Key Figures

EUR ’000 2006 2005 Change Balance Sheet DataTotal Assets 221,170 191,340 16%Gross Loan Portfolio 94,186 83,693 13% Business Loan Portfolio 73,761 63,941 15% EUR < 10,000 27,838 24,226 15% EUR > 10,000 < 50,000 24,577 23,748 3% EUR > 50,000 < 150,000 12,280 11,046 11% EUR > 150,000 9,065 4,921 84% Agricultural Loan Portfolio 5,747 4,446 29% Housing Loan Portfolio 5,467 7,626 -28% Other 9,211 7,680 20% Allowance for Impairment on Loans -5,211 -4,175 25% Net Loan Portfolio 88,975 79,518 12% Liabilities to Customers 191,947 159,832 20% Liabilities to Banks and Financial Institutions 10,203 10,780 -5% Shareholders’ Equity 17,312 17,957 -4%

Income Statement**Operating Income 15,148 13,142 15% Operating Expenses 10,862 9,371 16% Operating Profit Before Tax 4,286 3,771 14% Net Profit 3,058 2,691 14%

Key Ratios Cost/Income Ratio 63.4% 59.6% ROE 19.0% 17.9% Capital Ratio 15.4% 17.9%

Operational StatisticsNumber of Loans Outstanding 28,581 29,123 -2% Number of Loans Disbursed within the Year 21,996 11,872 85% Number of Business and Agricultural Loans Outstanding 18,265 17,754 3%Number of Deposit Accounts 143,679 101,960 41%Number of Staff 577 494 17%Number of Branches and Outlets 22 17 29%

* Some figures differ slightly from those in the 2005 an-nual report as they have been adjusted to reflect new calcu-lation methods ** The figures for the income statement differ from thosereported in the 2005 annual report as they have beentranslated into euros based on the average exchange ratefor 2005. In the 2005 annual report of 2005 they weretranslated using the exchange rate valid as of the end ofDecember 2005.

A n n u a l R e p o r t 2 0 0 62

Mission Statement 4

Letter from the Board of Directors 5

The Bank and its Shareholders 6

The ProCredit Group – Neighbourhood Banks for Ordinary People 8

ProCredit in Eastern Europe 10

The Year in Review 14

Management Business Review 16

Special Feature 23

Risk Management 24

Branch Network 26

Organisation, Staff and Staff Development 28

Business Ethics and Environmental Standards 29

Our Clients 30

Financial Statements 34

Contact Addresses 55

C o n t e n t s 3

Mission Statement

ProCredit Bank Albania is a development-oriented full-service bank. We offer excellent

customer service and a wide range of banking products. In our credit operations, we

focus on lending to very small, small and medium-sized enterprises, as we are convinced

that these businesses create the largest number of jobs and make a vital contribution to

the economies in which they operate.

Unlike other banks, our bank does not promote consumer loans. Instead we focus on

responsible banking, by building a savings culture and long-term partnerships with our

customers.

Our shareholders expect a sustainable return on investment, but are not primarily inter-

ested in short-term profit maximisation. We invest extensively in the training of our staff

in order to create an enjoyable and efficient working atmosphere, and to provide the

friendliest and most competent service possible for our customers.

M i s s i o n S tat e m e n t4

In 2006 ProCredit Bank Albania continued to consolidate its operations. The bank streamlined opera-tional procedures, improved cost control, and expanded staff training and development. We made great progress in controlling operational risks; the risk management department regularly reviewed various operational and financial risks, and the internal audit department monitored the risks involved in key operational processes. In an increasingly volatile environment, ProCredit Bank Albania strengthened its credit risk management, contributing to the bank’s moderate loan portfolio growth of 13%. Despite accelerated branch expansion, we sustained previous gains in organisational efficiency, leading to very satisfactory financial performance after taxes. The bank’s efficiency gains allowed for a conservative approach towards loan loss provisioning in the first quarter of the year, while the bank achieved a return on equity of 19%.

ProCredit Bank Albania has maintained an outstanding reputation throughout the years. The bank grew its deposit base by 20% this year, and the number of clients rose to over 140,000, representing an in-crease of 19%. The opening of additional branches promoted this increase. We extended our presence in smaller cities, such as Lac, Kuçova and Bilisht, providing high quality banking services in remote areas, and strengthened our position in larger urban areas. This expansion, together with the bank’s low aver-age loan amount and impressive number of new accounts, illustrates the extent to which ProCredit Bank Albania fulfils the mission of the ProCredit group.

This has been a crucial year with regard to staff development and the management of human resources. Staff turnover remained low during 2006, reflecting the bank’s avid focus on in-house training, organi-sational development and career planning. Based on the quality of ProCredit Bank’s training, which remains outstanding in the Albanian context, and the strength of our management team, we look toward the future with optimism.

Claus-Peter ZeitingerChairman of the Board

Letter from the Board of Directors

Members of the

Board of Directors as at

December 31, 2006:

Claus-Peter Zeitinger

Anja Lepp

Nicolas Baron Adamovich

Roland Siller

Stephan Boven

Members of

Executive Management

as at December 31, 2006:

Frieder Wöhrmann

Klid Saraçi

Anila Denaj

L e t t e r f r o m t h e B o a r d o f D i r e c t o r s 5

The Bank and its Shareholders

ProCredit Holding AG is theparent company of the global

group of ProCredit banks located in transition anddeveloping countries operating in three conti-nents. It was founded as Internationale MicroInvestitionen AG (IMI) in 1998. The ProCreditgroup of banks aim to make a difference by provid-ing banking services to people whom other bankseither do not serve at all (usually on the groundsof cost or risk) or only serve inadequately. Theholding company, working closely with Inter-nationale Projekt Consult GmbH (IPC), guides thedevelopment of the ProCredit institutions, provid-ing support in all key areas of banking operationsand human resources management. The companycurrently has an equity base of more thanEUR 200 million. Its shareholders consist of asound mix of private and public investors.

KfW Entwicklungsbank (KfW Devel-opment Bank): On behalf of the

German federal government, KfW Entwicklungs-bank finances investments and accompanyingadvisory services in developing and transitioncountries. Its aim is to build up and expand thesocial and economic infrastructure of the coun-tries in which it is active, and to advance sound

financial sectors while protecting resources andensuring a healthy environment. KfW Entwick-lungsbank is a leader in the field of microfinanceand is involved in target group-oriented financialinstitutions around the world. It is part of KfWBankengruppe (KfW Banking Group), which has abalance sheet total of EUR 362 billion (as of Sep-tember 2006). KfW Bankengruppe is one of theten biggest banks in Germany and is AAA rated.

Commerzbank AG wasestablished in 1870 and following the takeoverof Eurohypo AG, announced in November 2005, isnow Germany’s second-largest bank and one ofthe leading commercial banks in Europe. With astrong international network comprising officesand shareholdings in more than 40 countries,Commerzbank is a universal bank providing re-tail, corporate, public-sector and investmentbanking services. It also offers financial productsand services via a number of subsidiaries, suchas online banking, leasing, asset managementand real-estate investment.

ProCredit Bank Albania was founded in 1995 asthe “Foundation for Enterprise Finance and Devel-opment” (FEFAD) with 100% of its share capitalprovided by KfW. The institution focused on pro-viding small and very small Albanian businesseswith access to finance. Despite the country’seconomic and political turmoil of 1997, FEFADachieved strong financial performance and re-ceived a banking licence in 1999, becoming FEFADBank. The founding shareholders of the bank wereFEFAD Foundation, ProCredit Holding (then known

as IMI), the European Bank for Reconstructionand Development (EBRD) and the InternationalFinance Corporation; they were joined by Com-merzbank AG in 2002. This year, ProCredit Holdingfurther consolidated its stake in the bank, tak-ing over the shares of EBRD. Paid-in capitalhas risen continuously and now amounts toEUR 11.8 million. In 2003 the institution was re-named “ProCredit Bank”, thus reflecting its affili-ation with the ProCredit group.

Sector

InvestmentBankingBankingInvestment

Shareholder(as of Dec. 31, 2006)ProCredit HoldingKfW/FEFAD FoundationCommerzbankIFC

Total Capital

Headquarters

GermanyGermanyGermanyUSA

Share

43.75%25.0%20.0%

11.25%

100%

Paid-in Capital (in EUR million)

5.17 2.96 2.36 1.33

11.82

A n n u a l R e p o r t 2 0 0 66

The International Finance Corpora-tion (IFC) is the private sector arm of

the World Bank Group and is headquartered inWashington, D.C. The mission of IFC is to promotesustainable private sector investment in devel-oping and transition countries, helping to reducepoverty and improve people’s lives. IFC financesprivate sector investments in the developingworld, mobilises capital in the internationalfinancial markets, helps clients improve socialand environmental sustainability, and providestechnical assistance and advice to governmentsand businesses. From its founding in 1956through FY05, IFC has committed more thanUSD 49 billion of its own funds and arranged

USD 24 billion in syndications for 3,319 compa-nies in 140 developing countries. IFC’s worldwidecommitted portfolio as of FY05 was USD 19.3 bil-lion for its own account and USD 5.3 billion heldfor participants in loan syndications.

Th e B a n k a n d i t s S h a r e h o l d e r sTh e B a n k a n d i t s S h a r e h o l d e r s 7

The ProCredit Group – Neighbourhood Banks for Ordinary People

The ProCredit group comprises 19 target group-oriented banks operating in as many countries.We focus on developing countries and transitioneconomies in three regions: Eastern Europe, LatinAmerica and Africa. The group has 470 branchesstaffed by 12,600 employees. Currently, ProCreditbanks disburse more than 60,000 loans total-ling more than EUR 185 million every month. Bythe end of 2006, the number of loans outstandinghad grown to more than 740,000 (amounting toEUR 2.1 billion). The average loan amount out-standing is EUR 2,850 and the loan portfolioquality remains excellent with a ratio of loans inarrears (>30 days) to total loan portfolio of only1.2%. Over 2006, the group’s deposit base in-creased from EUR 1.3 billion to EUR 1.8 billion,with nearly one million new accounts having beenopened.

The ProCredit group is led by the Frankfurt-basedProCredit Holding AG, founded by the consultingfirm IPC in 1998. The staff of ProCredit Holdingand IPC provide centralised support, super-vision and management of all the ProCredit banks.ProCredit Holding is a private-public company,with international shareholders that include KfW,IFC, FMO, and the DOEN Foundation. In 2006, theshareholder group was joined by two new US-based private shareholders, TIAA-CREF and theOmidyar-Tufts Microfinance Fund.

But what do these facts and figures mean andwhat are these shareholders trying to achieve?ProCredit is building a global group of neighbour-hood banks. But what is a neighbourhood bank?Wherever we are, we aim to be the accessible,trusted, socially responsible bank for the localsmall businesses and the ordinary people wholive and work in the area. In our lending business,we focus on very small, small and medium-sizedenterprises. At the same time ProCredit providesretail banking services to “ordinary” people, witha focus on low-income families. In this way weaim to be the long-term banking partner for tar-get groups which most conventional commercialbanks neglect. By providing socially responsibleproducts we aim to contribute to the economicdevelopment of the countries in which we work.

In the developing countries and transition econ-omies in which the ProCredit group operates,conventional commercial banks tend to neglectsmall and very small businesses because theyare thought to keep inadequate records, haveinsufficient collateral and generate high admin-istrative costs. However, these businesses arethe main engine of economic growth and of jobcreation. Over the years, the ProCredit group andIPC, which developed the lending methodologyused by the ProCredit group, have gained a pro-found understanding of both the problems facedby small businesses and the opportunities avail-able to them, and have tailored the credit technol-ogy to reflect the realities of their operating envi-ronment. Thanks to this credit technology, whichcombines careful analysis of all credit risks witha high degree of standardisation and efficiency,the ProCredit institutions are able to reach a largenumber of small borrowers.

In contrast to ProCredit, other commercial banksgive priority in their lending operations to cor-porate finance and consumer lending, especiallythe latter. Consumer finance is attractive becauseit usually does not require skilled staff or muchfinancial analysis of the client, allowing banksfocused on market share to grow quickly. However,this quest for market share can lead to irrespon-sible lending and overindebtedness on the partof the client. ProCredit never forgets that a loanis also a debt. We place great emphasis on thecareful evaluation of a borrower’s debt capacityand on building lasting relationships. In this way,ProCredit is characterised by a responsible, long-term attitude towards business development andclient relationships.

Furthermore, ProCredit institutions strive to fos-ter a savings culture. We aim to build public con-fidence in banks by setting new standards in cus-tomer service, transparency and business ethics.ProCredit deposit facilities are appropriate for abroad range of customers, especially low-incomegroups. We offer simple savings products with nominimum deposit requirement. Eighty percent ofall deposit accounts have a balance of less thanEUR 100. This illustrates our target group orien-tation and highlights the challenge of servingthis target group of small savers who account foronly 1% of our total deposit volume. In the spirit

A n n u a l R e p o r t 2 0 0 68

of a neighbourhood bank, ProCredit banks placegreat emphasis on children’s savings productsand education campaigns as well as on sponsor-ing local community events. In addition to depositfacilities, clients are offered a full range of stand-ard non-credit banking services.

The shareholders of the group aim to strike theright balance between their prime developmen-tal goals: reaching as many small enterprisesand small savers as possible, and achieving com-mercial success. For 2006, the return on equityfor the group as a whole, expressed in hard cur-rency after deduction of profit taxes, is expectedto reach 13%. This level of profitability is requiredto support our rapid growth, to ensure our long-term sustainability and to generate a reasonablereturn for our shareholders.

The neighbourhood bank concept is not limitedto our target customers and how we reach them.It is also about our staff: how we work with oneanother and how we work with our customers. Theneighbourhood bank approach requires a highdegree of decentralised decision-making andtherefore judgement and creativity from all staff,especially our branch managers. Our corporatevalues embed principles such as honest commu-nication, transparency and professionalism into

our day-to-day business. Key to our success istherefore the selection and training of the rightstaff. We maintain a corporate culture that har-nesses the creativity and entrepreneurial spiritof our staff, while fostering their deep sense ofpersonal and social responsibility. This entailsnot only intensive training in technical and man-agement skills, but also a continuous exchangeof personnel between our member institutions inorder to take full advantage of the opportunitiesfor staff development which are created by theirmembership of a truly international group.

A central plank in our approach to training is thegroup’s ProCredit AcademyinGermany,whichpro-vides a three-year, part-time “ProCredit Banker”training programme for its high-potential localpersonnel. The programme includes intensivetechnical training and also exposes participantsto a very multicultural learning environment andto subjects such as anthropology and the humani-ties. The programme provides an opportunity forour future leaders to develop their views of theworld, as well as their communication and staffmanagement skills. The continued success ofProCredit relies on a self-confident team of peoplewho share a personal commitment to the targetgroup and to the neighbourhood way of doingthings.

The international group

of ProCredit institutions;

see also

www.procredit-holding.com

Th e P r o C r e d i t G r o u p – N e i g h b o u r h o o d B a n k s f o r O r d i n a r y P e o p l e 9

A n n u a l R e p o r t 2 0 0 610

ProCredit in Eastern Europe

ProCredit operates in 10 countries across EasternEurope. With more than 430,000 loans outstand-ing, it is the region’s leading provider of bankingservices to very small, small and medium-sizedbusinesses. Financial sectors and private sectorlending are rapidly expanding in Eastern Europe,often through heavy investment in the form offoreign capital and the activities of strong west-ern banks. In this context we are sometimesasked: can ProCredit really claim to be differentand to be making a difference in the region? Ouranswer is a resounding “yes”. We stand out asbanks deeply committed to small business lend-ing over the long term, to building a responsiblesavings culture rather than blindly fuelling con-sumer spending, and to setting new standards oftransparency and service for our customers.

