Bankieri No.4 July 2012

ISSN 2225-2959

Nr. 1 Tetor 2011

No. 4 July 2012 Publication of Albanian Association of Banks

Moderate Economic Growth

BANKS: YES WE CAN! www.aab.al • BANKIERI • 1

AAB offers member banks a cost-effective solution to train employees

AAB MEMBERS

www.aab.al 2 • BANKIERI • www.aab.al

Nr. 4 Korrik 2012

p.5

FRONTLINE

No. 4, July 2012

p.6

Facing and handling crisis

by Kaan PEKin

p.7

Actual economic development and the need for a new pattern of bank-business partnership by Selami XHEPA

Elvin Meka Editor-in-Chief

p.8

Klodian Tomorri Correspondent

Banks facing the economic downturn

by Klodian ToMoRRi

p.9

Junida Katroshi (Tafaj) Coordinator

p.11

Non-performing loans and their write-off - the consequences in the results and performance of the banking system by Eljona HOXHA (KONOMI)

p.12

Cards Fraud – How do banks fight against this phenomenon... by Klodian Tomori

p.16

Agribusiness and the need for bank financing

by Anjeza KELMENDI

p.17

Global Remittances - Vital part of the economy of developing countries

by Souren HAYRIYAN

p.19

p.21

ECONOMIST CORNER p.25 p.29

BALKAN NET Interbalkan news

p.33

TECH TOPICS The relevance of modeling in the banking sector

by Petraq PAPAJORGJI

p.37

p.39

AAB

Albanian Association of Banks building capacities

Seyhan PENCABLIGIL AAB Chairman & Chief Executive Officer, Banka Kombëtare Tregtare Ioannis KOUGIONAS AAB Vice Chairman & General Manager, National Bank of Greece Christian CANACARIS AAB Executive Committee Member & Chief Executive Officer, Raiffeisen Bank - Albania Flutura VEIPI AAB Executive Committee Member & Spokesperson of the Management Board, Procredit Bank Bozhidar TODOROV AAB Executive Committee Member & Chief Executive Officer, First Investment Bank - Albania Periklis DROUGKAS AAB Executive Committee Member & General Manager Alpha Bank Albania Endrita XHAFERAJ Secretary General, Albanian Association of Banks Hysen ÇELA Managing Partner, NH EuroConsult Adrian CIVICI Director of the Doctoral School European University of Tirana Spiro BRUMBULLI Rector - Tirana Business University

FINANCIAL AUDITORIUM Economic culture and banking products in Albania by Arbi AGALLIU

Besa Vila Editor

Editorial Board:

EXPERT FORUM

SOCIAL CAPITAL

Editorial Team:

Gert Hoxha Photographer

BANKING SYSTEM

Banking Crisis - Why is Spain suffering?

by Adrian CIVICI

Publication of the Association of Banks

Sonila Krashi Design & Layout

INTERVIEW

How to read Albanian Banks’ financials IFRS vs BoA by Arten ZIKAJ

BANKIERI is the newest official publication of the Albanian Association of Banks which will mainly focus the Albanian banking industry. BANKIERI will provide readers with valuable information on the financial industry's developments in general, and of commercial banks in particular.

Bankieri

Banks and moderate economic growth

by Alexander SzolnAi

Corporate Bonds - The latest innovation in the Albanian banking system by Artan SANTO

Nr. 1 Tetor 2011

Bankat: JA DALIM RRITJES SË MODERUAR EKONOMIKE!

EDITORS’S DESK Banking…or the task to burn the candle at both ends

by Elvin MEKA

ISSN 2225-2959

Contents

Botim i Shoqatës Shqiptare të Bankave

p.42

Enkelejda SHEHI Chairman of Albanian Financial Supervision Authority

ALBANIAN ASSOCIATION OF BANKS Bulevardi: “Dëshmorët e Kombit”, TWIN TOWERS Tower I, Floor 6, A3, Tirana Tel: +355 4 2280 371; Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

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Editor’s DeSK

BANKING…OR THE TASK TO BURN THE CANDLE AT BOTH ENDS! The Albanian banking system is facing a difficult task, to implement and preserve quality loan requirements, in a time when the consumer loan demand is becoming gold-plated, whereas they are unavoidably pushed to energize the consumer loan demand.

by Dr. Elvin MEKA1 Editor-in-Chief

T

he hot news hitting recent headlines was, undoubtedly, the Albanian economy to record a slump and retreat from the yearend 2011. The national economy is feeling and experiencing the pinch of continuing global economic slowdown and especially the complex economic situation evolving in Italy and Greece, the two most important trading & economic partners of Albania.

So, it’s not a hot news, it’s a red-hot news, indeed, especially for the banking system, if not only. The argument is plain simple. Banks need to run a particular business, which basically feeds and lubricates, simultaneously, the engine of the economy, given that the engine keeps running. As deposits continue to follow, as a blessing, the positive growth path, loan making is becoming a heavyweight sport. It is not for the quality standards, banks are requiring from the clients; rather, it is the client’s demand. Weather a psychological or financially-driven restrain, it is not a matter of concern, as the key issue in the spotlight is a weak consumer demand. This makes the economic equation rather tough than difficult, as consumption makes up to two-thirds of total GDP. If we add up the investment component, the picture gets full colors. The industrial

production is sweating, and this means quite a lot to banks. Obviously, the current structure of the economy looks as an unfurled SWOT matrix and banks read it perfectly, at least for their tactical positioning.

The Albanian banking system is facing a difficult task, or better say, a fistful of difficult tasks. It must watchfully observe regulatory standards, while implementing and preserving quality loan requirements, in a time when the consumer loan demand is at low ends and bank are unavoidably pushed to energize exactly this consumer loan demand! Typically, banks in Albania are asked now not to solve an economic equation; rather, it is a complex system with several not-so-easy equations. It is comparable to the task of burning the candle at both ends! Would it be for banks to provide solutions? Surely, YES, as each problem has a certain solution. Banking system, as part of the economic system, is well-positioned to provide exactly solutions to difficult tasks. As long as the banking system is well-capitalized and liquid, the fuel is guaranteed.

Finally, banks are run by professional and seasoned bankers, which are always above the curve!!!

1 Head of Department of Finance, EUT-UET

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FRONTline

BANKS AND MODERATE ECONOMIC GROWTH We are still experiencing economic growth, so there is no need for drastic changes in strategy; however, it is necessary for the banks to be more efficient and have a more effective management of their costs

by Alexander Szolnai Deputy Chairman of the Board of Directors Raiffeisen Bank

T

he decline in economic growth throughout the region, Albania included, need not necessarily be disturbing. We must consider the current rates properly and adjust our business strategies. Obviously, the situation is challenging, but in the coming years it will be the new economic reality.

With regard to this, Albania, as well as the other countries of the region, will probably have not the same growth rates as before 2008. Crediting will not be a sufficient source, since any new funding will be checked more carefully under the criterion of risk / return and risk-Weighted Asset (RWA). This is especially important given that there are new and higher demands for capital from large Groups of European Banking, which must also be met. Of course, our top priority in this challenging situation is supporting the existing clients and projects and providing professional advice to our clients on how they should respond to the new circumstances. At the same time, the new products and services offered (for example, cash management), aim

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at improving the situation. However, we are still experiencing economic growth, so there is no need for any drastic changes in strategy.

Our key priority is supporting the private sector through consumer loans and mortgages as well as improving the situation in the frozen real estate market. In addition, there are many other major infrastructure projects at their drafting stage that should be necessarily supported, and I hope that banks cooperate with one another for syndicated loans allocation. Besides business loans, there are also many other services to be implemented in the market, some of which have already been introduced, such as mobile banking, investment funds, etc. Thus, having previously had lower rates of income growth, it is necessary for the banks to become more efficient and have a more effective management of their costs.

When it comes to profitability, I must say that the level of provisions

for losses caused by problem loans is extremely high. Thus, it is very important for the entire economic system that collateral execution and judicial proceedings related to it function properly. This is not our current problem, yet the further improvement of this process remains our main priority.

Stimulation of demand for credit can not be influenced only by banks, since it must primarily come from the clients. However, we are at the initial stage of a campaign for consumer loans, offering the most attractive rates in the market. When it comes to the business, it is important for any new investment to have a solid business plan and a well-defined financial projection. Concerning loans, all the products needed are offered in the market, so I do not see any problems here. However, what banks need to improve is the way financing is structured for the clients. Funding should exactly meet the needs for cash flow.

Our top priority in this challenging situation is supporting the existing clients and projects and providing professional advice to our clients on how they should respond to the new circumstances.

FRONTline

FACING AND HANDLING CRISIS If banks could not offer credits for one reason or another, banking system profitability falls and whole economic system enters in a deeper crisis of recession with an accompanying collapse of financial system.

by Kaan PEKIN Treasury & FI Group Head BANKA KOMBËTARE TREGTARE

G

ood news could not stay prevalent these days. The performance of banks in general has been so troublesome in recent years due to two consecutive economic crises that started in U.S. with Lehman Brothers collapse and continued with euro zone debt crisis, that has already forced five countries to seek bailouts and fostered speculation about a breakup of the currency union. The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence.

Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, than their worstmanaged German or Dutch peers.

Two huge longer-term Refinancing Operation (LTRO) injection of cheap three-year loans (at 1.0%) into the euro zone banking system this year,

amounting to 1 trillion euros, bought only a few months’ respite. Banks are not eager to lend loans to companies in the private sector with the cheap money they took. Some banks already announced that they may repay early a chunk of the funds they borrowed from the ECB’s LTRO. The euro bloc is on the edge of recession and what offered as solution, could not provide any remedy to that real threat. European Banking Authority (EBA) requested European banks to increase their capital adequacy ratio from 8.0% to 9.0% by the end first half 2012 in the sake of sounder and safer banking system and banks, but actually EBA stirred-up the hornets’ nest. Banks’ shareholders which are tired due to consecutive years of crisis, could not inject any fresh capital, but reduced appetite to lend due to the need to

Flight from so called “riskier assets”, turn out to be a flight from South-eastern Europe assets, and this has implications for the cost and availability of credit in the region, including Albania, too.

rebuild capital. Flight from so called “riskier assets”, turn out to be a flight from South-eastern Europe assets. This has implications for the cost and availability of credit to businesses and consumers in a region that includes Albania and “derisk” term appeared. On the other hand, business confidence is being damaged by persistent turmoil and uncertainty over the crisis; orders are collapsing, inventories are being run down and production intentions are weakening.

I define banking business as the art of managing the assets. These assets shall be credits given to clients to promote economic activity globally. If banks could not offer credits for one reason or another, banking system profitability falls and whole economic system enters in a deeper crisis of recession with an accompanying collapse of financial system. In times of such crisis, savings and retail-oriented banks which have a business model geared not only shareholders, but also stakeholders, can focus more on retail lending and would be effected less from the crisis. Banks with such a business model, also park their excess liquidity to comparably safer assets during the crisis period to remain profitable and stay alert to start offering new credits to private sector at the first sign of economic recovery. Such policy may sound like a defensive one, but proven to be the best alternative among the others for the sake of economy and financial system.

