the next 6 - 12 months. banking system the albanian banking system continues to expand. it is solid, consolidated and fully capitalized. the system consists of 17 banks, of which only 3 are entirely domestically owned. banking network has been extended continuously including remote areas. banking products increased in number and improved in quality. entrance in the market of important european financial groups created a better competitive environment and further enhanced efficiency. the expansion of lending portfolio and more competitive lending rates has deepened financial intermediation. latest data show that in june 2006, the assets of the banking sector reached 60 per cent of the albanian gross domestic product ( gdp ). rapid changes in the banking system in light of credit boom, and global market financial integration impose the need for higher standards of transparency, accountability and governance from the banking system itself. not only with regard to bank of albania, but public as well. banks should behave responsibly and must integrate the stability of the entire system into their utility function. financial system reforms since years the banking systems has been in a constant process of transformation. the financial sector assessment program ( fsap ) marks a significant moment in this process. on behalf of the bank of albania i would like to thank imf and wb, for their excellent efforts on this professional and transparent financial certification of the albanian financial system. bank of albania remains very much focused in fulfilling the recommendations of the fsap following the priority and institutional hierarchy. • bank of albania has increased the access and investment opportunities of commercial banks in the securities market. • the draft on banks law is completed. • automated clearing house system is operational. • the number of electronic transfers has increased significantly. there is concrete evidence that shows a continuous reduction of cash economy. • bank of albania has extended its supervisory authority over all non - bank financial institutions that operate within the economic territory of the republic of albania. • supervisory board of the bank of albania has further increased the transparency of its decision making process. minutes are released regularly and bank of albania website provides fresh info on daily activity. • there is significant progress on establishing the credit information bureau. we hope by the end of next year that will be fully operational. • last but not the least i would stress out that we have already presented a detailed action plan for the remaining part of the fsap recommendations. honorable participants, designing and implementing monetary policy has become more challenging. globalization in particular has exposed our economy to foreign shocks. in addition policy actions of ecb and fed

, exert their impact on albanian economy mainly due to high extend of currency substitution. rapid growth of lending activity is the most notable development among domestic factors. according to our figures over the last two years credit to economy has expanded by an equivalent of 10 - 12 gdp percentage points. at this rate it is expected to reach 18 - 20 percent of gdp at the end of current year. is worth mentioning that approximately 30 percent of the outstanding credit represents consumer credit, moreover 75 percent of the outstanding stock is loaned in foreign exchange currency. this represents a very important development and deserves scrupulous attention. our main concerns relate to inflationary pressures and non - performing loans that such credit expansion might generate. in the light of these developments bank of albania assessed that existing stance of monetary policy was not providing enough stimulus to curb aggregate demand. therefore in july 2006 bank of albania decided to shift the course of monetary policy by raising the base rate ( 7 days repo rate ) with 25 basis points. we are happy to observe that market is reacting following our decision. however based on our short term inflation forecasts and in presence of several risks, some of which i already explained above, bank of albania perceives that inflation pressures for the next 12 months remain elevated. currently we are cautiously evaluating the extend of market response and assessing whether further action is needed. simultaneously bank of albania is becoming increasingly concerned regarding the quality of loan portfolio. the accelerated pace of credit expansion, is posing challenges to both banks and to supervisory authority. the response to these challenges will aim at achieving macroeconomic stability, by means of a well capitalized banking system. with this goal in mind, the bank of albania, as the supervisory authority, has intensified the dialogue with the banks in order to find an adequate consensus for : setting realistic objectives of annual activity growth ; containing the credit expansion and maintain good credit portfolio quality ; strengthen the internal control and risk monitoring systems ; and monitor carefully the capital indicators. i would like to use this floor to emphasize that bank of albania will be very firm to follow strictly all requirements that derive from the law and regulatory framework. on our part, we will make the necessary modifications in the supervisory and regulatory framework that target the above mentioned issues with a realistic and flexible approach. the sole purpose of this conformist approach to supervisory rules, is to provide a cushion for avoiding potential future disturbances in the financial stability. finally i would like to strongly emphasize for all business community, households and all other economic agents that bank of albania