Across the region, the focus of most banks, includ-ing the western banks, continues to be corporatefinance and consumer lending. They neglect lend-ing to small entrepreneurs and family businesses.Yet these businesses are the driving force behindeconomic growth and job creation across EasternEurope, and have been since the collapse of Sovietinfluence and the large state-owned enterprisesrelated to it. For most banks, it is simply easierto make money with consumer lending and loansto larger corporate clients, since small businesslending requires decentralised decision-makingand highly qualified staff who are able to assessrisk quickly and reliably and maintain durableclient relationships. The importance of ProCreditin transition economies should be no surprise:even in well-developed western markets only afew banks are dedicated to the long-term supportof small business customers.

It is also no surprise that consumer lending, whichis being so aggressively pursued by other banksin Eastern Europe, is not a business in whichProCredit actively engages. We believe that ittends to drive imports rather than domestic pro-duction. If pushed irresponsibly in the context of amarket share gain game – with very little analysisof a customer’s repayment capacity – it quicklyleads to overindebtedness. This creates suffer-ing for the individuals and families affected,and can threaten financial sector stability. Thegrowing incidence of steeply rising default ratesunderpins this view. Our approach is to provideloans primarily to businesses and to do so based

on a careful, efficient analysis of a client’s abil-ity to repay. We aim to build lasting relationshipsand we never forget that a loan is also a debt. Inthis way, ProCredit is characterised by a respon-sible, long-term attitude towards business devel-opment.

Across the region we provide agricultural loans,supporting a sector that has been particularlyneglected by other banks and that is vital for em-ployment and social cohesion outside the mainurban areas. We also provide housing improve-ment loans to help low-income families reno-vate their homes and improve energy efficiency.ProCredit banks offer their business clients loansand other services, including plastic cards andfast, low-cost money transfers (“ProPay”), pro-viding a truly integrated service for entrepre-neurs that are active across the region.

In the face of rapid expansion in consumer lend-ing, we make it a priority to create a “savings” cul-ture, not just a “spending” culture – because sav-ings are an important buffer against the vagariesof life. Through promotional events and direct,personal communication we encourage people –particularly those who do not yet have a bank-ing relationship – to use banking services and toregularly set aside a certain portion of their earn-ings. This outreach is combined with the offer ofsimple and reliable banking products, especiallysavings and deposit accounts.

P r o C r e d i t i n E a s t e r n E u r o p e 11

In keeping with our mission to be accessible toclients wherever they are, the ProCredit groupprovides comprehensive coverage across theregion with its 341 branches and more than8,600 staff. Our clients can now drive from Tiranain Albania to Kiev in Ukraine and enjoy the samefriendly service and open, welcoming branchesall along the way. We place a strong emphasison transparency in all ProCredit banks. We runinformation campaigns to ensure that all custom-ers understand the pricing of our products as wellas those of our competitors, since we find thataggressively growing markets create a lot ofscope for misleading customers about the trueprice of banking services.

Our staff are the key element in our approachto being a stable, down-to-earth banking part-ner to clients across the region. The group has astrong commitment to staff training, professionaldevelopment and cultivating an open, honestcommunication culture. Staff exchanges, cross-border training programmes and regional work-shops are an important part of our approach. Inthe highly competitive Eastern European bank-ing sectors, the well-trained, highly motivatedProCredit staff, who have built strong, long-termrelationships with clients, are in high demandfrom competitor banks. However, the ProCreditwork environment, the investment we make inour staff and the international opportunities thatthey enjoy, demonstrate that we have been verysuccessful in retaining our best people, providinga firm base for our ongoing growth in the region.

A n n u a l R e p o r t 2 0 0 612

Name

ProCredit Bank Albania

ProCredit Bank Bosnia and Herzegovina

ProCredit Bank Bulgaria

ProCredit Bank Georgia

ProCredit Bank Kosovo

ProCredit Bank Macedonia

ProCredit Moldova

ProCredit Bank Romania

ProCredit Bank Serbia

ProCredit Bank Ukraine

Highlights

Founded in March 199922 branches28,581 loans / EUR 94.2 million in loans143,679 deposit accounts / EUR 191.9 million577 employees

Founded in October 199726 branches42,459 loans / EUR 117.4 million in loans60,620 deposit accounts / EUR 90.4 million595 employees

Founded in October 200160 branches49,728 loans / EUR 309.8 million in loans136,223 deposit accounts / EUR 218.5 million1,074 employees

Founded in May 199932 branches58,967 loans / EUR 141.1 million in loans335,064 deposit accounts / EUR 97.8 million1,198 employees

Founded in January 200030 branches52,016 loans / EUR 237.7 million in loans229,995 deposit accounts / EUR 389.9 million722 employees

Founded in July 200324 branches21,277 loans / EUR 73.4 million in loans87,125 deposit accounts / EUR 74.2 million537 employees

Founded in December 199921 branches14,096 loans / EUR 25.2 million in loans259 employees

Founded in June 200229 branches29,621 loans / EUR 157.3 million in loans87,986 deposit accounts / EUR 116.9 million795 employees

Founded in April 200152 branches87,558 loans / EUR 306.2 million in loans220,204 deposit accounts / EUR 256.2 million1,421 employees

Founded in January 200152 branches49,270 loans / EUR 226.9 million in loans81,985 deposit accounts / EUR 118.2 million1,495 employees

Contact

Rruga Sami FrasheriTiranaTel./Fax: +355 4 271 272 / 276info@procreditbank.com.alwww.procreditbank.com.al

Emerika Bluma 871000 SarajevoTel./Fax: +387 33 250 950 / 250 971info@procreditbank.bawww.procreditbank.ba

131, Hristo Botev Blvd.SofiaTel./Fax: +359 2 921 71 00 / 71 10contact@procreditbank.bgwww.procreditbank.bg

D. Agmashenebeli Ave 154TbilisiTel./Fax: +995 32-20 2222 / 0580info@procreditbank.gewww.procreditbank.ge

Str. Skenderbeu10 000 Prishtina/ Kosovo UNMIKTel./Fax: +381 38-240 248 / 248777info@procreditbank-kos.comwww.procreditbank-kos.com

Jane Sandanski 109a1000 SkopjeTel./Fax: +389 2 321 99 00 / 01info@procreditbank.com.mkwww.procreditbank.com.mk

Stefan cel Mare si Sfant, 65Off. 900, 902, 904; ChisinauTel./Fax: +373 22 270707/ 3488office@procredit.mdwww.procredit.md

Calea Buzesti, no. 62-64, Sector 1011017 BucharestTel./Fax: +40 21 2016000 / 2016002headoffice@procreditbank.rowww.procreditbank.ro

Bulevar despota Stefana 68cBelgradeTel./Fax: +381 11 20 77 906/ 905info@procreditbank.co.yuwww.procreditbank.co.yu

107-A Pobedy Ave.Kyiv 03115Tel./Fax: +380 44 590 10 41 / 01info@procreditbank.com.uawww.procreditbank.com.ua

P r o C r e d i t i n E a s t e r n E u r o p e 13

The Year in Review

January

• ProCredit Bank Albania celebrates five years of operations in the Korça region.

March

• Fitch confirms ProCredit Bank’s B+ rating. There is no country rating for Albania, and we remain the only bank in the country with an international rating.• ProCredit Bank reviews more than 400 candi- dates through its “Future Bankers” evalua- tion programme, hiring 190 of these appli- cants as trainees.• ProCredit Bank opens a branch in Gjirokaster, which increases outreach to the Greek bor- der.• ProCredit Bank launches a new credit cam- paign and introduces product changes to make its small and very small loans more flex- ible.

April

• ProCredit Bank opens a sub-branch on Em- bassy Street, Tirana.

May

• ProCredit Bank opens the Train Station branch in Tirana. The new branch has a Busi- ness Centre for corporate clients. It also be- comes the centralised base for the manage- ment of lending operations.

June

• On June 1 ProCredit Bank celebrates Inter- national Children’s Day. Branches orga- nise children’s activities in kindergartens, schools, and open parks.• In honour of the FIFA World Cup in Germany, ProCredit Bank Albania collaborates with the German embassy to organise a Youth Tour Football Championship in Tirana. Seven hun- dred children participate in this 14-day cham- pionship.

A n n u a l R e p o r t 2 0 0 614

• ProCredit Bank is awarded the title of “Best Bank in Albania by Return on Assets 2006” by the British magazine Finance Central Europe.

July

• ProCredit Bank extends its branch network by opening a new office in Laç. The branch serves predominantly rural areas in the Mamurras, Milot and Fushë Kuqe regions of Northern Albania.• ProCredit Bank Albania launches a country- wide campaign for remittances; two months of informational events at the branches and direct promotion in all major cities result in a significant increase in deposits.

August

• ProCredit Holding buys out EBRD’s stake in ProCredit Bank Albania, increasing its owner- ship to 43%.

September

• The bank introduces ProKid; ProCredit staff conduct basic education on savings-related issues in primary schools and organise “Open Branch Days,” encouraging children and their parents to visit the bank.

October

• The bank opens a new office in Bilisht, ex- tending the network to 21 branches and sub- branches throughout Albania.• ProCredit Bank celebrates World Savings Day on October 31 to mark the end of the ProKid campaign.

December

• The bank celebrates the 8th anniversary of the branch in Fier, the third largest city in Albania.• ProCredit Bank launches the “ProPartner” product, which is tailored to small and medium-sized businesses.

Th e Y e a r i n R e v i e w 15

Management Business Review

Executive Management

from left to right:

Klid Saraçi

Deputy CEO

Anila Denaj

Deputy CEO

Frieder Wöhrmann

CEO

A n n u a l R e p o r t 2 0 0 616

Political and Economic Environment

2006 was an eventful year for Albania. After threeyears of negotiations, it became the third countryin the Western Balkans, following Macedonia andCroatia, to sign the Stabilisation and Associa-tion Agreement with the EU. This comprehensivecontractual framework is an important milestoneon the road towards EU accession. The agree-ment calls for improved political dialogue withinAlbania and for legislation compatible with EUstandards. It also seeks to establish strongercooperation and a free trade zone in the regionover the next ten years. As indicated at NATO’sRiga Summit earlier in the year, Albania may alsojoin NATO in 2008 if the required reforms are im-plemented.

Significant progress was made in reducing cor-ruption and improving the management of publicfinances. The year was also marked by politicaltension: the ruling coalition and the oppositionfailed to resolve differences over a new electorallaw. Albania experienced another energy crisis,which compromised efforts to improve its invest-ment climate and to attract much needed foreigndirect investment.

Albania’s macroeconomic environment achievedmixed results in 2006. The 5% increase in GDPwas slightly lower than expected due to theenergy crisis, and a slowdown in the constructionsector. At 2.4%, inflation remained within thedesired levels of 2% to 4%. This was a positiveresult given higher energy prices, increased pub-lic sector capital expenditure, and a consumerlending boom. The labour market also improved,with unemployment of 13.8%, down from 14.2%in 2005.

Improved tax and customs collection and lowpublic investment during the first half of theyear contributed to the first budget surplus in 15years. Despite the growth in exports as a resultof lower competition in the textile and footwearindustries from China and Vietnam, the tradedeficit widened from 21% to 23% of GDP, due toa continuous growth in imports. Remittances,estimated at 13% of GDP, increased their contri-bution to financing the trade deficit. Due to this

inflow of foreign exchange, the local currencyremained strong against the EUR and USD,despite the large current account deficit.

Privatisation stalled in 2006; INSIG, the telecomnetwork and the state oil company remained ingovernment hands. Sustainable economic devel-opment over the long term will require a strongerexport-led private sector, reduced barriers withinthe region and the EU, and improvements ininfrastructure.

Financial Sector Developments

Banks continued to dominate the financial sec-tor, while the insurance industry played a lim-ited role. As of year-end 2006, the country’s17 private banks had total assets of close toEUR 4 billion. Financial intermediation increasedas most banks aggressively expanded their lend-ing activities. In general, banks made better useof their funding and maintained high profitabil-ity, supported by wider interest margins fromlending. Total credit to the economy grew by 55%in 2006 (74% in 2005), reaching 20% of GDP.This growth coupled with aggressive consumerlending by the other banks, gave rise to concernsregarding the potential negative effects on over-all loan quality and its macroeconomic implica-tions. To contain portfolio growth, the Bank ofAlbania plans to impose higher capital adequacyrequirements for problematic loans. An amendedregulation on credit risk management came intoforce in early 2007. Equally noteworthy, stepswere taken to establish a credit bureau, which isexpected to be operational in 2007.

At the end of 2006, the insurance sector con-sisted of 10 companies. The insurance marketremained underdeveloped compared to those ofsimilar countries in the region; almost two thirdsof insurance contracts issued in Albania wereobligatory policies. Important regulatory changestook place; the Securities Commission, InsuranceSupervisory Authority, and Private Pension regu-latory bodies merged to become the FinancialSupervisory Authority, which will provide morestandardised supervision of non-banking finan-cial activities.

M a n a g e m e n t B u s i n e s s R e v i e w 17

Lending Performance

ProCredit Bank Albania strengthened its compet-itive advantage in 2006 by opening new offices,expanding field staff, and improving servicequality. We reduced interest rates and collateralrequirements to improve clients’ access to ourloan products. We also broadened our productrange, introducing housing and renovation loans.The bank placed strong emphasis on hiring, andstaff turnover decreased. To manage a larger fieldstaff, we intensified training and restructuredour credit division. A new Credit AdministrationDepartment provides branches with greater sup-port in managing arrears, and senior specialistsfrom the head office assist branch staff to im-prove credit analysis.

As a result of these efforts, the volume of ourloan portfolio increased by 13% to EUR 94 millionin 2006, while the number of outstanding loansslightly decreased compared to the previousyear, thus resulting in an increase of the bank’saverage loan size to EUR 3,300, compared toEUR 2,800 in 2005. At the same time, PAR over30 days1 accounted for 2.56% of the total grossloan portfolio. However, we have recognised theimportance of focusing on portfolio quality as we

achieve strong growth, and have introduced mea-sures to bring down PAR.

The total credit portfolio of Albania’s bank-ing sector grew by 55% in 2006, mainly due toaggressive expansion of consumer lending byour competitors. Unlike most commercial banks,ProCredit Bank Albania focuses on serving smalland medium-sized businesses. The amount ofloans outstanding to SMEs amounted to EUR 49million at year-end 2006, an increase of 18% over2005. Loans of less than EUR 10,000 increased involume by 12.5%, constituting 47% of the bank’stotal number of loans. ProCredit Bank also ex-panded its portfolio of agricultural loans, whichconsisted of over 3,000 outstanding loans witha volume of EUR 5.7 million by year-end. Thesefigures demonstrate ProCredit Bank Albania’sstrong commitment to serving those who are of-ten neglected by our competitors.

As in recent years, ProCredit Bank furtherstrengthened its local currency lending. Loansdenominated in local currency accounted for 97%of the total number of loans issued in 2006, com-pared to 80% in 2005.

1 PAR (portfolio at risk) is a common measure of loan portfolio quality. Portfolio at risk is defined as the entire balance of loans on which any instalments are outstanding for more than 30 days.

