Ardian Fullani: Improving the performance of Albania's banking sector
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the year-end event with the
Albanian Association of Banks, Tirana, 17 December 2013.
* * *
Dear bank executives,
Your Excellency Ambassador Sequi,
Dear Mr. Ilahi,
Dear Mr. Pencabligil,
It is a pleasure for me to participate in this year-end meeting, as we reflect about the
challenges we faced and the objectives we accomplished in this year, and endeavour to
identify issues that may arise over the next year. Given the celebrations time and the spirit of
this meeting, I would rather not dwell upon all the issues I would have liked to. However, I will
share with you my opinion on two issues I consider as important for a good performance of
the banking sector over 2014.
Before moving on, we should acknowledge that the year we are leaving behind was a difficult
one for the banking sector. In its development cycle for over more than one decade, this
year, the banking sector's growth slowed down sharply and annual lending levels contracted.
Deteriorated asset quality, dictated by credit, has led to lower financial profit due to higher
provisions needed. These developments have reflected the overall economic slowdown and
domestic demand drop resulting from lower private consumption and investments. However,
other developments highlighted the banking sector's capacity to properly respond to and
cope with these challenges. The banking sector has maintained ample liquidity and capital
levels thanks to the further rise in public deposits and added capital by parent banks. In
terms of non-performing loans, obvious efforts have been made to restructure credit and sell
off non-performing loans to non-bank financial institutions.
The Albanian Association of Banks has played an active role in discussing the problems with
relevant authorities and identifying solutions through the regulatory treatment of
nonperforming loans, notably, the legal amendments to collateral execution process, which
entered into force in September 2013.
Through its activity, the banking industry may transform 2014 into a better year for both the
banking industry and the Albanian economy. I think that this may be achieved through harder
work in the following aspects:
The first aspect pertains to restoring lending to adequate levels in Albania. This objective
may be achieved by interlinking these three elements:
a) Cleaning up balance sheets from non-performing loans. It is indispensible that you
should mark evident progress during 2014 to write off loss loans from their balance
sheets and engage in cautious credit restructuring, where necessary. The
improvement in the fiscal handling of loan write-offs, in the near future, is expected
to better support this process; however, this does not justify the sluggish and
protracted action. I, therefore, call for your utmost commitment to successfully
implement projects initiated with the World Bank in this regard.
Additionally, quantitative objectives for reducing the level of non-performing loans
should be included in your institution's annual work plans for 2014;
b) Evaluating and selecting new loan applications in a professional fashion. Indeed,
credit demand remains weak; however, this exists and must be viewed in terms of
its potential for growth in the future. In this regard, the banking industry should
strengthen its analysis to steer lending toward those sectors of the economy with
high development potentials. Priority should also be given to launching banking
products that boost credit demand from small and medium-sized enterprises,
mitigating credit risk through portfolio diversification and improving the stable return
on bank lending;
c) Reducing lending costs. I refer to the interest rate applied to lek loans. To our
opinion, it has inadequately reflected both the key interest rate trend and our
expectations. From the decrease in the interest rates applied to government
borrowing, we understand that the inert moves in the cost of lending reflect the risk
premia the banking industry imposes when lending to the private sector. For 2014,
we think that the banking industry should better support the private sector,
considering that:
•
IMF's agreement with Albania will mitigate government's need for borrowing;
•
Public arrears to the private sector are expected to begin to be paid off shortly;
•
Worsening financial ratios in the banking industry imposes the gradual return to
lending to the private sector, in order to improve the generation of income.
Second, I would like to underline the need for the significant improvement of technical
capacity and structures for risk management. In this regard, your decision making should
include analytical assessments of the performance of your institutions against various
scenarios. This is a requirement stipulated in the existing regulatory framework, which we will
monitor with additional caution over the next year. In our view, this element constitutes a
bank management quality indicator.
Sparing the details, I would like to emphasize that the Bank of Albania will continue to
provide the necessary support for all these processes. We appreciate the professional and
direct cooperation with you, as an important element to comply with the requirements of the
supervisory and regulatory framework.
Moreover, the IMF's agreement and additional financial support from the World Bank and the
European Union will contribute to restoring the country's long-term economic stability,
translating the macroeconomic stability into higher economic growth rates. I am confident the
banking industry will use this moment to identify the best opportunities to restructure and
improve its performance and expand its activity, thus reassuming its role as the engine for
the country's economic development.
Thanking you for the invitation, I would like to wish you all good health and a prosperous and
successful New Year!
Happy New Year!