UNEMPLOYMENT AS A MAIN DETERMINANT OF NON-PERFORMING LOANS: THE CASE OF WESTERN BALKAN COUNTRIES
UNEMPLOYMENT AS A MAIN DETERMINANT OF NON-PERFORMING LOANS: THE CASE OF WESTERN BALKAN COUNTRIES

Summary/Abstract: Non-performing loans are a crucial determinant of the stability of the banking and financial sector within an economy. Their mismanagement can often lead to numerous financial problems and even banking crises. The level of non-performing loans is influenced by many factors, especially macroeconomic variables. Given the importance of the financial system in financing a country’s economic activities, as well as the role of reducing unemployment in socio-economic well-being, this paper aims to examine the impact of macroeconomic factors—including GDP, unemployment, and inflation—on non-performing loans in the Western Balkan countries. For the empirical analysis, this study employs OLS panel regression models, fixed effects (FE), and random effects (RE) models, using data from the World Bank covering the period 2000–2024. The findings highlight a positive and significant relationship between the unemployment rate and non-performing loans in the Western Balkans during this period. Conversely, GDP has a negative impact on non-performing loans, while inflation does not show any statistically significant effect.This study fills an empirical gap regarding the Western Balkan countries by suggesting that improvements in macroeconomic factors can contribute to the strengthening of the banking and financial system.

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