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M a n a g e m e n t B u s i n e s s R e v i e w 19

A n n u a l R e p o r t 2 0 0 620

Other Banking Services

2006 was also a very successful year for ProCreditBank’s non-credit banking services. We achievedour growth targets, and the Banking ServicesDepartment completed substantial restructuringto boost its efficiency in supporting the branchnetwork. This department was divided into twomain functional divisions: a Business Develop-ment Division focusing on the retail business andan Operations Division that is streamlining inter-nal procedures to better manage the risks of non-credit banking services.

ProCredit Bank Albania increased its marketshare from 4.5% to 5.5%. Our deposit base grewby EUR 32 million and 41,719 accounts to end theyear with EUR 192 million in deposits. The bankachieved this growth through its high qualitycustomer service, intensive direct promotionalactivities, and flexible requirements for open-ing time deposits. Over 80% of our clients haddeposit balances of less than EUR 1,000, and theaverage balance was EUR 1,240, demonstratingthe bank’s ability to provide simple and reliablebanking products to ordinary people.

In the second half of the year, ProCredit Bank suc-cessfully launched a campaign targeting youngpotential clients, which produced approximate-ly 4,000 new saving accounts. In more than 80public and private schools across Albania, stafftaught 35,000 students between the ages of 7

and 10 about fundamental banking concepts. OnSaturdays in September and October, all branchesheld “Open Branch Days” for children to visit thebank in a friendly and festive atmosphere.

With monthly volumes exceeding EUR 9.5 million,outgoing international money transfers rose bymore than 15% in 2006. Incoming money trans-fers, which had a monthly volume of EUR 6.5 mil-lion, rose by 28%. In total, the bank processedover 27,000 transfers during 2006.

The card business was very challenging. The dailynumber of ATM transactions averaged between800 and 1,000, and 12 additional ATMs were in-stalled, increasing the total number to 36 oper-ational units. We provided 100 additional smallbusinesses with Point of Sale payment terminals,increasing the total number of outlets to 400. Ourextended network will further facilitate electron-ic payments, offering greater convenience to ourcustomers.

In 2007, ProCredit Bank will continue to focus onprospective clients who have limited or no bank-ing relationships, introducing them to a savingsculture. Our sponsorship activities will under-score our neighbourhood banking approach andmake a substantial contribution to the commu-nity. We will continue to implement our new train-ing concept, introduced in 2006 to enhance thecustomer service for which we are already wellknown.

M a n a g e m e n t B u s i n e s s R e v i e w 21

Financial Results

The bank continued to achieve excellent financialperformance this year, mainly due to the consoli-dation of its core credit products. RoE increasedto 19%, reaffirming our standing as a very effi-cient and financially viable institution.

Overall asset quality remained sound. Totalassets grew by EUR 30 million, or 16%, toEUR 221 million at the end of the year. Net loansand advances to customers increased by 12% toEUR 89 million. This balance sheet expansionwas financed entirely by growth in the depositbase. We were proud to reaffirm our position asAlbania’s leading bank in making efficient use ofcustomer funds to perform financial intermedia-tion. In line with our mission, we did not engagein speculative lines of business. We investedfunds in short and medium-term high quality as-sets, such as T-bills, securities issued by govern-ments of AAA-rated countries, or placementswith highly rated banks. Liquidity remained sat-isfactory throughout the year. The liquidity ratio(liquid assets up to 90 days as percentage of to-tal assets) was 43% at year end.

Deposits increased by 20% to a total of EUR 192million at year end. Over two thirds of our depositbase is made up of stable term deposits, and morethan 63% come from local currency. Borrowingsfrom international financial institutions contin-ued to decline, and at EUR 8 million, accountedfor a very small portion of our funding base.

Loan portfolio growth and sound treasury opera-tions enabled the bank to achieve a 14% increasein net profit, reaching EUR 3 million comparedto EUR 2.7 million in 2005. Through better costcontrol, the bank maintained a cost/income ratioof 63.4%, despite increased investment in staff,training, IT and branch renovation.

Outlook

We have set ambitious targets for our lendingbusiness and retail operations in 2007. We aim toincrease the volume of our loan portfolio by 35%and to have 37,000 loans outstanding by year-end 2007. Based on the rapid development ofour customer deposit base over the last 3 years,we project a growth of 16% in volume and 13%in number of accounts, resulting in an increase ofEUR 30 million in deposits by the end of 2007.

Albania’s anticipated stable macroeconomicenvironment should provide favourable condi-tions for reaching these targets. Growing demandfor financial services, Albanians’ increasingconfidence in the banking sector, and ProCreditBank’s solid reputation will also promote our ex-pansion.

To boost its projected growth, ProCredit BankAlbania will introduce new credit products aimedat better serving its target group. We will alsoincrease clients’ access to our services by con-tinuing our geographical expansion and consoli-dating our presence in urban areas. At the end of2007 we will have 25 branches and sub-branchesand over 670 employees. Most importantly, wewill strengthen our competitive advantage bymaintaining high quality staff and customer-oriented service. We will hire additional person-nel and intensify training to ensure continuedimprovements in the bank’s efficiency and thequality of its service.

M a n a g e m e n t B u s i n e s s R e v i e w22

might otherwise contribute to building the formaleconomy, bypass the official financial system.

Many emigrants send remittances informally be-cause they do not trust or have access to formalfinancial services. High fees applied to moneytransfers further discourage migrants from us-ing official channels. Remittance recipients fre-quently live in poorer, rural areas and have limitedawareness of or access to the banking system.

ProCredit Bank is leveraging its extensive geo-graphic reach to provide senders and recipientsof remittances with access to low-cost financialservices. We are the only bank in Albania that of-fers clients incoming international money trans-fers free of charge regardless of the amount.In 2006, we launched a new “remittances pro-gramme” that increased awareness of our pay-ment products and services. During August andDecember, our staff undertook direct promotionalactivities by talking to Albanian emigrants at cus-toms points, the Tirana airport, travel agencies,and in ports, parks and villages. We explainedthe terms and conditions of the bank’s moneytransfer services and promoted debit cards thatcould offer Albanian emigrants and their rela-tives convenient and easy access to their funds.Our efforts yielded immediate results: depositsgrew by EUR 7 million in August alone. In 2007,ProCredit Bank will continue to promote low-costtransfer payments for emigrants and their fami-lies by enhancing public awareness of and accessto its services.

Remittances in Albania

Albania’s history is marked by several phases ofmigration, the latest of which began after 1990.Between 1990 and 1996, approximately 600,000Albanians left the country. In 1997 the collapseof pyramid schemes wiped out the savings ofhundreds of thousands of people. This produceda combination of unemployment, poverty, andeconomic hardship that led to the migration ofanother 70,000 within a few months. Since 1998,gradual improvement has occurred in economic,political, and social conditions. These, andfavourable immigration policies in two key re-ceiving countries, Greece and Italy, have reducedillegal flows while facilitating legal migration.Many of the migrants who live and work abroadcontinue to send remittances to their families andfriends. These transfers exceeded foreign directinvestment in Albania by 3.6 times in 2006, andrepresent almost 13% of the country’s GDP.

The Bank of Albania estimates that in 2006, thenet flow of current transfers was about EUR 933million, of which more than 90 percent was fromAlbanian emigrants. This figure includes onlythose remittances made through official chan-nels. In many transition countries, a significantportion of these payments are transferred infor-mally, often via the back pockets of workers trav-elling home on visits. According to the centralbank, more than half of the remittances enteringAlbania are channelled through unofficial sour-ces. Thus, significant flows of money, funds that

Special Feature

B u s i n e s s R e v i e wS p e c i a l F e at u r e 23

Risk Management

Risk management plays a crucial role in ProCreditBank Albania’s overall management activities.The bank monitors and assesses credit, finan-cial, market and operational risks to avoid anypotential loss and to better confront unexpectedevents. In addition to the bank’s daily internalcontrol measures, management is involved inregular reviews of the bank’s overall risk expo-sure. Risk reports (general and operational) areprepared monthly, creating an important tool tocapture risk exposures via both quantitative andqualitative data. Several permanent risk commit-tees – the Operational Risk Committee, Assetsand Liabilities Committee, Credit Risk/ArrearsCommittee and IT Steering Committee – are re-sponsible for identifying, monitoring and manag-ing all of the risks inherent to our business.

Credit Risk

Credit risk was closely monitored during 2006.The bank maintained good loan portfolio qualityand continuous growth in outstanding credits. Atyear end, the bank reported portfolio at risk of2.56% while net write-offs were only 0.77%. Cov-erage for potential loan losses was ample, witha ratio of provisions to PAR of more than 216%.Due to the nature of our business, risk concentra-tion was very low; the bank’s ten largest creditexposures were equivalent to 64% of equity andaccounted for only 9% of the gross loan portfolioat the end of 2006.

Market and Liquidity Risk

The bank had low exposure to market risk. We usethe duration GAP methodology to calculate andassess interest rate risk. The bank’s exposure tointerest rate risk decreased in 2006. Its durationgap at the end of December 2006 was 0.09 years;i.e., the average mismatch between assets andliabilities was barely over one month. The bankwill apply flexible lending rates of interest in thefuture, further reducing interest rate risk.

The bank’s exposure to currency risk was alsolow. As per its policies, ProCredit Bank Albaniadoes not invest in speculative lines of business,including currency operations. Treasury closely

monitors foreign exchange risk, ensuring compli-ance with statutory and internal limits.

ProCredit Bank’s liquidity risk is continuouslymanaged and monitored by the Treasury Depart-ment, assuring that the bank can meet its obliga-tions at all times. The short-term liquidity posi-tion remained strong in 2006; cash and short-term funds exceeded 50% of the short-termdeposits throughout the year. Surplus fundswere invested in T-bills and in various invest-ment alternatives in OECD countries and otherProCredit banks.

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Operational Risk

Operational Risk was the Risk ManagementDepartment’s main focus during 2006. The bankupdated its most important procedures, ensur-ing application of the four-eyes principle anddocumentation of all processes. A risk manage-ment manual was approved at the beginning ofthe year followed by a detailed methodology forinterest rate risk calculations. In addition, thedepartment introduced an anti-fraud policy anda new approach to fraud risk reporting that willenable better data collection and analysis. Every

new employee receives introductory training inoperational risk management, and new policiesand procedures are communicated to all relevantparties. The Risk Management Department also placedstrong emphasis on upgrading ProCredit Bank’ssecurity systems and procedures. It establisheda dedicated Security Centre, enhanced IT secu-rity, and introduced an advanced and centralisedphysical security system that provides continu-ous monitoring of the bank’s premises by anexternal contractor.

R i s k M a n a g e m e n t 25

Fier

Tirana (6)

Shkodra

Vlora

Lushnja Pogradec

Korca

Sarande

Berat

Elbasan

Durrës (2)

Lezha

Albania

Adriatic Sea

Ionian Sea

Greece

Macedonia

KosovoMontenegro

Italy

Gjirokastra

Lac

KucovaBilisht

Branch Network

Our expanded branch network in 2006 strength-ened our presence in the capital and severalsmaller cities. Two new offices were establishedin Tirana, bringing the total in this city to six. Oneof these new branches was opened to centralisemanagement of lending operations, speeding uploan processing.

To strengthen our position in the central andnorthern regions of the country, we opened twonew sub-branches in Laç and Kuçova, where weoffer our entire product line. In response to highdemand, we upgraded our credit outlet in Bil-isht to a full-service sub-branch. By the end of2006, ProCredit Bank’s branch network included22 branches and agencies in 16 cities throughout

Albania, with each branch and agency offeringour entire line of loan and banking services.

The bank also continued to renovate existingfacilities, applying the ProCredit group’s new cor-porate design standards which we adopted in thefourth quarter of 2005. The renovations create afriendly and welcoming environment and betterservice for our clients.

Our targets for 2007 include continuation of geo-graphic expansion as well as greater presence incities where we already operate. We plan to openat least 6 additional branches throughout thecountry, thereby emphasising our commitment toachieving even closer proximity to our clients.

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B r a n c h N e t w o r k 27

In 2006 the bank introduced an additional layerof senior management and restructured its de-partments to clearly define tasks and responsi-bilities. We established formal divisions in theareas of credit, business development, bank-ing operations, internal services, finance andaccounting, and branch support and develop-ment. The increasing importance of independentrisk management processes in the bank led to theformation of a separate risk management depart-ment.

Approximately 20 new middle management posi-tions were created in the head office and branchesto better support the operational developmentof the bank. As a priority in 2006, we introducedextensive training and development for middlemanagement as a critical component of growingProCredit Bank’s branch network. The trainingprogramme, which will continue through 2007,consists of periodic seminars and workshopsthat lay the foundation for higher quality in staffmanagement. Two senior managers were select-ed to attend the ProCredit Academy in Germany,and another four managers will join the Academyin 2007.

The HR department was reorganised in the thirdquarter of the year to improve recruitment, careerdevelopment and staff evaluation. As in 2005, alarge number of new staff were hired; 180 staffmembers joined the institution, bringing thetotal number of employees to 577. Staff turnoverdropped from 48% in 2005 to 18% in 2006.

Training and integrating new staff members re-mained one of our biggest challenges. A newlyintroduced “welcome week” offered a generaloverview to all newcomers, not only of the bank’s

various operational areas but also of the historyof ProCredit, its corporate values, and basic rulesof conduct. Introductory courses and basic oper-ational training for a large number of staff hiredin 2005 were the focus of the bank’s internaltraining programme. In 2006, direct expenses fortraining measures approximated EUR 170,000. More detailed technical courses and refreshertraining will follow in 2007.

In addition to internal training activities, 70 loanofficers and credit coordinators visited sisterProCredit banks in the region to participate intraining activities and to exchange experiences.Several employees attended Visa Internationaland SWIFT training courses and participated ina special seminar on documentary business andtrade finance organised by ProCredit Bank Ko-sovo.

All cashiers and client advisors attended a four-day sales programme in 2006. This training in-creased awareness of our target group’s specificconcerns and expectations and built skills for de-livering services in an efficient yet friendly man-ner. This instruction was followed by a structuredcoaching process. A similar programme for loanofficers will be implemented in the first quarterof 2007.

The majority of our training sessions are con-ducted by the bank’s senior staff. To increase ourinternal training capacity, a group of 20 middlemanagers and senior staff participated in a train-ing-of-trainers seminar. This approach will alsoenhance the bank’s on-the-job training, whichconstitutes a major part of our professionaldevelopment activities.

Organisation, Staff and Staff Development

O r g a n i s at i o n , S ta f f a n d S ta f f D e v e l o p m e n tO r g a n i s at i o n , S ta f f a n d S ta f f D e v e l o p m e n t28

Part of the overall mission of the ProCredit groupis to set standards in the financial sectors inwhich we operate. We want to make a differencenot only in terms of the target groups we serveand the quality of the financial services we pro-vide, but also with regard to business ethics. Ourstrong corporate values play a key role in thisrespect. We have established six essential princi-ples which guide the operations of ProCredit in-stitutions:

• Transparency: We adhere to the principle of providing transparent information both to our customers and the general public and to our employees, and our conduct is straight- forward and open;

• A culture of open communication: We are open, fair and constructive in our communi cation with each other, and deal with conflicts at work in a professional manner, working together to find solutions;

• Social responsibility and tolerance: We give our clients sound advice; their economic and financial situation, their potential and their capacities are assessed and are translated into appropriate “products”; promoting a cul- ture of savings is important to us; we are com- mitted to treating all customers and em- ployees respectfully and fairly, irrespective of their origin, colour, language, gender or religious or political beliefs;

• Service orientation: Every client is served in a friendly, competent and courteous manner. Our employees are committed to providing excellent service to all customers, regardless of their background or the size of their busi- ness;

• High professional standards: Every employee takes responsibility for the quality of his/her work and strives to do his/her job even better;

• A high degree of personal commitment: This goes hand-in-hand with personal integrity and honesty – traits which are required of all employees in all ProCredit institutions.

