Elvin S. Meka

Albanian Financial System in Front of Global & Financial Crisis - A New Approach to Ensure Long-Term Sustainability

The intertwined global financial and economic crisis of 2008, unfolded the total exposure of the Albanian financial system in front of the systemic risk, by the Albanian banking system, as the absolute pillar of providing funding and intermediation in the economy. This cartel-like financing highway of the economy, developed by an oversized bank-based economy, could and practically downloads all the issues, pitfalls and inefficiencies of the banking system, on the shoulders of companies and individuals as borrowers, especially in times of economic contraction or crisis. This one-pillar financial system in Albania does not offer guarantees for a long-term sustainable economic development, which in turn, calls for a more balanced development of this system. This paper proposes that, a more balanced financial system, subject to inter sectorial competition, with the presence of ever-developing nonbank pillar, the development of capital market and its respective long-term instruments and institutional investors, along with new areas of banking business (agriculture funding, private banking, etc.) could make a valuable contribution, not only to the sustained economic growth, increased competition, but also in alleviating the factors and premises, which ignited and energized the unprecedented global & financial crisis of 2008.

Valuation of Factors that Affect Employment in the Albania Banking System: An Analysis Based on Design of Experiment (DOE) Method

Design of Experiments (DOE) is a statistical method well known in assessing the quality of products and services. The particularity in this work consist in the use and design of DOE to assess factors that affect employment in the banking system in Albania. Typically, this paper aims to design DOE in the view of analyzing different factors that affects employment, particularly young people, in the banking system. In this regard, a survey was conducted with heads of key departments at various banks in Albania, heads of human resource departments included, trying to evaluate different factors that are considered more important in the employment process. Furthermore, an orthogonal matrix is created for proper data processing, by using a standard matrix of Taguchi L28. The analysis has estimated the impact and weight of factors taken in study, which resulted more significant in employment of young graduated people into the banking system in Albania. The paper aims to improve orientation in high education studies, particularly in economic and financial faculties, in view of labor market.

Private Capital Funds and Their Role in Albanian Financial Market

The prolonged stagnation bank credit expansion, especially after the outbreak of recent economic and financial crises, has produced a significant impact on the availability of new and long-term sources of business financing, mainly related to mid and large-size companies, but also to start-ups. Currently, all such categories of businesses find difficult to obtain long-term financing from banks and this has major implications on financing their investments and projects in the pipeline. In a time when, paradoxically, bank credit is becoming increasingly difficult and therefore, to score a significant influence on the economy and investment financing, and regardless of the existing liquidity abundance, establishing and developing Private Equity Funds (PE) can play an important contribution in this regard. Despite the fact that such type of institutional investor is currently lacking within the Albanian capital market, some basic legal, institutional and economic premises do exist within the Albanian financial landscape, and which could provide grounds for such an actor to play its role in providing an alternative source of long-term financing for Albanian businesses. Consequently, their existence could pave the way for revitalization of the idea and attempts to put into operation a functioning capital market in Albania, which is still missing.

NPLs — The Solution Recipe for Albania

The quality of the loan portfolio in Albanian banking system is facing many obstacles during the last decade. In this paper we look at possible determinants of assets quality. During the recent financial crisis commercial banks were confronted with deteriorating asset quality that threatened not only the banking industry, but also the stability of the entire financial system. This study aims to examine the correlation between non-performing loans and the macroeconomic determinants in Albania during the last decade. NPLs are considered to be of a high importance as they represent the high risk exposure of banking system. A solid bank with healthy assets increases the market efficiency. Our approach is based on a panel data regression analysis technique from 2005-2015. Within this methodology this study finds robust evidence on the existing relationship between lending interest rate, real GDP growth and NPLs. We expect to find a negative relationship between lending interest rate and asset quality. Further we assume an inverse relationship between GDP growth and non-performing loans, suggesting that NPLs decrease if the economy is growing. Furthermore this study proposes a solution platform, which looks deeper into the possibility of creating a secondary active market for troubled loans, restructuring the banking system or implementing the Podgorica model. This research paper opens a new lieu of discussion in terms of academic debates and decision-making policies.

Capital Transfer Outside Albania and the Absent Capital Market

Capital outflows is beginning to attract the attention of policy makers, in the frame of stimulating investments within the country and furthermore, promoting lending to local business by commercial banks. The recent movement of the Albanian Parliament, by way of a special resolution of taking coercive actions by Bank of Albania, aiming at limiting capital outflows by commercial banks, is judged purely declarative and of good purpose only, without a real impact and value added, given the economic, political and strategic commitments, Albania has taken on international and European arena, the development of domestic economy and its model, and the stage of development and intermediation within the financial system and markets, as well as banking and non-banking sector.As per above, and in the context of an increasingly globalized world, and the Albanian’s integration aspirations in the EU, imposing constraints, either administrative or in the form of tariffs and taxes on the free movement of capital, will complicate foreign investment climate in the country, in a time when several segments of the financial market, such as: capital market and private securities, remain fairly underdeveloped, thus limiting the investing useful and profitable alternatives for banks and other entities, with temporary surplus capital and funds, within the Albanian domestic market. Therefore, it is deemed necessary that policy-makers and regulatory & oversight institutions for the Albanian financial system, must express and articulate a clear approach toward the TSE’ revitalization, along with further deepening of the financial system, as the only way these segments of the financial system could make a contribution to alleviate and mitigate such an issue for the national economy.

