The impact of private sector credit by banks on economic growth the case of viet nam

Specifically, this paper is going to collect secondary data from reliable organizations to analyze the effect of domestic credit provided by banks to the private sector on economic devel

BANKING UNIVERSITY HO CHI MINH CITY

TRẦN VÕ TƯỜNG VI

THE IMPACT OF PRIVATE SECTOR CREDIT BY BANKS

ON ECONOMIC GROWTH: THE CASE OF VIET NAM

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

Ho Chi Minh City, 2021

BANKING UNIVERSITY HO CHI MINH CITY

TRẦN VÕ TƯỜNG VI

THE IMPACT OF PRIVATE SECTOR CREDIT BY BANKS

ON ECONOMIC GROWTH: THE CASE OF VIET NAM

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

STUDENT NUMBER: 030805170084

CLASS: HQ5-GE03

SUPERVISOR TRẦN NGUYỄN MINH HẢI, PhD

Ho Chi Minh City, 2021

ABSTRACT

The graduation thesis entitled ―THE IMPACT OF PRIVATE SECTOR CREDIT

BY BANKS ON ECONOMIC GROWTH: THE CASE OF VIET NAM‖ will focus on the relationship between domestic credit provided by banks to the private sector and Vietnamese economic growth This relationship was concluded positive nexus by many writers that interested in this topic Therefore, this study re-examines this connection, however, in the case of Viet Nam This paper determines the effect of domestic credit provided by banks to the private sector on the economic growth between 1995 and 2019

in Viet Nam Specifically, this paper is going to collect secondary data from reliable organizations to analyze the effect of domestic credit provided by banks to the private sector on economic development by using three variables, which is popular and suitable with research objectives, as independent variables include domestic credit provided by banks to the private sector (CPS); gross capital formation (INV); lending interest rate (RATE), and the economic growth is represented by gross domestic product (GDP) that based on a synthesized of the variables analyzed in the previous studies This study approaches the Autoregressive Distributed Lag (ARDL) model to determine the long-term as well as the short-term relationship between the domestic credit provided by banks

to the private sector and the growth of the Vietnamese economy The findings result show that all independent variables have significance in the economy Particularly, domestic credit provided by banks to the private sector positively impacts the economic enhancement in the long-run period However, it is inverse in the short run Finally, this study also suggests some recommendations to the State Bank of Viet Nam about the effect of factors under this study based on (i) the development orientations; (ii) the theoretical framework; (iii) the empirical result of the impact of the domestic credit provided by banks to the private sector on the growth of Viet Nam economy about each factor included in the domestic credit provided by banks to the private sector, the domestic investment, and the interest rate This study also presents limitations and research direction of the topic

I am is currently a full-time university student with a high-quality program

at the Banking University of Ho Chi Minh City

The graduation thesis was completed under the guidance of Trần Nguyễn

Minh Hải, Ph.D

Major: Finance – Banking

Code: 7340201

This graduation thesis is the author's research, the research results are

truthful, in which there are no previously published contents or content made by

others except for cited citations in the graduation thesis

Ho Chi Minh City, April , 2021

The author‘s signature

Trần Võ Tường Vi

ACKNOWLEDGEMENT

The author would also like to express my deep gratitude to the instructors Trần Nguyễn Minh Hải, PhD., and the teachers of the Banking University of Ho Chi Minh City, as well as family has dedicatedly instructed, helped, and created the best conditions for the author to complete this graduation thesis

Because of the limited time and knowledge of the senior student, it will have some certain mistakes I look forward to receiving comments and suggestions to improve the graduation thesis

ABBREVIATIONS

ADB Asian Development Bank

AFDB African Development Bank

ARDL Autoregressive Distributed Lag

EIB European Investment Bank

FAO Food and Agriculture Organization of the United States FTA Free Trade Agreement

FTA Free Trade Agreement

GCF Green Climate Fund

GDP Gross domestic product

GEF Global Environment Facility

GNI Gross national income

GSO General Statistics Office of Vietnam

HDI Human Development Index

IDB Inter-American Development Bank

IMF International Monetary Fund

MPI Ministry of Planning and Investment

PQLI Physical Quality of Life Index

R&D Research and Development

SME Small and Medium Enterprise

VCCI Vietnam Chamber of Commerce and Industry

WTO World Trade Organization

LIST OF TABLES AND FIGURES

LIST OF TABLES

Table 1.1 Design of research process 4

Table 2.1 Classification of the Private Sector 7

Table 2.2 Separation of the Private and Public Sectors Conceptually 8

Table 2.3 Domestic credit provided by banks to the private sector from 1989 to 2018 (% of GDP) according to income category 10

Table 2.4 Summary of empirical literature about the relationship between domestic credit provided by banks to the private sector and economic development 17

Table 2.5 Summary of the variables from empirical studies 23

Table 2.6 Summary of hypothesis and expected sign 24

Table 3.1 Data sources 30

Table 4.1 Augmented Dickey Fuller Test 34

Table 4.2 The optimal lag based on AIC 35

Table 4.3 Bound test 35

Table 4.4 Long run coefficient estimation using ARDL model 35

Table 4.5 Short run regression analysis using error correction model (ECM) 36

Table 4.6 The international Free Trade Agreement in Viet Nam 37

Table 4.7 Domestic credit growth in Viet Nam from 2003 to 2010 (%) 42

LIST OF FIGURES

Figure 2.1 The importance of economic growth 14Figure 4.1 Number of new business registration in Viet Nam from 2000 to 2019 39Figure 4.2 Four foundations leading to an innovative economy 40Figure 4.3 Domestic credit provided by banks to the private sector in Viet Nam and Lower middle - income countries from 1995 to 2019 (% of GDP) 41Figure 4.4 Channels affecting inflation 41Figure 4.5 Fixed and Total asset accumulation in Viet Nam from 2000 to 2018 (% of GDP) 43