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FRONTline

ACTUAL ECONOMIC DEVELOPMENT AND THE NEED FOR A NEW PATTERN OF BANK-BUSINESS PARTNERSHIP Businesses and banks should readjust their basic assumptions of the credit plan, thus starting an important process of restructuring the loan, so as to avoid the maximum hardness of liquidity firms are faced with, risking the collapse of their sales or their economic activity.

by Dr. Selami XHEPA Member of Albanian PaRliament

A

fter a long period in the position of “Sleeping Beauty”, in which Albania was classified until early 2000, the second decade of transition marked the beginning of a “boom” of credit in the economy. The first decade of transition, focused on stabilizing reforms of liberalization and deregulation, created the suitable conditions for the growth of the banking sector and financial deepening.

Although Albania had a relatively high degree of financial deepening (measured as the ratio of monetary aggregate M3/GDP), it was primarily due to high levels of public debt and its monetary financing during that period. Financial intermediation was mainly focused on the relations between the banking system and the central government, at which time lending to the economy remained at very low levels. The powerful entry of foreign banks, either as a “greenfield” or through the privatization of public banking sector, such as BKT and SavLoans to deposit Loan growth rate GDP growth rate

1999 8.4 12.1 14.0

Source: Bank of Albania, Statistical Report

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2000 9.1 16.9 7.0

ings Bank should also be mentioned as an important part of the structural reforms of the first decade of the transition period. In this way, Albania was among the first countries in the region with a banking sector completely dominated by foreign banks, almost all originating from the European Union countries.

Credit growth in the economy (according to the following table) has remained at high levels, meeting the definition of its classification as a period of “credit boom” (usually, a loan increase is called a “boom” when its increasing rate is two times higher than GDP growth). The pace accelerated considerably after 2004 when the ratio of loans to deposit would increase from 19% to over 62% in late 2011. Literature generally identifies three main factors associated with the explosive loan growth in the economy or the “credit boom”: (1) during the period of economic development, credit growth is faster than economic growth. This is regarded as a period of “financial deepening”; (2) loan rises faster than economic growth during a growing economic cycle, due to the growing needs for working capital and investment firms, according 2001 10.2 20.2 8.0

2002 13.5 38.3 4.0

2003 15.7 31.1 6.0

2004 19.0 38.1 6.0

2005 28.5 74.3 6.0

2006 37.4 56.8 5.0

to the conventional model of financial accelerator, and (3) accelerated credit expansion can also occur due to an inadequate response of financial market agents to risk changes over time. According to the “financial accelerator models”, over-optimism about future profits leads to an overestimation of the value of assets, increase of capital inflows and the value of collateral, and also allows firms and households to borrow and spend more. But, if business performance falls below the expected levels, a backward process is set in motion - asset prices and collateral values fall and the debt burden grows, thus disabling the credit service and access to new loans. These factors play a major role in the duration of the problems in the credit market as well as in the severity with which they can accompany the process of adapting and returning to a new state of equilibrium.

In practice, it is difficult to determine which of these three factors has fueled credit growth, as it has been impossible to establish a level of “optimal” growth of lending that can influence policy makers to maintain this “optimal” level and avoid the risk of credit decline. Therefore, it would be 2007 47.4 50.4 5.9

2008 62.8 35.1 7.5

2009 66.6 13.3 3.3

2010 61.7 9.7 3.9

2011 62.1 12.2 2.7

…the bank-business partnership should be established upon a new philosophy of a new vision and a longterm relationship, and considered not only as a reciprocal shortterm benefit, but also as a social and public responsibility rather difficult for the Bank of Albania itself, to establish any objective indicator of an “optimal” credit in the economy as an operational indicator of its supervising and monitoring function.

Regarding the developments that have been observed in the credit market, starting in 2009, there has been a considerable decline in its growth rates, which highlights the problems that accompany the process of adaptation and adjustment. The decline of economic growth because of the impact of the global crisis, especially the regional crisis, has resulted in the decline of the business cycle. Thus, both businesses and banks should readjust their basic assumptions of the credit plan, starting an important process of loan restructuring, so as to avoid the maximum liquidity crunch, firms have to cope with, as a result of falling sales or their economic activity.

In these circumstances, the advice to governments “to be tight in times of economic boom and dynamic during difficult times and economic decline”, applies to banks as well, which must adopt the same philosophy. A business in liquidity difficulty, sooner or later would go toward complete insolvency, so, if banks tightened their financial conditions in moments of a downward economic cycle, they would but lead businesses to bankruptcy, thus risking their own collapse. What is still imperative today is that the bank - business partnership should be established upon a new philosophy of a new vision and a long-term relationship, and considered not only as a reciprocal shortterm benefit, but also as a social and public responsibility, in which case the Bank of Albania could provide a valuable support using all its available mechanisms.

BANKS FACING THE ECONOMIC DOWNTURN

T

he establishment of a sound financial system has undoubtedly been a determining factor for the macroeconomic stability and development of the Albanian economy, over the last decade. After the severe financial crisis of 1997, the privatization of first banks, paved the way towards the birth of a modern financial system, which is one of today’s most valuable assets of the economy.

This system enabled a rapid and explosive growth of financial intermediation in the economy, thus providing finance to private entrepreneurship and economic activity in general. Credit to economy grew explosively, and the growth of financial intermediation played a crucial role in the economic development of Albania. As Bank of Albania puts it, credit to economy alone, caused the GDP to grow, on average, by more than 1.5- 2% per year. In fact, this period of rapid financial market development coincided with the period of rapid economic growth, influencing it and at the same time being influenced by it. But the economics teaches us that market economy goes through cycles.

Actually, advanced economies have been experiencing a downward business cycle for 4 years now, whereas developing economies are facing a strong economic slowdown. These international developments have also affected the more-integrated Albanian economy. After 2008, economic growth rates have fallen substantially, reaching the lowest levels of the last 20 years. This economic slowdown and insecurity, because of the global crisis, have also affected the financial system, in terms of increasing the portfolio of problem loans and the fall of lending to economy. The annual credit growth has shrunk considerably, limiting the financing of new investment and consumption. This is not a liquidity issue, because the Albanian banking system still remains liquid and one of the best-capitalized in the region. Loan-to-deposit ratio fluctuates around the level of 65%, significantly lower than the region’s average of 106%, indicating that Albanian banks still have space and liquidity to finance the real economy, but considering the insecurity in the market, due to the global crisis, they are being more careful. It can be easily understood, that the complex economic situations of the two neighboring countries, which are also Albania’s main economic partners, conveys nervousness and insecurity in the Albanian market. Beyond the expected consequences, the global financial crisis revealed several inherent weaknesses of the financial system, not necessarily of banks, but mainly of the environment in which they operate, like: (1) the insecurity related to property titles and the weakness of contract enforcement, which are two key factors in the increase of problem loans, as well as insecurities in the financial system, to which banks responded, by showing greater care and tight loan standards; (2) the complex political situation, especially after 2009, has created a wait-andsee situation in the economy and the financial system, and (3) the high level of informality, especially in the labor market, which makes it difficult to estimate the exact borrowers’ solvency, thus causing the deterioration of the portfolio quality. Crises have always been seen as turning points, and current situation could be seen as a good opportunity for Albania, as it poses a challenge not only to the financial system, but also

by Klodian TOMORRI to the entire economic and social system.

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Interview

CORPORATE BONDS

The latest innovation in the Albanian banking system

Credins Bank is the first Albanian bank to issue corporate bonds, for the first time ever, in the Albanian financial system.

BANKER: - What

are some of the features and technical

aspects of this title?

Mr.Artan SANTO CEO, Credins Bank

BANKER: - Credins Bank has issued for the first time in Albania corporate bonds. What does this instrument mean to the Bank and the Banking System?

Credins Bank issued corporate bonds in late 2011 and the first months of this year, for the first time in Albania. A bond is a long-term debt, and the Bank has the liability to pay the bondholder the nominal value and interest, periodically, on a fixed date. It is a debt title that establishes the right of investors to get back 100% of the invested value, on the maturity date. It is a very important instrument for the bank and the banking system as a whole.

BANKER: - What client group is this financial title intended for, or who are the target holders and the already existing ones? How is this title offered in the Albanian market?

This kind of investment is intended primarily for specific clients of Credins Bank who have liquidity and want to invest money in a safe, long-term and profitable product.

Bonds offer the possibility of investment with very competitive interest rates compared to similar alternatives in the market, and provide a fixed and regular income under the terms of their issue. This title is offered in the Albanian market through private placement.

The offer to underwrite these titles was addressed to trusted clients selected by Credins Bank, offering them a unique and more efficient investment alternative. As mentioned above, the Bank must pay to the bondholders their interest periodically, on a fixed date.

This investment is characterized by a higher interest rate, which is given in the form of a semi-annual coupon, but it must not be forgotten that funds must be deposited for a period of 6 years. Principal payment is made at the end of the period in the form of “bullet payment”.

BANKER: - Why do you consider the offer of this financial title in Albania very important?

This product is as new in the Albanian banking market as it is old in the international financial markets. It is very important for us to meet the requirements of a particular group of customers, providing them with an efficient investment option and collecting stable and long-term funds for the bank which increase and diversify the funding sources, an aspect that is especially important nowdays.

This type of bank financing through selected investors is in full compliance with the current legislation on securities and under the supervision of the Financial Supervisory Authority, which regularly controls the process of issuing bonds and transparency to the client and by the Bank of Albania, which is always informed about this type of financing.

BANKER: - Are there long-term plans about issuing bonds by public offering?

Issuing bonds by public offering is part of our long-term plans. Credins Bank’s goal is to be closer to its customers and investors, strongly supporting them, meeting their needs and requirements through a full range of products, as well as introducing any new products that has already proved to be safe and stable in the international financial markets.

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BANKING SYSTEM

NON-PERFORMING LOANS AND THEIR WRITE-OFF THE CONSEQUENCES IN THE RESULTS AND PERFORMANCE OF THE BANKING SYSTEM

Write-offs could be considered as one of the options available to banks so as to manage the situations of economic constraints, in times of liquidity shortage and need for additional capital

by Eljona HOXHA (KONOMI) Finance Vice-director NBG Bank

I

n recent years, financial systems worldwide, have received a strong blow because of the financial global crisis of 2008, considered by a number of economists, as the worst financial crisis since the Great Depression in the U.S. in the ‘30s. Due to globalization and interconnection of financial markets, its effects were immediate worldwide, resulting in collapse and “disappearance” of several major financial institutions, as well as lack of confidence in the financial system.

Banking transactions in the financial market suffered a temporary freeze.

The intervention of governments and central banks of developed countries was prompt, injecting more capital and facilitating transactions in the money market, thus reducing the basic interest rates. Despite the interventions of governments and central banks, the economic recession that followed was impossible to be avoided by most of the world economies affected by the crisis.