These ProCredit values represent the backboneof our corporate culture and are discussed andactively applied in our day-to-day operations.Moreover, they are reflected in the Code of Con-duct, which translates the ProCredit group’sethical principles into practical guidelines for allProCredit staff. In order to ensure that staff fullyunderstand all of the principles that have been de-fined, several training sessions were conductedduring the year under review at which case stud-ies were presented and grey areas discussed. Wewill continue to conduct such training sessionsand increase their frequency in the future.

Another aspect of ensuring that our institutionadheres to the highest ethical standards is ourconsistent application of international best-practice methods and procedures to protect our-selves from being used as a vehicle for moneylaundering or other illegal activities such as thefinancing of terrorist activities. The important fo-cus here is to “know your customer”, and, in linewith this principle, to carry out sound reportingand comply with the applicable regulations.

We also set standards regarding the impact of ourlending operations on the environment. ProCreditBank Albania has implemented anenvironmental management sys-tem based on continuous assess-ment of the loan portfolio accord-ing to environmental criteria, anin-depth analysis of all economicactivities which potentially in-volve environmental risks, andthe rejection of loan applicationsfrom enterprises engaged inactivities which are deemed en-vironmentally hazardous andappear on our institution’sexclusion list. By incorporat-ing environmental issues intothe loan approval process,ProCredit Bank Albania is also ableto raise its clients’ overall level of environmen-tal awareness. We ensure that when loan appli-cations are evaluated, compliance with ethicalbusiness practices is a key consideration. Noloans are issued to enterprises or individuals if itis suspected that they are making use of unsafeor morally objectionable forms of labour, in parti-cular child labour.

Business Ethics and Environmental Standards

B u s i n e s s E t h i c s a n d E n v i r o n m e n ta l S ta n d a r d s 29

Our Clients

The small city of Tepelenë in southern Albania hasbeen home to Ilmi Shehu and his family for manyyears. During the communist era before 1990,IImi worked as a carpenter and was a member ofa cooperative. Thereafter, he did occasional workin villages around Tepelenë, such as repairingfurniture for various shops. Following the pathof many other Albanians, IImi decided to leavethe country after 1990 together with his wife andthree children to find work in Greece. It was noteasy to begin a new life in this foreign country.But Ilmi was determined; he soon found a job ina Greek furniture company and later helped torestore a museum. These activities allowed himto gain professional experience and to improvehis skills. Ilmi even accumulated some savings,which the family wanted to invest in buying ahouse. Since they still had strong ties to their na-tive country, the Shehus returned home. In 1996,Ilmi opened his own carpentry business in Tirana.Four years later, he learned that ProCredit Bankwas offering loans to very small businesses. Heapplied for a loan and could soon purchase betterequipment to improve the quality of his products.

This was the beginning of a very good long-termrelationship with ProCredit and the start of hisprofessional success story. Selim now applieshis skills and experience to his own business. Hiswork has become well known for its high qualityand for his ability to provide clients with custom-ised products, a service that is hard to find in Al-bania.

Today Ilmi has four employees. His high qualityworkcanbeseennotonlyinTiranabutalsoinothercities of Albania, be it a private house or a cosybar-café. Ilmi still strives to expand his business.His plans include transforming his workshop intoan extensive manufacturing enterprise.

Ilmi Shehu, Carpenter

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Zamira has a very special business niche in Alba-nia. She designs and produces unique clothingthat is in great demand, both for foreign touristsand also for Albanians. During the communist era,Zamira worked in a state-owned company. In the1990s, she met a famous fashion designer withwhom she worked for many years. Their creations– dresses, blouses and traditional clothes – area unique combination of contemporary fashionand traditional handicraft. Some of their dresseshave been shown at fashion shows and the MissAlbania Show.

Zamira became known for her creative styles. In2004, she decided to realise a long-held dream:opening her own studio. Since then, she has fur-ther developed her skills, producing decorativesilver articles that are quite popular. They areused for home decoration, purchased as souve-nirs, and treasured for special occasions, such asmarriages.

Zamira approached several banks when shedecided to obtain a loan. She chose ProCreditbecause she could obtain a small loan easily andtake advantage of other banking services. Today,ProCredit Bank Albania gives her fast servicewhenever she needs it. Zamira is happy to haveProCredit on her side as a reliable partner.

Zamira Dajçi, Craftswoman

O u r C l i e n t s 31

Kostaq Pëllumbi was born in 1944 in Korça, a citynear the Greek border. For many years, Kostaqand his wife worked in factories, Kostaq as amechanic and his wife as an agronomist. Theyhave retired and receive a modest pension.

Linda is the younger of the Pëllumbis’ two daugh-ters. While young, she discovered a talent forcomputers. Following this interest, she moved toTirana to study information technology. In 2002,her ambitions led her to the United States whereshe could gain the most up-to-date knowledgeand training. She continued her studies in theUS and also found a job that allowed her to savesome money. To support her family, Linda sentsome of her savings home through people whofrequently visited Albania.

In 2004, the Pëllumbi family opened an accountat ProCredit Bank Albania, through which theycan now receive money directly from Linda. ThePëllumbis value this service because they canwithdraw money whenever they want to, and theyare no longer dependent on people travelling toAlbania. In addition, their ProCredit bank accounthas helped them to accumulate and safely storetheir savings.

Kostaq Pëllumbi, Retiree

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Selim Roshlani, Farmer

Selim Roshlani was born in a picturesque villagejust outside Fier – about two hours’ drive fromTirana. He lives in this village with his parents,wife and two little daughters. Selim began hisprofessional career as an electrician while hisparents and wife worked in a cooperative. Afterthe privatisation of state-owned land and prop-erty in 1992, Selim decided to start a cattle farm.His family received two cows from the cooperativeandboughtthreemorewithSelim’ssavings.TodaySelim has 9 cows. Every morning his father deliv-ersfreshmilktofamilies inthevillageand sells therest at the market in Fier. They also raise calves tosell veal – meat that is in high demand in Albania.

In 2000, Selim heard from a friend that it waspossible to get a loan from ProCredit through asimple application process. At that time, Selim’sbusiness went through a difficult period. He lostfour cows that were a vital source of income forhis family. ProCredit Bank provided funds tobridge this crisis and gave him another loan tobuy additional cows.

Since then, Selimhas gradually in-vested his earn-ings in his busi-ness, constructinga new stall for his livestock and adding spacewhere he keeps food for the cows. He investedhis most recent loans in buying a piece of land togrow his own food for the livestock.

Over the years, Selim has improved his family’sliving conditions by investing in their house. Hehas transformed his home into a beautiful smallvilla with a little garden filled with trees and flow-ers. Recently, Selim and his wife discovered anopportunity to rent a nice bar-restaurant in Fier,which they now run together. Selim will continueto invest in his livestock business, particularlysince it provides key ingredients, such as veal,for dishes that are served in the restaurant.Selim says that he appreciates ProCredit Bankbecause it has always been there to help himwhen he asked.

O u r C l i e n t s 33

Financial Statements

Independent Auditor’s Report andthe Financial Statements as of and for the year ended 31 December 2006

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F i n a n c i a l S tat e m e n t s 35

Balance SheetAs at 31 December 2006

In LEK’000 *In Euro’000 (unaudited) Notes 31 Dec 2006 31 Dec 2005 31 Dec 2006 31 Dec 2005

Assets Cash and balances with Central Bank 3 3,429,794 2,851,654 27,693 23,263 Loans and advances to financial institutions 4 4,861,958 4,250,629 39,257 34,676 Loans and advances to customers, net 5 11,019,568 9,747,345 88,975 79,518 Financial instruments available for sale 6 7,253,513 6,027,746 58,567 49,174 Property and equipment 7 497,476 392,473 4,017 3,202 Intangible assets 8 67,428 53,483 544 436 Deferred tax assets 9 32,639 62,880 264 513 Other assets 10 229,549 68,226 1,853 557

Total assets 27,391,925 23,454,436 221,170 191,339

Liabilities Due to other banks 11 260,528 269,957 2,104 2,202 Due to customers 12 23,772,649 19,592,189 191,947 159,832 Other borrowed funds 13 1,003,093 1,051,491 8,099 8,578 Grant 14 2,632 4,063 21 33 Other liabilities 15 208,954 335,524 1,687 2,737

Total liabilities 25,247,856 21,253,224 203,858 173,382

Shareholders’ equity Paid-up capital 16 1,535,329 1,535,329 12,397 12,525 Legal reserves 16 243,188 157,745 1,964 1,287 Retained earnings 389,233 508,138 3,143 4,145 Investments revaluation reserve (23,681) – (192) –

Total shareholders’ equity 2,144,069 2,201,212 17,312 17,957

Total liabilities and shareholders’ equity 27,391,925 23,454,436 221,170 191,339

The balance sheet is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 40 to 54.*The Euro equivalent figures are provided for information purposes only and do not form part of the audited financial statements (refer tonote 2(c)).

A n n u a l R e p o r t 2 0 0 636

In LEK’000 *In Euro’000 (unaudited) Notes 2006 2005 2006 2005 Interest income 17 2,701,179 2,455,248 21,948 20,030 Interest expense 18 (776,129) (597,922) (6,306) (4,878)

Net interest income 1,925,050 1,857,326 15,642 15,152 Fee and commission income 19 127,209 110,819 1,033 904 Fee and commission expense (32,727) (16,297) (266) (133)

Net fee and commission income 94,482 94,522 767 771 Other operating income 20 49,091 20,870 399 170 Net foreign exchange result 38,327 (19,969) 311 (163) 87,418 901 710 7

Impairment losses on loans and advances to customers and financial institutions 4, 5 (242,693) (321,462) (1,972) (2,622)

Other operating expenses 21 (1,336,797) (1,163,179) (10,862) (9,489) Operating profit for the year before tax 527,460 468,108 4,285 3,819 Income tax expense 23 (151,056) (134,053) (1,227) (1,094)

Net profit for the year 376,404 334,055 3,058 2,725

The income statement is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 40 to 54.*The Euro equivalent figures are provided for information purposes only and do not form part of the audited financial statements (refer tonote 2(c)).

Income StatementFor the year ended 31 December 2006

Average exchange rate as of December 31, 2006: 1 EUR = LEK 123.07

F i n a n c i a l S tat e m e n t s 37

Statement of Changes in EquityFor the year ended 31 December 2006

Paid-up Legal Investments Retained Total Capital Reserve Revaluation Res Earnings

In LEK’000Balance at 31 December 2004 1,535,329 109,089 – 222,739 1,867,157

Appropriation of retained earnings – 48,656 – (48,656) – Current year profit – – – 334,055 334,055

Balance at 31 December 2005 1,535,329 157,745 – 508,138 2,201,212 Appropriation of retained earnings – 85,443 – (85,443) – Payment of dividends – – – (409,866) (409,866) Net change in AFS, net of tax – – (23,681) – (23,681) Current year profit – – – 376,404 376,404

Balance at 31 December 2006 1,535,329 243,188 (23,681) 389,233 2,144,069

*In EUR’000 (unaudited)Balance at 31 December 2004 12,151 863 – 1,763 14,777

Appropriation of retained earnings – 397 – (397) – Current year profit – – – 2,725 2,725 Translation adjustment 374 27 – 54 455

Balance at 31 December 2005 12,525 1,287 – 4,145 17,957 Appropriation of retained earnings – 690 – (690) – Payment of dividends – – – (3,309) (3,309) Net change in AFS, net of tax – – (191) – (191) Current year profit – – – 3,058 3,058 Translation adjustment (128) (13) – (62) (203)

Balance at 31 December 2006 12,397 1,964 (191) 3,142 17,312

The statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages40 to 54.*The Euro equivalent figures are provided for information purposes only and do not form part of the audited financial statements (refer tonote 2(c)).

A n n u a l R e p o r t 2 0 0 638

Cash Flow StatementFor the year ended 31 December 2006

In LEK’000 *In Euro’000 (unaudited)2006 2005 2006 2005

Cash flows from operating activities Operating profit for the year before tax 527,460 468,108 4,259 3,819 Adjustments to reconcile net profit to net cash flows from operating activities Depreciation 178,222 142,405 1,439 1,162 Amortisation 6,929 5,375 56 44 Impairment losses 242,693 321,462 1,960 2,622 Loss on disposal of assets 652 3,974 5 32 Other provision (3,884) 11,005 (31) 89 Effect of fair value adjustment to securities – (2,466) – (20) Deferred tax effect 35,219 (33,494) 284 (273) Release of grant to income statement (1,431) (2,015) (12) (16) Interest income (2,701,179) (2,455,248) (21,810) (20,030) Interest expenses 776,129 597,922 6,267 4,878

(939,190) (942,972) (7,583) (7,693)Changes in operating assets and liabilities

Increase in loans and advances to financial institutions (1,635,329) (63,740) (13,204) (520) Increase in loans and advances to customers (1,531,406) (243,115) (12,365) (1,983) Increase in other assets (108,230) (118,038) (874) (963) Decrease in due to banks (9,590) (180,131) (77) (1,469) Increase in due to customers 4,096,444 4,716,505 33,076 38,477 (Decrease)\Increase in other liabilities (98,556) 268,730 (796) 2,192 Income tax paid (193,059) (141,148) (1,559) (1,151) Interest received 2,689,028 2,423,040 21,712 19,767 Interest paid (691,952) (641,503) (5,587) (5,233)

Net cash provided by operating activities 2,517,350 6,020,600 20,326 49,117

Cash flows from investing activitiesPurchases of Treasury Bills (1,321,044) (2,275,122) (10,666) (18,561)

Purchases of government bonds 41,646 (199,692) 336 (1,629) Proceeds from sale of property 1,665 4,374 13 36 Purchases of intangible assets (20,874) (48,344) (169) (395) Purchases of property and equipment (287,715) (134,279) (2,323) (1,095)

Net cash used in investing activities (1,586,322) (2,653, 063) (12,809) (21,644)

Cash flows from financing activities Dividend paid (409,866) – (3,309) – Payments of borrowings to financial institutions (48,398) (86,206) (391) (703)

Net cash used in financing activities (458,264) (86,206) (3,700) (703) (Decrease)/Increase in cash and cash equivalents (466,426) 2,338,359 (3,766) 19,077 Cash and cash equivalents, beginning of the year 4,449,750 2,111,391 35,929 17,224

Cash and cash equivalents, end of the year (refer to note 24) 3,983,324 4,449,750 (32,163) 36,301

The statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages40 to 54.*The Euro equivalent figures are provided for information purposes only and do not form part of the audited financial statements (refer tonote 2(c)).

