ardian fullani : overview of albania ’ s banking sector speech by mr ardian fullani, governor of the bank of albania, at the end - year reception, organized by the albanian association of banks, tirana, 23 december 2011. * * * dear bank executives, dear participants, this end - year event with the albanian association of banks, turned into a tradition of communication between the banking sector and the bank of albania, provides an excellent opportunity to make a short resume of the results achieved by this sector in this year as well as to identify its challenges in the upcoming year. the banking sector managed to finish off 2011 successfully. its role in supporting albania ’ s economic activity was crucial, while prudence was made to guarantee its financial soundness. in this regard, the supervisory role of the bank of albania has provided an extraordinary contribution. banking supervision has been proactive and preventive by creating, at the same time, the necessary space for flexible banking activity management. amendments to the law “ on banks in the republic of albania ”, a number of amendments to the banking regulatory framework as well as the physical interaction through on - site inspections have contributed to enhanced immunity and dampened negative effects generated by the global crisis. the bank of albania has periodically conducted stress tests on specific banks to ensure that the banking sector ’ s security and functionality is never put in doubt. currently, we are working for this project to be transformed into regional cooperation taking into account that same banking groups operate across the entire region. according to banks reporting at end - september 2011, banking sector total assets expanded 9. 5 % from year start and about 13 % from the corresponding period of a year earlier. the banking sector credit portfolio widened 9. 6 % during the year or about 15 % year - on - year, constituting 49. 1 % of total assets. during the year, lek - denominated loans increased more rapidly than foreign currency - denominated loans. the activity increase was sustained mainly by deposits increases, which constitute 81. 4 % of total liabilities. during the year, they were up 9. 7 % or 14. 1 % higher than the corresponding period of 2010. liquidity ratios are stable and are expected to consolidate following recent regulatory requirements introduced by the bank of albania. as at september 2011, banking activity made a profit of all 1. 3 billion and return on assets and capital was 0. 2 % and 1. 9 %, respectively. capital adequacy ratio was

the pre - conditions for resurgence in domestic demand already exist. we need to take advantage of these. 6. the outturn for fy 2010 indicates that the fiscal impulse was far smaller than had been envisaged ( for several reasons ). the fiscal stance announced in the current year ( fy11 ) is appropriately geared to supporting an economic recovery. the challenge is to accelerate the implementation of some of the approved infrastructural projects so as to give a much - needed boost to the construction sector. obviously, a meaningful resumption in construction activity would be facilitated by steps to clear outstanding arrears to contractors. 7. it is important to stress that we are talking about a temporary fiscal stimulus for fy 2011, the plan being that government also devises a fiscal framework to return to budget balance as early as possible ( in the interest of reducing public debt ). bis central bankers ’ speeches 8. monetary conditions are ideal for a long - awaited resumption of private demand. with significant unused productive capacity, considerable excess liquidity and with core inflation expected to remain subdued, the bank sees further room for lowering the policy interest rate. in turn, we hope to see a much sharper reduction in bank lending rates. last year, we saw an appreciable reduction in mortgage interest rates but less so in other lending rates. we think that current spreads could more than afford a sizable cut in bank lending rates. 9. few banks have taken steps to facilitate lending to small businesses. however, data on loan guarantees to small businesses, through the business development company show a continued decline. for the medium term, it will be important for government, the banks and the business sector to work to enhance small business development programmes. 10. the central bank is able to give the assurance that foreign exchange availability would not be a bottleneck to production. as noted earlier, the prospect is for buoyant energy prices. in addition, we expect foreign reserves to be supplemented by inflows related to oil exploration activities and by proceeds of foreign loans. with official reserves now equivalent to around 12 months import cover, the bank is not targeting any additional increase in official reserves in 2011. 11. a brief word on the foreign exchange market. this table shows that after a period of substantial build - up from 2004 to 2008, the central bank has not been accumulating foreign exchange reserves. for 2011, the target is for a slight reduction in official reserves. this means that,