Factors Influencing the Portfolio of Domestic Currency Loans in Albania

This study aims to analyze and detect the main factors that influence domestic currency lending in Albanian banking sector. After a large period of domination of loans portfolio by FX loans, it seems that this trend has changed direction in the few last years. The supervisory authority has taken initiatives to reduce the level of euroization in the financial system, through regulatory tools; banks have increased their efforts to orient the unhedged clients towards loans in the currency in which they generate their income; and borrowers have changed their attitude towards local currency loans, becoming aware of the risks that accompany FX borrowing. In this respect, we find it necessary to analyze the determinants of local currency loans, as this topic is almost untreated in the existing literature for Albania. The results show positive relationship of local currency loans with economic growth, the spread between lending and deposits interest rates, banks’ sources of funds and lending interest rates. On the other side, we find negative coefficients for non-performing loans and for the differentials between lending interest rates in local and foreign currencies. All the relationships are statistically significant and the speed of adjustment of the dependent variable towards equilibrium differs between the two equations estimated. Keywords: banking sector, domestic currency loans, determinants