These financial statements have been approved by the Directors of the Bank on 9 February 2007 and signed on its behalf by:

Frieder Woehrmann Klid SaraçiChief Executive Officer Chief Financial Officer

F i n a n c i a l S tat e m e n t s 39

1. Introduction

FEFAD Bank Sh.a (the “Bank”) was incorporated in February 1999and in March of that year, was licensed to operate as a bank in allfields of banking activity in Albania in accordance with law No. 8365,“For the Banking System in Albania”, dated July 1998. The Bank isalso subject to law No. 8269, dated December 1997, “On the Bankof Albania”. The official address of the Bank is “Rr. Sami Frashëri,Tirana e Re, Pall. 11 katësh, kati 2-10-11 -P. O. Box 2395”.On 15 March 1999, the Bank received its initial paid-up share capi-tal of LEK 350 million from the Foundation for Enterprise Financeand Development (the “FEFAD Foundation”). In September 1999and April 2000 the share capital was increased to LEK 500 millionand LEK 700 million, respectively. On 14 July 2003, the Extraordi-nary Meeting of Shareholders decided to convert the paid-up capi-tal from Lek to EUR. Effective from 30 September 2003, the paid-upcapital was converted to EUR 5,173,688.1 using an exchange rateof 1 EUR to Lek 135.3. During 2004 the Bank increased its paid-up capital with EUR 1,478,000 out of retained earnings based ona decision of the Assembly of Shareholders on 10 March 2004.Moreover, in the Extraordinary Assembly dated 28 May 2004, theshareholders approved an additional increase of the share capitalin the amount of EUR 5,173,000 by the issuance of 70,000 new ordi-nary shares, each having a value of EUR 73.9. The contributions ofthe shareholders for the subscription of the new shares were fullypaid in cash.FEFAD Bank, upon the decision made at the Extraordinary Share-holders’ Meeting, changed its name to ProCredit Bank sh.a. on 6August 2003.

As at 31 December 2006, the shareholders held the following per-centages of shares:

%FEFAD Foundation 25

International Finance Corporation (IFC) 11.25 ProCredit Holding 43.75 Commerzbank AG 20

As at 31 December 2006 the Bank was operating from a head officein Tirana with 21 branches in Tirana, Durrës, Fier, Elbasan, Korçë,Shkodër, Lezhe, Lushnja, Pogradec, Berat, Saranda, Vlorë Gjiro-kastër, Bilisht, Kucove and Lac.

As at 31 December 2006, the Bank employs 568 staff (2005: 491),including 1 expatriate manager and operates mainly in the geo-graphical region of Albania.

2. Significant accounting policies

(a) Statement of compliance

The financial statements have been prepared in accordance withthe International Financial Reporting Standards (IFRS) and its inter-pretations adopted by the International Accounting StandardsBoard (IASB).

(b) Adoption of new and revised Standards

In the current year, the Bank has adopted all of the new and revisedStandards and Interpretations issued by the International Account-ing Standards Board (the IASB) and the International FinancialReporting Interpretations Committee (the IFRIC) of the IASB that arerelevant to its operations and effective for annual reporting peri-ods beginning on 1 January 2006. The adoption of these new andrevised Standards and Interpretations has resulted in changes tothe Bank’s accounting policies in relation to investments classifiedas at fair value through profit or loss. The impact of this change isdiscussed later in this note.

The Bank has chosen not to early adopt the following standard andinterpretations relevant to its operations that were issued, but notyet effective for accounting periods beginning on 1 January 2006:• IFRS 7, Financial Instruments: Disclosures (effective 1 January 2007);• IAS 1 Amendment - Additional disclosures regarding capital (effective 1 January 2007);• IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006).Management anticipates that the adoption of these Standards andInterpretations in future periods will have no material financial im-pact on the financial statements of the Bank.

Limitation of ability to designate financial assets and financial liabilities through profit or loss Following amendments to IAS 39 Financial Instruments: Recogni-tion and Measurement in June 2005, the ability of entities to desig-nate any financial asset or financial liability as ‘at fair value throughprofit or loss’ (“FVTPL”) has been limited.Financial assets previously designated as FVTPL that can no longerbe designated as at FVTPL are now classified as available-for-salefinancial assets, and are now measured at fair value with changesin fair value recognised in equity, according to their classification.There were no financial liabilities previously held as FVTPL.These changes have been applied by the Bank in accordance withthe transitional provisions of IAS 39 with effect from 1 January2006. The amendments result in Government Bonds held by theBank with a carrying amount at 31 December 2005 of Lek 1.889million that were previously designated as at FVTPL being reclassi-fied as available-for-sale investments. Although ordinarily the des-ignation of a financial asset as available-for-sale is made on initialrecognition, the transitional provisions of IAS 39 allow such desig-nation to be made on the date of de-designation (1 January 2006).Fair value movements after 1 January 2006 are recognised directlyin equity in the investments revaluation reserve.If the reclassification had been made from the beginning of thecomparative period (1 January 2005) the effect in the profit andloss would have been a decrease of Lek 2,466 thousand and anequal increase in Investment Revaluation Reserve as at 31 Decem-ber 2005. There is no effect on 1 January 2005.

(c) Basis of preparation

The financial statements are presented in Albanian Lek, rounded tothe nearest thousand. They are prepared under the historical costconvention, as modified by the revaluation of available-for-salefinancial assets and financial assets at fair value through profit orloss in 2005.In addition to presenting the financial statements in Lek, supple-mentary information in EUR has been prepared for the convenienceof users of the financial statements. The supplementary informa-tion has been prepared by translating from Lek’000 to EUR’000 asfollows:

Notes to the Financial StatementsFor the year ended 31 December 2006Amounts in Albanian Lek ’000, unless otherwise stated

A n n u a l R e p o r t 2 0 0 640

Euro equivalent figuresThe balance sheet, statement of changes in equity and cash flowstatement for the year ended 31 December 2006 have been trans-lated at the official rate of the Bank of Albania as at 31 December2006 of Lek 123.85 to EUR 1 (2005 figures: 122.58). The incomestatement has been translated with the average exchange rate for2006 of 123.07 to Eur 1 (2005 figures: 122.58).The accounting policies have been applied consistently to all theperiods presented except for financial assets available for sale thatwere classified as financial assets held at fair value through profitor loss in 2005 (Note 2 (b)).The preparation of financial statements in conformity with IFRSrequires management to make judgments, estimates and assump-tions that affect the application of policies and reported amountsof assets and liabilities, income and expenses. The estimates andassociated assumptions are based on historical experience andvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making thejudgments about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differfrom these estimates.The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised inthe period in which the estimate is revised if the revision affectsonly that period or in the period of the revision and future periods ifthe revision affects both current and future periods.Judgments made by management in the application of IFRSs thathave significant effect on the financial statements and estimateswith a significant risk of material adjustment in the next year arediscussed in note 2 (p).

(d) Financial instruments

(i) ClassificationThe Bank classifies its financial assets in the following categories:loans and receivables and financial assets at fair value throughprofit and loss. Management determine the classification of its in-vestments at initial recognition.

Loans and receivablesLoans and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an activemarket. They arise when the Bank provides money, goods or serv-ices directly to a debtor with no intention of trading the receivable.

Financial assets available for saleThis category includes those financial assets that are designatedas available-for sale, being those securities that do not meet thecriteria for being recorded as designated financial assets at fairvalue through profit or loss.All financial assets are designated as available for sale; the Bankdoes not apply hedge accounting. During 2005 the bonds, whichwere previously classified as available for sale, were designated asfinancial assets at fair value through profit or loss on initial recog-nition. As the demands for such a classification have increasedsubstantially, it is no longer appropriate to use this classificationfor all such financial assets. Accordingly, all financial assets at fairvalue through profit or loss were de-designated and classified as“securities available for sale” (“AFS”) starting from 1 of January2006 (note 2b).

(ii) RecognitionPurchases and sales of financial assets at fair value through profitor loss are recognised on settlement date – the date on which theBank commits to purchase or sell the asset. Loans and receivablesare recognised when cash is advanced to the borrowers.

(iii) MeasurementFinancial assets are initially recognised at fair value plus transactioncosts for all financial assets not carried at fair value through profitor loss. Financial assets are derecognised when the rights to receivecash flows from the financial assets have expired or where the Bankhas transferred substantially all risks and rewards of ownership.Financial assets at fair value through profit or loss are subsequentlycarried at fair value. Loans and receivables are carried at amortisedcost using the effective interest method.

(iv) Fair value measurement principlesThe fair values of quoted investments in active markets are basedon current bid prices. If the market for a financial asset is not active(and for unlisted securities), the Bank establishes fair value by us-ing valuation techniques commonly used by market participants.Where discounted cash flow techniques are used, estimated futurecash flows are based on management’s best estimates and the dis-count rate is a market related rate at the balance sheet date for aninstrument with similar terms and conditions. Where pricing mod-els are used, inputs are based on market-related measures at thebalance sheet date.

(v) Gains and losses on subsequent measurementGains and losses arising from changes in the fair value of the ‘finan-cial assets at fair value through profit or loss’ category are includedin the income statement in the period in which they arise. Wherethese investments are interest-bearing, interest calculated usingthe effective interest method is recognised in profit or loss.

(vi) Specific instrumentsCash and cash equivalentsCash and cash equivalents comprise cash balances and call depos-its with an original maturity of three months or less. The statutoryreserve with the Central Bank is not available for the Bank’s day-to-day operations and is not included as a component of cash andcash equivalents for the purpose of the statement of cash flows.Further details of what comprises cash and cash equivalents canbe found in note 24.

Financial assets available-for-saleAvailable-for-sale investments are those intended to be held for anindefinite period of time, which may be sold in response to needsfor liquidity or changes in interest rates, exchange rates or equityprices. Financial assets available for sale are carried at fair valuebased on their quoted market price.

Loans and advances to customers and financial institutions Loans and advances are reported net of allowances for impairmentto reflect the estimated recoverable amounts (see accounting pol-icy (e)).

(vii) DerecognitionA financial asset is derecognised when the Bank loses control overthe contractual rights that comprise that asset. This occurs whenthe rights are realised, expire or are surrendered. A financial li-ability is derecognised when it is extinguished. Financial instru-ments classified at fair value through profit or loss are recognised/ derecognised by the Bank on the date it commits to purchase /sell the investments. Loans and receivables are derecognised onthe day they are transferred by the Bank.

(e) Loans and advances to customers and financial institutions

Loans and advances to customers and financial institutions arereported at amortised cost net of specific and general allowancesto reflect the estimated recoverable amounts.

F i n a n c i a l S tat e m e n t s 41

Specific allowances are made against the carrying amount of loansand advances that are identified as being impaired based on regu-lar reviews of outstanding balances to reduce these loans andadvances to their recoverable amounts. General allowances aremaintained to reduce the carrying amount of portfolios of similarloans and advances to their estimated recoverable amounts at thebalance sheet date.The expected cash flows for portfolios of similar assets are esti-mated based on previous experience and considering the creditrating of the underlying customers and late payments of interest orpenalties. Increases in the allowance account are recognised in theincome statement. When a loan is identified to be not recoverable,all the necessary legal procedures have been completed, and thefinal loss has been determined, the loan is written off directly.If in a subsequent period the amount of impairment loss decreasesand the decrease can be linked objectively to an event occurringafter the impairment, the allowance is reversed through the incomestatement of income and expenditures.The allowance for loan impairment also covers losses where thereis objective evidence that probable losses are present in compo-nents of the loan portfolio at the balance sheet date (see account-ing policy (n)).

(f) Property and equipment

Items of property, plant and equipment are stated at cost lessaccumulated depreciation and impairment losses (see accountingpolicy (n)).Depreciation is charged to profit or loss on a straight-line basis overthe estimated useful lives of each part of an item of property, plantand equipment. Leasehold improvements relate to expenditureson branch renovations and are depreciated over the period of thelease. The following are approximations of the annual rates used:

%i. Computer and electronic equipment 33

ii. Vehicles 25 iii. Furniture and equipment 25

The residual value, if not insignificant, is reassessed annually.

(g) Intangible assets

Intangible assets acquired by the Bank are stated at cost lessaccumulated amortisation and impairment losses (see accountingpolicy (n)).Amortisation is charged to profit or loss on a straight-line basis at anannualrateof10%overtheestimatedusefullivesofintangibleassets.

(h) Borrowings

Borrowings are recognised initially at fair value less attributabletransaction costs. Subsequent to initial recognition, borrowingsare stated at amortised cost with any difference between cost andredemption value being recognised in profit or loss over the periodof the borrowings on an effective interest basis.

(i) Grants

Grants received for the purpose of acquiring property and equip-ment are recorded as deferred revenue in the balance sheet andreleased to the income statement on a systematic basis over theuseful life of the asset acquired.

(j) Revenue recognition

Interest income and expense is recognised in the income statementas it accrues, taking into account the effective yield of the asset.Interest income and expense includes the amortisation of any dis-count or premium or other differences between the initial carryingamount of an interest bearing instrument and its amount at matu-rity calculated on an effective interest rate basis.Fee and commission income arises on financial services providedby the Bank and is recognised when the corresponding service isprovided.

(k) Expenses

(i) Operating expensesThe operating expenses are recognised when incurred.

(ii) Employee benefits

Compulsory social security contributionsThe Bank makes only compulsory social security contributionsthat provide pension benefits for employees upon retirement. TheGovernment of Albania is responsible for providing the legally setminimum threshold for pensions in Albania under a defined contri-bution pension plan. The Bank’s contributions to the benefit pen-sion plan are charged to the income statement as incurred.

Paid annual leaveThe Bank recognises as a liability the undiscounted amount ofthe estimated costs related to annual leave expected to be paid inexchange for the employee’s service for the period completed.

(iii) Operating lease paymentsPayments made under operating leases are recognised in the in-come statement on a straight-line basis over the term of the lease.

(l) Income tax

Income tax on the profit or loss for the year comprises current anddeferred tax. Income tax is recognised in the income statementexcept to the extent that it relates to items recognised directly inequity, in which case it is recognised in equity.Current tax is the expected tax payable on the taxable income forthe year, using tax rates enacted or substantially enacted at thebalance sheet date, and any adjustment to tax payable in respectof previous years.Deferred tax is provided using the balance sheet liability method,providing for temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and theamounts used for taxation purposes. The amount of deferred taxprovided is based on the expected manner of realisation or settle-ment of the carrying amount of assets and liabilities, using taxrates enacted or substantially enacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is prob-able that future taxable profits will be available against which theasset can be utilised. Deferred tax assets are reduced to the ex-tent that it is no longer probable that the related tax benefit will berealised.

(m) Foreign currency transactions

(i) Functional and presentation currencyThe financial statements are presented in Lek, which is the Bank’sfunctional and presentation currency.

A n n u a l R e p o r t 2 0 0 642

(ii) Transactions and balancesTransactions in foreign currencies are translated at the foreignexchange rate ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies at the bal-ance sheet date are translated into Lek at the foreign exchangerate ruling at that date. Foreign exchange differences arising ontranslation are recognised in profit or loss. Non-monetary assetsand liabilities that are measured in terms of historical cost in a for-eign currency are translated using the exchange rate at the date ofthe transaction. Non-monetary assets and liabilities denominatedin foreign currencies that are stated at fair value are translated toLek at foreign exchange rates ruling at the dates the fair value wasdetermined.

The applicable rates of exchange (Lek to foreign currency unit) forthe principal currencies as at 31 December 2006 and 2005 wereas follows:

2006 2005 USD 94.14 103.58 EUR 123.85 122.58

(n) Impairment

The carrying amounts of the Bank’s assets, other than deferredtax assets (see accounting policy (l)) are reviewed at each balancesheet date to determine whether there is any indication of impair-ment. If any such indication exists, the asset’s recoverable amountis estimated (see accounting policy. An impairment loss is recog-nised whenever the carrying amount of an asset exceeds its recov-erable amount. Impairment losses are recognised in profit or lossunless the asset is recorded at a revalued amount, in which case itis treated as a revaluation decrease.

