Drivers of non-performing loans: Evidence from the Western Balkans

Abstract

The main aim of this study is to investigate the determinants that impact non-performing loans in the Western Balkans. The methodology used is quantitative, using secondary data obtained from World Bank Indicators for the period 2000-2022. The study employs econometric models used for panel data estimation, such as Pooled OLS, Fixed Effects, Random Effects, and the Hausman Test. The econometric results based on the Fixed Effects model, which was suggested as the appropriate model under the study context, show that an increased level of employment may be associated with a lower level of non-performing loans (NPLs), while domestic savings and higher real interest rates are associated with an increased level of NPLs under the study circumstances. The other macroeconomic variables, such as foreign direct investment, gross fixed capital formation, domestic credit to the private sector by banks, inflation, unemployment, and Gross Domestic Product, do not show statistical significance under the Fixed Effects model. However, due to the limited number of observations, the unbalanced panel, and the inclusion of only three countries in the econometric estimation, the results of this study are interpreted as sample-specific and preliminary rather than generalized, and are based on three Western Balkan countries, including Albania, Bosnia and Herzegovina, and North Macedonia (WB3). This research has implications for policymakers since it provides insightful information that suggests reducing non-performing loans (NPLs) may be achieved through targeted credit controls, improved employment levels, and macroeconomic stability.