TABLE OF CONTENTS

ABSTRACT ii

COMMITMENT iii

ACKNOWLEDGEMENT iv

ABBREVIATIONS v

LIST OF TABLES AND FIGURES vi

TABLE OF CONTENTS viii

CHAPTER 1: INTRODUCTION 1

1.1 Reasons for selecting the topic 1

1.2 Research objectives and questions 2

1.2.1 Overall research objectives 2

1.2.2 Specific research objectives 3

1.2.3 Research questions 3

1.3 Research scope and subjects 3

1.3.1 Research subject 3

1.3.2 Research scope 3

1.4 Research methodology 3

1.4.1 The approach methods 3

1.4.2 Data collection methods 4

1.4.3 Data processing methods 4

1.5 A framework of the research process 4

1.6 Contribution of the research 5

1.6.1 Literature contribution 5

1.6.2 Practical contribution 5

1.7 The composition of the study 5

CHAPTER 2: LITERATURE REVIEWS 7

2.1 The private sector 7

2.1.1 Definition 7

2.1.2 The important role of the private sector 8

2.2 Domestic credit provided by banks to the private sector 10

2.2.1 Definition 10

2.2.2 The important role of domestic credit provided by banks to the private sector

11

2.3 The economic growth 12

2.3.1 Definition 12

2.3.2 The importance of economic growth 13

2.4 The effects of domestic credit provided by banks to the private sector on the economic growth 15

2.5 Theoretical framework and empirical literature 15

2.5.1 Theoretical framework 15

2.5.2 Empirical literature 17

2.6 Regression model recommendation 23

Summary of chapter 2 24

CHAPTER 3: RESEARCH METHODOLOGY 26

3.1 The approach methods 26

3.2 Data collection methods 29

3.3 Data processing methods 30

3.3.1 Stationary test 31

3.3.2 Cointegration test 31

3.3.3 Autoregressive Distributed Lag model & Error Correction model 32

3.3.4 Autocorrelation test 32

3.3.5 Heteroskedasticity test 32

3.3.6 Specification error model test 33

Summary of chapter 3 33

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION 34

4.1 Stationary test 34

4.2 Cointegration test 34

4.3 Estimation long run and short run relationship 35

4.4 Research discussions 37

4.4.1 The nexus between Domestic credit provided by banks to the private sector (CPS) and Gross domestic product (GDP) 37

4.4.2 The nexus between Gross capital formation (INV) and Gross domestic product (GDP) 43

4.4.3 The nexus between the Lending interest rate (RATE) and Gross domestic

product (GDP) 44

Summary of chapter 4 44

CHAPTER 5: RECOMMENDATIONS AND CONCLUSIONS 46

5.1 Orientation for the development between 2021 and 2025 in Viet Nam 46

5.1.1 The economic development objectives 46

5.1.2 The domestic credit provided by banks to the private sector development objectives 47

5.2 Recommendations 47

5.3 Conclusions 48

5.4 Limitations and research orientation 49

GRADUATION THESIS SUMMARY 51

REFERENCES 55

APPENDIX 65

CHAPTER 1: INTRODUCTION

In chapter 1, this study is going to introduce the reason for selecting the topic, objectives, subjects, scope, and research methodology

1.1 Reasons for selecting the topic

The private sector is the part of the economy that is run for profit by individuals and various size firms rather than the government, which plays an essential role in economic development As a result, it includes all for-profit enterprises that are not owned or operated by the government (Investopedia, 2020) The private sector is the engine of productivity growth, more income creation, and productive jobs First, it provides 90 percent of job vacancies in developing countries (IFC, 2013) Therefore, the private sector also helps the poor overcome poverty and improves their lives Secondly, the private sector contributes to investment in many public services such as infrastructure, health, education which are essential elements in developing economics Finally, the private sector provides most of the taxes to the state budget Hence, the health of the private sector is the most important thing The IMF has recently emphasized the nexus between private sector development and inclusive growth (IMF, 2013) Limited

to access financial resources is one of the biggest obstacles to firm operation and growth that accounts for 15 percent of total corporations from 2006 to 2010 in the world (EIB, 2011)

Commercial banks are crucial sources for financing the private sector in many cases Such as investment, research, restructure Providing funds to the private sector invests indirectly in the growth of economics Hofmann (2001) concluded the link between credit and economic development, which calculated by macro-factor gross domestic product (GDP) Fund sources of the banking system help flexible in the manufacturing process, invest to the new project for-profit purpose It contributes to supporting employers from the private sector to innovate their technology, research, and development, thereby improving competitive productivity and efficiency in production business activities From that, it directly increases the economy (Tran Quan Tuyen, 2009)

Domestic credit provided by banks to the private sector is financial resources providing to the private sector by non-central banks depository corporations Such as loans, purchases of nonequity securities, trade credits, and other accounts receivable set

up a claim for repayment (Indexmundi, 2020; WB, 2020) Credit to public enterprises is one of the claims made by some countries Monetary authorities, deposit money banks, which available data, included among financial corporations (including those that do not accept deposits with transferable, but they are subject to debts such as term deposits and savings), as well as other financial corporations Finance and leasing companies, money lenders, insurance companies, pension funds, and foreign exchange companies are examples of other financial corporations (Indexmundi, 2020) There is much research about domestic credit provided by banks to the private sector in every corner of the world (Al-Malkawi &Abdullah, 2011; Mamman & Hashim, 2014; Osman, 2014; Yakubu & Affoi, 2014; Lakštutienė & Barkauskaitė, 2016; Amoo et al., 2017; Gbenga et al., 2019) These empirical researches use many analysis methodologies and time-series data However, most conclusions show a positive connection between domestic credit provided

by banks to the private sector and the development of economics On the other hand, some writers determine it negatively impacts the economy (Mohamed & Sidiropoulos, 2008; Leitão, 2012; Takats & Upper, 2013; Tahir et al., 2015; Cetin, 2016)

Moreover, there are many journals, reports about the increase of domestic credit provided by banks to the private sector in Viet Nam Because of the lack of studies examine the relationship between domestic credit provided by banks to the private sector and the development of economics in Viet Nam, this study will determine this nexus This study entitled: ―THE IMPACT OF PRIVATE SECTOR CREDIT BY BANKS ON ECONOMIC GROWTH: THE CASE OF VIET NAM‖ Specifically, this paper collects secondary data from reliable organizations to analyze through a quantitative analysis method Thereby, the study will suggest some recommendations to the State Bank and the financial intermediaries which providing funds to the private sector from the empirical results

1.2 Research objectives and questions

1.2.1 Overall research objectives

 The study aims to analyze the effect of domestic credit provided by banks to the private sector on the growth of Viet Nam economics From that, this study can

conclude and suggest some recommendations about the impact of domestic credit provided by banks to the private sector on economic growth

1.2.2 Specific research objectives

This study will focus on some specific objectives to achieve the target:

 To use a regression model to examine the impact of domestic credit provided by banks to the private sector on Viet Nam economics

 To suggest some recommendations to the effect of domestic credit provided by banks to the private sector on the economic growth of Viet Nam

