The impact of macroeconomic and bank internal factors on banking stability: Evidence from Kosovo banking sector

Abstract

The aim of this research paper is to empirically identify the impact of internal and macroeconomic factors on the stability of the banking sector in Kosovo. The stability of banks is determined by the amount of risk they can be exposed to. NPLs (non-performing loans) are one of the main factors used to measure banking stability. In addition to the literature in the Eurozone and the United States, there is a gap in Kosovo regarding the impact of internal and macroeconomic factors on the stability of the banking sector. This paper aims to fill the existing gap and expand the literature and knowledge on banking stability. The paper attempts to answer the following questions: which are the internal and macroeconomic factors that impact the banking stability in Kosovo? Regression modelling using panel OLS, random and fixed effects was used to generate the main findings and results. Results show that return on assets, loan loss provision, capitalization, and bank size at p-value <0.05 have a statistically significant impact on non-performing loans, whereas loan growth, GDP, and inflation have statistically insignificant impact on non-performing loans. The research paper is helpful for senior management of the banks, central bank, investors, and government to take into consideration the internal and macroeconomic factors that impact the banking stability.