The Effects of the Changes in Some Macroeconomic Indicators on the Non – Performing Loans in the Albanian Banking Sector (2007 – 2014)

Abstract

Having very high levels of non –performing loans (NPLs) has been one of the main problems of Albania since 2008 when the last global economic crisis started to affect Europe. In this paper, it was aimed to show how the changes in some macroeconomic figures of Albania have affected NPLs ratio in the banking sector knowing that it is also affected by some other factors related with the sector itself, borrowers and the legal system as well. The macroeconomic variables which were tested by using Least Squares Method are: real Gross Domestic Product (GDP) growth, unemployment rate, inflation rate, Albanian LEK (ALL)/EURO rate, remittances and foreign direct investments. The results show that NPLs has a negative correlation with remittances and unemployment rate (the latter is adverse according to economic theory) while its correlation with the other variables is not significant. The findings indicate that the huge decreases in remittances played a more important role than the general effects of the crisis in the continual and considerable increases of NPLs which have deteriorated financial tables of the commercial banks. As a result of this, the banks have become more selective in lending to business which also has caused NPLs rise (the vicious circle).Since the changes in these macroeconomic variables are, in general, not enough in explaining the big increase in NPLs, the other factors of NPLs such as bank risk management, structure of business entities and the legal system, which were not studied in this paper, should be analyzed to identify the other reasons behind this big problem. To decrease NPLs level; the banks should have more will to lend-especially to private entities- with paying attention to risk factor, the borrowers should try to find new partners/investors, markets to recover their businesses and meantime the government should encourage economic growth as well as strengthen and facilitate the legal system. DOI: 10.5901/mjss.2016.v7n3p162