ALBANIA Economy and the Banking System Dr. Elvin MEKA ALBANIAN ASSOCIATION OF BANKS 26 th EBF...

ALBANIAALBANIAEconomy and theEconomy and theBanking SystemBanking System

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

Dr. Elvin MEKADr. Elvin MEKAALBANIAN ASSOCIATION OF BANKSALBANIAN ASSOCIATION OF BANKS

2626thth EBF Associates’ Meeting EBF Associates’ Meeting 5 June 2008, Tirana, ALBANIA5 June 2008, Tirana, ALBANIA

ALBANIAN ECONOMYALBANIAN ECONOMY

ALBANIA - Located in Southeastern Europe (Western Balkans)

Economic Policy Framework

Open Market Economy,

No restrictions on profit and capital repatriation,

No exchange rate restriction, floating managed exchange rate regime,

Albania signed its Stabilization & Association Agreement with the European Union, the first formal step to eventual EU membership (12 June 2006).

© Source: CIA Factbook 2008

ALBANIAN ASSOCIATION OF BANKSSHOQATA SHQIPTARE E BANKAVE

ALBANIAN ASSOCIATION OF BANKS

ALBANIAALBANIAMain Economic Features & IndicatorsMain Economic Features & Indicators

Macroeconomic performance of the Albanian economy has been good overall, with sustained growth and low inflation.

Annual economic growth has been around 6% during the last 5 years; end-2007 at 6%.

Domestic demand mainly driven by migrants’ remittances (EUR 936 million by end-2007) which have significant impact on fiscal revenues and expenditures, as well as by other external current transfers, and rapidly expanding financial intermediation & credit.

Services, agriculture and industry share are respectively at 45%, 22.1% and 14.3%.



ALBANIAALBANIAMain Economic Features & Indicators Main Economic Features & Indicators

(2)(2)

EU is the main trading partner: 87.7% of exports and 57.5% of imports. SEE is the second trading partner: 9.3% of exports and 16.9% of imports.

Exports and imports for 2007 reached respectively EUR 790 million and EUR 3,07 billion – Net importer

…but all current account financed by remittances.

Foreign Direct Investments, until Sep.07 reached ~ EUR 370 million.

Foreign reserves EUR 1.5 billion, covering more than5 months of imports of goods and services.



ALBANIAALBANIAMain Economic Features & Indicators Main Economic Features & Indicators

(3)(3)



Key economic figures 2003 2004 2005 2006 2007

Population: 3.2 mn GDP (EUR bn) 6.0 6.0 6.7 7.28 7.95 GDP growth (% yoy) 5.8 6.2 5.5 5.0 ~6.0 GDP per capita (EUR at PPP) 4,250 4,640 4,860 6,224 n/a Industrial output (% yoy) 3.0 3.1 3.1 5.0 5.0 Unemployment rate (avg, %) 15.0 14.6 14.2 13.8 13.1 Inflation rate (% yoy) 3.3 2.2 2.0 2.5 3.0 Gen. budget balance (% of GDP) (4.8) (5.1) (3.4) (3.2) (3.4) C/A balance (% of GDP) (7.0) (4.7) (8.7) (7.6) (11) Public debt (% of GDP) 60.7 55.3 54.9 55.9 56 Gross external debt (% of GDP) 20.7 17.8 16.8 17.2 17.4 Official FX-Reserves (EUR bn) 0.8 1.0 1.2 1.36 1.50 ALL/EUR, avg 137.5 127.7 124.2 123.1 123.62 ALL/USD, avg 121.9 102.8 99.8 98.1 90.43

ALBANIAALBANIAMacroeconomic EnvironmentMacroeconomic Environment

POLICIES

Upward tendency of consumer prices during 2007. Inflation reached 3%.

Fiscal PolicyFiscal PolicyPrudential implementation of fiscal policies, by observing the planned parameters of fiscal indicators, has not transmitted excessive inflationary pressures and has contributed to maintaining price stability. Flat tax rate (10%) introduced by July 2007.

