Ardian Fullani: Health passes through .. bank
Interview given by Mr Ardian Fullani, Governor of the Bank of Albania, to Klan magazine,
published on 23 June 2007.
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- Mr. Fullani, initially we would like to listen to your comment about the efforts of the
government to channel financial business transactions through banks. Is this effort
somewhat strained, given that the other party (the business) expresses itself that high
transaction commissions of commercial banks increase business costs and the banks
themselves are not ready to carry out the transactions?
The channelling of financial transactions through the banking system, as a process already
tested and under development, is a much expected action, which outside the propaganda
contours will really contribute to weakening of the infrastructure that nourishes the
informality. In recent years, the banking system has passed through an irresistible process of
development and consolidation. Actually it may be stated without hesitation that the banking
system in Albania is completely capable of encountering with dignity this requirement of the
time.
Dealing briefly with two or three important moments, I would start with the operation of two
modern payment systems: Albanian Interbank Payment System (AIPS) where gross and real
time settlements are made, and the Automated Electronic Clearing House (AECH)
(smallvalue payments of clearing systems). Further on, I would highlight the significant growth of
epayments, the entry into the system of two well-known international banks, the increased
number of branches, as well as increase of ATMs and POS terminals for card payments in
the whole territory. Encountering successfully the channelling of public sector salaries
through bank accounts, followed also by those of the private sector and by a number of other
banking services, I think are indicators of the proactive, ever increasing role of the banking
system.
To clearly understand what progress we have made so far in this direction, it's worth
mentioning some statistics. The number of payments processed in AIPS system has
increased by 11 percent, while the value has increased by 21 percent compared to 2005. In
the meantime, both systems, the AIPS and the AECH have a much higher capacity than the
current number of payments processed in them. At end of 2006, compared to end of 2004,
the number of P0S terminals was 7 times higher, while the number of electronic cards in use
has increased more than 10 times and the transactions carried out through them was above
12 millions, with a value of about ALL 188 billion. During 2006, 62 branches and agencies of
commercial banks were established, leading the number to 294 at year-end.
In this sense, I think that the current infrastructure of the national system of payments we
provide is completely capable of facing the Albanian market demand for speed, number,
quality, size and security of payments carried out through these systems. Furthermore, the
Bank of Albania, in its role as the regulator of this system, is working for further
standardization of payment instruments, which will lead to increased quality of services
offered by banks to their clients.
On the other hand, the increased inflow of transactions in the banking system will further
encourage competition within the banking system. Banks would be encouraged, in exchange
of low commissions, to attract as many clients as possible, who in turn, would bring about
more financial resources to banks. The banking activity, as any other business, aims at profit
maximisation. Therefore, it is natural to charge commissions for services offered by the
system, while their amount is an individual policy that changes from one bank into the other,
in accordance with the size and other specifications. I am convinced that the increased
volume of work will bring about reduced banking commissions. I do not have any doubt in
this regard. What I would assure you, as the governor of the Bank of Albania, is the meeting
of an early requirement of the banking system to be very transparent about its products,
services, commissions and prices they generally apply.
- As the process of channelling the financial transactions of business through banks
had to be carried out since time ago, is it better to pass the costs of the moment and
to channel the economy through the banking system?
I would refer to "costs of the moment" as "benefits of the future". Imagine the other side of
the medal. How much informed will the banking system be in relation to the potential the
various businesses have, and how much safe will it feel in crediting them without any
hesitation? From this viewpoint, it is concluded that the operation is necessary and
furthermore, in the final analysis, businesses, and particularly individuals will be the
beneficiaries. In a broader aspect, the information on economic-financial potential of the
country would increase; the banking system effectiveness would increase; the variety of
banking products and services would increase; the geographic coverage by banking services
would increase; and in consequence the mobilization and re-allocation of funds would be
more appropriate; the competition would increase and costs would decrease. All these
achievements would contribute to creating a more complete economic infrastructure of the
country, which would raise the formality of the economy and would accelerate the economic
growth rates of the country.
- Credit extension has increased fourfold during four last years, but this has not
influenced on interest cut: Is this normal?
It is true that during last years we have had a rapid credit growth. During 2005 credit
increased by ALL 57.6 billion or about 82 percent in annual terms, whereas during 2006, it
increased by 70.2 billion or about 55%. Upward trends are as strong even in the first half of
2007. According to latest estimates, credit balance at end of 2007 will be around 21 percent
of GDP. Without doubt, this view reveals that Albania, likewise most similar countries, has
entered into the group of countries with high growth paces of credit to the economy. The first
cause listed by experts is the so-called "catching - up process", which in other words means
high growth caused by a rather low starting base.
Naturally, there are also other factors, such as: macroeconomic stability, the maintaining of
inflation under control, low interest rates in Albania, Europe and the USA, exchange rate
stability, increased banks' ambitions to lend and the public confidence in receiving credit. The
banking system development in the recent years, its successful privatisation and the process
of consolidation characterising it in 2006 are other factors that have influenced on rapid credit
growth. Also we may mention the introduction of new credit products, such as consumer
loans, house loans, and the efforts to make them more popular through aggressive
marketing forms.
Rise of credit to the economy at so high levels carries over the potential of cutting the interest
rates through which it is offered. Referring to Bank of Albania statistics, if an ALL loan of 6-12
month maturity at the beginning of 2002 was given on average by above 18 percent rate, in
April 2007 it was given by only 10.16 percent. However, we should be prudent and always
bear in mind the fact that about 75 percent of credit is in foreign currency and therefore, in
forming the price of this kind of credit, banks refer to international financial market rates, such
as euribor for the euro and libor for the American dollar. What is evidenced recently, thanks
to increasing competition, is that ALL credit rates as an average expression of new credits
have remained almost constant during the latest years, though euribor has increased almost
throughout the whole period.
