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The performance of commercial banks and the determinants of profitability: Evidence from Kosovo

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  • Govori, Fadil

Abstract

Financial intermediaries perform indirect financing, and in this context, commercial banks are very important participants. They carry out the bulk of indirect financing transactions. On the other hand, the implementation mechanism of monetary policy is closely linked to the functioning of the banking system. Kosovo’s Commercial Banks performance is satisfactory compared with regional. In this paper we provide some of the performance indicators. The rates of return of commercial banks are greatly and directly affected by the net interest margin, provisions for loan losses, revenues and expenses by the non-interest, taxes and the equity multiplier. In this context, liquid assets do not appear to be of high impact in determining and variability the rate of return, high liquidity with low returns. Also, we address the impact of the global financial crisis “2008-20012” in the commercial banks performance in Kosovo, mainly through the impact of the decline in the asset use ratio. We think that was a positive approach that banks have followed the course of returns fall by the reduction in interest-expenditures, while the costs of provisions for loan losses to total average assets marked constant level throughout the period, despite the increasing ratio of nonperforming loans. Drawing on these findings it is recommended that banks even further engage in reducing operational costs; diversify income sources in order not to rely exclusively on the interests of loans, and to strengthen credit risk management in order to minimize the credit risk.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46824.

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Date of creation: 03 May 2013
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Handle: RePEc:pra:mprapa:46824

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Keywords: Banks; banking sector; banking performance; determinants of performance; profitability; rate of return; net interest margin; non-performing loans.;

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  1. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  2. Allen Berger, 1994. "The Relationship Between Capital and Earnings in Banking," Center for Financial Institutions Working Papers 94-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
  4. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
  5. Demirguc-Kunt, Asli & Laeven, Luc & Levine, Ross, 2004. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 593-622, June.
  6. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
  7. Heiko Hesse & Thorsten Beck, 2006. "Bank Efficiency, Ownership and Market Structure,Why are Interest Spreads so High in Uganda?," Economics Series Working Papers 277, University of Oxford, Department of Economics.
  8. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
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