BANK OF ALBANIA

PRESS RELEASE
Second Deputy Governor Ahmetaj: Address to the conference on ''Balancing Fintech Opportunities and Risks: Implementing the Bali Fintech Agenda'', Vienna, Austria

Publication date: 29.01.2019

 

Dear Ladies and Gentlemen,

The Bali Fintech Agenda generates a matrix of objectives and guideline for enhancing the potential of our economies. As such, it is an international standard to be implemented at the national level.

But, for the implementation to be effective, each of the standards should be adapted to reflect the priorities of each country. In the case of Albania, this means that the work flow should reflect a small economy, with USD 4870 per capita, a strong presence of cash, high levels of emigration, and the lowest financial inclusion in the region - over 60% of adults do not have a bank account and 65% do not have a bank card.

Such a profile activates a red flag for two boxes of the matrix (before jumping to blockchain or digital currency): formalisation of remittances and financial inclusion. My discussion will focus on these two aspects.

Both of them have three allies in common: technology, financial education, and non-banks. I will now speak about each of them in brief.

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The stronger presence of technology in the lives of our citizens and, notably in the financial infrastructure, promotes simultaneously and reciprocally the formalisation of remittances through bank channels and the motivation to be consumers in the financial industry.

In general, technology is embraced for a number of advantages it brings to users. It brings people together in platforms where information is shared, expands the market concept in terms of time and space, and enhances security. But, it also produces new risks and, at the bottom line, it increases the productivity of the labour factor. For all of these, there is an unrivalled advantage: speed and horizon of action.

Technology providers may explain all of these and many other things in a sophisticated and, perhaps, confusing technical language. But, as users and mediators between fintech producers and the vast mass of users of products and services it generates, we need to internalise it and offer it in simple and understandable terms to the market. Otherwise, technology will not be embraced by the financial industry, irrespective of its usefulness, just for the mere reason that it cannot be sold. It cannot be sold unless it becomes evidently useful. This is where financial education has a role to play and we should take the lead in this aspect. We have a good foundation to build on. In Albania, we have 112% mobile phone subscriptions and 66% internet access.

More Fintech for us means:

  1. Less cash in the economy, as a result of the infrastructure for electronic payments and home banking. Besides the contribution to monetary policy pass through and enhancing financial stability, it contributes to reducing social costs in the economy. Another significant benefit comes from limiting the chances for an informal economy and fiscal evasion. Currently, cash is used for 90% of small payments, estimated to cost the economy at around 1.5% of the GDP.
  2. Increasing the channels for formal remittance inflows to Albania.

Currently, an estimated 3.4% of the world's population lives in a country other than their country of birth at an increasing trend. Around 500 million people depend of the remittance flows.

Around 1.2 million Albanians are emigrants, or 40% of those living in Albania and the remittance flows are estimated at around USD1.15 billion per year, or 12% of the GDP.

This important source of income provides a multi-dimensional contribution to:

  • the BoP, as it covers around 37% of the trade deficit for goods;
  • GDP growth. Over 2010-2017, they are estimated to have contributed to around 5.6% of the GDP;
  • families, as they are estimated to provide for 13% of the households budget, hence alleviating the poverty by increasing consumption and improving education, and health.

The global volume of remittances has doubled from a decade earlier.

This is for two reasons: increase in emigration and advancement in money transfer infrastructure. In general, it is difficult to make an exact calculation of remittances due to the numerous formal and informal channels. But, the preference over which channel to use depends largely on the financial systems and the overall institutional setting in the sending and receiving countries. Currently, in Albania, 4% of remittances enter through bank channels, 57% through non-banks and 39% in cash. This pattern of inflows, which is translated into their disbursement at 96% in cash, weakens the multiplying effect of financial intermediation.

To pass a judgement on which is the most effective intervention for the formalisation of remittances, we need to understand the reasons why the informal channels are chosen instead.

The surveys reveal three reasons:

  1. Difficulties for emigrants to access the banking sector in the home countries.
  2. Related costs for using formal channels are estimated at around 8-18%, notably higher than the region and far from the 3% global objective by 2030.
  3. Perception on bank procedures as complicated, due to poor financial literacy. This explains why 57% opt for non-banks, which have much higher costs, but are easier to access.

Removal of these barriers would contribute to inclusive growth and financial inclusion of beneficiary households. Formalising the remittance flows provides opportunities for rural families to be able to access basic financial products and, at a later stage, more sophisticated ones, such as loans.

Providing formal infrastructure at a larger scale and at a lower cost could shift the flows from informal toward formal channels. In this case, we need to strike a balance between having a regulatory regime that minimises in general the financial abuse, and facilitating the flow of funds between emigrants and their families at home.

