Key Macroeconomic Drivers on Reducing Non Performing Loans in Albania

Abstract

The financial system in Albania is really fragile, mainly focused in banking system. This banking system faced a sharp rise in non-performing loans after 2009. The level of NPL-s has increased from 10.48% on 2009 to the pick of 23.49% on 2013. Then, it started the decline arriving to 13.23% on 2017. The focus of this study it is the determination of the main macroeconomic factors affecting the level of bad loans. We tested statistically the role of GDP growth, inflation, unemployment level, Money Aggregate M2, Exchange rate and interest rates for loans, in the level of NPL-s. The data were taken from World Bank and Bank of Albania database. The data were elaborated through statistical program E-views 10. We conducted a multiple regression and the macroeconomic factors explaining NPL-s resulted: the GDP growth, the monetary aggregate M2 and the interest of loan. This connection resulted negatively correlated with GDP growth which began to grow after 2013 arriving at 3.84% on 2017, and positively correlated with M2 which has experienced a slight increase in these years; and interest of loans which is still low in Albania, decreasing from 2001 and on. These macroeconomic factors should be taken in consideration by Albanian authorities when compiling their plans and strategies.

The Macroeconomic Effects on Non-Performing Loan and its Implication on Allowance for Impairment Losses

“…People with employee status have other sources of income besides salary income, such as micro-enterprises or investments, so that they can help maintain family cash flow and debt repayment obligations to banks. The results of this research are in a row with the results of the previous studies conducted by Marouf & Guellil (2017) and Leka et al (2019). Those studies stated that the unemployment rate insignificantly affects NPL.…”

“…Inflation happens when there is a continuous rise in goods or services price, and society`s purchasing power will decrease; in this condition, the banking customer will find it difficult to pay their loan to the bank. Damanhur et al (2018), Naibaho and Rahayu (2018), and Leka et al (2019) stated that inflation has a positive and significant relation towards NPL, the rise of Inflation will trigger the rise of NPL credit ratio from the various economic sector.…”

The Relationship of Macro-risk Indicators, Internal Factors, and Risk Profile of Islamic Banking in Indonesia

“…GDP is the value of final goods and services based on market prices produced by an economy in a period using production factors located in that economy (Mishkin & Eakins, 2012). Umiyati & Faly (2015) and Leka et al (2019) argue that inflation's adverse effects also make GDP value decline. This decline will then affect the decline in domestic savings.…”

“…Apriadi et al (2017) found a negative relationship between NPL and NPF and GDP growth and inflation, but a positive relationship with unemployment. Leka et al (2019) and Donath et al (2014) found that the real GDP growth rate and inflation rate-CPI determined bad loans in the banks from Central and Eastern Europenegatively affect the unemployment rate a positive effect.…”

Examining the Effect of Economic Collison

“…The high value of inflation can positively or negatively affect the NPF. (Leka et al, 2019) argued that the bad impact of inflation can decrease GDP, which can affect people's savings, and ultimately banks will lose funding sources. Banking will experience a decline, marked by a decrease in funding (third party funds), which will affect the financing of Islamic banks.…”