 Place: Viet Nam

 Time: The period of 1995 – 2019

Before 2000, only 14,500 private sector companies established However, when the Enterprise Law adopted in 2000 triggered rapid growth in the number and size of private enterprises It eased restrictions and conditions in market entry Since then, the number of enterprises has increased at an awful rate (Le Duy Binh, 2018)

1.4 Research methodology

1.4.1 The approach methods

A range of definitions included through different views and concepts A variety of theoretical and empirical studies reviewed that have concluded This study on the acquisition and inheritance of theories as follows:

 Neoclassical Growth Theory was first devised by Solow and Swan (1956)

 Endogenous Growth Theory (Lucas, 1988; Rebelo, 1991 & Romer, 1994) is considered in the situation of a developing country

 The Quantity Theory of Credit (Werner, 1992; Werner, 1997)

1.4.2 Data collection methods

This paper is going to use secondary data about the domestic credit provided by banks to the private sector and economic growth calculated from high-quality reference sources of reliable organizations, including World Bank data, GSO data…

1.4.3 Data processing methods

This study uses the quantitative analysis method to consider the relationship between domestic credit provided by banks to the private sector and Viet Nam growth

1.5 A framework of the research process

Table 1.1 Design of research process

The research process consists of five steps:

Step 1: Determine the research problem and objectives

Research Problem: The impact of domestic credit provided by banks to the private sector on Viet Nam economic

growth

Research Objectives: The study aims to determine the effect of domestic credit provided by banks to the private

sector on economic growth Also, it suggests some recommendations to the impact of domestic credit provided by banks to the private sector on the Vietnamese economy

Step 2: Theoretical framework and empirical studies

A variety of theoretical and studies reviewed that have concluded:

Neoclassical Growth Theory (Solow and Swan, 1956);

Endogenous Growth Theory (Lucas, 1988; Rebelo, 1991 & Romer, 1994);

The Quantity Theory of Credit (Werner, 1992; Werner, 1997)

Step 3: Data collections method

Secondary data from international organizations such as WB, GSO

Step 4: Data processing method

Quantitative analysis such as Stationary test, Cointegration test, ARDL model based on time-series data

1.6 Contribution of the research

1.7 The composition of the study

In addition to the conclusion, appendix, table of contents, list of figures and tables, and references and citation using APA style, the study presented in five chapters:

 CHAPTER 1: INTRODUCTION

This study summarizes the reason, objectives, scope, and subject Moreover, methodology, contribution, and composition also mention in this chapter

 CHAPTER 2: LITERATURE REVIEW

This study summarizes the definitions of the private sector, domestic credit provided by banks to the private sector, economic growth Besides, this study reviews some literature and empirical studies related to the impact of domestic credit provided by banks to the private sector on economic growth

 CHAPTER 3: RESEARCH METHODOLOGY

This study introduces the research method and explains the purpose of using the quantitative analysis to determine the relationship between the development of the economy and domestic credit provided by banks to the private sector

 CHAPTER 4: RESEARCH RESULTS AND DISCUSSIONS

This chapter presents the results about the impact of domestic credit provided by banks to the private sector on the economic growth through using time-series data between 1995 and 2019 in Viet Nam Also, this study discusses the results of the research problem

 CHAPTER 5: RECOMMENDATIONS AND CONCLUSIONS

This study presents the orientation for the development of the economy and domestic credit provided by banks to the private sector in Viet Nam in the period from

2021 to 2025 Thereby, this study suggests some recommendations based on (i) the development orientations; (ii) the theoretical framework; (iii) the result of the effect of domestic credit provided by banks to the private sector on the growth of Viet Nam economics This study also presents the overall conclusion and limitations

CHAPTER 2: LITERATURE REVIEWS

In chapter 2, this study is going to present literature reviews and empirical studies related to the impact of domestic credit provided by banks to the private sector on the growth of the economy, including in the concept of the private sector, domestic credit provided by banks to the private sector, economic growth

2.1 The private sector

Table 2.1 Classification of the Private Sector

1 Sole proprietorships A company which is managed by one person and he/ she also

personally responsibilities for its debts

2 Partnerships Two people or more own this kind of business and have

responsibilities with his assets

3 Small and mid-sized businesses There are the businesses, which often have less than 100

employees for small size companies and from 100 to 999 employees for another

4 Large corporations and multinationals There are a kind of business that owns or controls the production

of goods or services in at least one foreign country

5 Professional and trade associations There are non-profit membership organizations that serve the

interests of members who work in the same field

6 Trade unions Association of the employees for the reason of secured rights of

workers

Source: Investopedia (2020); Indeed (2020)

Enterprises, companies, or businesses of any size, ownership, or structure are included in the private sector It encompasses all aspects of the food, agriculture, forestry, and fisheries systems, from production to consumption, as well as related services such as financing, investment, insurance, marketing, and trade According to FAO (2020), the

private sector includes a diverse range of entities ranging from farmer organizations, cooperatives, and SMEs to the largest international corporations Private financial institutions, industry and trade associations, and consortia representing private sector interests are also included

According to IMF (Lienert, 2009), the concept of ownership is important for defining the public and private sectors The private sector can be defined as those economic entities owned by the private sector Many private sector entities, particularly privately-owned enterprises incorporated under the law (corporations), are profit-oriented Enterprises owned by the government would be classified as part of the public sector, as opposed to the private enterprise sector Privately owned nonprofit organizations and households must also be included in the private sector

Table 2.2 Separation of the Private and Public Sectors Conceptually

Privately Owned (Private sector) Private Enterprises Private Nonprofit

Organizations and Households

Publicly Owned (Public sector) Public Enterprises Government

Source: Lienert (2009)

In short, the private sector is a broad array of entities that are run by individuals and companies for profit and are not state-controlled It plays an important part of the economy in comparison to the role of the public sector based on the ownership approach

As a result, the main feature of the private sector is that it is managed by private individuals without the involvement of the government, but there are other characteristics

of the private sector, which are as follows: (1) profit motive, (2) private ownership and control, (3) no state participation, (4) independent management, (5) capital sources, (6) employee work culture (Appendix 1)

2.1.2 The important role of the private sector

As an engine of economic growth, the private sector is critical The private sector plays the following roles:

 Significant stakeholders of the economy: the private sector is a major

contributor to tax revenues to support the infrastructure and social activities, and ensures the efficient flow of capital (Indeed, 2020) According to UNDP (2020),

Public Sector

the private sector is recognized as an essential strategic partner to the achievement

of the universally adopted sustainable development goals, which consist of eliminating poverty, transforming structure for sustainable development, and addressing climate change

