𝑇𝑖𝑖,𝑡𝑡 refers to the cost
of finance, which acts as a monetary policy variable. In this model, cost of finance is used as a
proxy for the interest rate, in other words it is the lending rate that commercial banks charge
against the credit provided. log(Sizei ,t ) is a measure of size of bank i at time t and usually refers
to a bank total assets; 𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖,𝑡𝑡 is a measure of liquidity of bank i at time t; NPLi,t refers to the non-
performance loan incurred by bank i at time t; 𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖,𝑡𝑡 is the total assets of bank i at time t; 𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡
refers to reserve ratio announced by the central bank for by bank i at time t; 𝑇𝑇𝑇𝑇𝑖𝑖,𝑡𝑡 refers to the
total deposits in bank i at time t. 𝐷𝐷𝑖𝑖,𝑡𝑡 is a dummy variable. 𝛾𝛾𝑖𝑖,𝑡𝑡 Is the time invariant error
component; 𝜀𝜀𝑖𝑖,𝑡𝑡 is the error term with the usual properties.

2
Spread rate is the difference between the lending rate and borrowing rate. The lending rate is proxyed by the
cost of finance and the borrowing rate is proxyed by the portion of the profit given to the investment deposits
holders. There is an effort to get the borrowing rate. Yet, as soon as it is become available, it will be incorporated.

17
2.3. Empirical and Estimation Results
The study empirically investigates Bank Lending Channel (BLC) of the Monetary Policy
Transmission in Sudan using bi-annual bank-level panel data for the period 2010-2016. In
essence, the paper examines two core questions, for each question, the paper set-up a hypothesis
to be tested with the model results. The first hypothesis points out that there is a negative
relationship between bank lending and costs of finance (interest rate) as well as inflation rates.
The second hypothesis assumes that lower reserve requirement reduces the inflationary pressure
through the banking credit. While the third hypothesis assumes the sensitivity of the individual
banks to the Monetary Policy shock is not homogenous. For each hypothesis, we assume that
there would be a time lag for the credit channel to have its impact on the aggregate demand, and
the inflation rate ultimately.

Table (2) Descriptive Statistics

TC TC LIQ INF CF TAS RR


Mean 1.35 1.35 8.78 0.25 0.11 2.39 1.09
Median 7.04 7.04 5.08 0.21 0.11 1.36 5.78
Maximum 1.15 1.15 8.47 0.44 0.13 1.98 8.80
Minimum 0.58 0. 58 3.49 0.11 0.09 1.33 1.50
Std. Dev. 1.87 1.87 1.19 0.11 0.01 3.09 1.37
Note: TC = total credit with time lag 1, TC-total credit, LIQ=total liquidity, INF=inflation rates, CF=cost of finance as a proxy
for the interest rate, TAS= total assets, RR- reserve ratio.`

This Table summarizes the descriptive statistics of banks characteristic variables as well as
interacting some macro variables used to the model specification. The average amount of the
credit growth was 1.35 percent with a standard deviation 1.87 percent. The maximum credit
growth provided to economic activities was 1.15 percent. The average growth of total assets was
2.37%, the average of inflation was recorded 25.1%, and this mainly attributed to the cession of
south Sudan shock in mid 2011 due to loss more than 65% of oil return.

18
Table (3) Choosing between pooled estimation method and the fixed effect method

Redundant Fixed Effects Tests


Pool: POOL01
Test cross-section fixed effects
Effects Test Statistic d.f. Prob.
Cross-section F 8.171900 (29,294) 0.0000
Cross-section Chi-square 195.080889 29 0.0000
Cross-section fixed effects test equation:
Dependent Variable: TC?
Method: Panel Least Squares
Date: 10/09/17 Time: 12:14
Sample (adjusted): 6/01/2012 6/01/2022
Included observations: 11 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 330
Variable Coefficient Std. Error t-Statistic Prob.
C 4.37E+08 2.21E+08 1.974605 0.0492
TC?(-1) 0.274106 0.024564 11.15882 0.0000
CF? -4.39E+09 2.12E+09 -2.074107 0.0389
NPL? -3.94E+08 2.01E+08 -1.960555 0.0508
TAS? 0.499996 0.017643 28.33919 0.0000
LIQ? -0.129862 0.031962 -4.063063 0.0001
INF?(-2) 1.46E+08 2.29E+08 0.638212 0.5238
R-squared 0.962982 Mean dependent var 1.46E+09
Adjusted R-squared 0.962295 S.D. dependent var 1.96E+09
S.E. of regression 3.80E+08 Akaike info criterion 42.37109
Sum squared resid 4.67E+19 Schwarz criterion 42.45168
Log likelihood -6984.231 Hannan-Quinn criter. 42.40324
F-statistic 1400.430 Durbin-Watson stat 1.073900
Prob(F-statistic) 0.000000

