Disaggregated Credit Extension and Financial Distress in South Africa

Abstract. This study analyses the relationship between disaggregated credit extension and financial distress in South Africa. Of particular interest is to isolate the components of disaggregated credit extension that show a strong relationship with the measure of financial distress. The empirical results reveal that aggregate total domestic credit extension is robustly positively correlated with the composite indicator of financial distress, while there is a mixed relationship between the components of disaggregated credit extension and the composite indicator of financial distress. In particular, the study finds that total domestic credit extension, instalment sale credit, loans and advances to households, investments and total loans and advances are highly correlated with the composite indicator of financial distress. Therefore,the study conjures that these components could be aggregated into a single measure of credit extension that could be usedfor financial stability purposes in South Africa.Keywords. Disaggregated credit extension, Financial distress.JEL. C32, E44, E51, G21