ALBANIA Economy and the Banking System

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

Dr. Elvin MEKA ALBANIAN ASSOCIATION OF BANKS 26 th EBF Associates’ Meeting 5 June 2008, Tirana, ALBANIA

ALBANIAN ECONOMY

ALBANIA - Located in Southeastern Europe (Western Balkans)

Economic Policy Framework

   

Open Market Economy, No restrictions on profit and capital repatriation,

© Source: CIA Factbook 2008

No exchange rate restriction, floating managed exchange rate regime, Albania signed its Stabilization & Association Agreement with the European Union, the first formal step to eventual EU membership (12 June 2006).

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ALBANIA Main Economic Features & Indicators



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



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



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



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

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ALBANIA Main Economic Features & Indicators (2)



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



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



…but all current account financed by remittances.



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



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

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ALBANIA Main Economic Features & Indicators (3)

Key economic figures

Population: 3.2 mn GDP (EUR bn)

GDP growth (% yoy) GDP per capita (EUR at PPP) Industrial output (% yoy) Unemployment rate (avg, %) Inflation rate (% yoy) Gen. budget balance (% of GDP) C/A balance (% of GDP) Public debt (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn)

ALL/EUR, avg ALL/USD, avg 2003

6.0 5.8 4,250 3.0 15.0 3.3 (4.8) (7.0) 60.7 20.7 0.8 137.5 121.9

2004

6.0 6.2 4,640 3.1 14.6 2.2 (5.1) (4.7) 55.3 17.8 1.0 127.7 102.8

2005

6.7 5.5 4,860 3.1 14.2 2.0 (3.4) (8.7) 54.9 16.8 1.2 124.2 99.8

2006

7.28 5.0 6,224 5.0 13.8 2.5 (3.2) (7.6) 55.9 17.2 1.36 123.1 98.1

2007

7.95 ~6.0 n/a 5.0 13.1 3.0 (3.4) (11) 56 17.4 1.50 123.62 90.43 ALBANIAN ASSOCIATION OF BANKS

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ALBANIA Macroeconomic Environment

POLICIES

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

Fiscal Policy

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

Monetary Policy

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

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ALBANIA Macroeconomic Environment (2)

Albanian economy experienced relatively high growth rate.

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

Source: IMF Source: IMF

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ALBANIA Macroeconomic Environment (3)

Economic Growth

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

Price Stability

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

Economic Growth Rate 2001-2007

4 3 2 1 8 7 6 5

6.5

2001

4.7

2002

5.8

6.2

5.5

5 6

2003 2004

Year

2005 2006 2007

Inflation rate 2000 - 2007

4 3.5

3 2.5

2 1.5

1 0.5

0

3.5

2001

3.3

2.5

3.01

2 2.2

1.7

2002 2003 2004

Year

2005 2006 2007

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ALBANIA Macroeconomic Environment (4)

Income & Employment



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

 

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

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

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ALBANIA Macroeconomic Environment (5)

Remittances

   

Albania’s receipts from workers’ remittances are, relative to GDP, among the highest in the world. Remittances are considerably larger than exports (1.2 times – Sep.07) and FDI (1.9 times – Sep.07). Remittances have significantly lowered the current account deficit and helped Albania build a comfortable level of external reserves.

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

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ALBANIAN BANKING SYSTEM

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ALBANIAN BANKING SYSTEM Brief History

Genesis

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

Central banking

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

Mixed Central & Commercial Banking

Establishment of National Bank of Albania (NBoA), 02 September 1925.

Communist era

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

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ALBANIAN BANKING SYSTEM Brief History (2)

Market Economy

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

To date

Albanian banking system has 16 commercial banks (by 01.01.2008).

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ALBANIAN BANKING SYSTEM Main Features

 

Universal banking system, The dominant sector within Albanian financial system, managing more than 97 % of total financial assets, Mainly foreign-owned (14 out of 16 banks are foreign-owned), Some big International names entered Albanian banking system in 2007: - Intesa SanPaoloIMI bought American Bank of Albania and Italian-Albanian Bank (both banks were merged and by 01.01.08 they operate under American Bank of Albania trademark); - Société Générale bought 75.01% of Popular Bank.

Almost all privately-owned (some minor state shareholdings), A highly concentrated banking system, where top four banks have a share of ~ 73% of total assets.

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ALBANIAN BANKING SYSTEM Main Features (2)

Continuous institutional expansion and development…

No Subjects [1] 2001 2002 2003 2004 2005 2006

1 2 3 4 Banks and branches of foreign banks Non-bank financial institutions Foreign exchange bureaus Save & loan associations 13 4 38 14 5 58 113 15 7 58 131 16 7 54 130 17 7 58 131 17 5 60 125 5 Unions of Save & Loan associations 2 2 2 2 2

2007

17 6 97 129 2

Other non-bank financial institutions

No Subjects [2] 2001 2002 2003

1 2 3 Insurance Companies Pension Funds Leasing Companies 5 1 1 5 1 1 5 1 1

2004

10 1 1

2005

10 3 2

2006

10 3 3

2007

10 3 3 [1] Subjects licensed by Bank of Albania.

