On the financial system stability in Albania H1 2005

Publication date: 29.07.2005


Pursuant to the Law No. 8269, dated 23.12.1997 "On the Bank of Albania" and in view of to the obligation to draw the attention of the Government Authorities, of the financial market and its operators, and the public, on the potential risks that may threaten the stability of the financial system, particularly of the Albanian banking system, the Bank of Albania issues the following statement:

The Bank of Albania does not observe any element or development that may threaten the stable progress of the banking and financial system, in the subsequent months.

However, like in the past, the Bank of Albania uses this opportunity to raise, in addition to the identification of potential risks, other issues that serve the progress of the banking system in its everyday operations and that assist for a better functioning of the financial system, overall.

1. The Bank of Albania observes that in the first part of 2005, positive developments in the banking system were highlighted, accompanied with more tangible and higher benefits for the bank's customers and the economy in general. More specifically:
a) In order to fulfill the market demand, the lending activity is extended and associated with new lending products. According to its maturity, a better loan structuring is performed. The good current loan quality as well as the stable environment, represent a safe basis for maintaining this quality in the future;
b) The downward trend of the interest rates has created the appropriate circumstances for a better support of the financial and banking system to the economic development of the country.
c) The Bank of Albania has further consolidated the payment system with the introduction of contemporary payment instruments, especially debit and credit cards issued by the banking system, as well as with the implementation of AECH system. The banking system is being extended across the country through opening of the new branches and agencies. By the end of June 2005, the total number of bank branches and agencies reached 110 and 108, respectively.

2. During the last period, the activity of the Deposit Insurance Agency has been further consolidated. The deposit insurance fund growth managed by this agency is being accompanied with an enrichment of its investments. The Deposit Insurance Agency aims at reviewing its legal framework in order to improve its current instruments and better know the financial condition of the insured institutions and to enhance its role throughout their operational activity. In view of the legal obligations, the Bank of Albania has supported the development needs of this institution.

3. During the first half of 2005, new developments were also highlighted in terms of the enrichment of the variety of the financial institutes. We mention the growth in the number of insurance and reinsurance companies, and the founding of the first non-public pension funds. These developments, which are expected to continue, should be accompanied with the enrichment and the consolidation of its regulatory framework as well as with the strengthening of their supervisory function.

Among the main financial indicators of the banking system for the last period, we may mention:




December '04


May '05



Capital adequacy








Shareholder capital (in millions of Lek)









Net outcome (in millions of Lek)









New credit (in millions of Lek)









Bad loan, net / net loan







Bad loan, gross / total balance






During the first half of 2005, the foreign experts submitted the financial system to a professional assessment as part of a global (2) program organized by the World Bank and International Monetary Fund. The assessment is not limited to only knowing the state of the financial system and its ability to manage different types of risks and develop in a stable way, but is also extended to the ability of the authorities in supervising this development in accordance with the best international standards. The final report is not published yet, but the preliminary results of this assessment for the banking system and its supervisory authority, are positive. The recommendations of this report will be part of the further development plan of the banking system, in the near future.

Despite these facts, Bank of Albania stresses on the following topics, which need a greater and periodic assessment from all of the banking system players.

The fast growth of credit, under the conditions of stronger competition, puts the Albanian banking system toward the real risk of credit malfunctioning, if banks lose the ability to identify the high-quality borrowers, which are able to provide stable incomes from the financial support. Apart form applying the procedures for "loan approval", banks should also put as soon as possible in place the proper structures, which are responsible for monitoring these loans. Likewise, it is necessary that banks must show conservative behaviour in loan provisions, at first signs of borrower's difficulty to repay loan. In this way, each single bank and the system as a whole, might avoid the deepening of problems arising from the quality deterioration of the loans, providing so stable financial outcomes.

In this framework, Bank of Albania is responsible for putting as soon as possible into operation the Credit Register, with the assistance of the international financial institutions.

In the environment of the competition growing, it is being noted an increase of the staff movements, especially high-qualified staffs, toward banks and financial institutions which provide better job conditions. Even though this is a natural development, the Bank of Albania requires each bank to do its best for keeping and motivating its staff. The objective of providing better job conditions to the staff does not only mean the material awarding based on the professional performances, but also the opportunities that the institution must provide for training, for professional upgrading, for promotions and benefits, etc. So, if these opportunities are not entirely used, some banks might experience an increase in their operational costs and a worsening of their services quality toward the public, thus having a significant negative impact in their market position and in their financial outcomes. These repeated resignations of the staffs at a time when a real attempt to motivate it is lacking, are considered from the Bank of Albania as an incapability of the management, which will affect the overall estimation of the bank.

It's significant that an open and periodic conversation exists between the most important players of the banking market and monetary and supervisory authority. Within their respective legal responsibilities and aware of their roles, the Parties should assure that this communication helps the constructive discussion of the relevant topics, concerning the implementation of monetary policy and supervisory regulatory framework. In this way, a better equilibrium would be reached between the monetary and supervisory authority from one part and the most important banking system players from the other, thus avoiding the one-way movements in the policies and instruments used by both parties, in order to signal the forthcoming objectives of their activities.

The second half of the year, represents the period of time when the reviewing of the existing Law No. 8365, dated 02.07.1998 "On Banking Law in the Republic of Albania" should be terminated. The project will be submitted to a wide discussion within the banking industry and all other institutions, which have an important role in the development of the financial market. The project is designed with the assistance of the international financial institutions and includes the best international practices in the field of the development and supervision of banking systems. The Bank of Albania requires the support of the Government and the Parliament, in order for this project to be reviewed and approved within the year 2005.

The begining of the next year, represents the period during which by law, is projected that the implementation and the effectiveness of the International Accounting Standards/International Financial Reporting Standards will be applicable for the commercial banks as well. The Bank of Albania, uses once again the opportunity in this statement, to require banks and other financial institutions, which play a role in the effective implementation of the above mentioned standards, to build up a strategy regarding the realization of this role and the achievement of their objective. The Bank of Albania stresses the need to institutionalize a mutual proces of discussion, where the institutions might discuss the problems emerged during the preliminary stage and the implementation of these standards, for a better understanding of the problems and for their stable and synchronized solution in time.

The Bank of Albania belives that during the period of time till the end of year 2005, the banking and financial system will continue to demonstrate a normal conduct of its activity, in the ongoing progress toward its consolidation and stability.

(1) - By the end of March 2005.
(2) - In English this assessment is known as "Financial Sector Assessment Program" (FSAP).