The null hypothesis indicates that the fixed effects model is not redundant, while the alternative
indicates that is redundant. As it can be seen from the table above that the model, in general, is
statistically significant given the P-value of the F-statistics which is below 0.05. This indicates
that the fixed effects model is not redundant, indicating that we choose pooled regression model.

Table (3) summarizes the result of regression of BLC on various sets of regressions; each
column summarizes a separate regression. Each regression has the same dependent variable
BLC, which is represented by TC; the entries in the first five rows are the estimated regression
coefficients with their P-value below them. In these panel regressions, we need not to look at the
individual t-statistics; instead, F-statistic gives us the decision whether to reject the null
hypothesis.

19
Table (4) Pooled Estimation of the Bank Lending

Regression 1 Regression 2 Regression 3 Regression 4 Regression 5 Regression 6


11694128 -25437154 4.13** -2.91*** 1.93 3.09
Intercept
(0.9736) (0.9441) (0.0733) (0.0044) 0.6114 (0.3778)
-0.13*** 0.23*** -0.81***
LIQ (0.0001) (0.0000) (0.0042)
8.77*** 8.39*** 1.59 -3.03*** -8135221. -5.02
INF?(-2)
(0.000000) (0.0001) (0.4924) (0.0000) (0.9835) (0.1611)
5.46
output growth - - -
(0.6478)
3.38
GDPG?(-1)
(0.3078)
-4.39** 0.38*** -2.33 -1.46
CF?(-1)
(0.0389) (0.0000) (0.5381) 0.6583
1.60***
M2? (0.6970)
-3.96**
NPL?
(0.0501)
0.50***
TD?
(0.0000)
0.27*** 0.41*** 0.75*** 0.84***
TC?(-1)
(0.0000) (0.0000) (0.0000) (0.0000)
0.34
RR
(0.6393)
0.50***
TAS?
(0.0000)
-1.77***
LOG(RR?)
(0.0000)
2.69***
LOG(TAS?)
(0.0000)
Interaction between two variables
2.19*** 9.78***
LIQ?*CF?
(0.0000) (0.0000)
1.19
GDPG?(-2)
(0.7706)
16.71***
M2?*RR?
(0.0002)
years 2010 -2016 2010 -2016 2010 -2016 2010 -2016 2010 -2016 2010 -2016
F-statistics 8.77E+09 10.54621 1400.430 716.7826 464.8699 599.7744
P-value (0.0000) (0.000035) (0.0000) (0.0000) (0.0000) (0.0000)
R-squared 0.052595 0.050497 0.962295 0.938383 0.900446 0.892928
Note: These regressions were estimated using panel data for 30 commercial banks. Regression (1) through (6) use data for all the
period (June. 2010-Dec. 2016). The data set is described in Appendix (1) to (6). The P-values are given in parentheses under the
individual coefficients, which are statistically significant at *10%, **5%, or ***1% significance level.

Regression (1) shows a positive sign for the inflation rate, which is statistically significant at all
level of significances (5%, 10%, 1%). A 1% increase in the inflation associated with an 8.8%
increase in the banking credit. In regression (2) we add GDP growth as one more explanatory
variable along with inflation rate. The coefficient on GDP growth is positive but statistically
insignificant at all levels. However, the model, in general, is statistical significance given the P-
value of the F-statistics. More precisely, as the economy grows by 1%, banks tend to increase
their credit to the market by 5.46%, this result is consistent with the economic theory. Inflation
20
rate remains as it is with a positive sign, yet, the coefficient on it declined slightly compared to
its coefficient in regression (1).

