IBNA Analysis/Elisabeta Gjoni, First Deputy Governor of the Bank of Albania talks about the Albanian banking system
Tirana, December 15, 2014/Independent Balkan News Agency
By Edison Kurani
The incomes that enterprises in Albania generate are taken out of the country. This is the concern articulated by the Bank of Albania. First Deputy Governor of the Bank of Albania says that in the first nine months of the year, 139 million USD or 140% more than a year ago have been taken abroad.
At the same time, the money circulating outside the banking system has also grown significantly.
The transfer of money abroad and circulation of informal funds, is considered as problematic by the Bank of Albania.
Bank experts say that informal lending by applying high interest rates, is developing more than the lending from the banking sector. According to the assessment of the Bank of Albania, the funds circulating in the informal market amount to 30% of the total value of funds. This phenomenon is explained with the inability of many businesses to meet the criteria of taking out a loan in private banks. They choose loan sharks who offer loans without collateral or any other banking criteria, but the interest that they apply are several times higher than banks. Economists believe that both of these negative developments come as a result of insecurity among businesses and individuals and also by the fact that businesses cannot secure all the necessary paperwork demanded from them by banks.
Experts say that the reduction of lending by the banking sector and the expansion of loans offered by individuals, is a potential risk for the Albanian economy.
Gjoni: The Albanian banking sector has maintained its structure and stability during 2014
In Albania, banks dominate the financial system, accounting for 94% of financial system activity, about 88% of GDP. Subsidiaries of foreign banks represent about 93% of total banking assets. Bank credit is funded largely by local deposits.
As a result of legal changes in 2012, all foreign banks operate as subsidiaries. There are 15 foreign-owned bank subsidiaries of major international banks, including banks from neighbouring countries (Greece, Italy, Turkey and the largest bank, Raiffeisen, from Austria). Greek banks account for one-fifth of Albania’s banking system.
Elisabeta Gjoni (photo), First Deputy Governor of the Bank of Albania said that the Albanian banking sector has maintained its structure and stability during 2014.
“The volume of activity grew and the financial performance improved. Overall, it remained liquid, well capitalized and capable to withstand various shocks”, Gjoni says.
Though there are improvements in liquidity and profitability, concerns over asset quality remain.
“By September 2014, banking sector assets expanded by 3% from the end of last year. Assets continued to be negatively influenced by the low pace of lending, due to the unstable demand for loans and the sale of non-performing loan portfolio by banks. For this reason, banking sector investment in Government securities amounted to around 25% of total bank assets or 60% of total public debt”, Mrs. Gjoni says.
The low pace of bank lending remains the major concern for the outlook of the Albanian economy.
The growth of lending remained below its historical rates – credit growth slowed down considerably in 2013 and shrunk in the first half of the current year. Both supply-side and demand-side factors impacted this performance.
Changes in parent bank policies, weakening of bank’ balance-sheets at home and tighter lending standards were factors that contributed to credit supply shrinking.
Mrs. Gjoni says that “however, there are slight signs of credit growth recovery – more evident during the third quarter of this year. At the end of September, bank lending turned positive – increasing by 2% in annual terms.”
The acting governor offers concrete figures over the banking activity and makes comparisons: “The banking system activity continues to be fundamentally financed by deposits, which account for 82% of total assets. Deposits expansion slowed down, recording an annual growth rate of 2.3%. Household deposits, which account 86.7% of total deposits, grew at a lower annualized ratio of 1.8%, from 3.7% in the previous year. Business deposits grew by 6.2%, from 4% a year earlier”.
Credit risk and impairments to the bank lending channel are the biggest financial stability challenge for the Albanian banking sector
The quality of the loan portfolio did not improve during 2014; the NPL ratio stands at 25%. Although provisions for impaired loans were up at 65%, NPLs net of provisions to capital still remained at around 50% and further efforts to foster workouts -particularly as regards collateral execution – thus appear necessary.”
Mrs. Gjoni suggests that the banking sector appears to be well hedged against direct risk from adverse exchange rate and IR movements, but the sensitivity to such changes has increased. “The ratio of net open foreign exchange position to the regulatory capital stands at 6.8% and banks ‘long’ position suggests limited exposure to the exchange rate risk”, – Gjoni notes.
Financial stability is more important than ever
Today, financial stability is more important than ever to the work of the BoA.
Therefore, Mrs. Gjoni says that “with the lessons from the crisis still fresh, we are in the process of strengthening our financial stability capabilities”.
Insured deposits, 66%
Official sources from Albanian Deposit Insurance Agency (AIDA) say that estimated insured deposits are EUR 4.1 billion Euro. That means 66% of individual depositors or 55% of total banking system deposits. The reserve ratio —which is the fund balance as a percentage of estimated insured deposits — is increased. However, as required by law, the Deposit Insurance Fund must achieve a minimum reserve ratio of 5 per cent, that means EUR 38 million more or 19% of required fund. /ibna/