The effect of foreign direct investment inflows on non-performing loans

Abstract

Foreign direct investments (FDIs) are an important part of a country’s economic development and banks play a crucial role in terms of facilitating the FDI inflows. However, given that these inflows enable banks to increase the portion of loans, this increases the exposure to credit risk leading to potential increased non-performing loans (NPLs) (Ozili et al., 2021). This study aims to investigate this relationship in the Albanian economy during the period 2008–2022. Considering the rapid growth of FDIs in Albania in recent years and the importance that the banking sector plays, the purpose of this paper is to assess the impact of FDI inflows on NPLs in Albania while controlling for other relevant NPL determinants. Using an ordinary least squares (OLS) regression model, we find a significant and positive relationship between FDIs and NPLs in Albania. The findings reveal that higher FDI inflows, which are channeled through the banking sector in the economy, provide increased credit growth and therefore a potential deterioration in credit standards leading to higher NPLs in the economy. In addition, we find a significant relationship between financial intermediation indicators and NPLs implying that financial intermediation also plays an important role in controlling the level of NPLs in the Albanian economy.