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A question naturally arises: What are the effects of this crisis on our country? At first glance, it seems as if Albania has not been affected by the financial global crisis of recent years, but is it absolutely true that our financial system is immune to global economic and financial crisis? Commercial banks in Albania

Loan write-off is more bureaucratic than the other processes mentioned above, and requires the fulfillment of some basic conditions for its realization.

are universal, so there is no legal restriction to the range of products they can provide. Nevertheless, the diversity of their investments is mainly limited to traditional products.

The modest stage of development of the Albanian financial system and lack of investment activity in complex products of high risk have acted as a protective shield against financial crisis. This lack of investment in derivative products made the initial impact of financial crisis in the Albanian market seem insignificant. In addition, a simple analysis of the structure of loans in the banking system shows that, on average, about 70% of loans granted to businesses and individuals are in foreign currency. From a long-term perspective, borrowing in foreign currency, when the main income of the population is in local currency, leaves room for the solvency of borrowers to fall prey to exchange rate fluctuations. Those who risk more are the individuals who cannot transfer or manage this risk, as businesses could do. Depreciation of the currency resulted in the increase of loan installment, thereby limiting the solvency of borrowers.

The aggravation of the economic situation was reflected in the banking

system’s loan quality deterioration and lending decline. Specifically, non-performing loans increased from 10% of total loans in 2009 to 14% in 2010, 18.8% in 2011 and finally, in the first quarter of 2012 reached 20%. On the other hand, the growth rate of loans in the banking system marks a significant decline. From 2002 this increase varied from 35% - 55%, reaching its highest level in 2005, when growth rate set a record by 74%. In 2009 the growth rate of loans was 11%, in 2010 10%, in 2011 it amounted to 12%, still far from the period before 2008.

What is the ongoing, growing impact of non-performing loans? Loans are defined as nonperforming loans

when the scheduled installments in the loan repayment program (principal + interest) are not paid on time (over 90 days late), or not paid at all.

Consequently, it affects the bank in several ways: (1) non payment of installment in due course exacerbates the liquidity of the bank, (2) the bank does not realize the projected revenues, reducing its profitability and (3) increase in non-performing loans increases fund provisions of the bank balance, leading to increased costs related to provisions in the statement of income and expenditure, further exacerbating the profitability of the bank.

Considering the above, reducing profits or increasing losses, forces banks to increase their capital, with the aim of ensuring the minimum ratio of capital adequacy, which is currently 12%1. Given that one of the phenomena that accompanied the financial crisis was precisely lack of liquidity, provision of additional capital by banks (mother) is a difficult process.

What are the solutions banks can come up with in such a situation? The most common ones in the practice of banks are: (1) the creation of the debt collection department (collection), which follows tactfully the progress of problematic clients in order to anticipate possible deterioration, (2) the restructuring of loans, with a view to adjusting the time limit and the size of the installment to the current changed options of the client; (3) non-performing loans’ write off from its balance sheet. Loans writeoff is more bureaucratic than the other processes mentioned above, and requires the fulfillment of some basic conditions for its realization, such as: (1) the classification of the loan as “lost” and (2) the enforcement and completion of the legal process for returning the loan or executing the collateral. This procedure is being implemented by some banks in the country. In parenthesis, it is worth mentioning that a special role in accelerating the process of collateral execution is played by the expansion of the legislative framework, with the coming into effect of Law No.10, 031, dated 11. 12. 2008, on the establishment and operation of private enforcement.

Loan write-off may be the first step taken by banks to escape the current situation prevailing in this sector.

Loans’ write-off may result in three different scenarios: 1. Under the first scenario, the bank decides to delete the lost loan from its books before executing the collateral. Loans’ write-off on its own would have no positive effect on the bank indicators.

The loan and the provision fund created for it are deleted from the balance, without causing any change in the value of assets. This is because the lost loan, according to the Bank of Albania, is provisioned with 100%, bringing its net value to zero balance from the moment of its classification as “lost” (on balance sheet, the loan has debit surplus, provision of an allowance has credit surplus, so the resultant is zero). However, the deletion of the loan will result in discontinuation in the statement of income and expenditure and the reclassification of the same amount of losses under another item, without affecting the financial outcome. With regard to the above mentioned, this scenario has no effect on the ratio of capial adequacy (regulatory capital / APR). Regulatory capital losses decrease with the increasing

1 For the banks established with Greek capital, the Bank of Albania has requested, for security purposes, that this ratio be 15% from December 2011.

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other hand, it increases the riskweighted assets by the same value. However, the regulatory framework in force leaves room for banks to profit from this process.

Thus, the interests of non-performing loans are accounted only for the first 90 days of the delay. Furthermore, information systems of banks calculate interest until the moment of loan write-off. This difference precisely results in the improvement of capital adequacy ratio. As noted above, capital adequacy is influenced by regulatory capital, which decreases with increasing losses, i.e. decreases with each additional loan provisioning and improves with the increasing of profits; consequently, it increases with the revenue recorded by the execution of the collateral.

When income recorded by the collateral is greater than the cost of provisioning registered in the past, the ratio of capital adequacy is improved.

of the losses or decreasing of the profits (loss / profit loss carried forward + profit / year), whereas the loan is weighted for its net value (loan - provision). According to this scenario, none of the elements of this report changes.

2. Under the second scenario, the bank is able to execute the collateral of the loan, by transferring it to the bank’s asset. In this case, the execution of the collateral and its transfer to bank asset, affects the bank in two ways: (i) asset balance

will increase the value of the collateral to be executed, thus increasing the value of risk-weighted assets (the asset is weighted by 100%), (ii) financial results will improve because of the value of the executed collateral, which is recorded in the income statement as revenue and expenses. At first glance, it appears that the effect on capital adequacy will again be zero, since, on the one hand, the execution of the collateral improves the regulatory capital by the value of the collateral, and on the

3. Under the third scenario, which is the most favorite but also the most difficult to be realized, the bank executes and implements the monetary value of the collateral associated with the lost loan, in one of the auctions organized by the bailiff. In this case, besides the improvement mentioned in the second scenario, there is a reduction in risk-weighted assets, since cash is weighted by 0%, leading to a significant growth of the capital adequacy ratio. Moreover, the return of cash collateral improves the liquidity of the bank.

This scenario, although the most efficient one, is difficult to realize because of the relative lack of liquidity economy is facing today, thus limiting sales transactions.

In conclusion, we could say that, despite the difficulties Albanian economy and particularly the banking system is facing, there can be found solutions which might somehow improve the current situation, encouraging the continuation of the fundamental activities of each sector in the banking system.

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BANKING SYSTEM

Cards Fraud – How do banks fight against this phenomenon...

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n 2004 Albania accounted for only 30 thousand users of banking cards thus being one of the most underdeveloped markets in the region. But after that year, the measures taken against the informal economy and the innovations introduced by the banks brought about an explosive use of cards as payment instruments. Last year the system processed about 11.5 million transactions through cards, estimated at 118 billion leks. This increase is welcomed, because despite its side effects, it is indicative of the formalization of the economy and reduction of cash money. The more the businesses grow the more they are exposed to fraud. Last year the payment system was faced with three attacks, the severest one being that organized by five Bulgarian nationals, finally arrested after a spectacular operation. According to official figures, last year there were recorded over 1415 fraudulent transactions worth a total of approximately 222 thousand euros. Enkelejda Balliu, the chairwoman of the Anti Card Fraud Committee, a special unit set up within the Albanian Association of Banks, says: “The rising trend of card fraud is a matter of concern not only to the banking system, but also to the payment industry. However, as far as the nominal value is concerned, Albania continues to have a lower level of losses caused by card fraud as compared with the European or the average global level”.

Fraud schemes

So far, the most commonly used schemes of fraud have been two. The first is that of copying the magnetic tape containing cards’ confidential data, by putting a copying device in the automated teller machines, so every card used is at risk of being copied. This was the scheme used by the 5 Bulgarian citizens. The second scheme was that of stealing

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information from the cards used in Greece from 2010 until July of 2011, by stealing data from EURONET, one of the largest Greek processors of card transactions.

Risk

According to statistics, Albania is not one of the countries that are highly risked by banking fraud, “but being

a country where card industry is under development, it is considered “enviable” by the pirates of cards,” Balliu says. Pirates of cards generally transfer their activity to developing countries, where institutions are still fragile and tentative, and in most cases they are adequately financed, well organized and educated individuals. The faster technology

Second Forum against fraud The Second National Forum against Fraud in Albania, organized by the Association of Banks and its Anti Card Fraud Committee, was held on May 10, 2012, at the Sheraton Hotel in Tirana. The first Forum of this kind was held on April 15, 2011, in Tirana.

The second Forum was honored by the participation of Mr. Hysni Burgaj, General Director of Albanian State Police, and Mr. Ioannis KOUGIONAS, Vice Chairman of the Albanian Association of Banks.

The forum discussed the key developments in cards industry, not only from the perspective of protection from fraud, but also its pursuit and capture. The key Word of the Forum was the further consolidation of cooperation between banks and law enforcement authorities in Albania, aiming at a steady development of this industry, which is the key to protecting the reputation of business cards, banks and the reputation of our country.

advances to establish protective measures, the faster criminals adapt to it. Banks pay special attention to protection from fraud and their cooperation on this matter is at the highest level. The establishment of the Committee against Fraud is clear evidence of human or financial resources that banks have mobilized to protect payments industry. It has enabled coordination, information collection and its processing at an optimal time, reducing losses and helping the investigation and detection of cases. Balliu explains: “Thanks to this cooperation we have achieved excellent results in identifying cases of fraud and taking preventive measures.”

Measures

Banks have taken a series of measures to combat fraud cases. Most of them have issued new CHIP cards, which are more difficult to compromise. At the same time, the majority of ATMs are equipped with cameras and this process is continuing by applying the most advanced technologies. A good part of the banks have installed nontracing devices and accessories in ATMs, which make it impossible to read the keyboard from the cameras.

“With the initiative of the Committee Against Fraud, banks agreed on applying nationwide the highest standards of security for traders exposed to abuse, transmission or storage of card data. This initiative, the only one in the region, was widely welcomed and appreciated”, Balliu says. The Committee cooperates with a number of strategic partners, primarily with the Visa, which has been its initiator, and with the MasterCard. “We also cooperate with OPDAT, the U.S. Embassy Legal Office in Tirana, which trains and supports the institutions of Albanian Prosecution and Police in the fight against financial crime and corruption,” Chairwoman Balliu continues. The main concern is cooperation with the State Police. In 2011, thanks to close cooperation with the Committee and the banks, police undertook 4 operations and arrested 14 people. “This collaboration is positively evaluated by the experts of the European Commission and the Council of Europe in their meetings with the State Police structures and has served as a good example for the other countries in the region”, Balliu concludes.