- Is the default risk the one that keeps high interest rates or do we have a situation of profit
by banks from an economy in transition, as randomly happens?
It is not the high default risk the one that obliges banks to apply high rates. In price formation
policies, banks, inter alia, factorise also the country risk, which for many objective reasons is
higher than that of the developed countries. Also, besides this risk, there exists also the
economy informality, problems about ownership, mortgage of properties and collateral
execution. All these factors make banks work hard to ensure information about the
borrowers. This leads to increased costs and to the risk of misleading financial analysis of
the borrower, which would influence negatively on credit portfolio quality in the future.
- Time ago you have issued the warning of "bad loans" risk; what is the current
situation like in this regard?
A governor should always be concerned about such an important problem, related to loans
portfolio quality. The current situation of credit quality remains satisfactory. The ratio of
"nonperforming loans to (gross) outstanding loans, which measures the net size of exposure to
credit risk is estimated to 1.5 percent.
Constantly the Bank of Albania's attention has been to strengthening of banking supervision
measures. Some amendments have been made to the Regulation on credit management,
consisting in improvement of the lending process of banks, improvement of risk management
and some measures have been taken for enhancing transparency with the public. Also, this
regulation has provided some requirements on additional capital of banks, in case they have
a high lending pace.
However, we have to do with a process, which never ends and which will always be at the
top-list of Bank of Albania priorities. We will continue to monitor prudentially credit growth
and its quality. We will further improve prudential regulations, making them in consistency
with best standards used by European central banks. Only in this way a good credit quality
will be ensured, for preventing any probable negative consequences on the financial stability
of the country.
- Until a year or so ago, treasury bills could be purchased only at central bank's
windows, while the selling of treasury bills may be also carried out at some
commercial banks. Has the liberalization process influenced on yield cut?
The possibility of participation of individuals in primary treasury bill market through the
banking system dates back to 1996, while the Bank of Albania was included in this process
only during the second half of 2001. The Bank of Albania, in its role as a central bank, having
the main target to achieve and maintain price stability, since the moment of opening its
windows has regarded this presence as temporary. In essence, the establishment of these
windows was another possibility for the people to have greater access in purchasing treasury
bills. The participation of individuals in the primary market is of non-competitive nature,
meaning that they do not influence on price formation. They just accept the resulting auction
price. Therefore, we may state that their impact on yield rate fluctuations is almost
insignificant. Since my taking office, I have insisted that the selling of treasury bills is an
operation that naturally belongs to commercial banks. To this end, we have discussed more
than once with the banking system and with the Ministry of Finance for designing a strategy
for the Bank of Albania's gradual leaving from this "business" not natural to it, believing that
the market forces and its principles are the ones that should manage this process. Therefore
the banking system was required to be aggressive in this regard, providing to the clients the
service of selling T-bills in primary and secondary markets.
Parallel to that, the Bank of Albania, concerning this service at its windows, made two
important steps, charging a service commission that covers connected costs and deciding
not to accept cash inflows of individuals who intend to invest in T-bills. Since then,
participation in treasury bill auctions through Bank of Albania windows may be made possible
only in case the intended amount for investment comes in the form of banking transfers.
- Can you mention the positive sides of this liberalization?
These measures may rightly create the idea of a liberalization process, which I think will
really lead to further deepening and expansion of the financial market in Albania. Presently,
we are working for presenting a new practice in the primary market of government securities,
that of the main mediators, or as already known in other terms, "primary dealers". We believe
that this relatively long period in transition has served as a school also for the public at large.
What is more important in the whole process is the fact that individuals are getting more and
more acquainted with market instruments. The better and with more conscience we know
them, the easier is the path to real financial market development. In such an economy,
individuals make the choice.
- Recently you have received evaluations, since the institution you govern has
succeeded in maintaining macroeconomic parameters and price level. Can you
mention some of the measures you have taken during this period?
It is true that the Bank of Albania's role in maintaining macroeconomic stability , particularly
in controlling inflationary pressures, has been recently highlighted by a number of institutions
within the country and abroad. However, I would highlight the public evaluation for the
institution I govern as the greatest success we have achieved. This evaluation is expressed
clearly in anchoring inflationary pressures in the country and in increasing the degree of
using their products. Naturally I regard it a direct reflection of high technical and professional
investment the Bank of Albania has made in setting up an equilibrated framework of
macroeconomic policies, in increasing financial markets, in developing the monetary market
infrastructure and in consolidating the banking institutions. On the political plane, the Bank of
Albania has kept unchanged its focus on monetary policy, to guarantee price stability in the
economy. It has monitored prudentially the liquidity conditions and interest rates in the
economy, as well as other factors of potential negative impact on inflation, raising twice the
key interest rate in the economy. Also, the Bank of Albania has been a productive partner in
coordinating the economic policies of the country and in the performance of the agreement
with the IMF.
On the financial market development plane, the Bank of Albania has undertaken a number of
incentives for completing the banking infrastructure and the legal framework. Reflecting
largely on macroeconomic stability and on improvement of banking infrastructure, lending to
the economy has undergone very rapid paces during three latest years. On the other hand,
the strengthening of banking supervision measures and the prudential regulations serve as a
guarantee that the banking system expansion and rapid credit growth to the economy will not
create problems for the financial health of banks and for their long-term sustainability. The
Bank of Albania is raising the degree of professionalism, which is a guarantee for
strengthening the independence, transparency and accountability. Therefore, the
decisionmaking process has been further perfected, thus increasing the credibility of the Bank of
Albania to the public.