Banks in the Western Balkans are financially strong and stable, but growing risks from rapid lending and rising investment in real estate could challenge their stability if not carefully managed, the World Bank warned in a new report.
The region’s banks—covering Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia—have maintained solid capital reserves and steady liquidity, helping them remain resilient amid a challenging global economic climate.
As of September 2024, the average capital adequacy ratio (CAR), a key measure of financial strength, stood at 19.3%, well above the regulatory minimum. Liquidity levels have also remained stable, with the average liquidity ratio around 28%.
“Banks in the Western Balkans are generally in good shape, but there are growing concerns about how quickly credit is expanding,” the report said. “Unchecked, this could strain bank balance sheets and increase exposure to risky sectors like real estate.”
While Kosovo had the lowest capital ratio at 15.5%, it still remained above the safe threshold. Serbia, meanwhile, continued to post the highest liquidity levels in the region.
Bank profitability has also improved. The average return on assets (ROA)—a measure of how effectively banks generate profit—reached 2.7% in September 2024, the highest in over a decade. Serbia led with 3.1%, followed by Montenegro. Albania lagged behind at 2.2%, partly due to declining interest rates.
However, the World Bank warned that the recent trend of falling interest rates could reduce banks’ profit margins and slow the strong performance seen since 2022.
Fast Credit Growth Poses Challenges
Lending across the region has picked up speed in recent months, raising red flags for regulators. The World Bank said this could lead to riskier loans, especially in sectors like housing and construction, and called for tighter financial oversight.
Countries like Kosovo are seeing more bank exposure to the real estate market—a sector vulnerable to price swings and debt buildup.
Despite current capital buffers, the report warned that external shocks or a drop in loan quality could test the resilience of some banks. It urged governments to boost regulatory tools, such as limits on how much people can borrow compared to their income or the value of their property.
“Supervision must remain strong and proactive to address risks early,” the report said.
Role of State-Owned Banks in Economic Development
The World Bank also emphasized the importance of development financial institutions (DFIs), such as state-owned development banks, in supporting long-term investment and job creation—especially in sectors that private banks tend to avoid.
In the Western Balkans, these institutions are expected to play a key role in helping countries prepare for future EU membership and implement major infrastructure and environmental projects.
But the report noted that some DFIs suffer from poor governance, political interference, and weak financial performance. This undermines their credibility and risks crowding out private lenders.
To address these challenges, the World Bank recommended stronger legal protections, improved supervision, and clearer rules to prevent unfair competition between public and private banks.
With the right reforms, DFIs could become “powerful tools to drive inclusive growth, support small businesses, and help the region meet EU standards,” the report concluded.