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

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ALBANIAN BANKING SYSTEM Main Features (3)

More coverage with banking services…

Number of employees Number of outlets Number of employees per:

- bank - bank unit

Number of residents per:

- bank - bank unit - bank employee

2004 2005 2006 2007

2,816 188 3,479 250 4,263 292 5,206 392 176 14 13 15 13 194,971 184,410 188,235 186,235 16,593 1,108 217 12,539 901 251 10,958 751 306 8,077 608

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ALBANIAN BANKING SYSTEM Main Indicators

Performance of total assets

Indicator

Total assets (mln EUR) In % of GDP

Dec ‘02 Dec ‘03 Dec ‘04 Dec ‘0 5 Dec ‘0 6 Dec ‘0 7

2,420.1 2,486.2 3,375.1 4,050.9 5,071.5 51.6 50.2 51.9 59.5 69.4 6,100 76.6

Asset structure (in %)

Interbank & Treasury Operations Credit Outstanding Securities Operations Fixed Assets

Steady growth of banking assets…

2004 2005 2006

9000

Banking system assets vs. GDP 2001 - 2007

8000 7000 74 60 51.5 6000 5000 4000 17 26 32 3000 2000 7 12 15 1000 0 2 2 1.5 2001 2002 2003 2004

Year

Banking assets

2005

GDP

2006 2007

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ALBANIAN BANKING SYSTEM Main Indicators (2)

Deposits’ growth

Total Deposits (mln EUR) in % of GDP Retail Deposits (mln EUR) in % of GDP

2002 2003 2004 2005 2006 2007

2,061.3 2,124.0 2,974.6 3,569.5 4,151.1 5,299.0 45.8 44.1 48.4 51.2 57 66.55 1,137.7 1,106.5 2,581.0 3,069.3 3,343.4 4,223.3 25.3 23.0 42.0 44.0 46 53.03

Continuous deposit growth – among the highest in SEE countries.

Deposits' Composition 2001 - 2007 2007 2006 2005 2004 2003 2002 2001 13.1

16.5

18.2

9.4

6 7.7

8.7

44.3

45 46.3

59.2

63.4

60.2

59 42.6

38.5

35.5

31.4

30.6

32.2

32.3

0 10 20 30 40 Demand Deposits in ALL 50 in % 60 70 Time Deposits in ALL 80 90 FX Deposits 100 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Main Indicators (3)

3000 2500 2000 1500 1000 500 0

Credit performance

Credit to Economy (mln EUR) in % to GDP in % to total assets Credit/deposit ratio

2002

275.5 5.7 11.5 13.5

2003

340.9 6.8 13.7 15.7

2004

552.4 8.4 16.9 19.0

2005

1,042.2 14.6 25.1 28.5

2006

1,553.3 21.3 31.3 37.4

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

2007

2,401 30.1 39.3 46.4

Credit to economy 2001 - 2007 Credit/Deposit ratio 2001 - 2007 2001 2002 2003 2004

Credit to Economy (mln EUR)

2005 2006

in % to GDP

2007 6 4 2 0 14 12 10 8 32 30 28 26 24 22 20 18 16

6000 5000 4000 3000 2000 1000 0 2001 2002

Credit to Economy (mln EUR)

2003 2004 2005

Deposits

50 40 30 20 10 2006 0 2007

Credit/deposit ratio

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ALBANIAN BANKING SYSTEM Main Indicators (4)

Private Sector Loan Structure

Corporate loans (mln EUR) Retail loans (mln EUR)

Credit Quality

2001

182 31

2002

238 54

2003

279 89

2004

375 168

2005 2006

666 1,040 309 513.3

2007

1,549 852

2007 2006 2005 2004 2003 2002 2001 0% 2001 2002 2003 2004 2005 2006 2007

Standard Loans Classified Loans 88.74 11.26 89.89 10.11 92.35 7.65 92.70 7.30 93.86 6.14 90.00 10,00 85.00 15,00

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

Loan structure 2001 - 2007 Credit quality 2001- 2007

18% 24% 15% 35% 33% 32% 31%

20%

retail

40%

76% 82% 85%

60%

corporate

65% 67% 68% 69%

80% 100% 15 13 11 9 7 5 3 1 2001 2002 2003 2004

classified loans

2005 2006 2007 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Main Indicators (5)

Average Interest Rates

in ALL

Treasury Bills rate 12-M (in%) Deposit Rate 12-M (in%) Lending rate 12-M (in%)

2001

10.5 7.80 11.9

2002

12.62 9.30 16.00

Average ALL Interest Rates 2001 - 2007 2003

9.56 7.62 10.52

2004

8.11 5.99 13.73

2005

6.91 5.57 12.6

2006

7.89 5.46 11.16

2007

8,41 6,33 13,255

10 8 6 4 2 0 18 16 14 12 Still high interest rate spreads in ALL, despite declining trends in deposit interest rates.