(o) Non- current assets as held for sale

Non-current assets are classified as held for sale if their carryingamount will be recovered principally through a sale transactionrather than through continuing use. This condition is regarded asmet only when the sale is highly probable and the asset is avail-able for immediate sale in its present condition. Management mustbe committed to the sale, which should be expected to qualify forrecognition as a completed sale within one year from the date ofclassification.Non-current assets classified as held for sale are measured at thelower of their previous carrying amount and fair value less coststo sell.

(p) Critical accounting estimates, and judgments in applying accounting policies

The Bank makes estimates and assumptions that affect the report-ed amounts of assets and liabilities within the next financial year.Estimates and judgments are continually evaluated and are basedon historical experience and other factors, including expecta-tions of future events that are believed to be reasonable under thecircumstances.

Impairment losses on loans and advancesThe Bank reviews its loan portfolios to assess impairment on amonthly basis. In determining whether an impairment loss shouldbe recorded in the income statement, the Bank makes judgmentsas to whether there is any observable data indicating that thereis a measurable decrease in the estimated future cash flows from

a portfolio of loans before the decrease can be identified with anindividual loan in that portfolio. This evidence may include ob-servable data indicating that there has been an adverse changein the payment status of borrowers in a group, or national or localeconomic conditions that correlate with defaults on assets in thegroup. Management uses estimates based on historical loss expe-rience for assets with credit risk characteristics and objective evi-dence of impairment similar to those in the portfolio when schedul-ing its future cash flows. The methodology and assumptions usedfor estimating both the amount and timing of future cash flows arereviewed regularly to reduce any differences between loss esti-mates and actual loss experience.

(q) Comparatives

The comparative information is presented consistently applyingthe Bank’s accounting policies. When necessary, comparative fig-ures are reclassified for the purposes of comparability.

3. Cash and balances with Central Bank

Cash and balances with Central Bank consisted of the following:

31 Dec 2006 31 Dec 2005Cash

Cash on hand 998,877 821,607 Current accounts Resident 2,712 4,502 Non-resident 47,057 30,340

Central Bank Current account 92,071 37,761 Statutory reserve 2,289,077 1,857,404 REPOs – 100,040

Total 3,429,794 2,851,654

In accordance with the Bank of Albania’s requirement relating to thedeposit reserve, the Bank maintains a minimum of 10% of customerdeposits and of certificates of deposit with the Central Bank as areserve account. The statutory reserve with the Central Bank is nor-mally not available for the Bank’s day-to-day operations.

4. Loans and advances to financial institutions

Loans and advances to financial institutions are detailed as fol-lows: 31 Dec 2006 31 Dec 2005 Deposit accounts Resident – 236,519 Non-resident 4,122,307 3,190,252 Loans 732,408 796,599 Other 15,242 41,946 Allowance for impairment losses on placements with non-OECD countries (7,999) (14,687)

Total 4,861,958 4,250,629

Other accounts include letters of credit and guarantees. 73.3% ofdeposits (2005: 48%) is held with banks in OECD countries andhave contractual maturities from three months to six months.

F i n a n c i a l S tat e m e n t s 43

Loans to financial institutions as at 31 December 2006 can befurther detailed as follows:

Lek Maturity Rate of equivalent interest (p.a.) Loans in 731,656 3–12 5.36%–7% USD 7,772,000 months Accrued interest in USD s7,988 752

Total 732,408

Loans to financial institutions as at 31 December 2005 can be fur-ther detailed as follows:

Lek Maturity Rate of equivalent interest (p.a.) Loans in 795,909 3–12 4.49%–7% USD 7,684,000 months Accrued interest in USD 6,665 690

Total 796,599

Loans are short-term and have been disbursed to banks from non-OECD countries. In accordance with the policies of one of the Bank’sshareholders (ProCredit Holding), these short-term borrowings areextended to banks in which the ProCredit Holding has share parti-cipation.

Loans and advances to financial institutions include, among oth-ers, the following inter-company balances belongong to theProCredit group:

31 Dec 2006 31 Dec 2005 ProCredit Moldova 261,617 278,598 Banco ProCredit Ecuador 470,792 518,001 ProCredit Bank, Georgia – 524,264 ProCredit Bank, Serbia&Montenegro – 123,105 ProCredit Bank, Romania – 249,280 ProCredit Bank, Bulgaria 566,359 312,217 ProCredit Bank, Kosovo 887 580

Total 1,299,655 2,006,045

Movements in the allowance for impairment losses on placementswith non-OECD countries are as follows:

2006 2005 At 1 January 14,687 14,278 Increase / (reversal) of impairment charge for the year (5,725) 663 Translation effect (963) (254)

At 31 December 7,999 14,687

5. Loans and advances to customers, net

Loans and advances consisted of the following:

31 Dec 2006 31 Dec 2005 Loans 11,148,268 9,760,934 Overdrafts 401,143 374,379 Credit Cards 30,006 27,445 Accrued interest 85,550 96,316 Allowance for impairment losses on loans and advances (645,399) (511,729) 11,019,568 9,747,345

Movements in the allowance for impairment losses on loans andadvances to customers are as follows:

2006 2005 At 1 January 511,729 228,075 Impairment charge for the year 248,418 322,125 Loans written off (114,551) (35,777) Translation effect (197) (2,694)

At 31 December 645,399 511,729

The nominal amount of non-performing loans on which interest isno longer being accrued as at 31 December 2006 is Lek 1,120,026thousand (2005: Lek 453,572 thousand). The amount of inter-est that would have been earned if the loans were standard isLek 30,099 thousand (2005: Lek 18,536 thousand).

6. Financial instruments available for sale

Financial instruments available for sale are comprised as follows:

31 Dec 2006 31 Dec 2005 Treasury bills 6,884,272 5,614,655 Government bonds 369,241 413,091

Total 7,253,513 6,027,746

Treasury billsThe effective interest rates on treasury bills during 2006 fluctu-ated between 4.86% and 7.58% (2005: 5.04% and 9.13%). Detailsof available-for-sale treasury bills by contractual maturity are pre-sented as follows:

Quoted market price for treasury bills and government bonds isarrived at by using valuation techniques commonly used by marketparticipants as there are no market quotations for these securi-ties.

31 December 2006 31 December 2005Maturity Quoted market Accrued Carrying Quoted market Accrued Carrying

value interest value value interest value 3 months – – – 98,633 787 99,420 6 months 3,763,242 60,819 3,824,061 1,111,193 16,132 1,127,325 12 months 2,975,419 84,792 3,060,211 4,230,990 156,920 4,387,910 6,738,661 145,611 6,884,272 5,440,816 173,839 5,614,655

A n n u a l R e p o r t 2 0 0 644

Government bonds During 2006, the Bank acquired three bonds denominated in Lekwith a nominal value of Lek 166,667 thousand. Also during 2006the two bonds denominated in USD matured.

31 December 2006Maturity Expiry Purchase Quoted market Interest Carrying

date price price accrued value Lek Bonds

24 months 17 January 2007 100,449 101,445 924 102,369 24 months 18 May 2007 100,091 98,555 4,200 102,755 24 months 05 April 2009 66,667 64,256 1,209 65,465 24 months 18 May 2008 50,102 48,193 389 48,582 36 months 18 December 2008 49,910 49,910 160 50,070 367,219 362,359 6,882 369,241

31 December 2005Maturity Expiry Purchase Quoted market Interest Carrying

date price price accrued value Lek Bonds

24 months 17 January 2007 99,551 128,484 4,200 132,684 24 months 18 May 2007 99,909 77,090 924 78,014

USD Bonds 96 months 15 November 2006 136,306 102,178 354 102,532 96 months 15 November 2006 81,147 99,274 587 99,861 416,913 407,026 6,065 413,091

Land Computers Vehicles Furniture Leasehold Construction Total and and electronic and improvements in progress buildings equipment equipment

Cost At 1 January 2005 – 349,391 37,690 160,024 176,071 85,942 809,118 Additions – 89,963 2,999 25,642 13,319 66,542 198,465 Disposals – (49,683) (19,239) (9,829) – (76,774) (155,525) At 31 December 2005 – 389,671 21,450 175,837 189,390 75,710 852,058 Additions – 136,492 8,024 27,823 31,203 81,857 285,399 Disposals – (22,894) (6,704) (4,529) (410) (1,535) (36,072) Transfer 48,506 77,162 – 10,966 – (136,634) –

At 31 December 2006 48,506 580,431 22,770 210,097 220,183 19,398 1,101,385Accumulated depreciation

At 1 January 2005 – (197,931) (29,208) (84,424) (76,017) – (387,580) Charge for the year – (86,151) (2,320) (27,521) (26,413) – (142,405) Disposals – 46,930 14,861 8,609 – – 70,400 At 31 December 2005 – (237,152) (16,667) (103,336) (102,430) – (459,585) Charge for the year (2,425) (117,804) (2,851) (32,708) (22,434) – (178,222) Disposals – 22,788 6,494 4,496 120 – 33,898

At 31 December 2006 (2,425) (332,168) (13,024) (131,548) (124,744) – (603,909)Carrying amounts

At 1 January 2005 – 151,460 8,482 75,600 100,054 85,942 421,538 At 31 December 2005 – 152,519 4,783 72,501 86,960 75,710 392,473

At 31 December 2006 46,081 248,263 9,746 78,549 95,439 19,398 497,476

Details of the available for sale bonds outstanding as at 31 Decem-ber 2006 are as follows:

In 2003 the USD bonds were reclassified as available-for-sale dueto the change in management’s intention to no longer hold thesesecurities to their maturity date. Interest is received semi-annuallyat a coupon rate ranging from 6.4 % to 9.2%.

Details of the available-for-sale bonds outstanding as at 31 Decem-ber 2005 are as follows:

7. Property and equipment

Property and equipment consists of the following:

Leasehold improvements Leasehold improvements relate to expenditures on the branches inTirana, Pogradec, Durres and Berat (improved in 2003), branches inTirana, Durres, Fier, Berat, Elbasan, Vlora, Lezha, Saranda, Korca,Shkodra (improved in 2004), Lushnja, Korca, Head Office (im-proved in 2005) and branches in Tirana, Durres, Fier, Lushnja,

Berat, Kuçova, Korça, Bilisht, Shkodra, Vlora, Lezha, Laç andSaranda (improved in 2006).

Assets pledged as collateralThere are no assets pledged as collateral as at 31 December 2006.

F i n a n c i a l S tat e m e n t s 45

8. Intangible assets

Intangible assets as at 31 December 2006 and 2005 are composedas follows:

SoftwareCost

At 1 January 2005 11,253 Additions 48,344 At 31 December 2005 59,597 Additions 20,874

At 31 December 2006 80,471

Accumulated amortisation At 1 January 2005 738 Charge for the year 5,375 At 31 December 2005 6,113 Charge for the year 6,929

At 31 December 2006 13,043

Net carrying amount At 1 January 2005 10,515 At 31 December 2005 53,483

At 31 December 2006 67,428

9. Deferred tax assets

The movement on the deferred income tax account is as follows:

31 Dec 2006 31 Dec 2005 Balance at the beginning of the year 62,880 29,385 Deferred tax (expense)/benefit relating to the origination and reversal of temporary differences (35,219) 33,495 Available-for-sale securities 4,978 –

Balance at the end of the year 32,639 62,880

As at 31 December 2006 and 2005 deferred tax assets and liabili-ties are attributable to the following items:

31 Dec 2006 31 Dec 2005Deferred tax asset

Accelerated accounting depreciation 30,340 36,861 Allowance for impairment losses – 28,963 Fair value adjustment to available- for-sale securities 4,750 259

Deferred tax liability Other provisions (2,451) (2451) Fair value adjustment to available- for-sale securities – (752)

Net deferred tax assets 32,639 62,880

The deferred tax assets have been recorded net of the deferred taxliabilities as the amounts are due to the same tax authority and areexpected to be settled on a net basis.

10. Other assets

Other assets are comprised of the following:

31 Dec 2006 31 Dec 2005 Agent transactions 117,455 11,673 Income tax receivables 53,093 – Prepaid expenses 21,420 18,648 Cash in transit for automatic teller machines 17,188 17,589 Other debtors 12,042 8,914 Collateral obtained due to legal process 3,751 3,751 Guarantee deposits paid 3,630 5,126 Cheques for collection 774 1,993 Swift Share 196 194 Clearing account – 338 229,549 68,226

At present the Bank is operating as an agent for the Albanian govern-ment, through cash acceptance for payments to the State budget.

11. Due to banks

Due to other banks as at 31 December 2006 is composed as fol-lows:

Lek ‘000 Maturity Rate of equivalent interest (p.a.) In EUR (2,100,000) 260,085 3 months 3.423% Accrued interest 443

Total 260,528 Due to other banks as at 31 December 2005 is composed as fol-lows:

Lek ‘000 Maturity Rate of equivalent interest (p.a.) In EUR (2,200,000) 269,676 3 months 2.21% Accrued interest 281

Total 269,957

The short term borrowings are obtained from banks in non-OECDcountries upon similar terms and conditions and in accordance withthe same shareholder’s policy as explained in note 4.

12. Due to customers

Customer accounts for enterprises, private entrepreneurs and indi-viduals consisted of the following:

31 Dec 2006 31 Dec 2005Current accounts

Foreign currency 2,089,392 2,106,981 Local currency 2,304,737 1,549,580

Savings accounts Foreign currency 423,741 540,037 Local currency 511,577 460,155

Term deposits Foreign currency 5,948,171 4,855,844 Local currency 11,777,400 9,401,288

Other customer account Foreign currency 444,381 489,070 Accrued interest 273,250 189,234 23,772,649 19,592,189

A n n u a l R e p o r t 2 0 0 646

Current accounts are non-interest bearing. Savings accounts in Lekbear interest at 2.5% per annum (2005: 1.2%), whilst those in for-eign currencies bear interest varying from 0.4% per annum to 0.5%per annum (2005: 0.3% per annum to 0.4% per annum).

For time deposits, the rates applied as of 31 December 2006 wereas follows:

For time deposits, the rates applied as of 31 December 2005 wereas follows:

13. Other borrowed funds

Other borrowed funds are composed as follows:

31 Dec 2006 31 Dec 2005 World Bank 130,181 179,260 FEFAD Foundation 872,912 872,231

Total 1,003,093 1,051,491

The loan from the World Bank is denominated in Lek and bearsinterest at a variable rate calculated as the average interest rateapplied by ProCredit Bank sh.a. to its 6-month term deposits, less0.5%. The loan is repayable in eleven annual instalments, whichcommenced on 30 June 2000.The amount due to the FEFAD Foundation, a shareholder of theBank, comprises four loans each bearing fixed interest at 4% perannum. The repayments of principal occur on a semi-annual basispayable on 30 June and 30 December of each year.

