New research finds financial activity rises before provincial sales, challenging assumptions about what drives growth.

The expansion of bank deposits and lending appears to be helping propel Ecuador’s economy rather than merely reflecting an improvement that has already taken place, according to new research examining financial activity across all 24 provinces.

The study found that increases in the money held in financial institutions and in the volume of loans issued to households and businesses tend to occur before sales begin to rise. That sequence suggests Ecuador’s banking system is acting as an engine of economic activity, particularly in a dollarized economy where the government cannot independently issue currency or adjust monetary policy.

Researchers analyzed monthly data on deposits, credit and sales from 2019 through 2025, a period that included the severe economic disruption of the Covid-19 pandemic and the uneven recovery that followed.

Their findings were presented July 16 and published in the International Journal of Financial Studies under the title “Financial intermediation and provincial economic activity in a dollarized economy: evidence from Ecuador’s VAR panel.”

Financial system leads the cycle

Economists have long debated whether banks lend more because an economy is already growing or whether expanded access to financing causes economic activity to increase.

The Ecuador study supports the second explanation.

Using sales as a measure of provincial economic performance, researchers found that changes in deposits and credit were followed by measurable increases in commercial activity. They did not find equivalent evidence that higher sales later produced significant growth in deposits or lending.

The researchers described the result as a “supply-leading” model, meaning the financial system provides resources that allow economic activity to expand.

The effect was especially pronounced in lending. A 1% increase in credit was associated with an estimated 0.21% rise in economic activity, according to Félix Casares, one of the study’s authors.

Loans can finance inventories, equipment, business expansion, construction and household purchases. When those funds are spent, they generate transactions throughout the economy, supporting sales among suppliers, retailers and service providers.

The findings suggest that policies affecting the availability and cost of credit can have consequences extending well beyond the banking industry.

Deposits begin the chain

The study identified deposits as the first step in the financial-intermediation process.

Banks and other financial institutions collect savings from individuals and companies, creating pools of liquidity that can then be converted into loans. Those loans are subsequently used to finance consumption and productive activity.

According to the research, growth in deposits begins to affect economic activity after approximately one month. The effect from credit generally appears after about two months.

The difference reflects the time required for banks to review applications, evaluate borrowers, approve financing and disburse funds. Once the money reaches businesses or consumers, additional time may pass before it is spent and recorded as a sale.

The study therefore describes a sequence in which greater savings strengthen bank liquidity, stronger liquidity supports lending, and new lending eventually contributes to increased commercial activity.

That sequence is particularly important in Ecuador because the country’s use of the U.S. dollar limits the tools available to national authorities during periods of weak growth. Without a national currency, the Central Bank cannot simply inject newly issued money into the economy in the same way as central banks in countries with independent currencies.

Pandemic exposed a break in intermediation

The Covid-19 crisis demonstrated what can happen when the connection between deposits and lending weakens.

From March 2020 through December 2021, households and businesses accumulated more money in deposits as uncertainty encouraged them to preserve cash. At the same time, financial institutions became more cautious about issuing loans amid job losses, business closures and fears that borrowers would be unable to repay.

As deposits rose, credit declined and sales suffered their steepest contraction during the period examined.

The result was an unusual disconnect: banks had more liquidity, but much of that money was not being converted into financing for the productive economy.

Researchers said the episode highlighted a structural vulnerability of dollarization. When banks reduce lending during a crisis, Ecuador lacks many of the monetary-policy instruments other countries can use to encourage credit expansion or quickly increase liquidity.

Recovery consequently depends more heavily on restoring confidence among depositors, lenders, consumers and businesses.

Lending also feeds government revenue

The benefits of credit growth may also reach Ecuador’s public finances.

David Jaramillo, economic director of the Association of Private Banks, said the research showed a close link among lending, sales and tax collections.

A 1% increase in the loan portfolio was associated with an estimated 0.13% rise in tax revenue. Expressed in monetary terms, every additional dollar issued in credit generated an average of 5.3 cents in added revenue for the government.

The relationship reflects the wider economic activity created when borrowed money is spent. Increased business sales can produce additional value-added tax collections, corporate income and employment, while consumer lending can support purchases that also generate taxable transactions.

Jaramillo said the estimates could help authorities prepare economic forecasts, set revenue expectations and develop the government’s annual budget proposal.

The findings also indicate that a contraction in lending can create a double burden for the State. Slower credit growth may weaken private-sector activity while simultaneously reducing tax collections, potentially leaving the government with fewer resources precisely when economic support is most needed.

For Ecuador, the research places the financial system near the center of the country’s growth process. Deposits supply the liquidity, banks determine how much of it becomes financing, and borrowers transform that financing into the purchases and investments that ultimately appear in provincial sales figures.