AGRIBUSINESS AND THE NEED FOR BANK FINANCING

by Anjeza KELMENDI Head of Agribusiness Sector ProCredit BANK

Banks have modestly served agriculture, since the latter is seen as a challenge which they do not want to undertake because of the high degree of risk to be faced with, although it is a challenge that should definitely be embraced

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gribusiness sector in Albania is under development and very important for our economy, which faces many major challenges and problems. The role of this sector is reflected not only in its percentage (18%) in the gross domestic product, but also in its job creating capacity of about 50% of the population. In recent years, agriculture has been growing in several directions, like vegetable-growing in solar greenhouses, fruit-growing, etc. This is partly attributed to initiatives or incentives for agricultural policies and partly to the encouragement of competition at home and abroad.

The present and future introduce challenges and opportunities for the development of this sector in Albania. Greater opportunities will be provided when Albania obtains the status of EU candidate country which, besides other advantages, will make it possible for the Albanian agribusiness to be supported by substantial funds, which will directly influence economic growth. Even though Albania has not yet obtained this status it is agreed upon allocating it a test fund, IPARD LIKE, estimated at 8.2 million Euros, which will be used to implement a program of measures approved by Brussels. This project is scheduled to begin in July 2012 (when the first call for applications from businesses starts) and ends at the end of 2013.

But these opportunities are associated with challenges for the fulfillment of business profitability criteria. For the businesses to become beneficiaries of these funds, a set of essential adopted conditions must be met, in terms of the

by Klodian TOMORRI

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legal aspect of the business, technical competence, environmental protection standards, food security, etc. Also, the use of EU funds is closely linked to the existence and operation of the banking system in agriculture and livestock, since the main rule of the EU is refunding of the implementation of winning projects of IPARD. Private banking sector is precisely the one that must show efficiency in terms of capital supply in the agricultural sector and enable maximum absorption of the funds allocated by the EU.

Financing agribusiness needs in Albania, challenges and problems

Despite the great need of the agribusiness sector for long term investment and financing, practice shows that this sector is given the lowest percentage of financing from the banking system. Agribusiness takes up only about 1.5% of the loan portfolio, versus 34% taken up by the output, and 25% by trade. This process becomes even more difficult for its/the clients, excluding requirements for mortgage guaranty or standard loan payment ways, which require higher flexibility and technical expertise. Therefore, there is a strong tendency in this sector towards self-financing or informal financing, accompanied by a high level of savings. The banking system is trying to change this perception, and during the last two years it seems to be increasingly focused on this sector, although there is still much need for investment and reorganization. Banks have modestly served agriculture, since the latter is seen as a challenge they do not want to face. ProCredit Bank is the first bank that has significantly supported the sector, irrespective of its difficulties and uncertainty. Currently, ProCredit Bank has financed over 21 thousand customers, with a funding of around 82 million Euros.

The difficulties that ProCredit Bank has faced in commitment to agribusiness lending, just as any other bank, can be summarized in the following aspects: (1) everpresent problematic issues related to assets and their certification as an opportunity of providing security, (2) high informality in the structure

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STRATEGY AND POSITION OF PROCREDIT BANK Thanks to its long term experience with this target group of customers and the specialized staff to serve it, ProCredit Bank has taken the following steps: ● The analysis and creation of financial services to this target group, in view of the cycle and needs of this business. The Bank provides financing for the new businesses (called Start-Up businesses), which are seen as a great opportunity for the Albanian economy, despite being highly exposed to risk. ● A project called “Triangle of Cooperation for Development”. In this chain of relationships the bank aims at the proper functioning of all links, leading to increased efficiency and profitability for the three parties. Under this project, through dissemination of latest technical and economic information as well as information about the market connectivity and orientation of producers to processors, provides a timely distribution and fulfilment of the needs of each business.

as well as the documentation, and (3) a greater need for technical experience and information to farmers and agro processors, to get acquainted with the updates on the latest technology in the field of agribusiness, which leads to increased productivity and business efficiency.

In regard to the needs of the agribusiness sector, they could be briefly summarized into the following: (1) markets security, or guaranteed sale of their products.

Agricultural market insecurity brings about insecurity for agribusinesses, too. Not rarely, as a result of lack of control mechanisms and regulation of this market, the business enterprises have been penalized, creating huge losses because of not having sold their products; (2) development of business insurance sector. Considered as a sector of high risk because of being greatly affected by climatic factors, it is vital that security mechanisms for these

businesses are created, aiming to boost investment initiatives (safer ones) and be a positive factor in reducing the risk banks are faced with in case of agribusiness financing; (3) the existence of contractual relations between agribusinesses.

Communication and flow of business between them is mainly verbal, non-contractual and illegal.

Challenges and opportunities in the agribusiness sector are two sides of the same coin. On the one hand, the challenges agribusiness sector is facing are serious, on the other hand, there must be will and expertise to get the best opportunities out of them and use them for the development of businesses and rural areas where they operate. The Albanian economy needs support and banks, ProCredit Bank being one of them, should continue their support for this important sector of the economy.

BANKING SYSTEM

Global Remittances- Vital part of the economy of developing countries

by Souren Hayriyan President & CEO Unistream Commercial Bank

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oney sent home by migrants constitutes three times the size of international aid and they provide an important lifeline for millions of poor households. With more than 3% of the world’s population (215 million people) living outside their country of birth, remittances contribute to economic growth and to the livelihoods of people worldwide. Moreover, remittance transfers can also promote access to financial services for the sender and recipient, thereby increasing financial and social inclusion. Remittances also foster, in the receiving countries, a further economic dependence on the global economy instead of building sustainable, local economies.

Remittances are playing an increasingly large role in the economies of many countries, contributing to economic growth and to the livelihoods of less prosperous people (though generally not the poorest of the poor). According to World Bank, remittances totalled US$414 billion in 2009, of which US$316 billion went to developing countries that involved 192 million migrant workers. As per the latest update, remittances to de-

veloping countries are estimated to reach US$372 billion in 2011, an increase of 12.1% over 2010. With the exception of Middle East and North Africa, the growth rate of remittances was higher in all regions in 2011 than in 2010. The new estimates show that the top recipients of remittances among developing countries in 2011 were India ($58 billion), followed by China ($57 billion), Mexico ($24 billion), and the Philippines ($23 billion). Other large recipients included Pakistan, Bangladesh, Nigeria, Vietnam, Egypt and Lebanon. For some individual recipient countries, remittances can be as high as a third of their GDP. As remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient, an essential aspect of leveraging remittances to promote economic development. The top recipients in terms of the share of remittances in GDP in 2010 included many smaller economies such as Tajikistan (31%), Lesotho (29%), Moldova (23%), and Samoa (23%).

Nevertheless, the current global economic slowdown, remittance flows are expected to continue growing, with global remittances expected to exceed $593 billion by 2014, of which $441 billion will flow to developing countries.

port) that contributes close to 11% of GDP, therefore the country is one of the key markets for Unistream Bank in the near future. With majority of Albanian Diaspora in Europe, Unistream plans to target Italy, Greece, Germany and UK where the immigrants can use Unistream network to send money back home to Albania.

As a rapidly developing remittance service provider, Unistream with headquarters in Moscow features solid positions particularly in UK, Germany, Greece and Cyprus where the system continues to make fast progress developing its own networks via affiliated companies.

We believe that presently the time has come for Albanian financial institutions to partner with an international remittances operator that offers the business new opportunities in: - widening its range of products by adding the services and thus becoming more and more desirable across the globe.

- significantly increasing its client portfolio.

- working the system that feature convenient, logical and affordable rates, and is very flexible when it comes to discussing the partner share in joint commission.

- significantly increasing level of its international activity and promote their brand internationally.

Opportunity in Albania:

One of the key players in the global remittance arena, UNISTREAM COMMERCIAL BANK (JSC) is exploring all possibilities to have strategic tie-ups with large network banks in Albania to facilitate delivery of remittances sent by Albanian immigrants overseas. The annual inflow of remittance in Albania is close to US$1.2 billion (as per World Bank re-

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EXpert forum

HOW TO READ ALBANIAN BANKS’ FINANCIALS IFRS VS. BOA The differences are mostly found in two directions: content and presentation of the financial statements and accounting policies and principles that mostly affect the financial results

by Arten ZIKAJ CFO UNION Bank

Background

Under Law no 9228, dated 29.04.2004 “On Accounting and Financial Statements”, starting from 1 January 2008, financial entities including banks, have to prepare their financial statements according to International Financial Reporting Standards (IFRS).

Therefore, commercial banks are obliged to prepare and deliver on a yearly basis, the audited IFRS financial statements to both tax authorities and Bank of Albania (BoA).

On the other hand, for statutory purposes, banks are also required to prepare the statutory financial statements in accordance with BoA legal and regulatory framework (specifically, Law No. 9662, dated 18.12.2006: “On Banks in the Republic of Albania” and Decision No. 95, dated 24 12.2008: “On Approval of the Methodology on Reporting and Contents of the Financial Reporting”). It should be noted that, statutory financial statements prepared on basis of such methodology, have to be delivered to BoA only, on yearly basis. In addition, BoA requirements, such as Capital Adequacy, Regulatory Capital and their respective periodic reporting and ratios, as part of the Unified Reporting System (URS), are compiled based on accounting

principles, as per BoA methodology, in addition to specific regulatory requirements related to URS elements.

The existence of any differences and their materiality to a bank’s financial statements depends on the complexity of their transactions and activities.

Therefore, no publication that compares two sets of these accounting standards can include all differences that could rise in this regard. Further below, we will have a closer look on the differences most commonly found in present practice, in two di-

The existence of any differences and their materiality to a bank’s financial statements depends on the complexity of their transactions and activities.

rections: content and presentation of the financial statements and accounting policies and principles that mostly affect the financial results.

Content and presentation of financial statements The contents of the financial statements are similar. Both reporting platforms have four classic financial statements, accompanied by notes to financial statements, however, the key differences are shortly listed below: The terminology used is not exactly the same. While reporting in accordance to IFRS the terminology evolves, in accordance with BoA’s “old” terminology is still in use (e.g. Balance Sheet instead of Statement of Financial Position, Statement of Incomes and Expenses instead of Statement of Comprehensive Incomes, etc.); Income Statement, for statutory purposes, does not include Other Comprehensive Incomes, as recently required under IFRS. For statutory purposes, one may find on the face of Statement of Income and Expenses “Extraordinary income/expenses”, whereas, for IFRS purposes, such concepts no longer exist.

The elements to be disclosed by the financial statements are not exactly the same. This is mainly due to frequency

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of IFRS changes and the respective application of these changes, whilst BoA’s methodology is rather static.

For example, IFRS requires that, Non-Monetary assets held for sale to be presented on the Balance sheet, while BoA reporting presents them under Other Assets; According to IFRS, the Statement of Cash Flows is prepared based on a specific standard, while in case of statutory reporting, there is no specific standard, which may be referred to, etc.

The Statement of Changes in Equity does not seem to be an obligatory statement, as per BoA’s reporting methodology, while i case of IFRS, it is a mandatory statement. However, it is usually presented in the statutory financial statements, too.

In the notes to the financial statements the followings are the very key differences:

The requirements for the description of the Significant Accounting Policies for IFRS standards are quite extensive and under continuous change while for BOA’s ones are more condensed and static.