Monetary PolicyMonetary policy of the Bank of Albania has generally had a neutral stance, but following the inflationary pressures during 2007, BoA has taken prudent measures to put reins of inflation and bring it within 2-4% target. Lending economy has been the main source of monetary expansion during 2007, unlike in the preceding years, when this function had been realized by government borrowing or foreign currency inflows.



Albanian economy experienced relatively high growth rate.

With the exception of 1997 (following the collapse of the pyramid schemes), Albania has consistently outperformed the CEE countries.

ALBANIAALBANIAMacroeconomic Environment (2)Macroeconomic Environment (2)

Source: IMF

Source: IMF




Economic GrowthContinuous and sustainable economic growth (5-6% annually).

Price Stability Inflation is one the lowest within SEE countries (ranging between 2-4%).

I nflation rate 2000 - 2007

1.7

3.5 3.3

2.22

2.5 3.01

0

0.5

1

1.5

2

2.5

3

3.5

4

2001 2002 2003 2004 2005 2006 2007

Year

in %



Economic Growth Rate 2001-2007

4.7

6.5 5.86.2

5.55

6

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007

Year

in %

Income & Employment

GDP growth has enabled rise of income per capita beyond EUR 2,500 per year, which, however, remains among the lowest figures in the region.

Notwithstanding the ongoing GDP growth in years, employment performance reflects a moderate behavior.

Unemployment rate reduction continues to be not significant, either in absolute value or in relative terms (Unemployment rate for 2007: 13.1%).




Remittances

Albania’s receipts from workers’ remittances are, relative to GDP, among the highest in the world.

Remittances are considerably largerthan exports (1.2 times – Sep.07) and FDI (1.9 times – Sep.07).

Remittances have significantly lowered the current account deficit and helped Albania build a comfortable level of external reserves.

Although the bulk of remittances is still sent through informal channels, the importance of the formal channel has increased in recent years.




ALBANIAN ALBANIAN BANKING SYSTEMBANKING SYSTEM



ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Brief HistoryBrief History

GenesisThe establishment of Imperial Ottoman Bank branch (1863) in Albanian territories.

Central bankingEstablishment of the National Bank of Albania, jointly with Italian and Austrian banking groups, 4 October 1913.

Mixed Central & Commercial BankingEstablishment of National Bank of Albania (NBoA), 02 September 1925.

Communist eraNBoA was nationalized in 13 January 1945 and the Albanian State Bank (ASB) was established, with both functions as central & commercial bank.



Market EconomyTwo-tier banking system introduced and Bank of Albania established as the central bank of the Republic of Albania (1992).

To dateAlbanian banking system has 16 commercial banks (by 01.01.2008).

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Brief History (2)Brief History (2)



Universal banking system,

The dominant sector within Albanian financial system, managing more than 97 % of total financial assets,

Mainly foreign-owned (14 out of 16 banks are foreign-owned),

Some big International names entered Albanian banking system in 2007:

- Intesa SanPaoloIMI bought American Bank of Albania and Italian-Albanian

Bank (both banks were merged and by 01.01.08 they operate under American Bank of Albania trademark);

- Société Générale bought 75.01% of Popular Bank.

Almost all privately-owned (some minor state shareholdings),

A highly concentrated banking system, where top four bankshave a share of ~ 73% of total assets.

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Main FeaturesMain Features



ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Main Features (2)Main Features (2)

Continuous institutional expansion and development…

Other non-bank financial institutions

[2] Subjects licensed by Financial Supervision Authority, except for Leasing Companies.

No Subjects[1] 2001

2002

2003

2004

2005

2006

2007

1Banks and branches of foreign banks

13 14 15 16 17 17 17

2 Non-bank financial institutions 4 5 7 7 7 5 6

3 Foreign exchange bureaus 38 58 58 54 58 60 97

4 Save & loan associations 113 131 130 131 125 129

5Unions of Save & Loan associations

2 2 2 2 2 2

No Subjects[2] 2001

2002

2003

2004

2005

2006

2007

1 Insurance Companies 5 5 5 10 10 10 10

2 Pension Funds 1 1 1 1 3 3 3

3 Leasing Companies 1 1 1 1 2 3 3

[1] Subjects licensed by Bank of Albania.



ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Main Features (3)Main Features (3)

More coverage with banking services…



2004 2005 2006 2007

Number of employees 2,816 3,479 4,263 5,206 Number of outlets 188 250 292 392 Number of employees per: - bank 176 217 251 306 - bank unit 14 13 15 13 Number of residents per: - bank 194,971 184,410 188,235 186,235 - bank unit 16,593 12,539 10,958 8,077 - bank employee 1,108 901 751 608

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Main IndicatorsMain Indicators

Performance of total assets

Steady growth of banking assets…

Asset structure (in %) 2004 2005 2006

Interbank & Treasury Operations 74 60 51.5

Credit Outstanding 17 26 32

Securities Operations 7 12 15

Fixed Assets 2 2 1.5

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

mln

EU

R

2001 2002 2003 2004 2005 2006 2007Year

Banking system assets vs. GDP 2001 - 2007

Banking assets GDP



Indicator Dec ‘02 Dec ‘03 Dec ‘04 Dec ‘05 Dec ‘06 Dec ‘07

Total assets (mln EUR) 2,420.1 2,486.2 3,375.1 4,050.9 5,071.5 6,100 In % of GDP 51.6 50.2 51.9 59.5 69.4 76.6

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Main Indicators (2)Main Indicators (2)

Deposits’ growth

Continuous deposit growth – among the highest in SEE countries.

0

1000

2000

3000

4000

5000

6000

7000

8000

2001 2002 2003 2004 2005 2006 2007Year

Deposits vs. GDP 2001 - 2007

R etail deposits Total deposits GDP



2002 2003 2004 2005 2006 2007 Total Deposits (mln EUR) 2,061.3 2,124.0 2,974.6 3,569.5 4,151.1 5,299.0

in % of GDP 45.8 44.1 48.4 51.2 57 66.55 Retail Deposits (mln EUR) 1,137.7 1,106.5 2,581.0 3,069.3 3,343.4 4,223.3 in % of GDP 25.3 23.0 42.0 44.0 46 53.03

Deposits' Composition 2001 - 2007

8.7

7.7

6

9.4

18.2

16.5

13.1

59

60.2

63.4

59.2

46.3

45

44.3

32.3

32.2

30.6

31.4

35.5

38.5

42.6

0 10 20 30 40 50 60 70 80 90 100

2001

2002

2003

2004

2005

2006

2007

in %

Demand Deposits in AL L Time Deposits in AL L FX Deposits


Credit performance

Experiencing a credit boom, but credit ratios still low compared to EU and SEE standards.

Credit to economy 2001 - 2007

0

500

1000

1500

2000

2500

3000

2001 2002 2003 2004 2005 2006 2007

mln

EU

R

02468101214161820222426283032

in %

Credit to Economy (mln EUR) in % to GDP

Credit/ Deposit ratio 2001 - 2007

0

1000

2000

3000

4000

5000

6000

2001 2002 2003 2004 2005 2006 2007

in m

ln E

UR

0

10

20

30

40

50

in %

Credit to Economy (mln EUR) Deposits Credit/ deposit ratio



2002 2003 2004 2005 2006 2007

Credit to Economy (mln EUR) 275.5 340.9 552.4 1,042.2 1,553.3 2,401 in % to GDP 5.7 6.8 8.4 14.6 21.3 30.1 in % to total assets 11.5 13.7 16.9 25.1 31.3 39.3 Credit/ deposit ratio 13.5 15.7 19.0 28.5 37.4 46.4


Private Sector Loan Structure

Credit Quality

Still good credit quality despite credit boom; retail loans in expansion.

