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October 5, 2025Multidisciplinary Science Journal3 citations

Determinants of banking profitability: The impact of internal and macroeconomic factors

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BSBujar StatovciDBDriton Balaj

Key Points

  • The study shows that cost-to-income ratio and loan loss provisions negatively impact bank profitability.
  • Results indicate capitalization and funding costs positively influence return on assets within Kosovo’s banks, enhancing performance.
  • Using fixed effects panel regression analysis, the study highlights unobserved heterogeneity among banks affecting profitability dynamics.
  • Findings emphasize the need for effective resource allocation and improved operational efficiency to boost bank profitability.

Abstract

This study empirically examines the factors impacting bank profitability, specifically Return on Assets (ROA), within Kosovo's banking sector from 2016 to 2024. Using quarterly panel data, the analysis initially considered various panel regression models, including Ordinary Least Squares (OLS) and random effects (RE), but ultimately selected the fixed effects (FE) model as the most appropriate for controlling unobserved heterogeneity across banks. The results reveal that the cost-to-income ratio (CIR), capitalization, loan loss provisions (LLP), and funding costs are statistically significant determinants of profitability. Specifically, cost-to-income ratio (CIR) and loan loss provisions (LLP) exhibit a negative relationship with ROA, indicating that operational inefficiency and higher credit risk provisions reduce profitability. In contrast, capitalization and funding costs show a positive and significant association with ROA, suggesting that well-capitalized banks and those with higher funding activity tend to achieve better performance. Conversely, bank size, deposit growth, gross domestic product (GDP), and inflation are found to have positive but statistically insignificant relationships with ROA, suggesting their influence may be limited or context-specific within Kosovo's banking environment. In particular, while the positive coefficient for bank size may indicate potential benefits from economies of scale, the lack of statistical significance suggests that size alone is not a decisive factor in explaining profitability during the observed period. On a practical level, the evidence suggests that bank management and policymakers should prioritize strategies that enhance capitalization, reduce operational inefficiencies, and improve credit risk management. Efforts should focus on lowering the cost-to-income ratio through optimized operational processes and efficient resource allocation, which are essential for sustaining and increasing profitability. Overall, this study provides novel empirical insights into the determinants of bank profitability in Kosovo’s banking sector and contributes to the broader discourse on financial performance in emerging markets.

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Cite This Study

Statovci et al. (2025) studied this question.

synapsesocial.com/papers/68e25385d6d66a53c2474cc9https://doi.org/10.31893/multiscience.2026187
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Also Consider

Synapse has enriched 5 closely related papers on similar clinical questions. Consider them for comparative context:

  1. 1The Determinants of Profitability of Western Balkan Countries Commercial Banks: A panel Data Approach2024
  2. 2The impact of macroeconomic and bank internal factors on banking stability: Evidence from Kosovo banking sector2024
  3. 3A Panel Study on the Determinants of Profitability of Bulgarian Commercial Banks2026
  4. 4The Impact of Working Capital Management and Credit Management Policies on the Financial Performance of Kosovo Banks2025
  5. 5Impact of size of banks and insurance companies on their profitability in Bosnia and Herzegovina2024