In regression (3) more explanatory variables being added especially from the financial sectors
such as the cost of finance, non-performance loan, total deposits, as well as the total liquidity. All
variables in this regression are statistically significant except for the inflation rate. However, In
general, the regression is statistically significant given the P-value of F-statistics. Regression (4)
is an example of the logarithmic panel regression or a linear-log model for some variables.
Coefficients on all explanatory variables are statistically significant, the coefficient on log(RR)
shows a negative sign.The interpretation in this regression is slightly different from other
regressions because it includes a logarithmic form. The coefficient on log(TAS) is positive and
statistically significant at all significance levels. A 1% decrease in the total assets is associated
with 0.0301 % reduction in the bank lending. Also, a 1% increase in the total deposits leads bank
lending to increase by 0.53%. More importantly, Non-performance loan is statistical significance
and negatively correlated with the banking credit. Holding other variables constant, a 1%
increase in NPL ration, leads banks to be less willing to provide credit.

Panel regression (5) includes some interaction terms which we find it useful to include in this
model. As it can be seen, the regression shows a positive coefficient on the interaction term
between monetary policy variables (growth in money supply, reserve requirement, and the cost
of finance) with its characteristic and macro variables (GDP). Therefore, there is a pass-through
effect for the monetary variables in the real economy and the effect extended to the inflation rate
eventually.

Table (4) shows the hypothesis related results, each column represents a hypothesis, and each
row reports a coefficient estimation and P-value, F-statistics, P-value, and adjusted R-squared.
Column (1) examines the first hypothesis states that higher cost of finance reduces the banking
credit to the market and increase inflation rates. All the expected signs affirmed on the
hypothesis part come true. The coefficient is negative in the cost of finance, non-performance
loans, and total liquidity, which are statistically significant. The inflation rate, however, is
statistically insignificant and positively correlated with the bank lending. In the hypothesis part,
we point out that the parameter on the inflation rate could be positive or negative.

21
Table (5) Panel Regression Models3 of the Bank Lending “Hypothesis Testing”

Regression 1 Regression 2
4.37** -2.95***
Intercept
(0.0492) (0.0091)
0.27*** 0.38***
TC?(-1)
(0.0000) (0.0000)
-4.39**
CF?
(0.0389)
-3.94**
NPL?
(0.0508)
0.50***
TAS?
(0.0000)
-0.13***
LIQ?
(0.0001)
-1.46
INF?(-2)
(0.5238)
-1.85***
LOG(RR?)
(0.0000)
0.50***
TD?
(0.0000)
3.07***
LOG(TAS?)
(0.0000)
7.37**
GDPG?(-2)
(0.0402)
-3.49**
EINF?(-3) (0.0403)
F-statistics 1400.430 631.0856
and P-value (0.000000) (0.000000)
Adjusted R-squared 0.962295 0.936513
Note: The P-values are given in parentheses under the individual coefficients, which are
statistically significant at *10%, **5%, or ***1% significance level.

More precisely, given all other variables constant, raising the cost of finance by 1%, bank
lending is expected to decline by 4.3%. The panel regression also shows a negative significant
relationship between Non-performance loan and total credit. As non-performance loan increases
by 1%, total credit is expected to decline by 3.9% keeping other variables constant. This result
indicates that banks would be more precautious on providing credit as the NPL ratio is high. This
is more likely to reduce the total liquidity which is found to be statistically significant and
negatively correlated with the bank lending, “as the total liquidity increase by 1%, the bank
lending decreases by 0.13%”. Total assets also found to be highly significant and positively
correlated with the bank lending, “as total assets increase by 1%, the bank lending increases by
0.50%”. The model also shows that there is a negative significant relationship between inflation
and bank lending. 1% increase in the inflation rates, cause bank lending to decline by 3.49%.

3
These regressions were estimated using panel data for 30 commercial banks. Regression (1) through (6) use data for all the period (Jan. 2010-Dec. 2016). The data set is described in
Appendix (1) to (6). The P-values are given in parentheses under the individual coefficients, which are statistically significant at *10%, **5%, or ***1% significance level.

22
Column (2) investigates the second hypothesis, which indicates that lower reserve ratio reduces
the inflationary pressure through the banking credit. As it can be seen in Table (4) the panel
regression shows consistent specifications with the hypothesis set earlier. More precisely, the
model includes a logarithmic form for both the reserve ratio and total assets. Holding other
variables constant, a 1% increase in the reserve ratio, leads bank lending to decline by
(0.01*1.85)=0.0185. It is also found that there is a positive significant relationship between total
deposits and bank lending from one side, and the total liquidity and bank lending form the other
side. If total deposits decreased by 1%, bank lending tends to decline accordingly by 0.50%.
Additionally, a 1% increase in the total liquidity will rise bank lending by 0.13%. In terms of
bank sizes, a 1% reduction in the total assets, holding other variables constant, leads banking
credit to decrease by (0.01*3.07) = 0.0307%. The coefficient sign on the output comes true as it
was expected by the hypothesis.