 Generate employment: The private sector plays the role of generating

employment opportunities within its community It accounts for roughly 90 percent of all employment in the developing world, including both formal and informal jobs (IFC, 2013; Avis, 2016) A significant number of businesses are under the control of the private sector, which suggests that these firms provide more jobs than the public sector, thereby reducing poverty problems (Inclusive Infrastructure, 2019; Indeed, 2020)

 Assist in development: The private sector contributes to the industrialization and

community improvement processes: By introducing technology and producing innovative ideas that modify methods of production and lead to better economic development Alternatively, it not only contributes to community development by promoting community businesses, cooperatives but also attracts potential investors who promote and expand existing companies (Indeed, 2020; WB, 2020)

 Supply of goods and services: The private sector is the primary supplier of goods

and services It encourages human capital development, which allows it to produce more goods and services and thus meet market demand (Indeed, 2020)

 Encourage business diversification: The private sector is teeming with

companies engaged in a wide range of activities Essentially, regardless of the type

of business, this sector provides new companies with the opportunity to develop With this freedom, private companies can diversify their operations (Indeed, 2020)

In short, the private sector is recognized as a vital economic development partner, providing income, jobs, goods, and services to improve people's lives and assist them in escaping poverty Therefore, multilateral development banks play a significant role in supporting the private sector, particularly in developing countries In fact, they provide critical capital, knowledge, and partnerships; help manage risks, and catalyze the other's participation (ADB, 2011)

2.2 Domestic credit provided by banks to the private sector

2.2.1 Definition

Domestic credit provided by banks to the private sector refers to financial resources provided by other depository corporations to the private sector (deposit-taking corporations other than central banks) Such as loans, purchases of nonequity securities, trade credits, and other accounts receivable, which establish a claim for repayment Credit to public enterprises is one of the claims made by some countries (Indexmundi, 2020; WB, 2020)

Financial sources, which from institutional investors, project sponsors, and financial institutions, promotes private sector investment through concessional instruments, including low-interest and long-tenor project loans, lines of credit to banks and other financial institutions, equity investments, and risk mitigation, such as guarantees, first-loss protection, and grant-based capacity building programs (GCF, 2020)

Domestic credit provided by banks to the private sector is financing flow from financial institutions and intermediaries that supply to the private sector to support investment projects, scale expansion, manufacture, etc Loans and guarantees may be made directly to private businesses without government guarantees, and capital market development projects and export financing may be undertaken (IDB, 2020)

Table 2.3 Domestic credit provided by banks to the private sector from 1989 to

2018 (% of GDP) according to income category

Source: World Bank (2020)

Table 2.3 shows the percentage of the amount of domestic credit financing in the private sector in some countries according to income category in 30 years In high-income nations, almost all domestic credit provided by banks to the private sector accounts for more than 70 percent of GDP each year On the other hand, the banks do not subsidize much for this object so the fraction does not high, majority less than 10 percent

in low-income countries Between 1989 and 2001, almost the percentage of domestic credit provided by banks to the private sector was lower than 50 percent, however, the ratio spread steadily from 2002 In 2018, this ratio increased by 50.17 percent in middle-income countries

In short, the banks sponsor all fields of the private sector in every country, which

is classified according to income groups such as high income, upper middle income, middle income, low & middle income, and low income

2.2.2 The important role of domestic credit provided by banks to the private sector

 Providing financial products: It finances private companies that lack sufficient

access to private sources of capital: provide a mix of instruments, including debt, equity, guarantees, Islamic finance, local currency loans, and political risk insurance (EIB, 2011; GEF, 2017) The private sector is also subsidized by commercial banks through leasing and factoring Leasing is a useful instrument to

acquire machinery and equipment necessary for growth without requiring collateral thereby reduces investment costs Factoring provides businesses with the immediate funds they require to finance working capital or short-term investments while reducing risk (AFDB, 2011)

 Providing advisory products: to assist technical problems make available the

specialized and scarce knowledge essential for effective investments, such as to improve the investment climate; strengthen project performance and impact; facilitate privatization and proper risk-sharing, enhance environmental, social, and corporate governance effectiveness EIB, 2011; GEF, 2017; Makovšek, 2019)

 Managing risks: financial institutions help mitigate several risks, including

country risk and also project risk through the due diligence and standard-setting that the financial institutions provide concerning the project, sponsor, and the company‘s environmental, social, and corporate governance procedures EIB, 2011)

 Supporting innovative solutions: financial organization transactions can also

help push the reform agenda, facilitating further investments in difficult or new areas, leading to further investments and creating or developing new markets, fostering safe innovation (EIB, 2011; GEF, 2017)

Overall, domestic credit provided by banks to the private sector supports the private sector to maintain their business, expand operate scale through supplying a variety of financial instruments Besides, an expert from the financial organizations will advise helping the private sector overcome when they have technical or risk problems Moreover, if businesses from the private sector want to seek opportunities in the new field, institutional investors will finance them As the result, domestic credit provided by banks to the private sector contributes to increasing the national output

2.3 The economic growth

2.3.1 Definition

The national economic growth is defined by Kuznets (1973) as a long-term increase inability to provide various goods and services to its population, this increasing capacity as a result of advancing technology and the institutional and ideological changes that it necessitates The sustained increase in the supply of economic goods is the result

of the growth of economics Economic growth is measured in terms of the rate of

physical accumulation, GDP per capita, improve economic efficiency (King & Levine, 1993; Allen & Ndikumana, 2000)

According to Jhingan (2011), economic growth is defined as a quantitative sustained increase in a country's per capita output or income accompanied by an increase

in consumption, volume of trade, capital, and labor force There are four ways to calculate economic development: (i) GNP, (ii) GNP per capita, (iii) welfare, and (iv) social indicators (PQLI; HDI) or basic needs (education, health, water supply, food, sanitation, housing)

According to Todaro and Smith (2020), economic growth is the omission or lowering of poverty, inequality, and the increase of employment in the period of a growing economy Three important characteristics of economic growth: capital accumulation, the increase of labor force through the population, technology Economic growth can be measured by GNI or GDP and HDI

Overall, the growth of economics is sustained rise of country output in the long period based on technological innovation, the labor force quality enhancement, and capital accumulation

2.3.2 The importance of economic growth

 Higher average incomes: Economic growth enables consumers to purchase more

goods and services, resulting in higher living standards It is a major factor in reducing absolute levels of poverty (Stevans & Sessions, 2002; OECD, 2008; Pettinger, 2019)

