Impact of interest rate, exchange rate, and inflation on commercial banks’ performance

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Abstract

This study aims to measure the impact of interest rates, exchange rates, and inflation on the performance of commercial banks in Albania, using monthly data from December 2015 to May 2022 obtained from the Bank of Albania and the Institute of Statistics of Albania (INSTAT). The multiple regression model measures the relationship between the dependent variable (ROA) and independent variables (inflation, interest rate, and exchange rate). The estimation results reveal that the interest rate variability has a high impact on the financial factor ROA. In contrast, the variability of the exchange rate harms it. The effect of variable nominal effective exchange rate (NEER) on ROA is low, and inflation negatively influences it. The model has resulted within all the criteria related to the regression analysis but with a low importance level. The important conclusion of this study is that the combination of variables, inflation, exchange rate, and interest rate, does not measure the impact of inflation on the performance of commercial banks. Other micro and macroeconomic factors can measure this impact.

Keywords: Inflation, Interest Rate, Exchange Rate, Commercial Bank Performance, Albania, ROA

Authors’ individual contribution: Conceptualization — F.M.; Methodology — F.M. and M.H.; Formal Analysis — M.H.; Writing — Original Draft —F.M.; Writing — Review & Editing — F.M. and M.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C31, C33, E31, E 43, F31, G10

Received: 09.10.2022
Accepted: 15.03.2023
Published online: 17.03.2023

How to cite this paper: Merko, F., & Habili, M. (2023). Impact of interest rate, exchange rate, and inflation on commercial banks’ performance. Corporate & Business Strategy Review, 4(2), 15–28. https://doi.org/10.22495/cbsrv4i2art2