Assume that the CBOS deliberately decides to hike the reserve ratio for more liquidity
absorption from the market for the loan-able fund. The hike in the reserve ratio makes
commercial banks more reluctant to extend their lending due to the decline in the total deposits;
hence, the liquidity of individual banks will diminish as a response to the RR hike. From another
angle, RR hike would have an implication on the IS-LM model as far as the real sector is
concerned. The reduction in the banking credit shifts LM curves upward, raising the real interest
rate which slows down investment, opening the door to the imported goods to replace the locally
produced ones due to the shrink of the total output.

Based upon the panel regression results in table (4), we can reject the null hypothesis that bank
lending channel of monetary policy transmission does not exists in Sudan and accept the
alternative.

23
2.4. Conclusion And Policy Implication:
The CBOS adopts monetary aggregate as a monetary policy regime by setting a target for the
money growth and uses its policy tools to influence the reserve money, making its way to
maintain price stability eventually. In this respect, The RR is found to be insignificant but
negatively correlated with the bank lending. As the RR increase by 1%, the bank lending
decrease by 0.408% given other factors constant. This result has some policy implications. For
instance, in case the CBOS deliberately decides to hike the reserve ratio for more liquidity
absorption from the market for the loan-able fund. The hike in the reserve ratio makes
commercial banks more reluctant to extend their lending due to the decline in the total deposits;
hence, the liquidity of individual banks will diminish as a response to the RR hike. From another
angle, RR hike would have an implication on the IS-LM model as far as the real sector is
concerned. The reduction in the banking credit shifts LM curves upward, raising the real interest
rate which slows down investment, opening the door to the imported goods to replace the locally
produced ones due to the shrink of the total output.

In times of recession, the Central Bank is less likely to tighten its monetary policy; instead, it
follows an expansionary monetary policy by reducing the reserve ratio or purchasing securities
to commercial banks. In this regards, tightening monetary policy reduces the total deposits of
individual banks and then slow down their ability to provide credit (the model shows that the
total deposit is highly significant and positively correlated with the total credit. The model
reveals that as total deposit increase by 1%, total credit will increase 0.38%), which in turn slow
down consumption and investment, aggregate demand, as a result, is expected to hold back and
inflation will shoot-up owing to the deterioration in the productivity.

On the other hand, the empirical results appear that there is a positive significant relationship
between the cost of finance and inflation rate, holding other variables constant, raising the cost of
finance by 1%, the inflation rate is expected to increase by 5% in a year ahead. However, the
dynamic nature of other variables in between has to be taken into account. For instance, it is
found that financial indicators are fully influenced by the change in the cost of finance. The
relationship between bank lending and cost of finance is negative but insignificant. This might be
due to that the response to this shock varies across banks.

We first gauge the direct relationship between the cost of finance and inflation rate. The cost of
finance with a time lag found to be highly significant and positively correlated with the inflation
rates. As the cost of finance increase by 1%, bank lending decreases by 5.5%. This result is
inconsistent with the economic theory and empirical literature. The economic theory from one
side tells us that as the central bank tends to increase the short-term interest rate, banks are less
likely to be engaged in the lending procedures because real interest rates will increase
accordingly causes borrowing to be more expensive.

24
By internalizing a couple of variables, the model finally shows consistent results especially when
the cost of finance along with other variables are regressed on the bank lending as a dependent
variable. For instance, Total liquidity is found to be significant and positively correlated with the
bank lending. As the total liquidity increase by 1%, the bank lending increases accordingly by
2.8%. Total assets also found to be highly significant and positively correlated with the bank
lending. As total assets increase by 1%, the bank lending increases by 0.48%.

The model also reveals that NPL found to be significant and positively correlated with the bank
lending. Given other variables consistent, increasing bank lending by 1%, NPL tend to increase
by 0.8%. For instance, In case the CBOS raises the cost of finance, commercial banks, in
general, would be much more cautious to provide credit to the real sector participants in
anticipation that they would suffer to repay back their debt, which in turn will increase the non-
performance loan ratio of the individual banks. As a result, total liquid assets, return on equity,
total liquidity, and total profit are expected to be influenced positively with the banking credit. In
other words, in case of the cost of finance hike, borrowing would be much more expensive, and
lending tends to be cheaper.

