How credit risk affects the bank’s performance in the Albanian banking system
Session
Information Systems
Description
Currently the most developed and regulated system in Albania, the banking system is characterized by high profitability and volatility. Actually, 12 commercial banks are operating in Albania and still the lack of organized capital markets and securities trading does not allow for the existence of investment banks. The main activity that commercial banks are completing is the intermediation of funds channeling them from the surplus entities to the deficit ones. That involves banks taking credit risk and consequently the degree that risk policies allow and the risk appetite of each bank affects their performance.
This paper explores how performance measured by return on equity and return on assets is affected by the main variables that characterize the credit risk of banks captured by the non-performing loan ratio and the capital adequacy ratio. For this purpose, quarterly data of the banking sector have been analyzed for the time period 2007-2021 to identify if there is any significant relationship between the variables. Preliminary findings suggest that there is a strong negative and statistically significant relationship between return on equity and return on assets with the non-performing loan ratio, while the capital adequacy ratio does not seem to be statistically significant in the return of banks.
This research contributes to the identification of credit risk characteristics that have a greater impact on the profitability of Albanian banks, as well as the development of different approaches to better manage credit risk.
Keywords:
Banking, system, credit risk, performance measuring, risk managing
Proceedings Editor
Edmond Hajrizi
ISBN
978-9951-550-50-5
Location
UBT Kampus, Lipjan
Start Date
29-10-2022 12:00 AM
End Date
30-10-2022 12:00 AM
DOI
10.33107/ubt-ic.2022.120
Recommended Citation
Kufo, Andromahi and Shanaj, Anxhela, "How credit risk affects the bank’s performance in the Albanian banking system" (2022). UBT International Conference. 121.
https://knowledgecenter.ubt-uni.net/conference/2022/all-events/121
How credit risk affects the bank’s performance in the Albanian banking system
UBT Kampus, Lipjan
Currently the most developed and regulated system in Albania, the banking system is characterized by high profitability and volatility. Actually, 12 commercial banks are operating in Albania and still the lack of organized capital markets and securities trading does not allow for the existence of investment banks. The main activity that commercial banks are completing is the intermediation of funds channeling them from the surplus entities to the deficit ones. That involves banks taking credit risk and consequently the degree that risk policies allow and the risk appetite of each bank affects their performance.
This paper explores how performance measured by return on equity and return on assets is affected by the main variables that characterize the credit risk of banks captured by the non-performing loan ratio and the capital adequacy ratio. For this purpose, quarterly data of the banking sector have been analyzed for the time period 2007-2021 to identify if there is any significant relationship between the variables. Preliminary findings suggest that there is a strong negative and statistically significant relationship between return on equity and return on assets with the non-performing loan ratio, while the capital adequacy ratio does not seem to be statistically significant in the return of banks.
This research contributes to the identification of credit risk characteristics that have a greater impact on the profitability of Albanian banks, as well as the development of different approaches to better manage credit risk.