The purpose of these loans was to finance lending to small andmedium-sized companies in Albania. The specific terms and condi-tions for each loan are as follows:• A DEM 10,000,000 (EUR 5,112,919 using the fixed exchange rate as at 31 December 2001) loan, based on an agreement dated 31 March 1999. The loan is repayable in 60 equal semi- annual instalments, commencing on 30 December 2008;• A DEM 1,625,000 (EUR 830,849 using the fixed exchange rate as at 31 December 2001) loan based on an agreement dated 31 March 1999. DEM 32,000 (EUR 16,361 using the fixed ex- change rate as at 31 December 2001) is repayable on 30 De- cember 2005 followed by 59 semi-annual instalments of DEM 27,000 each (EUR 13,805 using the fixed exchange rate as at 31 December 2001);• A DEM 1,500,000 (EUR 766,938 using the fixed exchange rate as at 31 December 2001) loan based on an agreement dated 18 July 2000. DEM 30,000 (EUR 15,339 using the fixed ex- change rate as at 31 December 2001) is repayable on 30 De cember 2005 followed by 60 semi-annual instalments of DEM 24,500 each (EUR 12,527, using the fixed exchange rate as at 31 December 2001);• A EUR 447,380 loan based on an agreement signed on 13 Sep- tember 2002. EUR 10,780 is repayable on 30 December 2005 followed by 60 semi-annual instalments of EUR 7,400 each.

During 2004, based on a decision of the Board of Directors, the loanagreement between the FEFAD Foundation and the Bank signed on13 September 2002 for an amount of EUR 2,000,000 was closed.

14. Grant

31 Dec 2006 31 Dec 2005 Balance at the beginning of the year 4,063 6,078 Released to grant income during the year (1,431) (2,015)

Balance at the end of the year 2,632 4,063

A grant agreement was signed on 27 August 2000 between theBank and the European Bank for Reconstruction and Development(the EBRD). The EBRD agreed to provide the Bank with technicalassistance for expansion of its branch network. One of the mainobjectives was the purchase of necessary office equipment for theopening of two branches in Shkodra and Korca.

15. Other liabilities

Other liabilities are comprised of the following:

31 Dec 2006 31 Dec 2005 Tax and social charges 19,472 16,880 Payments in transit 65,583 129,747 Sundry creditors 57,560 85,827 Accrued expenses 43,499 52,216 Provisions for expenses and legal claims 22,840 26,724 Income tax payable – 24,130

Total 208,954 335,524

Provisions for expenses and legal claims are retained for the pur-pose of providing for any liability which is likely to be incurred, orloss in relation to legal claims outstanding at 31 December 2006.

16. Paid-up capital and reserves

The initial paid-up capital of the Bank was Lek 700 million made upof 70,000 shares with a nominal value of Lek 10,000 each. During2003, based on a decision of the Extraordinary Meeting of Share-holders the share capital of the Bank was converted from Lek toEuro at the exchange rate prevailing on that date of 1 Euro: 135.3Lek. As at 31 December 2003 the paid-up capital of the Bank wasEuro 5,173,688 made up of 70,000 shares with a nominal value ofEuro 73.90 each. During 2004 the Bank increased again its paid-up

in % 1 month 3 months 6 months 1 year 2 – 5 years LEK 3 3.5 4.6 5.3 6.00–6.30 USD 2.9 3.15 3.35 3.95 4.10–4.25 EUR 2.4 2.75 3.1 3.5 3.75–5.00

in % 1 month 3 months 6 months 1 year 2 – 5 years LEK 3.9 4.1 5 5.5 6.3–6.5 USD 1.9 2.1 2.3 2.8 3.0–3.5 EUR 1.8 1.85 2 2.1 2.4–3.0

F i n a n c i a l S tat e m e n t s 47

capital with EUR 1,478,000 out of retained earnings and an amountof EUR 5,173,000 by the issuance of 70,000 new ordinary shares,each having a value of EUR 73.9. The contributions of the share-holders for the subscription of the new shares were fully receivedin cash.

Legal reservesThe legal reserves were created based on the decision of the Super-visory Council of the Bank of Albania No. 51, dated 22 April 1999,which states that commercial banks operating in Albania shouldcreate general reserves at 20% of profit after taxes and before divi-dends. Additionally, a legal reserve created as 5% of profit after taxes andbefore dividends is required by law No. 7638, dated November 19,1992, “On commercial companies”.

17. Interest income

Interest income was earned on the following assets:

Years ended 31 December2006 2005

Loans and advances to customers 1,967,200 1,930,988 Financial instruments AFS 441,525 320,768 Loans and advances to financial institutions 288,784 199,002 Other 3,670 4,490

Total 2,701,179 2,455,248

18. Interest expense

Interest expense was incurred on the following liabilities:

Years ended 31 December2006 2005

Due to customers 704,227 548,143 Other borrowed funds 38,946 42,086 Other 32,956 7,693

Total 776,129 597,922

19. Fee and commission income

Fees and commissions received were comprised as follows:

Years ended 31 December2006 2005

Banking services 42,991 35,571 Lending activity 34,468 39,321 Other 49,750 35,927

Total 127,209 110,819

Fees and commissions paid refer mainly to banking services pro-vided by correspondent banks.

20. Other operating income

Years ended 31 December2006 2005

Grant released to other income (note 14) 1,431 2,015 Gain on the fair value of the securities – 2,466 Repayment of loans previously

written off 18,609 3,924 Gain on sale of fixed assets 1,160 2,548 Collateral obtained in legal processes – 4,451 Release of provisions for unused holidays 13,879 – Losses from disposal of AFS securities 2,370 – Other 11,642 5,466

Total 49,091 20,870

21. Other operating expenses

Years ended 31 December2006 2005

Personnel costs (note 22) 430,861 380,247 Depreciation of fixed assets 155,788 115,992 Consultancy, legal fees and other services 150,300 129,929 Telephone and electricity 114,408 93,682 Advertising 108,760 84,312 Rent 107,602 79,198 Maintenance and repairs 69,466 67,326 Transportation and business trip exp 48,282 27,679 Insurance 48,190 41,405 Office supplies 31,707 26,790 Security services 30,959 30,927 Depreciation of leasehold improvements 22,434 26,413 Other 11,111 50,670 Amortisation of intangible assets 6,929 5,375 Other provision _ 3,234

Total 1,336,797 1,163,179

22. Personnel expenses

Personnel expenses can be detailed as follows:

Years ended 31 December2006 2005

Salaries 323,053 276,579 Social insurance 77,267 65,031 Other 30,541 38,637

Total 430,861 380,247

31 December 2006 31 December 2005Number of shares Equivalent in Lek Number of shares Equivalent in Lek

FEFAD Foundation 40,000 383,832 40,000 383,832 EBRD – – 18,000 172,725 IFC 18,000 172,725 18,000 172,725 ProCredit Holding 70,000 671,707 52,000 498,982 Commerzbank AG 32,000 307,065 32,000 307,065 160,000 1,535,329 160,000 1,535,329

A n n u a l R e p o r t 2 0 0 648

23. Income tax

Income tax for the years ended 31 December 2006 and 2005 iscomposed as follows:

Years ended 31 December2006 2005

Current tax 115,837 167,547 Deferred tax expense/(benefit) 35,219 (33,494)

Income tax expense 151,056 134,053

Income tax in Albania is assessed at the rate of 20% (2005: 23%)of taxable income. The following is a reconciliation of income taxescalculated at the applicable tax rate to income tax expense.

Years ended 31 December2006 2005

Profit before taxes 527,460 468,108 Prima facie tax calculated at 20% (2005: 23%) 105,492 107,665 Non-tax-deductible expenses 14,508 18,184 Effect of tax rate change – 5,024 Realisation of temporary differences 31,056 3,180

Income tax expense 151,056 134,053

The following represents a reconciliation of profit in accordancewith International Financial Reporting Standards and taxable profitfor Albania statutory purposes:

Years ended 31 December2006 2005

Profit before tax as per IFRS financial statements 527,460 468,108

Temporary differences Accelerated depreciation for accounting purposes 48,875 39,845 Allowance for impairment losses on loans – 144,815 Foreign exchange differences – monetary items (207) (898) Fair value adjustment to available- for-sale securities – (2,466) Effective interest income adj. AFS 8

Non-temporary differences Non-tax-deductible expenses 23,664 34,486 Gain from disposal of AFS securities (2,370) Foreign exchange differences – non monetary items (15,016) 44,576 Other temporary differences (3,234) –

Taxable profit as per statutory financial statements 579,180 728,466

The average effective tax rate for the year is 28.6% (2005: 28.6%).

24. Cash and cash equivalents

Cash and cash equivalents consisted of the following:

Years ended 31 December2006 2005

Cash on hand 998,877 821,607 Current account with Central Bank 92,071 37,761 REPOs – 100,040 Current accounts with banks 49,769 34,842 Loans and advances to financial institutions, with maturities of 3 months or less 2,842,607 3,455,500

Total 3,983,324 4,449,750

The statutory reserve with the Central Bank is not a component ofcash and cash equivalents.

25. Commitments and contingencies

Commitments and contingencies include guarantees extended tocustomers and received from financial institutions. The balance iscomprised of the following:

31 Dec 2006 31 Dec 2005 Commitments received from credit institutions 247,700 405,741 Guarantees received from credit institutions 248,108 374,224 Guarantees in favour of customers 463,369 469,172 Commitments in favour of credit institutions – 2,732 Commitments in favour of customers 382,486 342,282

Guarantees and letters of creditThe Bank issues guarantees for its customers. These instrumentsbear a credit risk similar to that of loans granted. Based on man-agement’s estimate, no material losses related to guarantees out-standing at 31 December 2006 will be incurred and thus no provi-sion for losses has been included in these financial statements.

LegalIn the normal course of business the Bank is presented with legalclaims; the Bank’s management is of the opinion that no materiallosses will be incurred in relation to legal claims outstanding at 31December 2006.

Lease commitmentsLease commitments for the year ended 31 December 2006 and2005 are composed as follows:

31 Dec 2006 31 Dec 2005 Not later than 1 year 76,926 87,754 Later than 1 year and not later than 5 years 264,391 271,530 Later than 5 years 167,200 113,681

Total 508,517 472,965

26. Financial risk management

By their nature, the Bank’s activities are principally related to theuse of financial instruments. A financial instrument is any con-tract that gives rise to the right to receive cash or another financialasset from another party (financial asset) or the obligation to de-liver cash or another financial asset to another party (financial li-ability). Financial instruments result in certain risks to the Bank.The most significant risks facing the Bank are credit risk, liquidityrisk and market risk. Market risk includes currency risk, interestrate risk and other price risk.

(i) Currency riskThe Bank is exposed to currency risk through transactions in for-eign currencies. As the currency in which the Bank presents itsfinancial statements is the Lek, the Bank’s financial statements areaffected by movements in the exchange rates between the Lek andother currencies.The Bank’s transactional exposures give rise to foreign currencygains and losses that are recognised in the income statement.These exposures comprise the monetary and non-monetary assetsand liabilities of the Bank.

F i n a n c i a l S tat e m e n t s 49

The analysis of monetary and non-monetary assets and liabilitiesas at 31 December 2006 by the foreign currencies in which theywere denominated was as follows:

The analysis of monetary and non-monetary assets and liabilitiesas at 31 December 2005 by the foreign currencies in which theywere denominated was as follows:

(ii) Interest rate riskThe Bank’s operations are subject to the risk of interest rate fluc-tuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differingamounts. The Bank attempts to mitigate this risk by monitoring therepricing dates of its assets and liabilities. In addition, the actualeffect will depend on a number of other factors, including the extentto which repayments are made earlier or later than the contracteddates and variations in interest rate sensitivity within repricingperiods and among currencies.

31 December 2006 LEK EUR USD TotalAssets

Cash and balances with Central Bank 1,929,562 1,037,087 463,145 3,429,794 Loans to financial institutions – 2,944,177 1,917,781 4,861,958 Financial instruments AFS 7,253,513 – _ 7,253,513 Loans and advances to customers, net 5,704,135 5,073,144 242,289 11,019,568 Fixed assets 564,904 _ _ 564,904 Deferred tax assets 32,639 _ _ 32,639 Other assets 183,412 32,729 13,408 229,549

Total 15,668,165 9,087,137 2,636,623 27,391,925

Liabilities Due to other banks – 260,528 _ 260,528 Due to customers 15,013,232 6,129,580 2,629,837 23,772,649 Other borrowed funds 130,181 872,912 _ 1,003,093 Grant 2,632 _ _ 2,632 Provisions 22,841 _ _ 22,841 Other liabilities 103,644 76,120 6,349 186,113 Shareholders’ equity 679,666 1,464,403 _ 2,144,069

Total 15,952,196 8,803,543 2,636,186 27,391,925

Net foreign currency position (284,031) 283,594 437 _

31 December 2005 LEK EUR USD TotalAssets

Cash and balances with Central Bank 1,527,023 427,721 896,910 2,851,654 Loans to financial institutions 120,052 1,880,892 2,249,685 4,250,629 Financial instruments AFS 5,822,172 205,574 – 6,027,746 Loans and advances to customers, net 4,675,735 416,051 4,655,559 9,747,345 Fixed assets 445,956 – – 445,956 Deferred tax assets 62,880 – – 62,880 Other assets 93,941 8,942 (34,657) 68,226

Total 12,747,759 2,939,180 7,767,497 23,454,436

Liabilities Due to other banks – – 269,957 269,957 Due to customers 11,759,815 2,837,981 4,994,393 19,592,189 Other borrowed funds 179,260 – 872,231 1,051,491 Grant 4,063 – – 4,063 Provisions 26,724 – – 26,724 Other liabilities 149,682 18,208 140,910 308,800 Shareholders’ equity 751,826 – 1,449,386 2,201,212

Total 12,871,370 2,856,189 7,726,877 23,454,436

Net foreign currency position (123,611) 81,991 40,620 –

A n n u a l R e p o r t 2 0 0 650

(a) Effective yield information

The average effective yields of significant categories of financialassets and liabilities of the Bank as at 31 December 2006 and 2005were as follows:

(b) Interest rate repricing analysis

The following table presents the interest rate repricing dates forthe Bank’s assets and liabilities. Variable-rate assets and liabili-ties have been reported according to their next rate change date.

