Abstract:
This paper explores the effect of NPLs on bank profitability in Albania in the period 2014-
2023. Given the importance of banks in funding the private sector and ensuring
macroeconomic stability, it is our research objective to test empirically the association
between NPL ratios and major profitability indicators; Return on Assets (ROA) and Return
on Equity (ROE). The study employs a panel data estimation method to analyze a sample of
active commercial banks in Albania and includes control variables: capital adequacy, loanto-
deposit, growth, inflation, unemployment. The regression results indicate that there is a
significantly negative relationship between NPLs ratio and both proxies for profitability.
Growth in NPLs has a significant negative impact on ROA and ROE as we can see, in which
reflects the necessity of controlling NPLs in order to maintain financial stability. The results
also provide evidence that bank-level factors like ownership structure and capital adequacy
impact the sensitivity to credit risk, and there is no clear evidence of macroeconomic
variables playing a significant role for the critical estimation specifications. The study also
enriches the finance and economics literature by providing policy implications and practical
lessons for policy makers as well as bank managers by suggesting the immediate necessity
of improving the credit screening process, reinforcing debt recovery, and adopting effective
means of management for the reduction of unsustainable NPLS. Especially for the Albanian
context, the results are of significance given that the country still faces vulnerability of the
banking system to the external shocks and limitations in terms of legal and financial
infrastructure by institutions.