From the Macro perspective, such a cost of finance hike would more probably affect the real
sector in the economy through the financial sector. It is more likely to slow down consumption
and investment, there would also be a slowdown in the Aggregate Demand, and expected
deterioration in the level of output due to the unwillingness of investors to borrow from the
financial sector, and this would lead to higher inflationary pressure in due course. Consequently,
the variables mentioned above are expected to have negative/positive signs with the banking
credit.

Finally, the debate over whether the inflation is a monetary phenomenon is still controversial in
the sense that there is some evidence support that inflation is a monetary phenomenon in Sudan.
Moreover, the findings of these results have some policy implications. Any policy adopted by the
central bank has a positive impact on economic growth during the study period. However, the
question still remains, does the current monetary policy regime appropriate for the CBOS, or
there is a need to shift to the inflation targeting regime.

25
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27
Appendixes
Appendix (1) Variables Definition

Variable Description Source


Bank Level Variables
TD Refers to the Total deposits of bank i at time t which
includes all kind of deposit a bank has been holding over
2010 – 2016 such as saving, current, and investment deposits
TC Refers to the Total Credit provided by bank i at time t . In case of
Sudan, however, it means the bank lending provided by bank
i at time t through Islamic Modes of Finance IMF.
SIZE Refers to the bank size which measured by the total assets of
bank i at time t Banking Supervision
Department
LIQUIDITY Refers to the total liquidity of bank i at time t
Central Bank of Sudan
NPL It is a ratio refers to the non-performance loan incurred as a
percent of the total credit of bank i at time t
CAR Stands for the capital adequacy ratio of bank i at time t
COF Refers to the cost of finance released by the Central Bank of
Sudan to commercial banks. In case of our paper, it is used
as a proxy for the nominal interest rate. It is worth
mentioning that, it is the lending rate charged against
Murabaha Mode of Finance.
Macroeconomic Variables
EXC Stands for the nominal exchange rate as a macroeconomic Exchange Rate Policy
Division
variable fixed across banks and varies across time. Policy, Research, and
Statistic Department
Central Bank of Sudan
Inflation It acts as macroeconomic variable as well fixed across banks Central Bureau of
Statistics
and varies across time
Mg Stands for the money growth which is fixed across banks and Monetary Operation
Department
varies across times. Central Bank of Sudan

28
Appendix (2)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 12:12
Sample (adjusted): 6/01/2012 6/01/2023
Included observations: 12 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 360

Variable Coefficient Std. Error t-Statistic Prob.

C 11694128 3.53E+08 0.033143 0.9736


INF?(-2) 8.77E+09 1.92E+09 4.574894 0.0000

R-squared 0.055234 Mean dependent var 1.55E+09


Adjusted R-squared 0.052595 S.D. dependent var 2.12E+09
S.E. of regression 2.06E+09 Akaike info criterion 45.73542
Sum squared resid 1.52E+21 Schwarz criterion 45.75701
Log likelihood -8230.376 Hannan-Quinn criter. 45.74400
F-statistic 20.92965 Durbin-Watson stat 0.165541
Prob(F-statistic) 0.000007

Appendix (3)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 12:30
Sample (adjusted): 6/01/2012 6/01/2023
Included observations: 12 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 360

Variable Coefficient Std. Error t-Statistic Prob.

C -25437154 3.62E+08 -0.070182 0.9441


INF?(-2) 8.39E+09 2.09E+09 4.010408 0.0001
GDPG?(-2) 5.46E+09 1.19E+10 0.457180 0.6478

R-squared 0.055786 Mean dependent var 1.55E+09


Adjusted R-squared 0.050497 S.D. dependent var 2.12E+09
S.E. of regression 2.06E+09 Akaike info criterion 45.74039
Sum squared resid 1.52E+21 Schwarz criterion 45.77277
Log likelihood -8230.270 Hannan-Quinn criter. 45.75327
F-statistic 10.54621 Durbin-Watson stat 0.162287
Prob(F-statistic) 0.000035

29
Appendix (4)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 16:43
Sample (adjusted): 6/01/2012 6/01/2022
Included observations: 11 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 330

Variable Coefficient Std. Error t-Statistic Prob.