 Lower unemployment: the private sector businesses tend to hire more employees

to reduce the unemployed rate in their home country (OECD, 2008; Pettinger, 2019)

 Lower government borrowing: As the economy grows, tax revenues increase,

and there is less need to spend money on benefits such as unemployment insurance Therefore, it helps to reduce public debt thereby decreasing debt to GDP ratios (Pettinger, 2019)

 Improved public services: Higher economic growth results in higher tax

revenues, allowing the government to spend more on public services like health care and education This can enable higher living standards, such as increased life expectancy, higher rates of literacy (OECD, 2008; Pettinger, 2019)

 Protecting the environment: With higher economic growth a society can devote

more resources to promoting recycling and the use of renewable resources (EIB 2011; Pettinger, 2019)

 Investment: Economic growth encourages the private sector to invest, to meet

future demand Increased investment expands the potential for future economic growth, resulting in a virtuous cycle of economic growth and investment (Pettinger, 2019)

 Increased research and development (R&D): Strong economic growth leads to

increased profitability for businesses, allowing them to spend more on R&D Also, sustained economic growth increases confidence and encourages firms to take risks and innovate (Blanco et al., 2016; Pettinger, 2019)

 More choices: In less developed economies, a large proportion of the population

work in agriculture, economic growth enables a more diverse economy with people able to work in the service sector, manufacturing, and having a greater choice of lifestyles (Pettinger, 2019)

Figure 2.1 The importance of economic growth

Source: Economicshelp (2017)

In short, the growth of economics plays an essential role It contributes to reducing poverty, providing more occupation opportunities, investing in public services & infrastructure, reallocating labor in the economic sector, and improving human basic needs such as health, education, etc

Economic growth

Increased employment Increased in tax

revenue

Increased consumption

Fall in unemployment Increase spending on

public services

Encourages investment

2.4 The effects of domestic credit provided by banks to the private sector on the economic growth

Domestic credit provided by banks consists of two main kinds: private sector credit and public sector credit Both private sector and public sector credit impact positively on the economy (Kouam & Kingsley, 2020)

Many authors research the effects of domestic credit provided by banks to the private sector on economic growth For example, Al-Malkawi & Abdullah (2011); Mamman & Hashim 2014); Yakubu & Affoi 2014); Osman 2014); Lakštutienė & Barkauskaitė 2016); Amoo et al 2017); Gbenga, James & Adeyinka 2019); etc Though these empirical researches use different analysis methodologies and time-series data, most conclusions show a positive connection between domestic credit provided by banks to the private sector and the development of economics On the other hand, some writers conclude that there is a negative relationship between domestic credit provided by banks to the private sector and economic expansion (Mohamed & Sidiropoulos, 2008; Leitão, 2012; Takats & Upper, 2013; Tahir et al., 2015; Cetin, 2016)

In short, domestic credit provided by banks in many countries around the world is also allocated to two main sectors Most of the writers concluded that the relationship between domestic credit provided by banks to the private sector and the growth of an economy is a positive nexus though they used different proxy variables and research analysis

2.5 Theoretical framework and empirical literature

2.5.1 Theoretical framework

This study is based on the theory of economic growth such as (i) Neoclassical Growth Theory (Solow and Swan, 1956); (ii) Endogenous Growth Theory (Lucas, 1988; Rebelo, 1991 & Romer, 1994); (iii) The Quantity Theory of Credit (Werner, 1992; Werner, 1997)

 Neoclassical Growth Theory

In Neoclassical Growth Theory, output growth results from one or more of three factors: labor, capital accumulation, and technology (Todaro & Smith, 2020) In this theory, capital is the main key in developing the economy It helps the company invest in purchasing equipment, expanding manufacturing scale, etc Therefore, capital accumulation indirectly creates more job opportunities The provision for social and

economic overheads like transport, power, education, etc., in the country, is possible through capital formation (Jhingan, 2011) Besides, it also leads to the progress of technology Capital accumulation and technological progress are important factors in the process of the growth of economics (King & Levine, 1993; Levine, 1999)

 Endogenous Growth Theory

Solow and other neoclassical growth theorists assumed that technological progress was the residual factor explaining long-term growth and that its level was determined exogenously, that is, independently of all other factors in the model (Todaro and Smith, 2020) According to Jhingan (2011), the theory of endogenous growth does not consider technological progress to be exogenous and assumes that technological progress is influenced by factors such as human capital and investment in research and development The implication of this theory for both developed and developing countries

 The Quantity Theory of Credit

Many authors used this theory as the framework in their research about the nexus between credit and growth Werner (2012) determines some empirical evidence support this framework, such as Werner (1992, 1997, 2005); King & Levine (1993); Calza et al (2006); IMF (2008); Swiston (2008); Cappiello et al (2010); Voutsinas & Werner (2011a, 2011b); Lyonnet & Werner (2012)

Starkey (2018) summarizes the quantity theory of credit, which is introduced by Werner in 1992 and 1997, the effect of financial sources from the banks for GDP transactions will depend on the purpose of the borrower If the bank lends to the individual for consumption through consumer credit, it will raise inflation because the aggregate demand is higher than the aggregate supply and does not impact the economic growth On the other hand, if the investment of the private sector is financed by the bank,

it will lead to the development of the economic activity The investment that increases the output of goods and services included in GDP transactions reduces inflationary pressures

in the economy as a result of increased production of goods and services, and it also raises the incomes of production factors According to Werner (2012), financial credit, which is not part of GDP, not only does not contribute to increasing the output but also causes asset inflation and bubbles, and banking crises

2.5.2 Empirical literature

Empirical pieces of literature focus on analyzing the impact of domestic credit provided by banks to the private sector on the growth of economics The writers present the effect of domestic credit provided by banks to the private sector not only in developed countries but also in developing countries

Table 2.4 Summary of empirical literature about the relationship between domestic credit provided by banks to the private sector and economic development

Author Research scope and data

sources

Theoretical framework

Research methodology

Supply Leading and Demand Following Theory; The Quantity Theory

of Credit

Stationary test;

cointegration test; Optimal lag length; Vector error correction model;

Domestic credit provided

by banks to the private sector activities directly conducive to Malaysian economics

Mohamed,

Sidiropoulos

(2008)

Real GDP, ratio M3/ GDP, private sector credit, trade openness, inflation, investment, government consumption Annual data were obtained from WB and Central Bank of Sudan in the period 1970 to 2004

