ardian fullani : microfinance in albania speech by mr ardian fullani, governor of the bank of albania, at the euro mediterranean conference on micro credit, rome, 5 - 6 december 2005. * * * distinguished participants! i ’ m glad to participate in the euro mediterranean conference on micro credit, an important event associated with the announcement of the year 2005 as the “ international year of micro credit ” by the united nations. authorities of a country usually aim at achieving sustainable economic growth in a non - inflationary environment. ideally, in a free market, capital will go to those opportunities that represent the most efficient and profitable investments. but, in a developing country, markets have several imperfections and issues and capital could easily be misallocated. it could go in those investment opportunities that provide high but risky quick returns and on other low efficiency ventures that are nearly safe. this behavior could however be problematic for future economic growth of the country. many sectors of enormous long term growth potential can be left unexploited. this means that some areas of the economy will be booming, while other areas will be considerably lagging behind leading to a very unbalanced economic development. also, various groups of population, particularly low income groups, will most probably be excluded from financing opportunities increasing the odds of becoming poorer. as a result, social problems and issues may arise such as : job losses, loose population movements and illegal establishments, etc, which will stretch public facilities to cope with this situation. therefore, it is important to find ways, to ensure more balanced development opportunities to all sectors of the economy and groups of population. albanian economy, by large relies, on micro - businesses. nearly all enterprises in albania fall into the category of small and medium enterprises sme - s. more than 90 percent of albanian enterprises can be classified as small or medium - size according to our instat data. the majority of these companies are engaged in trade and services, reflecting their micro business nature, and less in industry. as for employment, sme - s account for more than 40 % of total employment in the enterprise sector. there is a high concentration in the region of tirana - durres of private enterprises than other regions, while industry is concentrated mainly in elbasan. this new private sector especially sme - s needs the financial support to grow. until now banking sector has not been able to meet these needs. the situation is more problematic because sme - s do not

7 years several other institutions have been focusing on microfinance. currently we have 133 individual savings and loans associations organized under 2 unions, which operate in rural areas. the number of their members is around 18 thousand and the stock of their outstanding loans is around 12 million euro. in addition, we have 7 microfinance institutions with total assets amounting to 50 million euros, and loans of 43 million euros. banks are also getting more active in microfinance despite their little interest so far. this can be explained with tightening competitive conditions in the market and the need to explore new investment opportunities. now we see an increasing amount of credit going to small businesses, which often helps them in the initial stages. banks are particularly active for the microfinance in the urban areas. in fact, one of the banks has initially started to operate as a microfinance institution. it still holds a respectful position in this market segment, particularly in the urban areas. lending to microfinance sector now counts for more than 10 per cent of the whole lending portfolio of the banking system. the quality of the microfinance loans has been satisfactory. on average, the portfolio at risk is between 1. 5 - 2 percent, according to their reports. this is not only because of their small size ( usually under 1. 5 thousand euros each ), but also because of the diversity of the projects, ensuring diversification of the loan portfolio. one should also say that the experience gained by the microfinance institutions in this area, have also played an important role for this good quality. the legal framework on microfinance was completed in 1996, with the approval of a special law that defined the principles upon which such institutions could be found and operate. such principles for the specialized institutions included free will, reciprocal cooperation, capitalization of the profit and reinvestment in the community etc. later developments made it necessary for the law to change. hence, a new law “ on savings and loans associations and their unions ” was approved in parliament on may of 2001. several changes supported this new law. besides the principles that were restated, the law has defined the legal personality of the microfinance institutions, their permitted activities, the rights and the obligations of the members of the association, the managing structures of the associations and their functions, other important supervisory financial requirements and ratios, the role of the unions and that of the bank of albania as the regulatory and the supervisory authority. mandated with this role, the bank