C 4.13E+08 2.30E+08 1.797016 0.0733


TC?(-1) 0.274600 0.024629 11.14946 0.0000
CF? -4.36E+09 2.12E+09 -2.056576 0.0405
NPL? -3.96E+08 2.01E+08 -1.966233 0.0501
TAS? 0.499853 0.017670 28.28771 0.0000
LIQ? -0.130166 0.032013 -4.066015 0.0001
INF?(-2) 1.59E+08 2.32E+08 0.687258 0.4924
M2? 1.60E+08 4.11E+08 0.389712 0.6970

R-squared 0.963000 Mean dependent var 1.46E+09


Adjusted R-squared 0.962196 S.D. dependent var 1.96E+09
S.E. of regression 3.81E+08 Akaike info criterion 42.37668
Sum squared resid 4.67E+19 Schwarz criterion 42.46878
Log likelihood -6984.153 Hannan-Quinn criter. 42.41342
F-statistic 1197.239 Durbin-Watson stat 1.077107
Prob(F-statistic) 0.000000

Appendix (5)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 12:14
Sample (adjusted): 6/01/2012 6/01/2022
Included observations: 11 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 330

Variable Coefficient Std. Error t-Statistic Prob.

C -2.91E+09 1.02E+09 -2.865858 0.0044


TC?(-1) 0.382183 0.029931 12.76866 0.0000
LOG(RR?) -1.77E+08 19812368 -8.957373 0.0000
TD? 0.497974 0.031906 15.60767 0.0000
LIQ? 0.232590 0.036125 6.438402 0.0000
LOG(TAS?) 3.01E+08 48199896 6.243976 0.0000
GDPG?(-1) 3.38E+09 3.31E+09 1.021424 0.3078
INF?(-2) -3.03E+09 6.45E+08 -4.700900 0.0000

R-squared 0.939694 Mean dependent var 1.46E+09


Adjusted R-squared 0.938383 S.D. dependent var 1.96E+09
S.E. of regression 4.86E+08 Akaike info criterion 42.86519
Sum squared resid 7.60E+19 Schwarz criterion 42.95728
Log likelihood -7064.756 Hannan-Quinn criter. 42.90192
F-statistic 716.7826 Durbin-Watson stat 1.318533
Prob(F-statistic) 0.000000

30
Appendix (6)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 12:25
Sample (adjusted): 6/01/2012 6/01/2023
Included observations: 12 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 360

Variable Coefficient Std. Error t-Statistic Prob.

C 1.93E+08 3.80E+08 0.508534 0.6114


TC?(-1) 0.758605 0.031601 24.00611 0.0000
INF?(-2) -8135221. 3.93E+08 -0.020707 0.9835
CF? -2.33E+09 3.78E+09 -0.616281 0.5381
LIQ?*CF? 2.186174 0.415746 5.258435 0.0000
GDPG?(-2) 1.19E+09 4.09E+09 0.291821 0.7706
RR? 0.345317 0.736224 0.469038 0.6393
M2?*RR? 16.70642 4.435009 3.766942 0.0002

R-squared 0.902387 Mean dependent var 1.55E+09


Adjusted R-squared 0.900446 S.D. dependent var 2.12E+09
S.E. of regression 6.68E+08 Akaike info criterion 43.49882
Sum squared resid 1.57E+20 Schwarz criterion 43.58518
Log likelihood -7821.788 Hannan-Quinn criter. 43.53316
F-statistic 464.8699 Durbin-Watson stat 1.614018
Prob(F-statistic) 0.000000

Appendix (7)

Dependent Variable: TC?


Method: Pooled Least Squares
Date: 10/11/17 Time: 12:21
Sample (adjusted): 6/01/2012 6/01/2023
Included observations: 12 after adjustments
Cross-sections included: 30
Total pool (balanced) observations: 360

Variable Coefficient Std. Error t-Statistic Prob.