Supply Leading and Demand Following Theory; The Quantity Theory

of Credit

Stationary test;

Cointegration test; ARDL model; Stability test

The coefficient of domestic credit provided

by banks to the private sector is negative and insignificant in both the long and short-run in Sudan, thus implying that increases domestic credit provided by banks to the private sector will not boost private investment The reason for this negative effect is the lack

of professional organizations, strong businesses, and experts in the banking system about credit analysis

Ahmad,

Malik (2009)

Panel data over the period

1970 to 2003 for a set of 35 developing countries about GDP per capita, domestic capital, foreign direct investment, private sector

Endogenous Growth Theory;

Neoclassical Growth Theory;

The Quantity Theory of Credit

GMM analysis;

Parameter estimation; Wald test

The coefficients on domestic credit provided

by banks to the private sector and bank assets are significant and positive Therefore, it conducive to

credit, commercial bank assets, government consumption, inflation, trade openness, exchange rate, human capital All data were collected from World Bank

13 MENA countries Source collected from IFS of IMF

Demand Following Theory; The Quantity Theory

of Credit

Descriptive statistics; The Variance inflation factor;

Pooled OLS method with robust standard errors; FE model; RE model

Domestic credit provided

by banks to the private sector influences economic growth There is

a positive and significant relationship

Endogenous Growth Theory;

Neoclassical Growth Theory;

The Quantity Theory of Credit

GMM analysis;

Random effect model;

Fixed effect model;

Two-way component models

Domestic credit provided

by banks to the private sector is an important factor in developing economics The government should reduce the costs of credit and enhance national growth, especially, manufacturing and agriculture sectors in Kenya

The Source of data is the Central Bank of Nigeria (CBN) statistical bulletin and the Federal Office of Statistics and Bureau of Statistics

Endogenous Growth Theory;

Neoclassical Growth Theory;

The Quantity Theory of Credit

Descriptive statistics;

Stationary test;

Cointegration test; ARDL model

Domestic credit provided

by banks to the private sector affects the expansion of Nigerian economics in the period

Endogenous Growth Theory;

Neoclassical Growth Theory;

The Quantity

Multiple regression model; ANOVA test

The bank played a significant role in Nigeria's economic growth between 1987 and 2012, but its lending capacity is

bulletin and CBN annual reports statement from 1987

to 2012, e-books, online journal, textbooks

operations is relatively small 86.2 percent total credit outstanding balance

of the bank contributed to the development of economics

Osman (2014) Annual data from 1974 to

2012 from Saudi Arabia about GDP, domestic credit provided by banks to the private sector, commercial bank total deposit, trade openness, inflation, government expenditures

Supply Leading Theory; The Quantity Theory

of Credit

Stationary test;

Cointegration test; Optimal lag length; ARDL model;

Reliability test;

Stability test;

Domestic credit provided

by banks to the private sector impact positively

on the development of economics not only in the short run but also in the long run The amount of domestic credit provided

by banks to the private sector is very appropriate

so it contributes to a developing country Yakubu &

Affoi (2014)

Domestic credit provided by banks to the private sector in Nigeria and GPD All data were collected in a period of

20 years (1992-2012) from the Central Bank of Nigeria annual report

Endogenous Growth Theory;

Neoclassical Growth Theory

Simple regression models

The Nigerian economic growth was impacted by the volume of domestic credit provided by banks

to the private sector of the commercial banking system in Nigeria Olowofes,

Adeleke &

Udoji (2015)

Central Bank of Nigeria Statistical Bulletin and National Bureau of Statistics were used to look up quarterly data Data about macroeconomic factors such

as GDP, domestic credit provided by banks to the private sector, gross fixed capital formation, exchange rate, total government expenditure, the prime lending rate in 15 years (Q1/2000–Q4/2014)

The Quantity Theory of Credit;

Neoclassical Growth Theory

Stationary test;

Structural Breaks test;

Cointegration test; Error Correction model

Domestic credit provided

by banks to the private sector is a potential factor

in promoting the economy Therefore, the banking system, which provides domestic credit

to the private sector, also plays an essential role in the financial market

(2015) domestic credit provided by

banks to the private sector, the interest rate on lending to the private sector, inflation, investment, government consumption in Pakistan

Source collected from the World Bank in the period

1973 to 2013

and Demand Following Theory

statistics;

Correlation analysis;

Stationary test;

Optimal lag length;

Cointegration test; Vector Error Correction Model;

Regression analysis

relationship between economic growth and domestic credit provided

by banks to the private sector in Pakistan Only investment has a significant effect on GDP

in short time also long period

Endogenous Growth Theory;

Neoclassical Growth Theory;

The Quantity Theory of Credit

Correlation analysis;

Stationary test;

Cointegration test;

Lending activities and Baltic national economics have a medium/ high correlation From the result, future research could use the macro-factor GDP to forecast domestic credit provided by banks

to the private sector Amoo et al

(2017)

Employing quarterly data from 1990 to 2013 about the gross domestic product, trade openness, monetary policy, budget

Surplus/Deficit to GDP, domestic investment, electricity power consumption capita, domestic credit provided by banks to the private sector from Central Bank of Nigeria Statistical Bulletin

2013, the National Bureau of Statistics, World Bank, and The Economist Intelligence Unit

Endogenous Growth Theory

Stationary test;

FM – OLS method

Domestic credit provided

by banks to the private sector impact and significantly contribute to the increase of Nigerian economics

Endogenous Growth Theory;

Neoclassical

Autocorrelation test; ANOVA test; Simple

There is a strong and positive relationship between domestic credit

(2019) private sector from Central

Bank of Nigeria Statistical Bulletin between 2000 and

2017

Growth Theory;

The Quantity Theory of Credit

Regression model

provided by banks to the private sector and gross domestic product in Nigeria within the period

of analysis

Source: Synthesized by the author

In Africa, several empirical studies were conducted to examines the impact of domestic credit provided by banks to the private sector on the national output Especially, Were, Nzomoi & Rutto (2012) showed there was a positive relationship between domestic credit provided by banks to the private sector and economic growth by using data from the Central Bank of Kenya about bank structure index, domestic credit provided by banks to the private sector, sector-specific effects, and GDP from 2000 to