Weighted average Weighted average Weighted average interest rate (Lek) interest rate (USD) interest rate (EUR)

31 December 2006 2005 2006 2005 2006 2005Assets

Loans and advances to financial institutions – 5. 3 5. 74 6. 20 3. 46 2. 73 Financial instruments at fair value 6. 6 6. 97 – 4.41 – – Loans and advance to customers 20. 63 24.00 10. 68 10.77 11. 36 12.14

Liabilities Borrowings from financial institutions 2. 26 3.02 – – 4. 00 4.00 Due to banks – – – – 3. 61 2.21 Due to customers 4. 57 5.12 3. 24 2.6 2. 68 2.00

31 December 2006 Up to 1 – 3 3 – 6 6 – 12 Over 1 Non-interest Total 1 month months months months year bearing

Assets Cash and balances with Central Bank 936,956 508,224 388,551 357,035 98,311 1,140,717 3,429,794

Loans and advances to financial institutions 1,588,667 2,541,111 248,501 468,437 15,242 – 4,861,958 Financial assets AFS 809,127 2,375,468 1,976,073 1,930,486 162,359 – 7,253,513 Loans and advances to customers, net 595,662 988,300 1,383,702 2,648,425 5,373,773 29,706 11,019,568 Fixed assets – – – – – 564,904 564,904 Deferred tax assets – – – – – 32,639 32,639 Other assets – – – – – 229,549 229,549

Total 3,930,412 6,413,103 3,996,827 5,404,383 5,649,685 1,997,515 27,391,925Liabilities

Due to other banks – 260,528 – – – – 260,528 Due to customers 5,105,319 4,838,867 4,063,800 3,923,382 1,002,771 4,838,510 23,772,649 Other borrowed funds – – 53,257 4,178 945,658 – 1,003,093 Other liabilities – – – – – 211,586 211,586 Shareholders’ equity – – – – – 2,144,069 2,144,069

Total 5,105,319 5,099,395 4,117,057 3,927,560 1,948,429 7,194,165 27,391,925 Gap (1,174,907) 1,313,708 (120,230) 1,476,823 3,701,256 (5,196,650) –

31 December 2005 Up to 1 – 3 3 – 6 6 – 12 Over 1 Non-interest Total 1 month months months months year bearing

Assets Cash and balances with Central Bank 357,687 593,175 185,740 820,842 – 894,210 2,851,654

Loans and advances to financial institutions 1,754,236 1,933,145 – 517,900 – 45,348 4,250,629 Financial instruments at fair value through profit or loss 448,404 1,465,436 1,315,427 2,590,962 201,452 6,065 6,027,746 Loans and advances to customers, net 885,050 1,009,519 1,395,299 2,277,714 4,644,694 (464,931) 9,747,345 Fixed assets – – – – – 445,956 445,956 Deferred tax assets – – – – – 62,880 62,880 Other assets – – – – – 68,226 68,226

Total 3,445,377 5,001,275 2,896,466 6,207,418 4,846,146 1,057,754 23,454,436Liabilities

Due to other banks – 269,676 – – – 281 269,957 Due to customers 4,879,808 4,353,447 3,082,593 2,848,495 398,232 4,029,614 19,592,189 Other borrowed funds – – 53,213 4,135 994,143 – 1,051,491 Other liabilities – – – – – 339,587 339,587 Shareholders’ equity – – – – – 2,201,212 2,201,212

Total 4,879,808 4,623,123 3,135,806 2,852,630 1,392,375 6,570,694 23,454,436Gap (1,434,431) 378,152 (239,340) 3,354,788 3,453,771 (5,512,940) –

Fixed-rate assets and liabilities have been reported according totheir scheduled principal repayment dates.

F i n a n c i a l S tat e m e n t s 51

(iii) Credit riskThe Bank is subject to credit risk through its lending activities andin cases where it acts as an intermediary on behalf of customersor other third parties or issues guarantees. In this respect, thecredit risk for the Bank stems from the possibility that differentcounterparties might default on their contractual obligations. Themanagement of the credit risk exposures to borrowers is conductedthrough regular analysis of the borrowers’ credit worthiness andthe assignment of a rating grade. Exposure to credit risk is alsomanaged in part by obtaining collateral and guarantees.The Bank’s primary exposure to credit risk arises through its loansand advances. The amount of credit exposure in this regard is rep-resented by the carrying amounts of the assets on the balancesheet. In addition, the Bank is exposed to off-balance sheet creditrisk through commitments to extend credit and guarantees issued(see note 25).Concentrations of credit risk (whether on or off balance sheet) thatarise from financial instruments exist for counterparties when theyhave similar economic characteristics that would cause their abilityto meet contractual obligations to be similarly affected by changesin economic or other conditions. The major concentrations of creditrisk arise by type of customer in relation to the Bank’s investments,loans and advances, commitments to extend credit and guaranteesissued.

The following table presents the distribution of the Bank’s loans,overdrafts and credit cards by industry sector, excluding accruedinterest:

31 December 31 DecemberIndustry sector 2006 % 2005 %Trade 4,702,876 41 3,547,149 35

Industry and other production 2,025,012 17 1,978,892 19 Construction 1,410,464 12 1,229,710 12 Transport 636,902 6 470,811 5 Other services 1,339,993 12 1,026,759 10 Other 1,464,170 13 1,909,439 19 11,579,417 100 10,162,760 100

Collateral received from customers includes cash, mortgages,inventory and other assets pledged in favour of the bank from itsborrowers and as at 31 December 2006 amounts to Lek 40,834,333thousand (2005: Lek 32,190,586 thousand). Collateral is valued atthe date credit is extended and reassessed periodically for impair-ment.

31 December 31 DecemberPrimary guarantee type 2006 % 2005 %

Mortgages 158,532 1 217,089 2 Other collateral 4,716,622 41 3,506,163 35 Mixed (Mortgage and other) 6,674,149 58 6,407,688 63 Unsecured 30,114 0 31,820 –

Total 11,579,417 100 10,162,760 100

(iv) Liquidity riskLiquidity risk arises in the general funding of the Bank’s activitiesand in the management of positions. It includes both the risk ofbeing unable to fund assets at appropriate maturity and rates andthe risk of being unable to liquidate an asset at a reasonable priceand in an appropriate time frame to meet the liability obligations.Funds are raised using a broad range of instruments including de-posits, other liabilities evidenced by paper, and share capital. Thisenhances funding flexibility, limits dependence on any one sourceof funds and generally lowers the cost of funds. The Bank makes itsbest efforts to maintain a balance between continuity of fundingand flexibility through the use of liabilities with a range of matu-rity. The Bank continually assesses liquidity risk by identifying andmonitoring changes in funding required to meet business goals andtargets set in terms of the overall Bank strategy.In addition the Bank holds a portfolio of liquid assets as part of itsliquidity risk management strategy.As at 31 December 2006 the fifty largest deposits from individualcorporate clients represent 11.5% of total balances due to custom-ers (2005: 12 %).

The following table provides an analysis of the financial assets andliabilities of the Bank into relevant maturity groupings based onthe remaining periods to repayment.

Up to 1 – 3 3 – 6 6 – 12 Over 1 Total 1 month months months months year

31 December 2006Assets

Cash and balances with Central Bank 2,077,673 508,224 388,551 357,035 98,311 3,429,794 Loans and advances to financial institutions 1,588,667 2,541,111 248,501 468,437 15,242 4,861,958 Financial assets AFS 809,126 2,375,468 1,976,073 1,930,486 162,359 7,253,512 Loans and advances to customers, net 625,369 988,300 1,383,702 2,648,425 5,373,773 11,019,569 Fixed assets – – – – 564,904 564,904 Deferred tax assets – – – – 32,639 32,639 Other assets 154,440 58,041 5,049 6,945 5,074 229,549

Total 5,255,275 6,471,144 4,001,876 5,411,328 6,252,302 27,391,925

Liabilities Due to other banks – 260,528 – – – 260,528 Due to customers 9,943,829 4,838,867 4,063,800 3,923,382 1,002,771 23,772,649 Other borrowed funds – – 53,257 4,178 945,658 1,003,093 Other liabilities 190,002 – – 18,953 2,631 211,586 Shareholders’ equity – – – – 2,144,069 2,144,069

Total 10,133,831 5,099,395 4,117,057 3,946,513 4,095,129 27,391,925

Liquidity gap at 31 December 2006 (4,878,556) 1,371,749 (115,181) 1,464,815 2,151,173 –

A n n u a l R e p o r t 2 0 0 652

Up to 1 – 3 3 – 6 6 – 12 Over 1 Total 1 month months months months year

31 December 2005 Assets

Cash and balances with Central Bank 1,251,896 593,175 185,740 820,843 _ 2,851,654 Loans and advances to financial institutions 1,756,014 1,937,259 _ 515,410 41,946 4,250,629 Financial instruments at fair value through profit or loss 452,605 1,465,436 1,317,292 2,590,961 201,452 6,027,746 Loans and advances to customers, net 877,395 976,641 1,350,387 2,201,555 4,341,367 9,747,345 Fixed assets – _ _ _ 445,956 445,956 Deferred tax assets _ _ _ _ 62,880 62,880 Other assets 59,155 _ _ _ 9,071 68,226

Total 4,397,065 4,972,511 2,853,419 6,128,769 5,102,672 23,454,436

Liabilities Due to other banks _ 269,957 _ _ _ 269,957 Due to customers 8,775,390 4,407,434 3,122,206 2,882,378 404,781 19,592,189 Other borrowed funds _ _ 53,213 4,135 994,143 1,051,491 Other liabilities 232,454 _ _ _ 107,133 339,587 Shareholders’ equity _ _ _ _ 2,201,212 2,201,212

Total 9,007,844 4,677,391 3,175,419 2,886,513 3,707,269 23,454,436

Liquidity gap at 31 December 2005 (4,610,779) 295,120 (322,000) 3,242,256 1,395,403 _

27. Estimation and disclosure of fair value

Fair value estimates are based on existing balance sheet financialinstruments without attempting to estimate the value of antici-pated future business and the value of assets and liabilities notconsidered financial instruments.

Loans and advances to financial institutionsLoans and advances to financial institutions include interbankplacements and items in the course of collection. As loans, advan-ces and overnight deposits are short term and at floating rates theirfair value is considered to be equal to their carrying amount.

Loans and advances to customersLoans and advances are net of allowances for impairment. TheBank’s loan portfolio has an estimated fair value approximatelyequal to its book value due to either their short-term nature orunderlying interest rates, which approximate market rates. The ma-jority of the loan portfolio is subject to re-pricing within a year.

Due to other banks and customersThe estimated fair value of deposits with no stated maturity, whichincludes non-interest-bearing deposits, is the amount repayableon demand. As at 31 December 2006, the fair value of the timedeposits was Lek 18,278,277 thousand (2005: Lek 14,720,581thousand), while their carrying value was Lek 18,296,548 thou-sand (2005: Lek 14,257,132 thousand).

Other borrowed fundsAs at 31 December 2006, the estimated fair value of borrowedfunds from the World Bank approximates the carrying value due tothe interest rate which approximates market rates. Other borrowedfunds from the FEFAD Foundation have an approximate fair value ofLek 513,151 (2005: Lek 498,297 thousand) while the carrying valueis Lek 872,912 thousand (2005: Lek 872,231).

F i n a n c i a l S tat e m e n t s 53

Exchange rate as of December 31, 2006: 1 EUR = LEK 123.85

28. Related party transactions

During 2006 the Bank entered into the following related partytransactions with several banks in the ProCredit group, one of theshareholders of the Bank (refer to note 1). The ProCredit group hasa share participation in the related banks ranging between 17 and80%.In addition, the Bank has a management services agreement withIPC, a consulting company as approved by the Board of Directors asat 10 March 2004. IPC is considered a related party due to its activeinvolvement in providing the Bank with personnel who are the highlevel management of the Bank. Currently the CEO and the CFO areemployees of IPC. During 2006 IPC invoiced to ProCredit Bank Sh.aan amount of Lek 88,856 thousand (2005: Lek 72,581 thousand) asmanagement fees.All of the Bank’s related party transactions are carried out on anarm’s length basis.

A summary of related party transactions are as follows:

Type of related party EnterprisesYears ended 31 December

2006 2005Loans

Loans outstanding at beginning of the year 796,599 928,564 Loans issued during the year 6,037,337 3,778,396 Loans repaid during the year 6,101,528 3,910,361

Loans outstanding at end of the year 732,408 796,599

Deposits Deposits at beginning of the year 1,207,713 963,109 Deposits issued during the year 23,248,879 16,077,057 Deposits repaid during the year 23,892,149 15,832,453

Deposits at end of the year 564,443 1,207,713

Bank accounts at end of the year 2,803 1,733

Total cash and loans to financial institutions at end of the year 1,299,654 2,006,045

Other assets outstanding at end of the year 15,327 5,348

Borrowing Borrowing outstanding at beginning of the year 269,957 242,786 Borrowing issued during the year 5,976,511 3,865,809 Borrowing repaid during the year 5,985,963 3,838,638

Borrowing outstanding at end of the year 260,505 269,957

Other liabilities outstanding at endof the year 2,900 7,781

2006 2005Income for the year

Interest income 128,541 110,214Expenses for the year

Interest expense 29,235 5,757 Other expense 14,516 8,145

29. Post-balance sheet events

There are no events after the balance sheet date that would requireeither adjustments or additional disclosures in the financial state-ments.

F i n a n c i a l S tat e m e n t s54

Contact Addresses

Head Office

SarajevoRr. Sami Frashëri, Tirana e RePall. 11 katësh, kati 2-10-11P.O. Box 2395Tel. +355 (04) 271 272 / 73 / 74 / 75Fax. +355 (04) 271 276 / 7Fax. +355 (04) 233 481 (SWIFT)Fax. +355 (04) 221 568 (Payments)Tel./Fax. +355 (04) 230 499 (ATM)Call Centre +355 (04) 240 777info@procreditbank.com.alwww.procreditbank.com.al

Branches

Tirana No. 1Rr. Sami Frashëri, Tirana e ReTel. +355 (04) 233 496Fax. +355 (04) 237 958

Tirana No. 2Rr. Ferit XhajkoTel. +355 (04) 376 174 / 41 / 717Fax. +355 (04) 340 105

Tirana No. 3Rr. Ded Gjo Luli,(pranë Muzeut Kombëtar)Tel. +355 (04) 234 671 / 80 / 81Fax. +355 (04) 234 670

Tirana No. 4Laprakë, Rruga e DurrësitBlloku Coloseum GinatshTel./Fax. +355 (04) 255 072

Tirana No. 5Rr. Skënderbej, (pranë ambasadave)Tel. +355 (04) 234 671 / 80 / 81Fax. +355 (04) 234 670

Tirana No. 6Rr. Reshit Petrela,(pranë stacionit të trenit)Tel. +355 (04) 256 237 / 256 314 / 264 972 / 264 973

Durrës No. 1Lagjia 4, Bulevardi KryesorTel. +355 (052) 352 25 / 243 87 / 352 24Fax. +355 (052) 276 38

Durrës No. 2Lagja Nr. 6, Rr. „Aleksandër Goga“Tel. +355 (052) 370 98 / 99Fax. +355 (052) 370 97

ElbasanBlv. Qemal Stafa, P. 15Tel. +355 (054) 532 17 / 533 27Fax. +355 (054) 545 11

BilishtUnaza e qytetit Bilisht,kryqëzimi Bilisht-Miras(Tel.Fax. Missing)

PogradecRr. RiniaTel. +355 (083) 22 055 / 25 577Fax. +355 (083) 25 566

KorçëRr. Shën Gjergji, Nr. 7Tel. +355 (0824) 3754 / 5550Fax. +355 (0824) 2399

FierRr. Ramiz AranitasiTel. +355 (034) 200 21 / 22Fax. +355 (034) 200 22

ShkodërRr. 13 Dhjetori, Nr. 4Tel. +355 (0224) 2115 / 2024Fax. +355 (0224) 3710

VlorëLagja Lef SallataRr. Sadik ZotajTel. +355 (033) 25781 / 82Fax. +355 (033) 25783

LaçLagjia Nr.1, përballë hotel DiplomatTel. +355 (053) 2345 / 2800

LezhëLagjia BesëlidhjaTel. +355 (0215) 2100 / 215 3778Fax. +355 (0215) 2101

BeratBulevardi “Republika”Tel. +355 (032) 36 344Fax. +355 (032) 36 345

KuçovëLagjia Tafik Skendo(Tel.Fax. missing)

LushnjeLagjia Xhevdet NepravishtaShëtitorja KryesoreTel. +355 (035) 25 681 / 2Fax. +355 (035) 25 683

GjirokastërLagjia 18 ShtatoriTel. +355 (084) 68641/2Fax. +355 (084) 68643

SarandëLagjia 1, Rr. Skënderbeu (pranë Limanit)Tel. +355 (085) 261 56 / 7Fax. +355 (085) 261 58

C o n ta c t A d d r e s s e s 55