Albania and Kosovo with Development Potential, but Limited Support from the Banking Sector

Abstract

The purpose of the study is to examine the financial performance of commercial banks in Albania and Kosovo. As they are considered to be the main financial institutions in both countries, facilitating individual and corporate financing, and therefore influencing a country's economic growth. The data is collected from audited financial statements of each commercial bank in Albania and Kosovo for the period 2010-2021. The regression models 'pooled OLS', 'fixed effects (FE)', and 'random effects (RE)' were utilized for analysis, and the Hausman test was used to compare the fixed effects model to the random effects model. Return on assets (ROA) and return on equity (ROE) of the activity of commercial banks were assessed, while independent variables included the number of banks, non-performing loans, real GDP growth, GDP per capita, consumer price inflation (percent, period average), and the unemployment rate. The results show that bank performance is positively correlated to the number of banks, real GDP growth, GDP per capita, and the unemployment rate. On the other hand, the results show that bank performance is negatively affected by inflation and non-performing loans. According to the results of the study, we can conclude that the banks in Kosovo have performed better than the banks in Albania. Moreover, from the research on the two countries, it is clear that there cannot be a good balance between economic growth and satisfactory banking performance.