Credit Supply Response to Monetary Policy: Evidence from Pakistan

Abstract

The research analyzes the effects of monetary policy on banking credit supply in Pakistan by filling a significant research gap by simultaneously studying bank-specific qualities combined with macroeconomic elements from an emerging economic perspective. The study incorporates 24 Pakistani commercial banks and 17 years of data through GMM analysis to assess how monetary instruments shape loan decision-making by banking institutions. During analysis, the study employs bank-specific metrics like size and liquidity, capital adequacy and profitability, credit risk metrics, and macroeconomic elements such as GDP growth and inflation. The research shows that banks use inflation-sensitive behaviors to raise funding supply during monetary contractions, increasing credit availability. Strong capital positions and sufficient reserve liquidity increase lending abilities of financial institutions on top of larger banking scale. Economic stability that includes GDP growth promotes increased credit expansion although inflation generates risk-adjustment behavior that leads to caution among lenders. This study establishes the existence of the bank lending channel (Bernanke & Gertler, 1995) in Pakistan by showing that profitability supply-side motives dominate typical demand-side limitations. The findings support the need to establish monetary frameworks which unite institutional differences with structural weaknesses and cyclic movements of the economy. This research provides developing economies with actionable policy frameworks by analyzing bank attributes and policy instruments' interactions while maintaining macroeconomic stability. It enhances worldwide discussions about monetary transmission in developing economies.