Evaluating the Determinants of Credit Growth in Banks Across Western Balkan Countries: A Panel Data Approach

Abstract

This study investigates the determinants of credit growth in Western Balkan countries over the period 2011–2023, assessing whether lending dynamics are driven by macroeconomic fundamentals or financial sector conditions. The analysis focuses on key variables, including GDP growth, foreign direct investment (FDI), inflation, and lending interest rates. Using a balanced panel dataset, the study employs pooled Ordinary Least Squares (OLS), fixed and random effects models, and a two-way fixed effects specification with Driscoll–Kraay standard errors to address cross-sectional dependence and unobserved heterogeneity. The empirical results show that lending interest rates exert a statistically significant negative effect on credit growth, indicating that financial conditions play a central role in constraining lending activity. In contrast, GDP growth and inflation are not found to be significant determinants, challenging conventional macro-financial expectations. FDI becomes significant only when introduced in a lagged specification, suggesting a delayed transmission mechanism through which external capital inflows influence credit expansion. The study contributes to the literature by providing comparative multi-country evidence from structurally constrained and bank-dominated financial systems. The findings suggest that credit growth is driven less by traditional macroeconomic factors and more by financial sector conditions and institutional characteristics. These results have important policy implications, highlighting the need to strengthen financial intermediation efficiency and credit transmission mechanisms rather than relying solely on macroeconomic expansion to stimulate lending.