The role of credit in economic growth

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Credit is a powerful driver of a nation's economic development. It is through credit that companies and entrepreneurs obtain capital to expand their businesses, develop new products and services and invest in technology and innovation.

Credit is also a powerful tool for governments looking for resources to make infrastructure projects viable that can improve people's lives - sanitation, road works and public transport, for example - and also to finance research and development, which can result in the creation of new industries, new products and services, more jobs and boost economic growth.

Credit also facilitates international trade by providing financing for the production of exportable goods and for the import of goods from other countries. By boosting exports, credit helps generate hard currency.

In addition, credit can help reduce social inequality by providing people with the capital they need to start businesses, invest in education and also participate in the consumer market by buying products and services that they have access to with credit. What's more, when people take out credit responsibly and fairly, they are more likely to improve their lives and those of their communities, which can have a positive impact on long-term economic development.

And what can we say about the size of the Brazilian credit market?

Data from Central Bank of Brazil show that the credit balance in the country is in the order of R$ 6 trillion. This figure represents the balance, due or to become due, of loans and financing operations carried out through the National Financial System. Over the last few years, this balance has grown significantly, especially during the pandemic.

To put into perspective what the volume of credit operations means, it's worth comparing this figure with Brazil's Gross Domestic Product (GDP). According to the Central Bank, the credit balance represents around 53% of GDP.

Calculating credit as a proportion of GDP indicates the importance of credit in relation to the size of the economy, allowing comparisons between countries. The credit-to-GDP ratio is an important indicator of an economy's financial health. In economies where credit is dictated by the market, if the ratio is high, it shows the maturity of credit discipline in the evaluation process, in competition and in the legal security of guarantees. If it is very low, it indicates room for evolution in the credit market, benefiting the economy and social welfare.

Looking at recent history and international figures, there are two clear conclusions. The Brazilian credit market has grown considerably over the last 20 years and there is plenty of room for expansion. It's enough to see that, at the beginning of the 2000s, the balance of credit operations represented approximately 25% of GDP. Throughout that decade, this percentage grew, surpassing the 50% mark for the first time in 2013. In the following decade, the credit balance fell due to the recession of 2014-2016, recovering a few years later. Between ups and downs, credit as a proportion of GDP has more than doubled in the country since the early 2000s.

It remains to be seen whether there is room for growth. At the moment, credit growth estimates are well above GDP growth estimates, which points to an improvement in the relationship between these variables. This expectation is in line with a series of transformative measures, encouraged and supported by the credit bureau sector, which have helped to build a favorable regulatory environment for credit management.

It has been proven that the design of good rules matters, as witnessed by the institutional changes that have favored the advance of credit in recent decades. Just look, for example, at the role of the Positive Registry (CP) in recent years and its contribution to reducing bank spreads and the financial inclusion of those invisible to credit.

This measure and countless others, such as encouraging competition in the banking market and financial education actions, are more than temporary stimuli: they are structural changes with the potential to make the credit market grow on a sustainable basis and bring the country closer to the international average.