THE DETERMINANTS OF CREDIT RISK IN THE ALBANIAN BANKING SYSTEM FROM 2014 - 2025: AN ECONOMETRIC ANALYSIS

Credit risk management is a cornerstone of financial stability, particularly in bankdominated economies like Albania. This study provides a comprehensive econometric analysis of the factors driving non-performing loans (NPLs) in the Albanian banking sector over an eleven-year period (Q1 2014 – Q4 2025). Utilizing quarterly time-series data from the Bank of Albania, the research employs an Ordinary Least Squares (OLS) regression model to evaluate the impact of both macroeconomic indicators and bankspecific variables on credit quality. The empirical results reveal that the NPL ratio, which reached a historic low of 3.8% by late 2025, is significantly influenced by the broader economic environment. GDP growth emerges as the most potent determinant, showing a strong negative correlation with credit risk, thereby confirming that economic expansion enhances borrower repayment capacity. Conversely, inflation and policy interest rates exhibit a positive and significant relationship with NPLs, suggesting that monetary tightening and rising costs of living increase the debt burden and elevate default risks.
Among internal factors, the Capital Adequacy Ratio (CAR) is found to significantly mitigate credit risk, reinforcing the premise that well-capitalized institutions maintain stricter lending standards. The findings underscore a critical trade-off for regulators: while interest rate hikes are necessary to curb inflation, they simultaneously pose a threat to loan portfolio quality. The study concludes that maintaining robust capital buffers  and fostering stable economic growth are essential for safeguarding the resilience of the Albanian financial system. These insights serve as a vital guide for policymakers and bank managers in refining risk mitigation strategies