Loan Management and its Role in the Lending Process

Bank loan management is crucial and it is instrumental in ensuring the success or failure of any credit institution. Albanian banking system as a relatively newcomer in the market economy, started to apply modern lending rules & procedures after the major loan portfolio was already created, whereas the key role of risk management and its respective procedures was mostly unknown for the majority of banks in Albania, during the credit boom. On the other side, Bank of Albania has been relatively late in taking up its role in controlling and monitoring the process of setting up the lending structure and regulation, as a mandatory standard, applicable in lending practices for commercial banks in Albania. The adjusted Basel I standards helped banks in Albania to weather the effects of the last financial crisis, but proved incomplete, in terms of ensuring long-term loan quality management. The paper shed light on main reasons why Albanian banks lagged behind in terms of applying and implementing modern risk management practices and procedures, during the credit boom period and explain why applying rules, procedures, intending to correct mistakes done during lending process, or improving the low quality portfolio, proved to be costly and of less success. Also, the paper put emphasis on lack of properly qualified and well-trained credit officers, within Albanian banks, as most of them practiced “on job training”, and only a few banks took care of training the staff, and arranging proper organizational structures, which were mostly focusing to sales rather than risk. Finally, the paper provides some recommendations on improving internal lending practices and procedures, along with modern risk management principles and near-future full implementation of Basel II standards by Bank of Albania.

Bank Competition in Transition Economies: The Case of Albania

The Albanian banking system coming from a centralized economy’s heritage went through a long transition phase, to be converted, during recent years, into a modern banking system, reflecting the developing market economy in Albania, with many country-specific features. Given such characteristics, and the fact that the new market economy in Albania with still-to-be-consolidated businesses and relatively a big number of banks, with lots of cheap funds to lend, there has been room for a stiff, if rather unfair competition among banks for market share, thus causing a low-quality loan portfolio and liquidity problems in the market. New entrants in the banking market, mainly foreign ones, may have induced too much entry and relatively too many bad loans. Notwithstanding positive effects of banking competition during the entry phase, banks have adopted and seek very high targets on lending, therefore funding risky projects, which failed to produce success stories. When twinning this fact with the actual global and local financial crises, the situation is practically affecting the stability of the banking system in Albania. The paper analyzes and investigates how bank competition affects efficiency of credit allocation, using the historic data of the last decade, and provides some recommendations on improving lending practices, procedures, portfolio diversification, aiming to preserve the stability of the banking system in Albania.

Corporate Bonds - The New Frontier for Corporates in Albania

Despite the fact that the Albanian economy and its business & banking system weathered an indirect shock, in the course and in the aftermath of the global financial and economic crisis of 2008, it revealed the characteristic phenomenon of cartel-like financing, of the economy and Albanian companies, by the banking system. This source of financing, as derived from an oversized and wholly bank–based economy, conveys all the issues and risks, accompanying the banking system activity, towards companies as borrowers, especially in times of economic contraction, in the form of tightened lending terms & conditions and lacking cost-effective and competitive financing terms.This paper addresses the importance of corporate bonds as a long-term source of finance and proposes their issuance, as a still-absent, but efficient & competitive alternative source of financing, for medium and large-sized enterprises in Albania, given the first signs of an emerging interest for bonds’ public issuance. Also, theoretical and practical advantages, regarding corporate bonds’ issuance, are mentioned in the paper, which could be easily energized and implemented by Albanian companies, in the frame of the existing legal environment in Albania.

Albanian Banking System – The Past the Present and the Future…

The Albanian banking system is a relatively new system and has been developing mainly during the last 10-15 years, whereas its significant growth and progress was recorded 10 years ago, via the privatization of Savings Bank. Along with privatization, the development path included, also, greenfield investments form foreign banks and capital pooling by Albanian venture capitalists. This process has undoubtedly been crucial and instrumental, in providing the economy with the so-much-needed finance, as the actual ratio of loans-to-GDP stands at 42%, starting from a negligible basis, during 1990s. The Albanian banking system, as well as the global financial system, felt the pinch of the global financial and economic crises, through two almost simultaneous warning events: the deposit withdrawal from the fourth quarter of 2008 till around mid-2009 and the steep increase in non-performing loans, which almost doubled in 2008. Actual data show a stabilized rate of non-performing loans, which indicate that we are now in the upper frontier of natural adjustment of credit to economy. The now days reality is putting the Albanian banking system in front of serious challenges, like: (1) the “paradox” of ever-growing external financing sources and the (2) “difficulty” to invest disposable funds efficiently, (3) effective management of banking system’s maturity phase, and (4) continuous deepening of the Albanian financial system.Conclusively, the Albanian banking system must be obviously prepared to manage and cope with macroeconomic challenges, in the frame of some-years moderate economic growth, as well as the unavoidable consolidation of banking operators, typically with M&A process, spurred by the need to improve the economic efficiency and eventual increase of competition by non-bank financial institutions.

Albania & Kosovo Financial Cooperation and Integration - A New Approach for Financial Regional Integration

Albania and Kosovo, as two Albanians’ states in the region, are trying to bridge their national economies on a permanent basis. Although in its first steps such common vision, willingness and aspiration by many interest groups in both states need to be materialized by identifying real and practical opportunities and ways for a sustainable and coordinated cooperation between both economies, aiming at their final harmonized integration, within Balkan region.Typically, the financial integration of both countries’ banking systems seems to be one of the most important and probable way to ensure their economic integration. There are several substantial reasons, which could establish the suitable premises and favor such a financial integration, along with some obvious positive effects, the latter could provide to both financial systems and economies, respectively. Our discussion is particularly focused on Albania’s public debt and on possible positive effects, such integration could produce. Such particular cooperation and integration could serve as a hotbed and platform for a possible and practical cooperation & integration among Balkan states, which share similar features, in terms of economic development pattern, its stage of advancement, established goods & services markets and regional positioning.