BANK OF ALBANIA

BANK OF ALBANIA STATEMENT
On the financial system stability in Albania H2 2006

Publication date: 01.03.2007

 

Pursuant to the requirement of the Law No. 8269, dated 23 December 1997 "On the Bank of Albania" and to the obligation to draw the attention of the institutions in the country, of the financial market and its operators, as well as of the public, on the potential risks which may threaten the stability of the domestic banking and financial system, the Bank of Albania publishes the present periodical statement.

There were no specific factors over the second semester of 2006, which could pose the financial system and its institutions to threatening risks for their stability. The sound financial performance, the new foreign investments and the expansion of the financial institutions network, in particular for the banking sector, provide evidence that the improved competition environment in the financial system is boosting the consolidation of financial institutions activity.

Issues related to the financial stability were at the core of the Bank of Albania activity over the previous year. Apart from various regulative measures, periodical and non-periodical analysis and reports, financial stability issues were at the heart of the Bank of Albania annual conference held in October 2006. In the discussions held, it was emphasized that the opening of national markets and their integration to the regional developments and even broader, is followed by various potential risks, apart from the advantages and other benefits. Therefore, it is indispensable to have as much as possible harmonized stands through regional co-operation, in order to safeguard the financial stability of institutions and to provide for the sound functioning of financial systems.

The mosaic of the financial system supervisory authorities changed over the previous period through the establishment of the Financial Supervision Authority, as a result of the integration of separate supervisory authorities, which monitored the activity of insurance companies, pension funds and of security-trading companies. The newly-established authority provides a more appropriate climate for improving the supervision of this financial market segment and for enhancing the co-operation between the supervisory authorities of the financial system in general.

The changes in the development infrastructure of the financial and banking market activity and of their supervision marked essential developments through the amendments to the banking legislation, following the passing of Law No. 9662 "On banks in the Republic of Albania" by the Albanian Parliament on 18 December 2006. This law, which becomes effective on 1 June 2007, sets higher standards in exercising the banking activity over the licensing, organization, supervision and its closure. In addition to other important changes, this law provides for the first time the establishment and management of Credit Registry by the Bank of Albania. The purpose of establishing this registry is to assist the banks' structure to improve the analyses they base on for making loans-related decisions.

The banking sector developments over the second semester of 2006 deepened the trend observed in the first semester. In more concrete terms, the banking network increased considerably, causing the banking business to expand and the volume of assets and deposits to grow. As of end 2006, the banking system presented with good liquidity and capitalization figures. It resulted profitable, ending with better figures than in 2005. The rates of crediting to economy were considerable, while the quality of loans' portfolio remains in satisfactory levels, despite the slight decrease.

As of end 2006, the main indicators of the banking system were as follows:

Indicators

December '06

December '05

Capital adequacy (%)

18.10%

18.60%

Shareholder capital (in millions of ALL)

42,162.22

33,017.79

Net outcome (in millions of ALL)

7,450.58

6,597.89

Annual growth of loans' portfolio (%) 55.0 83.0

Net non-performing loan / net loan (%)

1.36

0.95

Gross non-performing loan / total balance (%)

0.97

0.60


Commercial bank's inclination to maintain high investment rates of financial resources in instruments providing a higher profit rate continued over the second semester of 2006. This tendency affects the decrease of capital adequacy rate and preserves the characteristics of risk on loans' portfolio quality.

In order to provide a well-capitalized and balanced banking business and to push banks to carry out a more prudent control of business risks, at the end of 2006 the Bank of Albania adopted some regulative amendments, which focused on the lending activity. These amendments aim to orient the control of its growth and to enhance banks' transparency to clients related to this business. Based on the provisions in the new law "On banks in the Republic of Albania", and in close co-operation with the commercial banks, the Bank of Albania is finalizing the drafting of the sub-legal framework, which establishes the way Credit Registry is organized and functions, the type of information and data used, the method and time period for their reporting, as well as the terms and conditions for using these information and data from the authorized users of Credit Registry.

Moreover, in order to improve the safety climate in the lending activity and in the framework of the legal reform undertaken by the Ministry of Justice for the amendment and improvement of the Civil Procedure Code, the Bank of Albania is fully committed to closely co-operate with the banking sector, for completing and defining the procedures of mandatory execution of eligible securities, used by commercial banks as collaterals to guarantee the amount of loan. The proposals of the Bank of Albania, most of which have been taken into consideration, have aimed at providing solution for some issues encountered in the banking business, which relate to the execution of eligible securities by the court execution authorities. They seek to improve the legal basis on the efficient application of procedures, aiming at reducing the time of eligible securities execution through the definition of specific terms for the notification of parties during the execution procedure, the definition of accurate procedures for determining the value of the object set as a guarantee for meeting the obligation and carrying out the auctions efficiently; the provision of alternative opportunities for the debtor for the execution of the obligation following the Court's decision.

The Bank of Albania states that upon the enhancement of competition in the banking system and the increasing opportunities for the expansion of banking business, there are possible financial risks following as a result. The characteristics of such risks differ in various institutions, depending on the proper and balanced organization and orientation of activity in the institution and on its ability to cope with competition in the market. The Bank of Albania is constantly seeking from the managing structures of commercial banks to attend the market developments prudently, to strengthen the control systems in their institutions, to take proper measures to better diversify the financial resources and the channeling of their investment, to constantly develop a well-capitalized activity and to monitor its risks. On the other hand, the Bank of Albania will continue to put these issues at the core of its supervisory policy.

The Bank of Albania believes year 2007 will continue to provide evidence for a smooth activity of both the banking and financial system, in its constant efforts to reach consolidation and stability.