Ardian Fullani: A summary analysis of domestic economic developments
and the banking sector situation
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting,
Shkodra, 20 January 2011.
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Ladies and Gentlemen,
The Bank of Albania considers its communication with the public a key element to an
effective communication of its decision-making. To serve this purpose, it makes use of all
forms and types of communication. However, direct contact with the people provides us with
a real perception and interpretation of their position and expectations and supports a more
effective decision-making process. Therefore, I am pleased to be again in your city, the
centre of a region of well-known intellectual, cultural and patriotic heritage, which also gives a
significant contribution to the country's gross economic product.
I would like, to start this direct communication with you with a summary analysis of domestic
economic developments and, after that, dwell in more details on a number of concrete issues
that affect the strength of relations between families and businesses on one side, and the
financial system and banking sector on the other. During 2010, the Albanian economy is
expected to have recorded a satisfactory growth. For the third quarter, annual economic
growth is estimated at 4.9 per cent.
The economic growth rate has been stable for the last two years, thus proving a good level of
resistance to the effects of the international economic crisis. Other macroeconomic indicators
have ranged within acceptable and expected levels. It is worth mentioning that this
macroeconomic stability is a reflection of the successful combination of key economic
policies, that is to say, monetary and fiscal policies, during last year.
More specifically, the fiscal policy aimed and succeeded to realise the necessary
consolidation process following a fiscal expansion that accompanied economic
developments in 2009. Fiscal consolidation was accomplished through better control over
public expenditures and collection of revenues close to foreseen levels.
The exchange rate for the national currency, regardless of its underpricing in 2009, less so in
2010, has been much more stable than currencies of other countries in South Eastern
Europe, which apply a free flexible exchange rate policy. A gradual under-pricing of the
Albanian Lek is deemed to have had a positive affect on the reduction of trade and current
account deficits through establishing a more favourable dynamic for our economy's exports
and imports.
Eventually, it is fully proven that the adoption of a flexible exchange rate regime has been
one of the most outstanding choices of economic and financial policies over the past two
decades.
Annual increase of consumption prices has been almost all the time within the parameters
established by the Bank of Albania, namely 2-4 per cent. Under moderate inflationary
pressures, the Bank of Albania has followed a facilitating monetary policy, injecting liquidity
into the inter-bank market and lowering the key interest rate to the level of 5 per cent. For
2011, macroeconomic indicators are expected to follow a trend similar to that of 2010. The
Bank of Albania holds that last year's successful harmonisation of the monetary policy with
the fiscal policy should continue even further in 2011. Fiscal and monetary policies should
aim at the stability of these indicators, in addition to supporting economic growth. The
influence of supply and demand factors over the exchange rate or the national currency is
expected to be balanced. Inflationary pressures are expected to be moderate this year,
although prices of imported goods are an apparent risk.
The Bank of Albania will maintain its monetary policy flexibility to prevent any undesired
inflation development.
Honourable participants,
Next, I would like to dwell in more details on the banking sector situation and some issues
that the Bank of Albania considers pivotal to the role of this sector in financial mediation and
public relations, with a mutual benefit. In recent years, the banking sector, a driving force in
the financial sector, has been a powerful supporter of the country's economic growth through
an active role in financial mediation. Certainly, banking activities involve risks, but the
international financial crisis of the last three years proved that the banking sector in our
country was stable and did not need public assistance to overcome the situation. Last year,
the financial situation of the banking sector is assessed, generally, better than that of the
preceding year. Regardless of the growing value of problematic loans, the banking sector
marked a financial performance many times higher than that of 2009.
Liquidity situation is clearly improved with a stable growth in deposits. For that reason, the
need of the banking sector for liquidity by the Bank of Albania is substantially reduced.
The banking sector is well-capitalised thanks to cautiousness in expanding activities and
increase of capital by shareholders. In spite of this good progress of the banking sector, rapid
improvement is needed in some areas on which the Bank of Albania has focused its
supervisory activity.
First area relates to the need for crediting expansion and loan quality improvement. Both
elements may support each-other, if careful actions are taken.
Crediting expansion will be better supported during 2011, due to two important developments
namely, a substantial improvement of the liquidity situation and a falling tendency of interest
rates for bank loans in Lek. The first signs of a more positive trend were noticed during the
last two months of 2010, with the annual crediting pace significantly accelerated.
On the other hand, loan quality remains problematic, although a gradual improvement is
expected during the current year.
I take this opportunity to reiterate our call on banks to be more active in handling problematic
loans and their collection. Concerning loans considered not to have any hope of collection, in
conformity with the legal and regulatory framework, banks need to take actions for the
execution of collateral.
In this process, there is a need for further legal improvements in order to reduce the risk of
banks in crediting as well as costs for the client. This process is indispensable to clean bank
balances from investments that are burdensome and release funds that would be used for
new credits.
In this context, monitoring of loan quality and behaviour or difficulties that banks face in this
process lays at the very centre of the supervisory activity.
Second area concerns the cost of banking services for clients. On this issue, the Bank of
Albania has conducted necessary analysis, which led to the conclusion that costs for a
number of bank products and services, including payments and transfers, debit and credit
cards, as well as some other forms of crediting, could be lower.
In relation to this issue, we are focused on two aspects:
First, promoting transparency in the banking sector on its relations with the clients regarding
these services. For this issue, we have implemented requirements for the establishment of
methodologies to determine effective crediting costs and clearly define contractual
obligations vis-à-vis the clients. Banks are asked to provide all the information and
explanations to the interested clients. In addition, following the same logic, we would ask
from banks to establish methodologies to define their costs for bank services, mainly related
to payments and transfers.
Therefore, it will be easier for clients to compare between a variety of offers by banking
institutions and, hence, be able to make their choice according to the most favourable
alternative.
For this to happen in the best possible way, customers themselves need to pay due attention
and obtain accurate information on bank products and services. When necessary in this
process, more specialised external expertise may be requested.
Secondly, Bank of Albania aims to offer a concrete incentive in this process for commercial
banks, by further reducing their costs for the use of AIPS and AECH, payment systems
during their transactions in Lek, on their own or their clients' behalf.
We believe that through a more competitive policy in products pricing by the banking sector
clients get more benefits and we may see an increase in their number and, subsequently,
generate an increase in the revenues of the banking sector.
Third area, in which we are focused relates to the requirements to increase accountability in
banking institutions management, asking repeatedly that professionalism, dedication and
accountability be transformed into a work culture for all banking institutions staff.
For that matter, we are continuously reviewing the processes through which the banks
realise their decision-making, ensure control of certain activities and reporting chain within
their institutions, as well as their interaction with the public.
Internal control systems define, mostly, the capacity of an institution to operate securely.
These are necessary to avoid any gap that may be abused to the disadvantage of the
institution.
Hence, in its regular communication with banks, the Bank of Albania has requested that they
undertake all necessary measures; in terms of money, human resources and technology; to
guarantee the security of any banking [trans] action.
Concluding, I would like to underline that the Bank of Albania shall always be at the position
the public expects it to be, in order to satisfy, at any given time, its legal responsibilities for
price level and banking sector stability. In this process, state authorities, in particular the
judiciary, would be needed to offer their indispensable cooperation and consider banking
system issues a high priority, with the knowledge that a stable economic development of the
country depends on it. The Bank of Albania calls on all relevant factors to accelerate their
structural reforms on property title and execution of collateral as well as undertake a number
of other administrative and bureaucratic regulations which affect banking system costs.
Inviting you to openly discuss on these issues, I thank you for your attention!