With regard to the IMF / World Bank Financial Sector Assessment Program

Publication date: 15.12.2005


The purpose of this visit is to share with you the main findings of Financial Sector Assessment Program, which was conducted in early 2005 by a joint World Bank and IMF mission.

Any member country of the International Monetary Fund and the World Bank can request that their country receive a Financial Sector Assessment Program, better known as an FSAP. This assessment program brings together a team of experts to evaluate a countries' financial sector in essence to take a snapshot of what is going on in the financial sector at that particular time. So far, over half of the IMF's total 184 member countries have undertaken an FSAP, and another 30 countries are in the process of one.

There are two main goals of the FSAP. First, to see if there are problems developing on the horizon that may lead to financial instability or to difficulties in implementing appropriate macroeconomic policies. Second, to see how a country can improve the functioning of its financial system to better support economic growth and thereby improve the lives of its citizens. The conclusions of the FSAP team are published, with the permission of the country, in a document called a Financial Sector Stability Assessment or FSSA. In the case of Albania, that document was released on August 9, 2005 and is available on the IMF's website ( and also on the Bank of Albania website (

Our evaluation of the Albanian financial sector shows the financial sector is healthy and generally functioning well. Since 1991, when Albania introduced a market-based economic system, the financial sector has steadily become better at taking the savings of households and businesses and putting that money to work in various investments the amount of cash circulating outside the financial system is gradually diminishing. In many respects, the Albanian financial system, mostly banks since they are the institutions at the heart of the financial system, has made remarkable progress. Banks are doing especially well at collecting deposits, providing more and better services to a larger clientele, and improving their risk assessment procedures related to granting loans. However, loans are still a small portion of bank's business and most banks are still investing in government T-bills. But this is true of many countries in this stage of development and will change over time as more and more lending opportunities are made available in the Albanian economy to the privately-owned banks and at the same time other possible investors, like pension funds as well as normal citizens, observe that they can invest in government T-bills, broadening the ownership of government securities.

Although the financial sector is doing well, there are always improvements to be made. With economic growth being so strong, and the need for better infrastructure and living conditions acute, the increase in loans has been very rapid. It will therefore be increasingly important that banks and the Bank of Albania's supervisory team make sure loans are only granted to those borrowers who can repay even if their economic situation deteriorates somewhat whether those loans are in Albanian lek or euro. Thus, the FSAP recommends that banks formally disclose to borrowers that if they need to pay the loan and the interest back in a foreign currency, such as euro, that the value of that currency might change over time, making it more costly for them to repay. The FSAP also recommends that the Bank of Albania's supervisory staff continue to monitor the banks' use of foreign exchange and their risk management practices carefully. Because real estate, such as land and houses, are often used to support loans as collateral, the FSAP recommends that banks pay closer attention to real estate valuations and that the Bank of Albania develop some statistical methods to better measure overall real estate prices. To make sure borrowers are not over-extending themselves and that supervisors can see when this is happening, the FSAP recommends setting up a credit information bureau where loan information could be "registered." The FSAP team believes that the Bank of Albania is well-placed to act as a catalyst for the development of a credit information bureau. However, the banks that provide the information need to agree upon the type of information to be submitted and decide how it is shared to assure loans are not extended to borrowers unable to pay.

On the topic of developing the financial sector to improve the growth performance of the Albanian economy and provide access to all Albanians of the fruits of their savings, the FSAP first notes that many areas of the financial sector are still in their early, formative stages and thus there is still much to do.

As in many developing eastern European countries, the banking sector in Albania is well on its way to being a solid base for financial sector development. But, for households and small businesses who live far away from major cities in rural areas, the growth of Savings and Credit Associations will also be important. The FSAP recommends that these institutions attempt to unify some of their operations to save costs and attract larger amounts of money from donors and depositors. This will allow them to make larger loans and provide more bank-like services, while at the same time keeping decision making at the local level. To make depositors more certain about holding their savings in such institutions, the FSAP recommends that a deposit insurance scheme be set up for Savings and Credit institutions along the lines that exist for banks.

Another area that needs attention in the near term is the insurance sector. Here the FSAP team noted that the number of insurance companies had doubled within 2004. Mostly Albanian insurance companies provide insurance for automobiles, but as life insurance products catch on and citizens feel more comfortable about long-term investments, it will be important that this sector have a solid reputation for business integrity and be able to manage long-term investments well. The FSAP recommends a number of fundamental actions to put the insurance sector on a path to this end, such as better accounting and disclosure practices. The new 2006 accounting standards are an important step in this direction. Having a reputable, knowledgeable, and politically independent supervisory agency is also key. It is also important that insurance companies, and eventually private pension funds, have safe places to put their money government debt securities are good place to begin, but so far the maturities are fairly short term. The FSAP recommends that over time, longer maturity bonds be issued by the government to provide a better instrument for insurance companies and private pension funds to invest in. And more generally the Ministry of Finance should prepare a strategy to better manage the country's debt and develop new instruments to satisfy the demands of different kinds of investors.

The FSAP has a number of other suggestions about how, over the longer term, the financial sector can become a better tool for savers and investors. It is important to let such developments take place naturally, as the economic need arises. For instance, it is not obvious that at this stage of development Albania needs a stock exchange. Thus the FSAP recommends that the publicly-owned Albanian Stock Exchange be offered for sale to the private sector and if the underlying need for a stock exchange is not enough to generate private interest in owning and running it that it be closed until such time as it is economically viable. Since 90 percent of all Albanian enterprises are small with less than 5 employees there is little need for enterprises to issue publicly traded equity. The few large enterprises that are present are mostly owned by just a few individuals or by foreigners and they can find funds for investment from their overseas parents. The absence of a stock exchange should not be viewed as a set-back, but redirection of scarce financial expertise and resources to areas where they could be better used.

Because of its very nature the financial world depends so highly on trust and relationships, it is important that the financial sector develop in a way that encourages the highest degrees of integrity and professionalism. In this regard, the FSAP team felt that, in recent years, the Bank of Albania had done a good job of establishing itself as a trustworthy and professional institution. The FSAP recommends a few minor alterations to assure that conflicts of interest among its management do not arise and that its employees are protected against law suits if they need to make tough decisions. Conflicts of interest can arise in high levels of decision-making, for example, if a board member owns shares in a bank that they regulate. In fact, steps have been taken to assure no such conflicts of interest are present and our recommendation is to provide a legal basis for the future. The IMF will assist the Bank of Albania in the development and implementation of such laws. These alterations to their business practices and laws should be made transparent, just like the rules for the Bank of Albania' trading with foreign exchange dealers has been made public on its website. Another way to establish professionalism is to assure all supervisory agencies are well-run and all conflicts of interest are removed. To this end, the FSAP recommends that the non-bank supervisory organizations be merged under one roof, as they are in a number of other countries like Slovakia, Bulgaria, the Czech Republic and now Croatia. This will also conserve scarce financial resources.

In building institutions that have integrity and professionalism, attention will need to be paid to what can be called the infrastructure of the financial system those items not visible to the public. For example better accounting standards, but also improvements in the judicial system to make contracts more enforceable and legal proceedings more efficient, further efforts to remove money laundering from all areas of the economy, and some minor alterations to make the payment and settlements systems, which allows retail payments to be made in a cheaper and more efficient manner. The more robust the infrastructure of the financial system, the more rapid the progress will be with the ultimate goal to bring the Albanian financial system up to the standards of the European Union.

Laura Kodres Ann-Margret Westin Greta Minxhozi
IMF Deputy Mission Chief Resident Representative Acting Country Manager
Albania FSAP team IMF mission in Albania World Bank Tirana Office