A central bank may serve as a catalyst for advancing Fintech, while, at the same time, remaining a strict regulator. It is only a matter of balances between promoting innovative Fintech ideas and regulatory prudence.

Therefore, the formalisation of remittance inflows through banking channels, together with the subsequent effect on reducing the cash circulation in the economy, has been at the focus of a joint project with the World Bank. In this context, in 2017, a study was realised focusing on retail payments, including remittances. The findings of the study were used as a basis for drafting the National Strategy for reforming the retail payments market in Albania. The implementation of this Strategy is at the focus of the National Payment Systems Committee, an inter-institutional structure.

In this framework, the Bank of Albania has drafted a new law on payment services, which addresses also retail payments. This law approximates the EU's PSD2 to the Albanian context, a move considered as a revolution for supporting innovation in the field of payments and is expected to have a significant impact in the Albanian payments market. It also envisages creating adequate conditions for enhancing competition, transparency and security. A project under review is that for offering a “basic account” for the lower-income segment, which would allow for the provision of basic payment services at zero costs.

Some of the measurable targets of this strategy success will be reaching plus 130% cashless payments and an adult account ownership of 70% by the year 2022.

As cross-border settlement and payment services are accommodated by correspondent banks, which impose monetary and time-related costs, we consider setting out relevant legal and infrastructure preconditions for integrating the domestic market to the SEPA as a very important step. This would bring costs down. In addition, innovative fintech services, such as blockchain and instant payments could contribute to the same purpose.

In line with the World Bank, the Bank of Albania has set up a database with fees and commissions on payment services in the Albanian market, which will be expanded to include non-banks, creating thus the possibility for monitoring their gradual reduction and convergence toward international objectives. And financial education is essential for the success of this project.

Greenback is another project already introduced in Albania with the support of our partners. Through awareness-raising and financial education activities, the Project’s goal is to formalise remittances and reduce costs.

Banks dominate the Albanian financial market, with 90% of its share, but their network penetration is lower than the regional one for 100,000 inhabitants 18 years and older. Together with 9 financial institutions licenced to conduct payment and transfer services, they make up the retail payments market. The banking system has invested seriously in this field offering home-banking services, which allow for remote access to funds, and electronic payment instruments. Two banks offer also electronic trading services, which may contribute to partially channel remittances in the form of goods. The use of cards is increasing. Currently, 1/3 of the population has a debit card and only 8% have a credit card. Yet, the infrastructure for their use is concentrated in the urban areas and they are used mostly for basic services.

But, contrary to the positive trend in remittances and technology which favour their formal inflow, there is a negative trend among banks with regard to their attention and focus on products dedicated to emigrants. And we must bear in mind that banks in Albania share 90% of the financial market. If we are to compare banks’ activity in providing products to this market segment, currently, we have fewer banks offering such products than 10 years ago, before the crises. The main products they offer to emigrants are transfers and deposit. Meanwhile, they have stepped back from credit products for emigrants launched in the market 10 years ago.  

The only positive development in this segment is related to electronic cards.  

While shifting their attention away from this market, they have placed themselves in an unfavourable position compared with non-banks. Unlike banks, the non-bank financial institutions are more active towards this segment, not only with micro-credit products, but also with remittance service, and recent developments show they embrace innovation faster.

The Bank of Albania is among pioneering central banks in the region related to the concrete involvement in financial education for the public. For a number of years now, the Bank of Albania has a comprehensive annual agenda in this regard. In recent years, the focus has shifted from traditional education on the economy to financial literacy. This shift comes as a result of the sophistication of financial products and services, as well as the increasing involvement of fintech in this industry, which makes it an even more pressing issue.

Likewise, the expansion of the financial market with new products, such as pension funds, health and assets insurance, are increasingly shifting the need for long-term financial protection, from businesses to individuals, thus making financial literacy even more imperative for them.

 The Bank of Albania is also aware of the fact that level of financial inclusion is an indicator for measuring the effectiveness of this process. Despite the progress made insofar, this indicator for Albania shows that a lot remains yet to be done.

As a regulatory authority, the Bank of Albania aims that the system provides financial services and access to credit in the fair manner. Regulation also ensures fair treatment of clients by banks, enabling them to serve the whole community, including low-income segments of the society. Because, sustainable economic growth requires inclusive growth. Access to financial services and resources and providing for a level playing field are essential ingredients for successful growth.

If financial inclusion is increasingly improving, it means that the public is increasingly becoming part of the financial system, is using its products, and is contributing to the expansion of financial intermediation.

If this intermediation expands, the economy is then sustained with funds, new projects are implemented, and the potential of the economy broadens. Financial education means improvement of the well-being for everyone. This will make us all more actively involved in this process.

Thank you!