







































Asian Themes in Social Sciences Research 
ISSN: 2578-5516 

Vol. 1, No. 2, pp. 44-49 
2018 

DOI: 10.33094/journal.139.2018.12.44.49 
© 2018 by the authors; licensee Online Academic Press, USA 

44 
© 2018 by the authors; licensee Online Academic Press, USA 

   
 
 
 
 

The Relationship between Risk Management and Profitability 
of Commercial Banks in Albania 
 
 
 

Arjeta Hallunovi1* --- Miranda Berdo2 

 
*1Lecturer, Business Faculty, Aleksander Moisiu University, Durres, Albania 

 
2Department of Performance Audit, Albania Supreme Audit Institution, Albania 
 

 
 

Abstract 

Profitability is an indicator of the capacity of commercial banks to cope with their risk and/or 
capital growth, showing their competitiveness and measuring the quality of management. 
Credit risk is one of the significant risks of commercial banks by the nature of their activities. 
By effectively managing the exposure of commercial banks to credit risk, they not only support 
the viability and profitability of their business but also contribute to the system, stability and 
efficient allocation of capital to the economy. The purpose of the study was to determine 
whether there is a relationship between credit risk management and profitability in 
commercial banks in Albania. In this paper, there are four variables: ROA and ROE are the 
dependent variables, whereas non-performing loans (NPLs) and capital adequacy (CAR) are 

the independent variables. The main source of data collection are the annual reports for a 7-
year period (2008-2015) by the Albanian Association of Banks. For quantitative data 
analysis, multiple regression model was used (SPSS). 
. 
 
 

Keywords: Albania, Commercial banks, Profitability, ROE, ROA. 
Licensed:  This work is licensed under a Creative Commons Attribution 4.0 License.  

 
 
1. Introduction 

As a critical part of financial systems, banks play an important role in contributing to the country's 
economic development and also the functioning of an economy (Pasiouras and Kosmidou, 2007). If the banking 
industry is not working well, the effect on the economy can be large and broad. Efficiency of commercial banks 
in managing their risk in different business cycles can lead to improved losses and crises between them 
(Alexandri and Santoso, 2015). Typically, Ameur and Mhiri (2013) defined risk as an exposure to a proposal 
for which one is uncertain. While risk management is the process of risk identification, risk analysis and 
assessment, risk audit and risk management to control the financial exposure of the commercial bank, based on 
study of Chinoda (2014). Banks are exposed to risks, while credit risk is one of the threats to the credibility of 
commercial banks (Panda and Hota, 2014). 

The study of profitability  is important not only because of the information it provides about the health of 
the economy every year, but also because profits are a key determinant of growth and employment in the 
medium term according to Ongore and Kusa (2013). Banking performance assessment is a process that 
requires special attention from several factors. In developing countries where our country is classified, it is 
very important to have good, sustainable, fast economic progress, thus increasing the benefits of  all financial 
institutions (Suzuki and Sastrosuwito, 2014). It is imperative for every country to have the banking sector, 
well structured and profitable, in such a way as to be competitive and successful (Saeed, 2016). The stability of 
the financial system depends on the profitability of the banking sector. Profitability is an indicator of the 

https://www.doi.org/10.33094/journal.139.2018.12.44.49


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© 2018 by the authors; licensee Online Academic Press, USA 

bank's capacity to cope with the risk and increase its capital. Profitability is used to determine the progress of a 
business. Profitability determinants have been studied and researched even though the profitability definition 
varies between studies (Sayilgen and Yildirim, 2009). 
 

2. Literature Review 
Many studies conducted by different authors have concluded that credit risk management is the main 

determinant of bank profitability (Shrestha, 2017). But there are also studies that have proven the opposite. 
Awoke (2014) has made a study on bank profitability, where it has come to the conclusion that there is a 
positive relationship between profitability and liquidity in 12 European, North American and Australian 
banks. Meanwhile Gitau et al. (2017) have concluded, according to their study, that these two variables have 
negative relationship. Gizaw et al. (2015) in their empirical study reported that US banks in the 1980s had a 
strong positive correlation between the equity ratio and profitability but this relationship may be negative in 
certain situations. In another study, Abdullah et al. (2014) found the same result for commercial banks in the 
United Kingdom during 2000-2005. Another study conducted by Frederick (2014) examined the relationship 
between credit risk and liquidity risk in relation to the profitability of banks in Indonesia and revealed a 
negative credit risk effect and a positive effect of liquidity risk on bank profitability. 

