The Trend of Non-Performing Loans in Albania's Banking Sector - Causes - Challenges & Recommendations

Abstract

Non-performing loans in the Albanian banking system is becoming one of key concerns for banks, particularly after the breakout of the last global financial & economic crises of 2008. The crises effects, twinned with other specific factors of Albania’s economic structure, could be identified as the main causes of increasing NPL’s.

The paper identifies the most specific causes, as those of coming from global and local financial crises, like: lack of economic growth, declining remittances, unpaid and deferred government obligations to businesses, and furthermore, loan-making pattern applied by the Albanian banking system, before and after the financial crisis. The upswing trend of NPLs in the banking system is triggering an increasing amount of banks’ loan loss provisions banks, a diminishing regulatory capital, thus reducing banks’ lending capability to the economy. We come to the conclusion that such actual situation is becoming a certain vicious circle.

The paper analyses the loan-making approach & practices of Albania’s banking system, during the last decade, and provides recommendations on improving lending practices, procedures, and especially NPLs’ resolution, portfolio diversification and aggregating risk within tolerable and manageable limits.

Keywords: Non-Performing Loans (NPL), Banking Crisis, Financial Crisis, NPL's Resolution

JEL Classification: G21, G33, G38