2010 After analyzing through fixed-effects approach, they concluded the significantly important role of domestic credit provided by banks to the private sector and encouraged the government should reduce the costs of credit and deepen the function of the financial sector to enhance national goods and services Other studies with similar results but different data time-series and method approach, consists of Aliero, Abdullahi & Adamu (2013) used data from 1974 to 2010; Mamman & Hashim (2014) used 1987 to 2012 data; Yakubu & Affoi (2014) conducted to analyze with data from 1992 to 2012; Olowofes, Adeleke & Udoji (2015) used quarterly data between 2000 and 2014; Amoo et al (2017) employed quarterly data from 1990 to 2013; Gbenga, James & Adeyinka (2019) used data between 2000 and 2017 to examine the effect of domestic credit provided by banks

to the private sector in their country

Some Asian researchers also investigate the effect of the financial sector on the expansion of the economy Vaithilingam, Guru & Shanmugam (2003) collected quarterly data about real GDP, domestic credit provided by banks to the private sector, inflation, government consumption, interest rate, investment between 1968 and 1998 from IMF to examine the nexus between domestic credit provided by banks to the private sector and Malaysian economic development Osman (2014) also re-examined the relationship between domestic credit provided by banks to the private sector and growth in the case of Saudi Arabia The author used other time-series data between 1974 and 2012, which is different from other researchers, to analyze These results provided empirical evidence

for the field of study about the impact of domestic credit provided by banks to the private sector on the development of economics in Asia

Ahmad & Malik (2009); Al-Malkawi & Abdullah (2011); Lakstutiene & Barkauskaite (2016) used panel data to research the link between domestic credit provided by banks to the private sector and the growth of national output Ahmad & Malik (2009) argued that the advantage of panel data is capture both time-series and cross-section variation in variables They used data in 35 countries in the period 1970 to

2003 to test the impact of the financial sector on economic growth in a short time and long time Similarly, Al-Malkawi & Abdullah (2011), whose study was based on the set

of 13 countries between 1980 and 2005 to explore the finance and growth nexus Lakstutiene & Barkauskaite (2016) also carried out their scientific research by using quarterly data in the period 2005 to 2013 in three Baltic countries Although writers enact their research in a different year, they have the same conclusion that domestic credit provided by banks to the private sector influences economic growth There is a positive and significant relationship between domestic credit provided by banks and economic growth

On the other hand, Mohamed & Sidiropoulos (2008), Tahir et al (2015) have opposite opinions about the impact of domestic credit provided by banks to the private sector on the economy Mohamed & Sidiropoulos (2008) concluded that because of the lack of professional organizations, strong businesses, and experts in the banking system about credit analysis, the coefficient of domestic credit provided by banks to the private sector is negative and insignificant in both the long and short-run in Sudan, thus implying that increases domestic credit provided by banks to the private sector will not directly increase private investment in the economy Tahir et al (2015) came out with similar results from their study in the case of Pakistan from 1973 to 2013

Overall, all conclusions that there always have a connection of domestic credit provided by banks to the private sector to the development of economics scale though writers used different measurement methods and periods to find the best reliable answers Most of the empirical researches shows a positive relationship between domestic credit provided by banks to the private sector and economic growth These researches suggest some recommendations to not only the government but also the financial institutions should have suitable policies to ensure the long-term sustainable development of the

economy However, these have a problem that the number of observation variables, specifically, the period is not enough to analyze

2.6 Regression model recommendation

Also, this study carries out to build the linear regression model based on the overall model:

Where : the dependent variable;

: the intercept;

: the regression coefficient with i = 1, 2, 3, … N;

: the independent variables at the time t with t = 1, 2, 3, … T period;

: the random error in population

Moreover, this paper chooses the proxy variable, which was used to examine the effect of domestic credit provided by banks to the private sector on the economic enhancement by many writers, founded on the empirical literature consists of 7 variables such as gross domestic product proxy for the dependent variable, domestic credit provided by banks to the private sector; inflation; government consumption; interest rate; gross capital formation; trade openness are proxy for explanatory variables (Vaithilingam, Guru & Shanmugam, 2003; Mohamed & Sidiropoulos, 2008; Ahmad & Malik, 2009; Al-Malkawi & Abdullah, 2011; Were, Nzomoi & Rutto, 2012; …) to analyze and build a regression model to consider the nexus between domestic credit provided by banks to the private sector and the economic expansion Nevertheless, this study only uses 3 variables, which is suitable with research objectives, as independent variables include domestic credit provided by banks to the private sector (CPS); gross capital formation (INV); lending interest rate (RATE), and the economic growth is represented by gross domestic product (GDP)

Table 2.5 Summary of the variables from empirical studies

Empirical literature

Dependent

Tahir et al (2015) X X X X

Source: Synthesized by the author

Also, the purpose to determine the effect of domestic credit provided by banks to the private sector on economic development, this study assumes some scientific hypotheses with the expectation of signs to analyze and examine in the research process (Table 2.6)

Table 2.6 Summary of hypothesis and expected sign

sign The empirical literature

H1

Domestic credit provided by banks to the

private sector (CPS) impact on Gross

Adekunle et al (2018)

H3 Gross capital formation (INV) impact

al (2015); Meyer & Sanusi (2019) Source: Synthesized by the author

In short, this sector presented the overall linear regression model, variables consist

of dependent, controlling variables that will be used for analysis Furthermore, scientific hypotheses and the expectation of sign about each independent variable affect the economic growth which is represented by GDP

Summary of chapter 2

In chapter 2, this study presented a definition of the private sector, the domestic credit provided by banks to the private sector, and economic growth Besides, this study also proved the necessary to financing the private sector through domestic credit provided by banks to the private sector via the important role of these factors in the economy to (i) generate employment, (ii) assist in the development, (iii) provide goods and services, (iv) promote diversification of business When private sector businesses work well based on the support of depository intermediaries, they contribute to increasing the national output

This study also presented the theoretical framework, which this paper based on to conduct the research, such as (i) Traditional Neoclassical Growth Theory (Solow and Swan, 1956); (ii) Endogenous Growth Theory (Romer, Lucas & Rebelo, 1988); (iii) The

Quantity Theory of Credit (Werner, 1992; Werner, 1997) Moreover, the impact of domestic credit provided by banks to the private sector on economic growth is enlightened via introducing many empirical kinds of literature Almost all writers concluded that the relationship between domestic credit provided by banks to the private sector and the growth of the economy is positive nexus though they used different methods and data Therefore, domestic credit provided by banks directly supports activities of the private sector and indirectly contributes to strengthening the national economy In short, domestic credit provided by banks to the private sector is necessary, not only to subsidize private businesses but also to develop the economy