According to IFRS, the requirements and the disclosures for notes to financial statements are also extensive and under continuous change. As a practice, each concept is treated under a spe-

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cific standard, which covers mainly the definitions, recognition, measurement and the related disclosures. For example, the disclosures related to financial instruments under IFRS, are quite extensive, compared to those of BoA requirements. The same would be for consolidated financial statements, impairment of assets, leases, segment reporting, etc.

Accounting policies and principles when preparing the financial statements

Both statutory and IFRS financial statements are prepared upon principles set under each framework. Consequently, differences arise not only in the presentation, but also in the financial results. The most significant accounting policies and principles that do affect the financial results presented in the financial statements are listed below: Loan Loss Provisions (LLP) Methodology. Under IFRS, a financial asset or a group of financial assets (including loans) is impaired and impairment losses are incurred only if there is objective evidence of impairment, as a result of one or more events that occurred after the initial recognition of the asset, and that loss events (or events) has an impact on the estimated future cash flows for the financial asset or group of the financial assets

that can be reliably estimated. For this, the bank first assesses whether objective evidence of impairment exist individually for financial assets that are individually significant. If yes, the amount of provision is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. If the bank determines that no objective evidence of impairment exist for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Usually, based on historical data for each of these groups a loss factor is calculated, which is then apTable 1 Loan Category Standard Special Mention Substandard Doubtful Lost

Provision rate 1% 5% 20% 50% 100%

plied to estimate impairment loss on each group.

Under BoA requirements, pursuant to the regulation on “Credit risk administration” that is the basis for the calculation of LLP for statutory financial statements, loans are classified into five performing categories, according to customer‘s financial situation, days in arrears, etc. Once each loan is classified under one of the categories given rates of provisions are applied (refer to Table 1) It is to be mentioned the fact that the expected cash flows or the collateral value, unless it is cash, is not considered when calculating LLP, as per BoA regulation.

Because of such difference in the methodologies applied, the provision calculated and charged in the statutory financial statements is different from those calculated and charged upon IFRS ones. In general, given that BoA has a more conservative approach, LLP charge for statutory financial statements would be higher than IFRS charge and, therefore, the statutory profit would be lower, compared to IFRS profit. However, this is a timing difference, because at the moment of repayment, the LLP release would be higher for statutory financial statements than IFRS ones, resulting in a higher statutory profit. With regard to presentation,

according to IFRS, LLP is presented as counterparty of Loans balance in assets side, same as for the three last categories of for BoA requirements.

The LLP for the two first categories are presented in the liabilities side.

Capital revaluation. According to statutory rules and regulations, capital in foreign currency should be accounted for at the exchange rate on the date of the transaction on the face of balance sheet and a “translation reserve” created in equity, which represents the difference between the year-end and historical BoA fixed rate, is used to record the foreign currency share capital (in total equity, that effectively makes the capital be presented at the exchange rate as the balance sheet day). As per IFRS, the equity is considered to be a non-monetary item, and therefore, is kept at historical rate. As adjustment to BoA approach, for IFRS purposes, the “translation reserve” is reversed back in Income Statement and therefore the net profit is affected.

Deferred tax. There is no requirement, under statutory rule and regulation, with regard to calculation and recognition of deferred taxes, while, as per IFRS, in addition to the current tax (that is, the expected tax payable on the taxable income for the year and any adjustment to tax

payable in respect of previous years) the banks should also recognize the deferred taxes (that is determined using tax rates that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled). Because of deferred tax recognition, for IFRS purposes, the tax expense and therefore the net profit is affected.

Depreciation and Amortization.

For statutory purposes, the amortization/depreciation of Intangible/ Tangible assets is calculated on a straight-line basis at some given yearly rates (20-25%). For IFRS purposes, the amortization/depreciation is done based on the estimated useful life of the assets. In addition, IFRS recognizes that, some intangible assets with indefinite useful life, are not depreciated but tested for impairment on a yearly basis. In case that the method used for IFRS purposes would result in different yearly rates (or number of period the asset need to be depreciated) or in identification of intangible assets with indefinite useful life, the depreciation charge in the profit and loss accounts would be different.

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EConomist Corner

BANKING CRISIS – WHY IS SPAIN SUFFERING? The problem lies in the financing and lending model which, by “copying” the Anglo-Saxon financing model, has favoured the commercial interests at the expense of risk management standards, providing more real estate loans and showing no concern about the solvency of their customers.

by Prof.Dr. Adrian CIVICI Director of the Doctoral School European University of Tirana

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ntil 3-4 years ago, Spain was mentioned as “an extraordinary example of success, as an economic miracle”, as a country with economic growth well above the eurozone average, its unemployment level below 5% and the public debt 36% of its GDP. But, beyond these apparently impressive figures, there existed important macroeconomic and financial imbalances. Currently, the banking sector in particular, and Spanish economy in general, are at a dangerous crossroads and troubling crisis not only for Spain but for the whole eurozone. The revelation of the problems of “Bankia”, one of the four largest banks in the country, opened the “Pandora’s box” for the whole Spanish banking system. The Governor of the Bank of Spain stepped down a month prior to completing his term by adding another question mark to the already existing ones. “Bankia” asked the government for help, which initially consisted of 23.5 billion euros in May 2012, and later discounted to 19 billion euros, to recapitalize. But, the ECB reacted to this by stating that it would not allow Spain to use ECB funding to recapitalize the “Bankia”or any other banks in trouble.

The government responded that they could save their banks without the intervention of the ECB. However, for the financial markets that do not support the “quixotic” logic of an only white knight, this was the signal of departure from treasury bonds and other financial securities of the Spanish banks. Interest rates on treasury bonds rose immediately to 6.7%, or 5.15% higher than the interests of German

bonds, thus approaching the dangerous level of 7%, which recently forced Greece, Ireland and Portugal to ask EU for help. The Spanish Minister of Budget, Cristobal MONTORO, considered these higher interest rates the main indicator of “Spain’s limited access to financial markets”. Market pressure became too strong, forcing the government of Prime Minister Rajoy to resort to “EU financial assistance to support his country and save the banking system that is in big trouble”. The most urgent problems are “financing and recapitalization of banks, liquidity issues, and debt service”. The most preferable solution would require that ECB bought the Spanish debt, but it is not getting the expected support from the ECB, which has ceased buying the debts of different member countries of the eurozone.

The main problem lies in the size of the economy, which ranks fourth in the eurozone and represents 12% of its GDP, whereas Ireland, Portugal and Greece taken together represent only 6% of it. However, the rescue plans for these countries have respectively cost 85, 78 and 292 billion euros so far, showing that if it comes to save Madrid, the figures would be much higher. Despite the persisting refusal of Spain to subject to a “rescue plan that would result in losing its budgetary sovereignty”, financial institutions estimate that “in the next three years, there would be needed more than 600 billion euros to save Spain from the devastating effects of the financial markets, an amount that Spain can’t afford, and the eurozone

The most urgent problems are “the financing and recapitalization of banks, liquidity issues and debt service”.

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can not allocate”. Through EMS1, Europe possesses a total of 750 billion euros, but it can not spend over 80% of it only for Spain. The only hope is the strategy of “rescuing the banking system and the direct recapitalization of banks”, estimated at approximately 100 - 150 billion or possibly up to 200 billion euros, that could be provided by EFFS2, already possessing over 450 billion euros, an amount that could recapitalize banks through the issuance of bonds as it did in the case of Greece. For this scenario to be successful, german refusal must be surmounted. In order to avoid the “surrender of financial sovreignty”, Spain seems to prefer the direct recapitalization of banks, without subjecting to the Brussel’s tutelage mechanism over the entire banking sector, while Berlin insists that “neither EFFS nor EMS are authorized to directly capitalize banks”.

Consequently, “passing through a public entity guarantee for the use of European funds is mandatory”. Eurozone seems ready to respond positively to the request of the Spanish government, to provide it with a financial aid of 100 billion euros, reviewable at a second stage, after the results of the audit of the banking sector. So, no coercive plans similar to those of Greece, Portugal or Ireland, are expected to be implemented; the only obligation is the commitment of Madrid to rigorously enforce its requirements for the banking sector. The Spanish government considers the Eurogroup’s readiness as a “victory of euro’s credibility” as a “reward” for the extraordinary measures of Spain for budgetary and structural reforms aiming at stabilizing the situation.

Although Brussels is convinced that Spain is engaged in drastic structural reforms and exceptional budget tightening, financial markets have lost confidence in Rajoy government and “do not make any gifts” when it comes to determining the required figures of banking recapitalization. Everyone seems to 1 European Mechanism of Stability 2 European Fund of Financial Stability

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await the final results of the audit cabinets Deloitte, KPMG, PwC, Ernst & Young, which will determine the real needs of the banking sector, deeply weakened by the exposure to real estate sector, and assess the degree of weakness in bank assets for each group of banks, as well as make predictions for their real needs in the coming months. Experts put the blame on the financing and lending model used by banks, which by “copying” Anglo-Saxon model of finance, favoured commercial interests at the expense of risk

management standards. Banks had given many real estate loans, without being concerned about the solvency of their customers, thus stimulating a “great real estate bubble”, whose explosion in 2008, invalidated many “problematic” billions of euro assets in the balance of the Spanish banks.

A negative impact was also created by the violation of the financial and budgetary discipline on the part of local governments or the Spanish regions, which broke into huge debts by being engaged in pharaonic projects,that added no value to the efficiency of the economy.

It all started 4 years ago, when housing prices began to fall rapidly.

In 2000, Spain’s economic growth relied more on the construction

sector and the period 2000-2008 was described as “the construction boom”. But at the end of this period, prices decreased by 40-55%, while over 700,000 houses were trapped due to inability to sell. Shortly after, there exploded unemployment, at a time when 10-12% of the workforce in Spain, or about 2 million employees, was engaged in the construction sector (twice the European average).

What made the situation worse was the totally inflexible labor market legislation, which became an obstacle to employment adjustment.

Spain’s entry into the eurozone was associated with a drastic reduction in the cost of credit, because it was immediately connected with that of the developed countries of the eurozone such as Germany, France, etc. But, this influx of euro at a cheap price was badly used and spent almost entirely on the construction sector.

In 2007, Spain built 760,000 homes, a figure higher than the analogous one in France, Germany and Italy taken together.

According to banking experts, “Bankia is the tree that hides the forest”, the real problems of Spanish banks such as Santander, BBVA and Caixa, and the Spanish government will have to find 150-200 billion euros to recapitalize them, a figure equal to about 1214% of the GDP of Spain. Faced with these huge figures, the Spanish government is making a gentle tug, stating that “Spain is ready to deliver a portion of its sovereignty, especially in the budgetary field”, on behalf of “a European budgetary authority, which would exercise a centralized control on the finances of the country”.

