The Impact of Risk Management on the Performance of the Banking Sector in Albania

Abstract

This research paper will examine the way that risk management influences the financial health of the banking sector in Albania. To investigate this topic, risk measurement ratios are included in the analysis, along with macroeconomic factors, while also considering the size of the banks as a micro-level factor. Return on Assets as a financial ratio is used as a measurement of profitability in the research. The literature review section establishes the foundation by exploring the role of risk management, causes of risks, and international perspectives on risk management strategies. It also examines the regulatory environment and challenges in the banking sector in Albania. To achieve precise results, a panel data analysis is conducted, applying a random effects model for year-by-year observations from 2014 to 2023. Nine Albanian banks are part of the study, and all the included data are collected from reliable sources, including annual reports from each bank and the World Bank. The results provide information on the dynamics between risk management and the effectiveness of banking operations, similar to other published works. For instance, Loan to Deposit ratio has a reducing influence on Return on Assets, while the size of the bank appears to have the contrary effect. Other factors also affect the profitability. The results of this study help in understanding the crucial role of risk management practices for a better environment for bank profitability in Albania.