The effect of credit risk on the financial performance of commercial banks in Balkan countries

Abstract

This study aims to examine the effect of credit risk on the profitability of financial institutions. For research, we have collected secondary data from the relevant institutions of the Western Balkan states such as Kosovo, Albania, North Macedonia, Serbia, Croatia, Montenegro, and Bosnia and Herzegovina. In total, there are 26 commercial banks from 2010 to 2022 that serve in these countries. We consider information from three panels that categorize state-owned banks, private banks, or multinational banks according to their ownership structure. Return on assets (ROA) or return on equity (ROE) were used as surrogates for financial performance measures, while the percentage of bad loans was used to measure credit risk (Furhmann, 2022). Where the research objective was to explore the relationship between credit risk and financial performance in commercial banks operating in the Balkan countries, to understand the factors that affect credit risk, and to suggest measures to increase the financial performance of banks in the region (Gbadamosi & Olaleke, 2019). From the evaluation results, we can see that both ROA and ROE are inversely related to credit risk (Al-Malkawi, 2019). The profitability of commercial banks in the Balkan countries from 2010 to 2022 has been shown to be related to credit risk management. As a result, financial institutions should pay more attention to credit risk management, especially bad debt prevention and investigation. Therefore, managers should pay more attention to the latest credit risk management strategies.