Ali et al. (2011) in their study showed that the management of credit risk had an effect on the profitability 
of commercial banks taken in the study. As to the two indicators taken as representatives of credit risk 
management, it turned out that NPL has a greater impact than the CAR in one of the ROE profit 
determinants. This effect is different in different commercial banks. Gul et al. (2011) concluded in their study 
that credit risk management has a positive impact on the profitabil ity of commercial banks. The same 
conclusion was found also by Isik et al. (2016), where non-performing loans, loan loss provisions and capital 
adequacy have a significant impact on the profitability of commercial banks in Ethiopia. In other studies of this 
nature Ishak et al. (2016) reviewed the factors that affect the performance of Islamic commercial banks. It was 
reported that the high level of financial leverage and the high credit rate in relation to assets showed a positive 
correlation with profitability. Also Naceur (2003) concluded in a positive relationship between the credit risk 
of Swiss commercial banks and the capital rate during 1989-1995. Kosmidou (2008) study the factors that 
influence the profitability of commercial banks in Europe. He found a positive relationship between CAR and 
profitability. Previous studies also reflected a close relationship between NPL and credit risk management.  
 

3. Empirical Analysis 
In order to answer the hypothesis of the study, an econometric model has been built  to identify and 

measure the variable that most affects the commercial banks' profitability in Albania. Estimated multiple 
regression equation: 

y ̂=b0+b1x1+b2x2+…bpxp 

This is the estimated multiple regression equation, which determines the correlation between variables 
taken in the study (Li and Zou, 2014). Where b0 is the constant term of the model and b1, b2 are the regression 
function coefficients. Using this model and comparing the coefficients next to each independent variable, it will 
be found which of the variables affects the profitability of the banks. 
 

Table-1. Summary of the econometric model for dependent variables (ROA/ROE). 
       Model Summary 

Model R R Square Adjusted R Square Std. Error of the Estimate 
1 .778 .606 .579 .26319 
2 .815 .665 .642 3.08454 

      
According to the results in Table 1, the test has calculated that the Adjusted R Square is 0.579 ie 57.9% of 

the ROA variable explained by the model. Capital adequacy and non-performing loans account for 57.9% of 
changes in profitability of commercial banks measured by return on assets. Meanwhile, 42.1% is the 
unexplained part, which may be explained by other factors that are not included in the model. Correlation 
coefficient R = 0.778 means that there is a strong linear relationship between the variables ROA and 
independent NPL and CAR variables. While the test has calculated that the Adjusted R Square is 0.642 ie 
64.2% of the ROE variable is explained by the model. That is, capital adequacy and non-performing loans 
explain 64.2% of changes in banks' profitability measured by return on equity. Meanwhile, 35.8% is the 
unexplained part, which may be explained by other factors that are not included in the model. Correlation 
coefficient R = 0.815 means there is a strong linear relationship between the ROE-dependent variables and the 
independent NPL and CAR variables. 
 

 
 
 
 
 
 



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© 2018 by the authors; licensee Online Academic Press, USA 

Table-2. ANOVA Table. 
       ANOVAa 

Model Sum of Squares Df Mean Square F Sig. 

1 Regression 3.088 2 1.544 22.290 .000 
Residual 2.009 29 .069   

Total 5.097 31    
2 Regression 547.018 2 273.509 28.747 .000 

Residual 275.917 29 9.514   

Total 822.935 31    

 
According to the results in Table 2, the two hypotheses are confirmed for the importance of the first 

model as a whole. 
Ho: Independent variables, NPL and CAR do not affect the dependent variable ROA.  
Ha: Independent variables, NPL and CAR affect the dependent variable ROA.  

For α = 0.05 

P = 0.000 <0.05 → Ho ↓ → Ha ↑ 
So, the basic hypothesis falls down and alternative hypotheses are accepted. It is concluded that the model 

is important in its entirety, independent variables, therefore, non-performing loans and capital adequacy affect 
the dependent variable of return on assets. To prove the hypothesis is also found critical value through Fisher 
distribution. 

Fc = Fk,n-k-1,α = F2,29,0.05 = 3.3277 
According to the results in Table 2, the two hypotheses are confirmed for the importance of the second 

model as a whole. 
Ho: Independent variables, NPL and CAR do not affect the dependent variable  ROE. 
Ha: Independent variables, NPL and CAR affect the dependent variable ROE. 

