The Impact of Non-Performing Loans Ratio on Banking Profitability in the Albanian Banking System

Abstract

Most of the studies have determined credit risk as the biggest risk among all other risks with a direct impact on the financial performance of a bank. The main objective of any bank, like any business unit, is to maximize shareholder value, so we considered it important to treat the impact of one of the most important bank’s risks on its profitability. Bank profitability and the non - performing loans ratio (NPLR) are the two main concepts in our study. This study aims to investigate the relationship and the stability over time of this relationship between the non - performing loans as the main indicator of credit risk management and profitability of commercial banks in Albania. The linear regression model is used to test the hypothesis raised in the study which tests the relationship that exists between the credit risk management indicator and bank profitability indicators. NPLR is taken as a representative indicator of credit risk management and ROE (return on equity) and ROA (return on assets) are taken as representative indicators of bank profitability. The statistical analysis in the study showed a negative impact of the NPLR indicator on the two indicators of bank profitability in our country. The findings of our study constitute a valuable contribution to banks and policy makers because a strong banking system motivates the financial stability of a country and increases the elasticity of economies to face economic crises. To conduct the study, we faced difficulties and challenges in finding a long time series of data for all the indicators taken in the study for each of the commercial banks operating in Albania. Although we were not able to provide the data for each commercial bank, we overcame this difficulty by taking the total data from the official website of the Bank of Albania. Taking into consideration that the banking history in Albania is relatively short we managed to find data for an 8-year study period which we used in our study.