All this, according to the Spanish prime minister, may be involved in “the reflections of the European Commission on the centralization of bank supervision, deposit guarantee fund and the creation of instruments for direct capitalization of European banks”. The situation became more critical with the addition of another detrimental factor, the interconnection between the savings

Spanish economy seems to have internal reserves, to overcome fears of a potential disaster to her. According to BBVA, a Spanish bank, “since 2008, Spain has improved the level of competitiveness and productivity of its economy much more than the EU countries…

banks and different regions of Spain; the latter urged the banks to finance huge programs on house building.

This “housing fever” forced many of these savings banks to merge; such was the case of “Bankia” which is a group of 7 savings banks. It is estimated that this kind of banks constitute the real problem of the Spanish banking sector, since the other major banks such as BBVA or Santander, despite being exposed to about 180 problematic billion euros of real estate assets out of a total of 340 billion, are in a relatively less dramatic situation, their percentage of bad loans being around 7-8%.

Spanish economy seems to have domestic reserves to overcome the fear of a potential disaster. According to BBVA, a Spanish bank, “since 2008, Spain has improved the level of competitiveness and productivity of its economy much more than the EU countries. Scheduled productivity increased by 8.3% during the years of crisis and exports increased by 9.5%”.

Is this sufficient for Spain to feel safe

from the crisis and to not be afraid of it? The main cause of the increasing poor performance allegations against the Spanish banking sector are the numerous aid plans that Spanish government is making public, which makes investors not believe in their quality. Many experts in the field estimate that “far from being maximally alarmist, the concerns about the Spanish banking sector are far from over. Other bad news appears on the horizon: economy contracting and the shadows of recession are always around, real estate market is still declining, a significant proportion of deposits are flowing from Spain aligning it with the Greek scenario, speculative attacks are increasing, etc.”. There are also concerns about the debt situation of Spanish families and enterprises. According to the Bank of Spain, the debt of Spanish businesses and households has reached 218% of the GDP, and under the pressure of economic recession, their bankruptcy and loan insolvency are dramatically rising.

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SOCIAL CAPITAL

ALPHA BANK

ALPHA BANK organizes the “Alpha Bank Volunteer Day” On May 27, 2012, Alpha Bank organized for the fourth consecutive year “Alpha Bank Volunteer Day”. Last year Alpha Bank employees visited Albania and went to “the House of the elderly” in Tirana where they contributed to fulfilling the most urgent needs of the asylum.

This year, Alpha Bank has helped 100 families in need, in Tirana. Its employees have visited the Social Centre “Stand together” at Kombinati area, and distributed food packages to the families. This event was attended by the Mayor of Tirana, Mr. Lulzim Basha.

Mr. Periklis Drougkas, Director General, stated that social responsibility is very important to Alpha Bank, RA. He said: “In cooperation with the Municipality of Tirana we are informed about its projects, which are consistent with the values, principles and activities of Alpha Bank Group and support them”.

BKT BKT supports Albanian orphans In cooperation with the National Institute for the Integration of Albanian Orphans, BKT supported the activity organized on May 20th, on the occasion of the National Day of Orphans.

The event was attended by the OSCE Ambassador in Tirana, Mr. Eugen Wollfarth. An appeal was made for greater care and attention to orphans and the protection of their rights since they are part of a social category that needs more love and support.

Emporiki BANK

EMPORIKI BANK ALBANIA distributes gifts to orphans on the Children’s Day, June 1 On June 1st, the Children’s Day, Emporiki Bank Albania - Crédit Agricole Group, supported the orphaned children in Tirana and Durres. In cooperation with the Chamber of Commerce and Industry, the bank embraced the initiative of 30 companies which contributed economic aid and distributed gifts to the children of SOS Village in Tirana.

During the day, another event was organized at the premises of the House of Infants in Durres, where representatives of the Bank distributed gifts to all the children of this institution.

These events strengthen the position of Emporiki Bank Albania, part of the Crédit Agricole Group, as being permanently an active supporter of the community, paying specific attention to the social impact of its activities.

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INTESA SAN PAOLO BANK Albanians for one another, social support to orphans and families in need In cooperation with the “Qatar” Foundation in Albania, Intesa Sanpaolo Bank Albania was part of the initiative “Albanians for one another”, which involved a large number of the Bank staff. They collected a significant amount of clothing, footwear, toys and books for the orphans and families in need. These benefits along with a modest amount of money donated by the employees of this branch, were submitted to the “ Qatar” Foundation by Mr. Gramos Osmani, director of the bank branch located in Durresi Street.

The Bank also supported the celebration of June 1 by orphans, organized by “Qatar” Foundation and attended by Mr. Alberto Prestopino, the Retail Director.

International Environment Day, June 5, 2012 Me rastin e ditës ndërkombëtare të mjedisit, në 5 qershor 2012, On the occasion of the International Environment day on June 5th, 2012, under the slogan “Green Economy, is it involving you?” the Bank conducted an awareness campaign intended for its employees and customers, through posters displayed in the premises of the Bank, on the web and awareness messages shown on ATM screens. This initiative joined those of all banks of Intesa Sanpaolo Group, which this year, according to Bloomberg classification, has received the international award as “the Greenest” Bank in Italy and the Third “Greenest” Bank in the World, for its sustainable environmental policies and its investment in renewable energy, in full compliance with the environmental provisions.

NBG

NBG Albania celebrates the first of June with the children Under the slogan “It is never early to invest in your child’s future”, NBG Bank Albania organized a celebratory event on June 1st. The special guests of this activity were the children of Tirana, for whom there had been prepared a show of games and songs. The activity organized in Murat Toptani Street in the capital, was also supported by the Municipality of Tirana.

Ioannis Kougionas, General Director of NBG Albania, expressed his special delight to celebrate the day with the children and promised them continued support.

NBG Albania pays particular attention to children through special programs, such as financial aid to children in need, as well as through products that aim at promoting saving money for the future from an early age.

Credins BANK In the wake of events related to social responsibility and philanthropy, Credins Bank, as a permanent supporter of “SOS”Village, participated in the activity organized on June 26, the day dedicated to the supporters of this institution. It appreciated and supported the young talents of this village; it also participated in the auction organized for selling children’s paintings.

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PrOCrEDIT BANK Children’s education – an investment in the future of the Community On the occasion of Children’s Day, June 1st, numerous activities were organized by every branch of ProCredit Bank. Branch employees welcomed groups of children accompanied by their parents, with games, music, books and gifts. The central figure in these celebrations was the ProKid Squirrel, the symbol of the savings account for children.

Banks are an integral part of the communities where they operate, and the quality of life of the community is important to them. Over the years, these communities have been supported by a series of development policies and programs related to public education, the elderly, orphans and the disabled, such as the programs of “Neighborhood”, etc.

In addition, the South Branch of ProCredit Bank supported an innovative and entertaining activity, called the “The Ice-cream Feast” organized for the children of “Children’s Home”. There was organized a competition with the best paintings part of which were also children with disabilities.

rAIFFEISEN BANK RAIFFEISEN BANK contributes to the transport of the two injured girls to Austria Raiffeisen Bank offered financial support to the health institutions for the transport of the two girls, injured in the tragic accident that happened in Himara in May. Raiffeisen Bank financially contributed to transport them to one of the hospitals in Austria for more specialized medical assisstance.

Mr. Christian Canacaris, CEO of Raiffeisen Bank in Albania said: “I would be very happy to shake hands with them when they return from Austria”.

This contribution was a sign of solidarity with the people, institutions and particularly with the Ministry of Health which made every effort to help these girls.

TIrANA BANK TIRANA BANK participates in the Regional Conference on CSR (Corporate Social Responsibility) On June 5th, 2012 there was held a Conference on the “Development of Social Responsibility - Challenges and practices in the region”, with representatives of business sector, government institutions, civil society and the media from Albania, Macedonia and Montenegro. Tirana Bank was the sole representative of the banking industry in Albania. The presentation made by Mrs. Frida Krifca, Head of Marketing and PR activities, covered the challenges of CSR activities, and brought to the attention of the participants the CSR activities of the Piraeus Bank Group, such as the “Green Banking” initiative for hybrid vehicles, harmless to the environment, which reflect the culture that characterizes the group. Tirana Bank presented some CSR projects, such as support for the education of children, blood donation (an initiative of the Red Cross), and environmental care (encouragement for clean cities).

The conference, the first of this kind, was essential in the framework of presenting the current “beginner” stage of the region and promoting social responsibility in Albania and beyond.

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SOCIETE GENERALE ALBANIA Sponsorship in Shkodra On the occassion of the Day of Europe and social reponsibility, SGAL supported the activity about the promotion of new football talents, organized in Shkodra, on May 9th, 2012. The event was organized in partnership with the Municipality of Shkodra and Albanian Football Federation as well as the support of the Information Centre of the EU in Shkodra. It was attended by about 2000 people, among whom many students, passersby and others.

The first place winner was awarded a price of 50.000 leks by SGAL. Sponsorship in “SOS” Children’sVillage in Tirana.

Societe Generale Albania sponsored the organization of an event in the “SOS” Children’s Village, on June 26th, 2012. On this particular day, “SOS” Children’s Village organized an auction sale of the paintings of the children. They presented their own paintings and commented on them, thus attracting the attention of the participants. SGAL bought three paintings during this activity.

UNION BANK UNION BANK supports Children’s Festival “Feast 2012” of Kukës On the occasion of the 100 Anniversary of the Independence of the Albanian State, Union Bank is supporting various regional cultural and artistic activities. It has lately supported the Children’s Festival “Feast 2012”, organized by the Regional School District of Kukës.

The festival took place from May 31st to June 4th, 2012 in the town of Kukës, with the participation of children and school students.

Union Bank praised the work and commitment of the artists, creators and instrumentalists of the Festival by presenting the winners with prizes.

VENETO BANKA Veneto Bank has supported the Social Centre “Murialdo”, an educational center for young people. “Murialdo” operates in two cities, Durres and Fier. It organizes professional training courses for the acquisition of various professions necessary for the youth of communities, mainly in rural areas. This is an Italian center with extensive experience in almost all the areas of Italy.

Veneto Bank will continue to further support this centre.

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balkannet

Interbalkan news BOSNIA & HERZEGOVINA

Turkey’s Ziraat Bank to provide a €100m credit line to Bosnia and Herzegovina BNE - 17 May 2012 Turkey has agreed to provide a €100m credit line facility to support the development of the Bosnia and Herzegovina economy, through Turkish Ziraat Bank . The facility is being placed through Turkish Ziraat Bank Bosnia and Bosna Bank International, which will each receive €50m.

The funding will be used to fund investments into the agriculture and tourism sectors, to increase employment through SME and micro-lending. The credit line is also intended to support the sustainable return of refugees and internally displaced persons.

Banking sector of Bosnia and Herzegovina strong and stable Balkans.com BUSINESS NEWS CORRESPONDENT - 21 May 2012 Governor of Central Bank of BiH (CBBiH) Kemal Kozaric stated at panel on financial sector within Sarajevo Business forum (SBF) that, banking sector in BiH is healthy and that the local currency is stable. “Banking sector in BiH is strong and healthy and is a good partner to potential investors in BiH’’, Kozaric said. He emphasized that banks must aim at credit liquidity and that adequate recapitalization of banks must be reached in BiH. He also mentioned there are 29 commercial banks in BiH and five of them control 70% of market share.

