Abstract This paper explores the influence of macroeconomic indicators, namely GDP growth, the Consumer Price Index and the unemployment rate on the quality of loan repayments by households in the banking market of the Federation of Bosnia and Herzegovina. Potential influence is observed over a period of fourteen years at the level of nonperforming household loans using regression analysis. The authors aim to determine whether macroeconomic forces actually influence loan repayment, and if so how and what can be done by banks to utilize this information in order to reduce future credit losses, and by the government to maintain the stability of the banking sector.

This research explores most dominant lending product to population of Bosnia and Herzegovina, a consumer loan, with aim to answer the question of what factors trigger loan repayment failure. It explores relation of borrower characteristics such as gender, age, level of indebtness to likeliness of loan repayment by use of probit on banking data sample representing 39% of the market share in the country. It identifies factors which lead to loan repayment failure and also provides exact empirical model for default prediction at loan approval stage. Main audience of this research should be banks, which could use the finding of the study to adjust their credit policies and risk appetite to ensure that lending losses from this strongly present product are minimized, thus leading to stable and financially sound banking sector.