Factors Affecting Interest Rate Risk: The Case of Kosovo

Abstract

This paper aims capturing the short- and long-run effects of the factors affecting interest rate risk in Kosovo banking industry through conducting ARDLBT approach to co-integration for covering data 2004Q1–2014Q4 and monthly based data. However, in the short-run, the effects are contrary to the theoretical expectations. In long run beside bank specific factors were included also macro indicators, most results were as expected where net profit (NP) and overall expenses (EXP) positively affect IRS while GDP and inflation appeared to have negative affect. However, Interest income (INI) showed to be moving differently from expectations where INI effects interest rate spread negatively. Findings shed light on the ongoing concern that followed the whole transition process of the banking industry in Kosovo. Policy makers would benefit not only to improve the current business environment but also conduct further steps in reducing interest rate spread in Kosovo banking industry.