Impact of Domestic Investment on Domestic Credit Level. Does Institutional Quality Matter?

Domestic investment can significantly affect the domestic credit market by shaping credit demand, borrower creditworthiness, lender behavior, interest rates, and financial sector policy decisions. These interdependencies underscore the necessity of a balanced and supportive economic environment to foster a healthy interaction between domestic investment and domestic credit levels. This study explores the complex relationship between domestic investment levels and the domestic credit market in the Sub-Saharan Africa region from 2002 to 2022, emphasizing the moderating role of institutional quality. Utilizing the two-step system generalized method of moments (s-GMM) estimation technique, the findings reveal that domestic investment exerts a crowding-out effect on domestic credit levels. However, the results become positively significant when domestic investment interacts with institutional quality variables, suggesting that institutional quality plays a crucial role in influencing domestic credit levels. This study confirms that institutional quality plays a moderating role in the relationship between domestic investment and domestic credit levels in the Sub-Saharan Africa region. We also calculate the marginal effect of institutional quality, which offers valuable insights into specific policy recommendations. These findings highlight the importance of enhancing institutional quality to optimize the positive effects of domestic investment on the domestic credit market.