Analyzing Credit Risk Factors: A Western Balkans Case Study

The purpose of this research paper is to determine factors of credit risk expressed in terms of non-performing loans in six countries of the Western Balkans (Kosovo, Albania, North Macedonia, Bosnia, and Herzegovina, Montenegro, and Serbia). The research uses different econometric techniques for the presentation of econometric models, where 4 models are used: OLS, fixed-effects model, random-effects model, and Hausman Taylor IV estimators. The results from the empirical analysis presented show that unemployment and the real interest rate have a positive impact on the growth of non-performing loans where both coefficients are statistically significant at the 1% level, while other variables (financial stability, economic growth, and inflation) show a statistically significant negative impact. These findings are important for the decision-makers of the financial systems of these countries, especially countries that have limited use of monetary policy, making decisions to create greater financial stability to reduce credit risk.