The Performance of the Albanian Banking System, an Econometric Analysis

Abstract

The aim of this paper is to analyze the influence of some internal banking factors in the performance of the Albanian banking system. From the literature review is noticed that the banks’ performance is influenced by both macroeconomic and banking factors. We use ROA as a dependent variable and capital adequacy ratio, exchange rate euro/ALL, total loans, NPL ratio and interest rate spread as independent variables. The relation between the performance of the banking system and the banking factors will be tested by using a regression model like the ordinary least squares (OLS). The Albanian banking system was affected by the global financial crises of the 2007 especially in terms of performance measured by ROE and NPL. For example ROE decreased very much in the first trimester of 2009 while the NPL ratio had a rapid increase especially in the fourth trimester of 2008. Despite the measures taken from the Bank of Albania the NPL ratio is still a concerning problem because is about 24% in March 2014 while the ROA and ROE seem to be stabilized respectively by 0.64% and 6.70%. The regression results find out that the performance of the Albanian banking system is positively related to capital adequacy ratio and negatively related exchange rate euro/ALL, total loans and NPL ratio while the interest rate spread seems to be not significant to explain the banks’ performance. JEL: G2, G21. Keywords: Albanian banking system, internal banking factors, total loans, interest rate, capital adequacy ratio.