Almost the entire reduction of the gross external debt was due to the repayments made by financial institutions. By 29 February 2012 banks owed EUR 5.48 billion, while the gross external debt amounted to EUR 35.08 billion. Banks cover their debt as they can not find quality projects to finance in Bulgaria, due to their criteria or due to the unwillingness of physical and juridical persons to draw loans.

Bad Credits in Bulgaria Are Covered with Reserves Standart - 11 May 2012

BULGARIA

Banks continue to repay their foreign debt FOCUS News - 27 April 2012 Bulgarian banks have repaid EUR 105.8 million of their foreign debt in February 2012 and a total of EUR 1.14 billion for the past 12 months, Investor.bg informs.

“The size of the bad credits in Bulgaria should not be a worry of the citizens, because the Bulgarian bank system has enough buffers for protection,” the governor of the Bulgarian National Bank (BNB) Ivan Iskrov stated at a scientific forum on the challenges before economy.

According to the data of the BNB, the bad credits amount to 16%, but according to Mr. Iskrov their size is 10% of all credits if the provisions are removed. The analysis of the BNB show that the economic growth in Bulgaria for 2012 will be about 0.7%, but some corrections through the year are not excluded. The latest forecast of the Ministry of Finance is for a 1.4% economic growth. BNB Governor recommends that long-terms solutions are sought in for the development of Bulgaria’s economy.

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CROATIA

Croatia’s central bank cuts its required reserve ratio for commercial banks to 13.5% BNE - 12 April 2012 Croatia’s central bank cut its required reserve ratio for commercial banks to 13.5% from 15%, the bank said in a statement after a board meeting. The statement said the move was made to free up more than HRK4bn (EUR534m) of liquidity to boost lending to the corporate sector, Reuters reported. The central bank, aims to spur an economic recovery after three years of recession. It is hoping banks will extend new loans particularly to export-oriented firms. The central bank has also asked commercial banks to match the freed amount in new funds available for lending, which should not be an obstacle as liquidity in the banking sector has been strong in recent months.

Bank profits up 12 per cent CROATIAN TIMES - 07 May 2012 The total profits of Croatian banks grew to 3.73 billion kunas (EUR 497.7 billion) in the first quarter of 2011, an 11.9 % increase over the same period last year, daily 24 Sata reports. Bank lending increased 0.8 % at the same time, while total deposits in bank and checking accounts fell by 13.8 %, compared to the end of last year. Savings decreased by 6 %, with time deposits growing 2.6 %. Total deposits dropped 0.5 per cent, according to the reports from the Croatian National Bank (HNB).

Greece handed 18 billion euros to its four biggest banks CNBC - 29 May 2012 Greece handed EUR 18 billion (US$ 22.6 billion) to its four biggest banks, an official said, allowing the stricken lenders to regain access to European Central Bank funding.

The injection via bonds from the European Financial Stability Facility rescue fund will boost the capital base of National Bank, Alpha , Eurobank and Piraeus Bank. “The funds have been disbursed,” an official at the Hellenic Financial Stability Facility, told Reuters. The HFSF was set up to funnel funds from Greece’s bailout programme to recapitalise its banks. The HFSF allocated 6.9 billion euros to National Bank, 1.9 billion to Alpha, 4.2 billion to Eurobank and 5 billion to Piraeus.

KOSOVO

Stronger banking cooperation between Kosovo and Albania 11 June 2012 The Central Bank of Republic of Kosovo (CBK) and Bank of Albania have renewed the Cooperation Agreement between the two institutions, whereby amongst the new areas of cooperation stands that of a joint project on public financial education.

Highly appreciating the cooperation to date, Governor Gërguri and Governor Fullani, expressed their willingness to further deepen cooperation between the two central banks, granted that this cooperation will contribute to the more effective and more efficient realization of the objectives of both institutions.

GREECE MONTENEGRO Credit Agricole to take control of assets in Bulgaria, Romania and Albania from its Greek subsidiary Emporiki Bank

Five Montenegro’s banks record negative results in Q1

BNE - 18 June 2012 French bank Credit Agricole has taken control of assets in Bulgaria, Romania and Albania from its Greek subsidiary Emporiki Bank, the bank said in a statement June 15.

“This intra-group transaction is the last step of a process developed since the beginning of 2009 to reinforce links between Credit Agricole SA and Emporiki Group’s subsidiaries,” Emporiki said, Novinite quoted. “This agreement will also allow Emporiki to further rationalize its corporate structure and reinforce its focused efforts to effectively deal with the current circumstances and challenges.

BNE - 12 June 2012 For the Montenegrin banking sector, Q1 financial results were negative for five banks, positive for six. The Association of Montenegrin Banks noticed hat, the deficit amounted to EUR 6.6 million, compared to a negative financial result from the same period in 2011 of EUR17.5 million. This year’s quarterly results were characterized by positive trends, especially an increase in balance, loans and deposits. “The loan to deposit ratio has improved, while the non-performing assets and loans decreased,” the Association said, adding that both active and passive interest rates saw a slight decrease.

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MACEDONIA

EBRD loans €5 million equivalent in Denars to FYROM’s ProCredit Bank EBRD - 04 April 2012 The EBRD is increasing the availability of financing to private businesses in FYR of Macedonia, with a local currency loan equivalent to EUR 5 million to FYROM’s ProCredit Bank for on-lending to micro, small and medium-sized enterprises (MSMEs). The loan is extended under the EBRD-Italy Local Enterprise Facility and will help FYROM’s ProCredit Bank to diversify its funding base and maintain the access to credit for MSMEs in the current challenging environment.

FYROM’s banking system remains stable Balkans.com - 23 May 2012 FYR of Macedonia’s banking system remained stable, maintaining high solvency and liquidity despite uncertainty of the EU debt crisis. Stress-tests have shown that FYR of Macedonia’s banks would sustain even the worst-case scenarios, concluded the Financial Stability Committee, which reviewed Tuesday latest trends in the country’s banking system. “The FYR Macedonia’s banking system demonstrates exceptional stability.

Capital adequacy has increased by 17.5 percent, whereas the highly liquid assets in the total assets of the banking system has reached 31.5 percent in the first quarter of 2012”, said National Bank of the FYR Macedonia (NBRM) Governor Dimitar Bogov.

ROMANIA

The credit consumer market in Romania was up 10 percent last year BUSINESS REVIEW - 12 April 2012 The credit consumer market in Romania was up 10 % to EUR 469 million last year, representing the volume of new issued credit, according to data from the Financial Companies Association – ALB Romania. Cetelem IFN, the credit consumer firm part of BNP Paribas Personal Finance, estimates the credit consumer market will grow by 5 percent this year. Cetelem is the leading credit consumer firm in Romania reporting a 24 percent increase in credit volume last year.

Romania’s C.Bank eased regulations for the way it provides liquidity to commercial banks BLOOMBERG - 01 June 2012 Romania’s central bank eased regulations for the way it provides liquidity to commercial banks, giving lenders a

chance to tap more money in exchange for state treasuries.

Policy makers raised the number of different state debt issues a bank can use as collateral to get liquidity from the central bank to five from three, including for weekly repurchase operations, according to a document published on the regulator’s website. Some of the 41 banks operating on the Romanian market, mostly owned by western European lenders, started relying more on the funding provided by the central bank as a worsening of the European sovereign-debt crisis trims funding from parents.

SERBIA

Serbia’s banking system one of the region’s more stable Balkans.com - 28 May 2012 The National Bank of Serbia is closely monitoring the situation in the banking and financial system of the country and no trends have been noticed that could be rated as destabilizing, said Governor Dejan Soskic. He pointed out that there is no reason to be nervous and that the local banks are highly capitalized and liquid.

Foreign currency savings of citizens are not only insured by the state up to the level of 50,000 euros per savings deposit, but also a relatively high level of foreign currency mandatory reserves is an additional guarantee of not just liquidity but also of solvency of the banks holding deposits of citizens, explained Soskic.

TURKEY

Citigroup is selling a 10.1 percent stake in Turkey’s Akbank TAS SFGate – 25 May 2012 Citigroup Inc. is selling a 10.1 % stake in Turkey’s Akbank TAS, valued at about $1.27 billion as the third-largest U.S. bank by assets boosts capital. The New York-based bank is placing 404 million shares in Akbank owned by Citigroup Overseas Investment Corp. to investors at 5.20 liras to 5.30 liras apiece, according to Bloomberg.

The Development Bank of Turkey signed a 75 mln euro loan agreement with EIB Balkans Business – 11 May 2012 The Development Bank of Turkey (DBT) signed an EUR 75 million loan agreement with the European Investment Bank (EIB) for the ‘Development of Small and Big Enterprises (DBT Loan for Renewable Energy and Energy Productivity).’ DBT has been cooperating with the EIB since 2002 and has secured 462.5 million euros in loans from the EIB since that date, Hurriyet Daily reports.

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Tech Topics

THE RELEVANCE OF MODELING IN THE BANKING SECTOR Banks change their business model to introduce new processes, or to modify existing ones to survive in a competitive market, to increase client’s satisfaction

by Petraq PAPAJORGJI Lecturer at EUT & Editor-in-chief International Journal of Agricultural & Environmental Information Systems

I

n most of the cases, banks in Albania are provided the software from their mother institutions and therefore they have a French, British or otherwise-made information system.

Initially, this was an unavoidable solution, as our banks did not have any business model or information system that was proper to our conditions.Implementing a foreign model was the only way to start having a functional bank with some acceptable standards. It is true that implementing a foreign information system provides a fast solution at the starting point, but with time, there are a few problems that arise and need to be addressed as soon as possible. In my humble opinion, a bank in Tirana does not function, and it does not have to function, in the same way a bank does in London or New York, Paris etc. Bank products are closely related to the economy of the country and to certain extend, to the mentality of the country, as well.

In this context, I think it is important that our banks start thinking about developing their business model of bank management. This is not to ignore the very valuable foreign expertize, but just to start the

process of combining foreign experience with our specific needs.

A first step in this direction is to have a closer look to the curriculum of courses in our economics and/or finance departments to make sure the right topics are taught to our future banking specialists. It is our understanding that such topics are not yet introduced intothe curriculum of courses taught in our universities. It is necessary to introduce new courses such as Business Modeling, Business Process Modeling, Simulation Modeling and other similar topics. Let’s have a closer look into what these topics are and why are they important to be introduced into the curriculum of our universities.

According to Wikipedia, a business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). Business Modeling is an important tool to capture, design, innovate and transform the business. The business model should not be considered as a separate activity but in close connection with the bank information system. This connection is very important and should be the focus of bank management all the time. The information system and the business model in the banking sector are designed, developed and maintained by different group of people. The business model is designed by a team that includes strategists, economists, forecasters and other people that de-

cide about the nature of the activities a bank should undertake to make a profit. The information system is designed basically by software engineers that take into account professional considerations by accountants, marketing people, etc., to develop the system that records all possible transactions of the bank, according to a well determined business model.