CHAPTER 3: RESEARCH METHODOLOGY

This study introduces the research method and explains the purpose of using the quantitative analysis to determine the relationship between the development of the economy and domestic credit provided by banks to the private sector

3.1 The approach methods

This study is based on theories about economic growth and credit to achieve quantitative analysis target through a regression model that analyzes the impact of domestic credit provided by banks to the private sector on economic growth, thereby suggest some recommendations to the financial institutions which provide funds to private sector customers in Viet Nam based on the empirical results

In Neoclassical Growth Theory (Solow and Swan, 1956), capital accumulation is the main key in developing the economy Besides, labor and technology also affect national output However, the Endogenous Growth Theory (Lucas, 1988; Rebelo, 1991 & Romer, 1994) emphasizes technology is a crucial factor in long-term economic growth King & Levine (1993) argued the financial institution can exactly evaluate risk, management and investment projects when they supply credit to the private sector thereby increasing the success of innovative ideas which contributes to the economy Levine (1997) examined financial organizations influence economic growth through two channels: capital accumulation and technological innovation In capital accumulation, a financial system can affect national output by influencing the rate of capital accumulation through altering the savings rate reallocating savings among different capital-producing technologies Financial institutions impact growth by altering the rate of technological innovation which creates new goods and products Werner (2012) concluded that if the investment of the private sector is financed by the bank, it will lead to the development of the economic activity Hence, all theories are good starting foundations for analyzing the impact of domestic credit provided by banks to the private sector on economic growth

From empirical literature, most of the authors have examined the nexus between domestic credit provided by banks to the private sector and the growth of the economy in developing countries such as Malaysia, Nigeria, etc In the selected country, the importance of domestic credit provided by banks to the private sector to the economy can

be expressed through its positive effects Therefore, this is a cornerstone to determine the impact of the domestic credit provided by banks to the private sector on Vietnamese economic growth According to IMF (2018), Viet Nam is an emerging market and developing country

Moreover, this study also chooses popular variables, which are selected from the empirical literature, to check the relationship between domestic credit provided by banks

to the private sector and the development of the Vietnamese economy The number of using each variable by the writers in empirical studies, the meaning of each variable, and the summary of hypothesis and the expected sign were synthesized in part 2.6 of chapter

2

The linear regression model illustrates the effect of domestic credit provided by banks to the private sector on the economic growth in the case of Viet Nam from the equation (2.1):

: the gross capital formation at the time t (% of GDP);

: thelending ratethat the internal banks finance the needs of the private sector at the time t (%);

: the random error in a sample

From selection proxy variable based on the empirical literature for the reason to examining the impact of domestic credit provided by banks to the private sector on the economic growth, this paper is going to present the meaning of variables in the regression model

 Domestic credit provided by banks to the private sector (CPS) (% of GDP)

Domestic credit provided by banks to the private sector is defined as financial resources provided by financial corporations to the private sector For instance, loans, purchases of non-equity securities, trade credits, and other assets, which establish a claim for repayment Monetary authorities and deposit money banks, as well as other financial

corporations such as foreign exchange companies, finance, and leasing companies, pension funds, money lenders, and insurance corporations with data (including corporations that do not accept transferable deposits but incur liabilities such as time and savings deposits), are included in the financial corporations (Indexmundi, 2020; WB, 2020)

This study selects this variable because of the following reasons:

Firstly, the central bank implements monetary policy through the banking industry, thereby developing the economy (Mathai, 2020)

Secondly, the financial market is still mainly concentrated on credit from bank sources in Viet Nam Vietnam's success in recent years has relied on the growing financial resources of the banking sector, with the credit to GDP ratio jumping from 17 percent in 1996 to over 130 percent in 2018 (WB, 2019)

 Gross capital formation (INV) (% of GDP)

Gross capital formation (formerly gross domestic investment) is that the sum of expenditures on fixed asset additions plus net changes in inventory levels Land improvements (fences, ditches, drains, and so on); the purchase of plant, machinery, and equipment; and the construction of roads, railways, and similar structures such as schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings and so on are examples of fixed assets Inventories are goods stocks that businesses keep on hand to meet temporary or unexpected fluctuations in production or sales, as well as "work in progress." According to the SNA of 1993, net acquisitions of valuables are also considered capital formation (WB, 2021)

Tahir & Khan (2014) showed that there was a positive relationship between domestic investment and Asian economic growth They chose 22 developing nations in Asia to check the impact of domestic investment on economic growth in the period from

1990 to 2009 Nikoloski et al (2015) also suggested that capital accumulation has significant meaning in the economic growth of developing countries Moreover, Meyer & Sanusi (2019) presented the positive connection between capital formation and economic growth though they only used data in South Africa

 Gross domestic product (GDP) (%)

GDP annual percentage growth rate at market prices in constant local currency The aggregates are calculated using constant 2010 US dollars GDP is calculated because

of the sum of the gross value added by all resident producers within the economy, plus any product taxes and minus any non-product value subsidies It's computed without taking under consideration the depreciation of manufactured assets or the depletion and degradation of natural resources (WB, 2021)

As GDP provides a direct indication of the growth and health of the economy, private sector businesses can use GDP as a guide to their strategic plans business The Central Bank uses the growth rate and other GDP stats as part of their decision process in determining suitable types of monetary policies to implement If the economy is in recession, they can exercise an easy monetary policy to boost the economy and vice versa (Fernando, 2020)

Therefore, this study will choose GDP proxy for the economic growth in Viet Nam

 Lending interest rate (RATE) (annual %)

The lending rate is the bank rate that typically meets the private sector's short and medium-term financing needs This rate is usually differentiated supported by the creditworthiness of the borrower and therefore the goals of the financing The terms and conditions attached to those rates differ by country, however, limiting their comparability (WB, 2021)

The Nigerian economic growth was significantly negatively impacted by the interest rate in the long run as well as the short-run (Obamuyi, 2009; Adekunle et al., 2018)

Mutinda (2014) showed the negative relationship between the lending interest rate and the economic growth in Kenya after analyzing the regression model using quarterly data from 2003 to 2012

3.2 Data collection methods

According to Hassouna (2020), the minimum observation using time-series analysis is 25 observations for annual data Moreover, some scientific research papers done in Viet Nam have used a small sample size For example, Le Thanh Tung (2015);

Le Trung Thanh & Nguyen Duc Khuong (2017); Kieu Huu Thien et al (2019); Huynh Thi Thuy Vy (2020) Therefore, this study only collected between 1995 and 2019 because of the lack of data to clarify the role and determine the effect of domestic credit