15% 85%

18% 82%

24% 76%

31% 69%

32% 68%

33% 67%

35% 65%

0% 20% 40% 60% 80% 100%

2001

2002

2003

2004

2005

2006

2007

Loan structure 2001 - 2007

retail corporate



2001 2002 2003 2004 2005 2006 2007 Corporate loans (mln EUR) 182 238 279 375 666 1,040 1,549

Retail loans (mln EUR) 31 54 89 168 309 513.3 852

2001 2002 2003 2004 2005 2006 2007 Standard Loans 88.74 89.89 92.35 92.70 93.86 90.00 85.00 Classified Loans 11.26 10.11 7.65 7.30 6.14 10,00 15,00

Credit quality 2001- 2007

1

3

5

7

9

11

13

15

2001 2002 2003 2004 2005 2006 2007

in %

classified loans


Average Interest Rates

Still high interest rate spreads in ALL, despite declining trends in deposit interest rates.



in ALL 2001 2002 2003 2004 2005 2006 2007

Treasury Bills rate 12-M (in%) 10.5 12.62 9.56 8.11 6.91 7.89 8,41 Deposit Rate 12-M (in%) 7.80 9.30 7.62 5.99 5.57 5.46 6,33

Lending rate 12-M (in%) 11.9 16.00 10.52 13.73 12.6 11.16 13,255

Average ALL Interest Rates 2001 - 2007

0

2

4

6

8

10

12

14

16

18

2001 2002 2003 2004 2005 2006 2007

in %

Treasury Bills rate 12-M Lending rate 12-M Deposit Rate 12-M

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Performance IndicatorsPerformance Indicators



Liquidity A highly liquid and solvent banking system

Capital adequacy Capital adequacy at satisfactory levels

Shareholders’ Equity

Well–capitalized banks

in mln EUR 2003 2004 2005 2006

1. Short-term Assets 1,101 1,212 1,339 1,616 2. Short-term Liabilities 1,027 1,253 1,674 2,184

1/ 2 in % 107 97 80 74

2003 2004 2005 2006 2007

Capital Adequacy Ratio in % 28.5 21.6 18.6 18.1 17.1

in mln EUR 2003 2004 2005 2006 2007 Shareholders’ Equity 160 203 266 342.5 465

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Performance Indicators (2)Performance Indicators (2)



Profitability A highly profitable banking system

Return on main operations Banks moving towards more profitable assets within the structure of earning assets.

in % 2003 2004 2005 2006 2007

RoAA 1.20 1.30 1.40 1.36 1.6

RoAE 19.5 21.10 22.4 20.17 20.7

in % 2003 2004 2005 2006

Interest income/ interest bearing average assets (1)

6.81 6.78 6.96 7.05

Interest expenses/ interest bearing average assets (2)

3.08 3.23 3.88 2.83

Net interest margin (NIM) [(1)-(2)] 3.73 3.55 3.08 4.22

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Exchange RatesExchange Rates



Average Exchange Rates

LEK (ALL) has been appreciated significantly during last years, then being quite stable.

in ALL 2001 2002 2003 2004 2005 2006 2007

EUR/ ALL 128.5 132.4 137.5 127.7 124.2 123.1 121,78

US$/ ALL 143.5 140.1 121.9 102.8 99.8 98.1 83,03

Average Exchange Rates 2001-2007

80

85

9095

100

105

110115

120

125

130135

140

145

2001 2002 2003 2004 2005 2006 2007

in A

LL/F

X u

nit

EUR/ALL US$/ALL

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Electronic CardsElectronic Cards



Electronic Cards

Type 2004 2005 2006 2007

Cashtronic + Debit Cards 33.288 223.227 343.711 603,384

Credit Cards + Prepaid Cards 806 2.686 9.754 12,991

Total 34.094 225.913 353.465 616,375

ATM 93 205 335 433

POS 155 779 1,183 1,776

26

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Regulatory FrameworkRegulatory Framework

Law no.9662, dt.18.12.2006 “On Banks in the Republic of Albania”.