For α = 0.05 

P = 0.000 <0.05 → Ho ↓ → Ha ↑ 
Thus, the basic hypothesis falls down and alternative hypotheses are accepted, concluding that the model 

is important in its entirety, independent variables such as non-performing loans and capital adequacy affect the 
variable variability of return on equity. To prove the hypothesis is found critical value through Fisher 
distribution. 

Fc = Fk,n-k-1,α = F2,29,0.05 = 3.3277 
 

 
Chart-1. Fisher distribution. 

  



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Chart-2. Fisher distribution. 

 
Based on the results in Tables 3 and 4, are also presented the estimated equations (for ROA and ROE) and 

the interpretation of the coefficients. 
Table-3. Coefficient Table (ROA). 

Coefficients 

Model Unstandardized Coefficients Standardized Coefficients t Sig. 
B Std. Error Beta 

1 
(Constant) -3.641 .979  -3.720 .001 
NPL -.018 .007 -.327 -2.668 .012 
CAR .287 .058 .612 4.995 .000 

 
First Equation Estimated: 

y ̂ =-3.641 - 0.018x1 + 0.287x2 

If banks keep constant capital adequacy (x2) and increase the rate of non-performing loans with a unit then 
return on assets will decrease to an average of 0,018 units. Thus, the growth with a credit risk unit will 
decrease the ROA by (0.018) to 1.8%. If banks keep constant the problem of problem loans (x 1) and increase 
the capital adequacy rate with a unit then return on assets will increase to an average of 0.287 ie by 28.7%. 
Thus, the increase with a capital adequacy unit will increase ROA by 28.7%. 
 

Table-3. Coefficient Table  (ROE). 

Model Unstandardized Coefficients Standardized Coefficients T Sig. 

B Std. Error Beta  

1 

(Constant) -46.863 11.472  -4.085 .000 

NPL -.265 .080 -.375 -3.320 .002 

CAR 3.680 .675 .617 5.456 .000 

         
Second Equation Estimated: 

y ̂ = -46.863 - 0.2658x1 + 3.680x2 

If banks keep constant capital adequacy (x2) and raise non-performing loans with a unit (x1) then return 
on equity will decrease to an average of 0.265 ie by 26.5%. Thus, the growt h of a credit risk unit will lead to a 
decline in ROE by (26.5%). If banks keep the problem of non-performing loans constant (x1) and increase the 
capital adequacy ratio with a unit (x2) then the return on equity will increase to an average of 3,680. Thus, the 
increase with a capital adequacy unit will lead to an ROE increase of 3,680 units.  
 

4. Conclusions 
Based on the above analysis, it was concluded that credit risk has a significant impact on the profitability 

of commercial banks by verifying the hypothesis. Some specific endings were also achieved, such as: 
▪ The results showed that there is a negative relationship between credit risk and profitability ROA 

and ROE, hence there is a correlation with profitability. Credit risk remains the most important risk 
faced by commercial banks, so its accurate measurement and credit risk management is of crucial 
importance. The relationship between credit risk and profitability was expected to be negative, given 
that the more unprofitable loans a bank has, the more the bank's profitability will be reduced. 

▪ The results showed that capital adequacy has a positive relationship with two profitability variables 
with return on assets and return on equity. More importantly, capital adequacy has a return on equity 
with a higher statistical value than the return on assets. Capital adequacy ratio is one of the most 
important variables to measure the profitability of commercial banks, because a strong capital bank is 
able to pursue more efficiently and has more time and flexibility to dealing with problems arising 



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from unexpected losses, thus increasing profitability. Thus, from the data analyzed in this study it is 
noticed that capital adequacy has value for profitability. 

▪ Just as non-performing loans and capital adequacy influenced both models, such as return on assets 
and return on equity. In the ROA model, two independent variables account for 57.9% of changes in 
profitability of commercial banks, compared to ROE, which have a higher percentage of explained 
greater ROA than 64.2%. Even the coefficient of correlation shows that ROE has a stronger linear 
relationship between ROE and NPL and also CAR while ROA has weaker connections. Thus, it is 
concluded that the return on equity is a more efficient profitability measurement than t he return on 
assets. The empirical study concluded that there is a strong relationship between credit risk and 
profitability of commercial banks. 

 

5. Recommendations 
▪ Credit risk and capital adequacy are significant indicators of the profitability of commercial banks in 

Albania. It is recommended that focusing on improving or managing these indicators can result in 
increased profitability of commercial banks or their performance. 

▪ Banks should ensure that they are constantly aware of the performance of the lending portfolio and 
normally of the weight they occupy in the overall portfolio in order to be ready to take appropriate 
measures to cope with the risk cases. 

 
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