C 3.09E+08 3.50E+08 0.883044 0.3778


TC?(-1) 0.844275 0.029161 28.95188 0.0000
INF?(-2) -5.02E+08 3.58E+08 -1.404192 0.1611
LIQ? -0.806513 0.279620 -2.884316 0.0042
LIQ?*CF? 9.779846 2.255981 4.335075 0.0000
CF?(-2) -1.46E+09 3.30E+09 -0.442586 0.6583

R-squared 0.894419 Mean dependent var 1.55E+09


Adjusted R-squared 0.892928 S.D. dependent var 2.12E+09
S.E. of regression 6.93E+08 Akaike info criterion 43.56618
Sum squared resid 1.70E+20 Schwarz criterion 43.63095
Log likelihood -7835.913 Hannan-Quinn criter. 43.59194
F-statistic 599.7744 Durbin-Watson stat 1.683736
Prob(F-statistic) 0.000000

31
Appendix (8)
Dependent Variable: TC?
Method: Pooled EGLS (Cross-section random effects)
Sample (adjusted): 6/01/2012 6/01/2022
Included observations: 11 after adjustments
Cross-sections included: 30 Date: 10/11/17 Time: 17:49
Total pool (balanced) observations: 330
Swamy and Arora estimator of component variances
Variable Coefficient Std. Error t-Statistic Prob.
C 3.76E+08 1.86E+08 2.024382 0.0438
TC?(-1) 0.197521 0.021855 9.037817 0.0000
CF? -3.37E+09 1.69E+09 -2.000913 0.0462
NPL? -5.47E+08 2.07E+08 -2.643354 0.0086
TAS? 0.492898 0.015575 31.64654 0.0000
LIQ? -0.057357 0.031343 -1.829941 0.0682
INF?(-2) 1.40E+08 1.81E+08 0.773847 0.4396
M2? 77182318 3.21E+08 0.240229 0.8103
Random Effects (Cross)
_B1--C 7.21E+08
_B2--C 2.23E+08
_B3--C 58968443
_B4--C 1.83E+08
_B5--C 45595421
_B6--C 50456197
_B7--C 1.47E+08
_B8--C 40047202
_B9--C 93251594
_B10--C -1.70E+08
_B11--C 25745488
_B12--C -1.50E+08
_B13--C -52044899
_B14--C -21954082
_B15--C -35033021
_B16--C 23500553
_B17--C -33078002
_B18--C 59676112
_B19--C -8544213.
_B20--C 17446072
_B21--C -1.87E+08
_B24--C 28557871
_B25--C -60647884
_B26--C -34728368
_B27--C 1.38E+08
_B28--C -3.20E+08
_B29--C -44351811
_B30--C -34523257
_B31--C -6.24E+08
_B32--C -79311981
Effects Specification
S.D. Rho
Cross-section random 1.62E+08 0.2304
Idiosyncratic random 2.97E+08 0.7696
Weighted Statistics
R-squared 0.951527 Mean dependent var 7.05E+08
Adjusted R-squared 0.950473 S.D. dependent var 1.43E+09
S.E. of regression 3.17E+08 Sum squared resid 3.24E+19
F-statistic 902.9752 Durbin-Watson stat 1.269918
Prob(F-statistic) 0.000000
Unweighted Statistics
R-squared 0.959892 Mean dependent var 1.46E+09
Sum squared resid 5.06E+19 Durbin-Watson stat 0.813993

32
Appendix (9) Banks Deposits and Finance (2002 - 2016)

90,000
79,918
80,000

70,000
63,885
83,355
60,000

50,000 44,321
39,544 37,657 54,193
40,000
44,321
30,000 25,875 27,776
37,622
17,04119,088
20,000
12,30913,942 30,483
9,776
22,867
10,000 4,730 6,466 14,961
1,972 2,742 3,631 11,140 20,599
12,999 18,163
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Finance Deposits

Appendix (10) the Share of Total Credit to GDP

16.0% 13.9% 13.9% 13.4%


12.7% 12.2% 12.5%
14.0% 11.7% 12.0%
11.0%
12.0% 10.9%
9.4% 9.3%
10.0% 8.9%
8.0% 5.9%
6.0% 4.5%
4.0%
2.0%
0.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Credit to GDP

33
Appendix (11) Contribution of Modes of Finance during the period (2002 - 2016)

Others
27%

Salam
2%

Mudaraba
6% Murabaha
52%

Musharaka
13%

Appendix (12) Cost of Finance Movement during (2010-2016)

Cost of Finance
.14

.13

.12

.11

.10

.09
M6 M12 M6 M12 M6 M12 M6 M12 M6 M12 M6 M12 M6 M12
2010 2011 2012 2013 2014 2015 2016

34