Causes and Consequences of NPLs in Bosnia and Herzegovina Banking Sector

Abstract

Abstract: This paper analyzes the relationship between risks to which banks are exposed, rate of non-performing loans as well as capital adequacy. The analysis was conducted among the banking sector of Bosnia and Herzegovina. For the purpose of the analysis, the International Monetary Fund data - Core Financial Indicators for the period 2008 – 2013 were used. This study differs from previous researches primarily in the fact that the case study is Bosnia and Herzegovina, where there haven't been similar studies. To analyze and evaluate the model, correlation and regression analysis were used. The paper points to those aspects which deserve further attention in order to achieve better and more efficient management of them. Results indicate the increase in risk-weighted assets and rising rates of non-performing loans as one of the component assets. At the same time the growth rate of non-performing loans leads to the growth in risk-weighted assets and therefore the bank is exposed to major risks. Higher return on assets, as an indicator of business performance and management resources and profitability, leads to capital adequacy improvement. There is a strong correlation between the rate of capital adequacy and non-performing loans and that requires further research. Results indicate that better liquidity control leads to a reduction in the rate of non-performing loans and consequently better liquidity position of banks, and thus reduction in liquidity risk. During the analysis it was found that a large proportion of non-performing loans to total loans leads to deterioration in the financial result which is further reflected in the banks' capital. When we talk about capital adequacy we come to the conclusion that the banking system in Bosnia and Herzegovina, despite all the shortcomings and problems is adequately capitalized.