On the financial system stability in Albania H2 2005

Publication date: 09.02.2006


Pursuant to the requirement of the Law no. 8269, dated 23.12.1997 "On the Bank of Albania" and the obligation to draw the attention of domestic institutions, the financial market and its operators, as well as the public's, on the risks which might threaten the financial system stability, and in particular that of the banking system in the country, the Bank of Albania publishes the following periodical statement.

The Bank of Albania observes that the current satisfactory levels of capitalization and profit of the banking system shall influence on maintaining its stability for the upcoming period. At the same time, the Bank of Albania regards that the reinforcement of competition conditions in the market, along with the high increase of lending extends the possibilities of vitalizing a number of risk elements related to the decrease of credit portfolio quality. These risks require a prudent and continuous monitoring by the respective banks' structures, so that they do not materialize and do not become significant in the banking system activity.

The second semester of 2005 was characterized by positive developments in the banking system, which more concretely and at large were benefited by the bank clients and the economy on the whole. In concrete terms:

a) Crediting continued to extend in various forms to better adapt to the market demands. Credit quality remains good and the current banks' criteria in lending represent a sound basis for maintaining such a quality in the future as well. The Bank of Albania considers that the current paces in the increase of lending make the enhancement of the control systems and of the relevant structures in the commercial banks necessary. A required element which shall influence on reinforcing the analysing capacities of commercial banks in the lending process is the establishment and the setting up of the Credit Information Office. In cooperation with the international financial institutions, domestic authorities and the banking industry, the Bank of Albania is determined to make all the necessary steps in order to enable a quick setting up of this monitoring instrument;

b) The interest rates shifts in the market have been easily absorbed by the general economic environment and the activity of the financial market operators, thus maintaining favourable conditions for the banking system and the financial system on the whole to better assist the economic development in the country;

c) The banking system has experienced a profitable activity and has been presented well-capitalized;

d) The banking system has continued to extend throughout the country, through the opening of new branches and industries. At the end of December 2005, the number of operating branches of the banking system reached to 131, while the number of operating agencies reached to 117;

e) At the end of the year, a new bank with Albanian capital, called Union Bank, was licensed and started operating. As such, the number of banks reached to 17;

f) The interest of the foreign capital to be invested in the banking system in Albania has increased. The process of change in ownership of former Dardania Bank (currently, Italian Bank of Development) has finalized, and the selling process of the Albanian State shares in the Italian-Albanian Bank has considerably progressed. At the same time, there have been changes in the banking institutions in order to provide a better structuring of the activity, through the application of changing their way of organization (the case of Tirana Branch of the First Investment Bank).

The main financial indicators of the banking system for the past period were as follows:



June '05

December '05 [1]




Capital adequacy



Shareholders' capital (in millions of ALL)



Net result (in millions of ALL)



New credit (in millions of ALL)



Net non-performing credit / net credit



Gross non-performing credit / total balance



In the context of inter-institutional cooperation, even during the second semester of 2005, the Bank of Albania strengthened the cooperation with other domestic institutions, which exercise supervisory functions at certain segments of the financial market. We highlight here the cooperation with the Insurance Supervisory Authority and the General Directorate of Money Laundry Prevention at the Ministry of Finance. Furthermore, the way of communicating with banks has improved, making a better use of the assistance provided in this context by the Albanian Bankers' Association, a body which enables the unified presentation of banks' opinions on various issues related to their activity and the interaction with other institutions. The Bank of Albania requires that this cooperation continues in the future for important issues of the banking and financial system.

The Bank of Albania sustains the efforts of public authorities and international financial institutions in the country's financial market development and is determined to play an active role in this process. The measures taken for the extension of the formal sector of the economy and the prevention of the fiscal evasion, as well as the establishment of an integrated supervisory authority for financial institutions which are not licensed by the Bank of Albania are crucial elements that support the development of an economic activity under the conditions of a fair competition, aiming at defining and implementing a complete regulatory framework and increasing accountability and efficiency in carrying out the supervisory function at certain segments of the financial market. The Bank of Albania shall continue its cooperation with the Ministry of Finance and the banking industry to improve the planning process, the carrying out of auctions and the establishment of an effective market in trading the domestic debt instruments of the Government of the Republic of Albania, in order for the market and its institutions to take a major role in trading this debt to the public.

Regarding the enhancement of the financial market functioning, the Bank of Albania observes the need for legal and regulatory improvements in the following directions:

a) Upon the approval of Law No. 9396, dated 12.05.2005 "On Financial Leasing", was raised the need of defining the relevant regulatory framework and the supervisory authority for each institution exercising such an activity pursuant to this Law. Implementing the law requirements, the Ministry of Finance and the Ministry of Economy, Trade and Energy, are charged with this task. In this context, the Bank of Albania deems that the sub-legal acts to be issued should clearly define the concept of "financial institutions/ entities", since such a definition is lacking. The Bank of Albania deems that these institutions should operate as quickly as possible to close the supervisory regulatory and institutional gap for the entities, which perform financial activity pursuant to the above law. In this way, any risks resulting from the performance of a non-supervised activity would be prevented, and the compliance with the recommendations of international financial institutions assisting the financial market development in Albania for well-regulated and supervised institutions would be maintained;

b) In the context of the elements, which smooth the potential risk in the lending activity, the existence of rapid procedures in executing the real estates set as collateral by the borrower for guaranteeing the credit value plays an important role. The banking practice has indicated that the following improvements should be made in these procedures:
  • Article 564 of the Civil Procedure Code should define that the estimation of the sequestrated object should be carried out by independent auditors, selected by the Executor's Office. In this way, the unnecessary complaint procedures against the initial estimation of the object are shortened;
  • Article 577 of the Civil Procedure Code should provide the shortening of the time frame between two auctions, from three to one month; the right of possessing the object without the obligation to return the difference of the object value should be recognized to the creditor (the bank); the right to sell the object at a lower value than in the first auction should be recognized to the creditor (the bank); the maintenance of the sequestration over the object should be provided, and the creditor (the bank) should be entitled to open the execution procedure when the market conditions are in its favor.
  • These changes should be associated with other amendments to the Law "On the Registration of Real Estates", and to relevant regulatory framework. Moreover, a law should be drafted on "Auction Procedures", currently provided in Article 573, Paragraph 4 of the Civil Procedure Code;
c) This year represents the period when the reviewing of the existing law No. 8365, dated 02.07.1998 "On Banks in the Republic of Albania" should be completed. Using the experience of countries accessing the European Union, the assistance of international financial institutions, and the large discussion to be held about this project with the banking industry, would enable the adoption of a draft law, which shall significantly improve the way of operation and the supervision of institutions that perform banking activities.
The Bank of Albania believes that the period until the end of 2006 shall continue to testify the normal activity of the financial and banking system, of the constant performance towards its consolidation and sustainability.

[1] Operative data for December