2001 2002

Treasury Bills rate 12-M

2003 2004 2005

Lending rate 12-M

2006 2007

Deposit Rate 12-M

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ALBANIAN BANKING SYSTEM Performance Indicators

Liquidity

in mln EUR

1. Short-term Assets 2. Short-term Liabilities 1/2 in %

2003

1,101 1,027 107

2004

1,212 1,253 97

2005

1,339 1,674 80

Capital adequacy

Capital Adequacy Ratio in %

Shareholders’ Equity

in mln EUR

Shareholders’ Equity

2003

28.5

2003

160

2004

21.6

2004

203

2005

18.6

2005

266

2006

342.5

2006

1,616 2,184 74 A highly liquid and solvent banking system

2006

18.1

2007

17.1 Capital adequacy at satisfactory levels

2007

465 Well – capitalized banks

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ALBANIAN BANKING SYSTEM Performance Indicators (2)

Profitability

RoAA

in % 2003

1.20

2004

1.30 RoAE 19.5

Return on main operations

in %

Interest income/interest bearing average assets (1) Interest expenses/interest bearing average assets (2) Net interest margin (NIM) [(1)-(2)] 21.10

2005

1.40 22.4

2006

1.36 20.17

2007

1.6 20.7 A highly profitable banking system

2003 2004 2005 2006

6.81 3.08 3.73 6.78 3.23 3.55 6.96 3.88 3.08 7.05 2.83 4.22 Banks moving towards more profitable assets within the structure of earning assets.

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ALBANIAN BANKING SYSTEM Exchange Rates

Average Exchange Rates

in ALL

EUR/ALL US$/ALL

2001

128.5 143.5

2002

132.4 140.1

2003

137.5 121.9

2004

127.7 102.8

2005

124.2 99.8

2006

123.1 98.1

2007

121,78 83,03 LEK (ALL) has been appreciated significantly during last years, then being quite stable.

145 140 135 130 125 120 115 110 105 100 95 90 85 80 2001 2002 Average Exchange Rates 2001-2007 2003

EUR/ALL

2004 2005

US$/ALL

2006 2007 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Electronic Cards

Electronic Cards

Type

Cashtronic + Debit Cards Credit Cards + Prepaid Cards

Total

ATM POS

2004

33.288 806

34.094

93 155

2005

223.227 2.686

225.913

205 779

2006

343.711 9.754

353.465

335 1,183

2007

603,384 12,991

616,375

433 1,776

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ALBANIAN BANKING SYSTEM Regulatory Framework

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

Main Licensing Requirements for Credit Institutions:



Banks shall be founded as joint stock companies. No discriminatory restrictions in terms of capital participation and formation.



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



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



The bank shall have at least two general executive directors.

Licensing Requirements for bank’s branch office

: Similar requirements as those required for Albanian banks.

26

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ALBANIAN BANKING SYSTEM Regulatory Framework (2)

Licensing



Preliminary approval or deny, within 3 months from the date of its receipt of the application for a license at Bank of Albania.



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

Scope of activity



Universal banking principle.



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

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ALBANIAN BANKING SYSTEM Banking Supervision

Prudential Banking Supervision

The supervision process is carrying out through the following instruments:



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



Ad hoc (special) reporting of various data;



On-site (full scale or targeted) examinations;

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Off-site analysis.



CAMELS system is employed during on-site examinations (CAMELS rankings range from “1” – top performance- to “5” – poor performance).

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ALBANIAN BANKING SYSTEM Banking Supervision (2)

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

       

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

initial capital of the allowed activities of banks and

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

bank”.

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ALBANIAN BANKING SYSTEM Credit Register

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

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

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ALBANIAN BANKING SYSTEM Payment System

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

Postal service network, part of payment system also, mainly for money transfer ordered by individuals. Bank of Albania is the operator of two payment systems: AIPS (Albanian Interbank Payment System), a real-time gross settlement system (RTGS), which processes all interbank big value (equal to or exceeding ALL 1,000,000 (~USD 10,000)) payments (a SWIFT-based Y-copy service, “live” from January 2004).

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ALBANIAN BANKING SYSTEM Payment System (2)

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

Both systems are owned by Bank of Albania.

Yet to come: Regulation “On usage of IBAN” (mandatory by May 2009); Regulation “On Direct Debit”.

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ALBANIAN BANKING SYSTEM Future Developments & Challenges



Reduction of informal economy,



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



Introduction of new technology: e-banking,



Full implementation of IAS/IFRS, by January 2008,



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

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Contacting AAB

URL: www.aab.al

E-mail: [email protected]

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THANK YOU!

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