Main Licensing Requirements for Credit Institutions: Banks shall be founded as joint stock companies. No

discriminatory restrictions in terms of capital participation and formation.

The minimum amount of initial capital required, paid in cash, in respect of a bank, is not less than ALL 1 billion (for existing banks: ALL 850 million, but from March 1st, 2008 is raised to ALL 1 billion);

Administrators having a business or professional history for the past 3 years,

The bank shall have at least two general executive directors.

Licensing Requirements for bank’s branch office:Similar requirements as those required for Albanian banks.



Licensing Preliminary approval or deny, within 3 months from

the date of its receipt of the application for a license at Bank of Albania.

A bank or branch of foreign bank, which has been granted preliminary approval shall, within one year starting from the day of the preliminary approval, request in writing from the Bank of Albania granting of the final license.

Scope of activity Universal banking principle.

The range of allowed banking & financial activities a bank may provide is subject of central bank’s approval (no capital quota qualifications).

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Regulatory Framework (2)Regulatory Framework (2)



Prudential Banking Supervision

The supervision process is carrying out through the following instruments:

Periodic data reporting regarding banking financial indicators, through unified reporting system (reporting various balance and off-balance sheet items, as well as other indicators, as the supervision regulatory framework requires);

Ad hoc (special) reporting of various data;On-site (full scale or targeted) examinations;Off-site analysis.CAMELS system is employed during on-site examinations (CAMELS rankings range from “1” – top performance- to “5” – poor performance).

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Banking SupervisionBanking Supervision



Bank of Albania has already approved a set of all necessary and well-detailed rules and regulations, whose implementation help to ensure prudential banking supervision, as follows:

Regulation “On Capital Adequacy”, Regulation “On the amount and fulfillment of minimum

initial capital of the allowed activities of banks and branches of foreign banks”,

Guideline “On Bank’s Regulatory Capital”, Regulation “On Market Risks”, Guideline “On the Liquidity of the Bank”, Regulation “On Significant Risk Management”, Regulation “On Open Foreign Positions”, Regulation “On Bank Relations with persons related to

bank”.

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Banking Supervision (2)Banking Supervision (2)



Bank of Albania passed the Regulation “On Credit Register Operation”, (18.07.2007), which has entered into force by 01.01.2008.

Its purpose is to define the organization and operational rules of the Bank of Albania Credit Register, as an electronic database.

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Credit RegisterCredit Register



The Albanian payment system is run and regulated by Bank of Albania.

Postal service network, part of payment system also, mainly for money transfer ordered by individuals.

Bank of Albania is the operator of two payment systems:

AIPS (Albanian Interbank Payment System), a real-time gross settlement system (RTGS), which processes all interbank big value (equal to or exceeding ALL 1,000,000 (~USD 10,000)) payments (a SWIFT-based Y-copy service, “live” from January 2004).

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Payment SystemPayment System



AECH (Albanian Electronic Clearing House) System, an automated clearing system, for processing banks’ payments to their clients (small value payments; “live” from 2005). The system is fully integrated with AIPS and the net clearing position is settled daily in AIPS.

Both systems are owned by Bank of Albania.

Yet to come:- Regulation “On usage of IBAN” (mandatory by May

2009);- Regulation “On Direct Debit”.

ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Payment System (2)Payment System (2)



ALBANIAN BANKING SYSTEM ALBANIAN BANKING SYSTEM Future Developments & Future Developments &

ChallengesChallenges

Reduction of informal economy,

Further expansion of banking retail networks and products, more banking service coverage,

Introduction of new technology: e-banking,

Full implementation of IAS/IFRS, by January 2008,

Increasing the beneficial effects of remittances, by attempting to channel most of them through the financial system.



Contacting AABContacting AAB

URL: www.aab.alE-mail: [email protected]



THANK YOU!



ALBANIA Economy and the Banking System Dr. Elvin MEKA ALBANIAN ASSOCIATION OF BANKS 26 th EBF...

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