Interest Rate Spread, Profitability and the Transition to Green Finance: Evidence from Kosovo's Banking Sector

This paper empirically investigates the nexus between interest rate spread (IRS) and bank profitability in the Republic of Kosovo, situating the analysis within an evolving banking sector that is increasingly oriented toward sustainable finance.Using sector-level monthly data spanning 2014 to 2024, the study employs regression analysis to assess whether narrowing interest margins constrain bank profitability (measured by Return on Average Assets, ROAA), particularly amid expectations that banks finance green projects and transition toward environmentally sustainable business models.The results reveal a statistically significant negative relationship between IRS and ROAA, indicating that tighter interest spreads pose profitability challenges.These findings contribute to the sustainable banking literature by illuminating potential trade-offs between financial performance and sustainable finance commitments in a transitional economy.The study offers important implications for banks and regulators in Kosovo aiming to balance financial viability with the sector's growing role in green lending, climaterelated disclosures and ESG-aligned investment practices.