Initially, the business model and the information system are designed to support each other. It is understood that it is the business model that dictates the functions of the information system.

Although these two different and

The business model is designed by a team that includes strategists, economists, forecasters and other people that decide about the nature of the activities a bank should undertake to make a profit. www.aab.al • BANKIERI • 37

…the technology can affect the business model very strongly, meaning that the team that designs and maintains the business model should have a close look to advances in the technology sector.

important parts of the bank have the same starting point, with time they naturally diverge. Banks change their business model to introduce new processes, or to modify existing ones to survive in a competitive market, to increase client’s satisfaction, etc.

It takes time for the information system to make the necessary modifications to adjust to the business model changes. As a result of the “inertia” of the information system, meanwhile, it may happen that there are transactions that are not recorded and “information holes” maybe created. This situation could create serious problems as there are bank operations that could not be accounted for and therefore, bank management may have difficulties to evaluate part of its activities. Thus, there is a need to, not only have a well-studied business model, but also an approach of designing and modifying the bank information system every time there are changes of the business model. It is relevant to note that this approach should be model driven, as the bank business model is the driving force.

The adjustments between the business model and the corresponding information system, is not an issue for the banking sector only, but for all types of enterprises. The software industry has responded to this problem by offering a model-driven

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approach to software development.

The most important initiative in this direction is the Model Driven Architecture (MDA). MDA is a software design approach for the development of software systems. It provides a set of guidelines for the structuring of specifications, which are expressed as models. Model-driven architecture is a kind of domain engineering, and supports model-driven engineering of software systems. It was launched by the Object Management Group (OMG) in 2001. The MDA approach defines system functionality using a platform-independent model (PIM) using the Unified Modeling Language (UML). At a later stage, this PIM is transformed into a platform specific model (PSM) that takes into consideration the specifications of the computing platform. Thus, a PIM could be translated into several PSM; meaning that the same business model expressed in UML could be converted into different computing platforms, considering hardware specifications that can be different in different institutions. In other words, the fact that the bank uses Oracle and/or .NET technology or any other technology for that matter, does not affect the business model at all. In the MDA approach, the code of the system is obtained by the model; every time the model changes the code

should change accordingly;it does not make sense to change the code as the code is the result of the model.

On the other hand, the technology can affect the business model very strongly, meaning that the team that designs and maintains the business model should have a close look to advances in the technology sector.

As an example, the business model in the twenty-first century has to take into account the capabilities of Web 2.0, such as collective intelligence, network effects, user generated content, and the possibility of self-improving systems. Nowadays, it is unconceivable not to provide bank clients with the availability of checking their accounts online, a feature that is not common in our banking system.

Furthermore, because of the common use of the Euro in our market, banks should provide to its clients the ability of checking their different accounts for different currencies.

As a conclusion, banks need to start creating teams of modelers, with the task of understanding and further developing the business model incorporated into the bank information system. Very soon banks may be required to make changes to their information system, as a result of changes happening in their business models.

Financial Auditorium

ECONOMIC CULTURE AND BANKING PRODUCTS IN ALBANIA An overview of banking products and services in Albania, the problems and possibilities of their development

by Arbi Agalliu, PhD Candidate Lecturer, EUT-UE

A

lbanian banking system is new compared to the banking systems of developed countries. This market in Albania has been expanding over the last decade. However, the data indicate that the banking system is developing steadily and positively, showing stability during the crisis period. Bad credit growth is balanced to some extent, by the increase of deposits from emigrants, who have recently trusted the Albanian banks. The difficult economic situation in the neighboring countries, especially in Greece, has positively influenced the movement of monetary capital (necessary liquidity) toward the banking system in Albania. Given that the banking system in Albania is the main financial intermediary, the development of this system should be considered carefully and viewed as a great opportunity for sustainable growth of the entire economy.

The main relationship between the bank and its client (customer) is performed through banking prod-

ucts and services. The more developed and diversified the banking products and services are, the greater the chances that banks increase the number of their customers. Furthermore, the banking system needs to develop those services and products that are consistent with the preferences and financial capabilities of the customer. In developed countries this works perfectly, encouraging banks to increase services and products they offer, thus increasing competition between them. Banks in Albania, especially during the recent years have added several new products and services, but the banking system is still behind if compared to the services and products offered by banks in developed countries. Based on the reports of the Bank of Albania as well as those of the other banks, two of the most used products are bank deposits and loans. The albanian banking system has a significantly limited use of services and products offered and focuses mainly on competition in terms of interbank loans and deposits. Why are the services and products offered by the banking system in Albania in such a situation and why many banking products and services in Albania do not find a “market”? I think the answer to these questions is lack of economic culture by Albanian customers!

In general, Albanian costumers have a modest economic culture and above all a very modest culture related to the use of banking system, for a

couple of reasons. First, the history of Albania has no cases when Albanians had been active users of financial intermediaries, regardless of the forms of mediators. Secondly, the economic opportunities of Albanian customers have generally been limited, as they still are today for the best part.

We have noticed that those who have established a relationship with the banks are mainly people who deal with income generating activities.

Third, the phenomenon of “pyramid” firms has deeply rooted in the minds of the Albanian customers the distrust of money “delivery”, even to a financial institution. These three aspects and others, are the reasons

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Banks in Albania should consider undertaking joint initiatives to create a new spirit, the spirit of economic culture.

why the Albanian customers lack the necessary economic culture of channeling their transactions through the banking system. In addition, we have noticed that the young generation in Albania lacks substantial economic culture, which is problematic if we take into consideration the fact that young people are thought of as potential clients of the banking system in the near future.

A survey conducted in April 2012 with 400 students of the Faculty of Economics at the University of Tirana and some other public universities showed that: 81% had no information about the number of commercial banks in Albania; 24% of the young people surveyed said they did not need the banking system and did not know what products and services banks offer; 74% could mention no more than 3 services or products offered by the banking system, but at the same time, 90% had no information about the cost of these products or services. Only 10% of

students said that their parents used banking system to conduct transactions (minimally bill payment), and only 37 students worked during the school period. About 70% of students surveyed claimed to have gone at least once to a bank window when obliged to pay for their higher studies or to accompany any of their relatives.

Based on the results of this survey, there naturally arises the question: if these young people who study economics in the capital of Albania, where there is the largest number of banks, have no information on the banking system, what would be the expected level of information of young people in other cities of the country where they have no particular connection with the economic field?

Given this lack of information, it is required that banks do more to sensitize the Albanian costumer, especially the younger generations, as they will unavoidably be their clients in the near future. Thus, banks in Albania should consider undertaking joint initiatives, to create a new spirit, the spirit of economic culture. They should hold regular meetings with the customers and inform them, because advertisements are not enough, and there should be exploited other ways or alternative methods to increase the economic culture of the Albanian customer. Despite the costs associated with this venture, it will definitely bring more customers to banks. Banks should not only see their profit maximization as a short term objective, but must coordinate their efforts in order to move ahead toward a secure future, guaranteed only by a population with economic and banking culture. This will bring more customers to banks and provide them with the opportunity to develop and offer more services and new products to maximize their profits.

AAB and IFC support the development of the Energy Efficiency Market Thanks to the successful collaboration of AAB and IFC, now the AAB’s website has improved with a special link, with information and insight for the public regarding the Energy Efficiency (definitions, benefits and advantages, practical rules and possible investments on Energy Efficiency), as well as on the Energy Efficiency Loans (steps to follow, procedures, necessary documentations, costs involved, terms and conditions, etc.)

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AAB

Albanian Association of Banks Building Capacities AAB - TRAININGs April - June 2012 Training Course on Bank Liquidity Risk Management, 16-17 April 2012 AAB organized in cooperation with IFC a two day training course on Bank Liquidity Risk Management on 16-17 April 2012, in Tirana. The training was attended by 30 high level/senior managers at risk departments of 15 member banks and 2 representatives of Bank of Albania and aimed mostly at identifying the main causes and consequences of liquidity risk in the context of overall bank financial and non-financial risks.

Training Course on Customer Care and Negotiation Skills, 17-18 May 2012 AAB organized in May, a two days training course, on “Customer Care and Negotiation Skills”. The training was attended by representatives of 7 member banks and it addressed, particularly topics on how banks’ officers should be equipped with the skills/ techniques required to provide quality customer services and attain sales objectives in an assertive (win-win) customer-needs based selling approach through sound inter-personal communication skills.

Training Course on Bank Analysis, 12 – 14 June 2012 AAB organized in collaboration with BACEE an Intensive Training Course on Bank Analysis which was attended by 13 banks employees of member banks. The training was delivered by Mr. Istvan Lengyel, Chief Analyst, and Secretary General of BACEE and it provided an in-depth view on latest developments in the methodology and practice of bank analysis. A substantial part of the training was dedicated to developments in the banking supervision environment.

Workshop on Financial ratios in bank analysis, 15 June 2012 The Workshop one day Workshop on Use of Financial Ratios in Bank Analysis organized by AAB in collaboration with BACEE and delivered by Mr. Istvan Lengyel, was attended by 15 banks employees from 10 member banks. The workshop was tailored for researchers and analysts in banks who shall have a better knowledge on financial ratios and in their use in bank analysis.

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Training Course on Compensation and Reward Management, 14-15 June 2012 AAB organized in collaboration with the Hay Group a Training Course on Salary Management, Compensation and Benefit Skills. The objectives of the training were to support HR Professionals to analyse, interpret and effectively use salary policies, to understand how an organisation’s strategy is connected to rewards and how the existing salary practice is connected with the desired salary policy.

Workshop on Problem Loans Management, 18 June 2012 AAB in cooperation with the USAID Mission in Tirana – the FSVC Program, organized a one-day practical seminar on problem loan workout techniques for bankers, on 18 June 2012, in Tirana. The program addressed problem loan management issues related to prevention, recognition of potential problem loans and action necessary to remedy these loans. The Seminar was attended by 36 risk managers, portfolio managers and loan officers coming from all member banks.

Training Course on International Financial Reporting Standards (IFRS) – Intermediate Level, 20-22 June 2012 AAB organized a 3 day training course on “IFRS Intermediate Module”. This was a follow up on the training course on “IFRS Introductory Module” that was organised by AAB in February this year, and was attended by 14 employees of 6 banks. The course addressed, particularly, the IFRS which regulate banking activity and are already required to be applied by banks in Albania.

Training on Credit Portfolio Risk Management, 26 – 27 June 2012 AAB in cooperation with the USAID Mission in Tirana and Assist Impact, organized a two days training on Credit Portfolio Risk Management, on 26 and 27 June 2012. The Course was attended by 24 high level / senior managers at the Risk Management Departments from 12 member banks. Its objectives were to help attendants: identify best practices for building and maintaining sound loan portfolios; use concrete mathematical models for realistic stress tests; as well as find and implement solutions related to credit portfolio risk management.

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