Bankieri No. 18 - January 2016

Publication of the Albanian Association of Banks

No. 18, January 2016

Bankieri

AAB 2016

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AAB MEMBERS

Content

Bankieri

Bankieri No.18, January 2016 Publication of the Albanian Association of Banks No. 18, January 2016

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Botim i Shoqatës Shqiptare të Bankave

Editorial Anti - Informality From word of the day to rule of Thumb!

Elvin MEKA Frontline Banks facing informality What is the role to play?

Gideon Van Den BROEK Formalizing the economy A very complex endeavor Arben MALAJ Interview American Bank of Investments A new synergy between the bank and non bank Andi BALLTA

ANTI INFORMALITY Both sides of the story

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Bankieri is the official publication of the Albanian Association of Banks which mainly focuses on the Albanian banking industry. Bankieri provides readers with valuable information on the financial industry's developments in general, and of commercial banks in particular.

ALBANIAN ASSOCIATION OF BANKS Street "Ibrahim Rugova" SKY TOWER, 9/3, Tirana Tel: +355 4 2280371/2 Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

Banking System Trade Finance: Is there any demand in Albania?

Ardita SEKNAJ Banks' profits…in the line of fire!

Ermal NAZIFI Special Financial education: An essential investment Wim MIJS Experts' Forum The Albanian Eurobond: A successful reissue Suela TOTOKOÇI Big Data and the Albanian banking system Alban BURAZERI Electronic payment systems in Albania Increasing efficiency through projects and innovation Irida HUTA, Dritan MOLLANJI Economist Corner Messages and effects of FED decision to raise key interest rate Adrian CIVICI Social Capital Banks' activities Tech Topic Security Operations Center Challenges and Benefits Anila HOXHA Financial Auditorium Loan restructuring Testing the customer before making the decision on loan restructuring Elsa PECA

EDITORIAL TEAM:

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Elvin Meka Editor-in-Chief Eftali Peçi Coordinator Junida Tafaj (Katroshi) Collaborator Andis Rado Photographer Design & Layout: FCB Afirma Printed by: EDITORIAL BOARD: Christian CANACARIS AAB Chairman & CEO of Raiffeisen Bank Albania

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Gazmend KADRIU AAB Vice Chairman & CEO of Union Bank Periklis DROUGKAS AAB Executive Committee Member & CEO of Alpha Bank Albania Seyhan PENCABLIGIL AAB Executive Committee Member & CEO of Banka Kombëtare Tregtare Frédéric BLANC AAB Executive Committee Member & CEO of Societe Generale Albania

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Bozhidar TODOROV AAB Executive Committee Member & CEO of FIBank Albania Endrita XHAFERAJ Secretary General, Albanian Association of Banks Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IKEA) Adrian CIVICI President of European University of Tirana

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AAB Activities

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AAB Trainings

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Spiro BRUMBULLI Chief of Cabinet, Ministry of Finance Enkeleda SHEHI Chairwoman of Albanian Financial Supervision Authority

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Editorial

Anti - informality From word of the day to rule of Thumb!

It should be clear to everyone that the formalization of economy is a system of necessary, but painful and complex, reforms, especially in the frame of Albanian economy and society, but in any case it cannot be reduced and identified as a simply taxmen’s campaign, which produces more tax revenues and tax receipts.

by Prof. Asoc. Dr. Elvin MEKA1 Editor-in-Chef

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uring the last quarter of 2015, the term “anti – informality” turned out to be not only the word-of-the-day, but also the actionof-the-day, by being the epicenter of all debates and discussions, be they professional, social and political ones. Of course, such endeavors and undertakings are assessed, judged and prejudged according to interests of various stakeholders, and this is not an Albanian practice, but a global one. Despite this, the least common multiple of all this government undertaking is the need for a higher degree of formalization of our national economy, whereas the approach for its practical implementation remains an open discussion.

It remains a fact of life that, commercial banks in Albania have been in the front line for supporting any efforts and undertakings, pertaining to formal economic activity and economic and financial formality per se. It must be noted that, banks in Albania had to cope, since the Day One of their activity, with an extreme pragmatism and paradox: increasing and expanding

their loan portfolio, whilst maintaining and preserving lending standards and starting from scratch, towards an emerging, latent capitalist economy and entrepreneurs, without any inherited financial, fiscal and business culture, in the frame of a completely new form of government, for which the former had to pay levies and taxes. In this mosaic of economic, political and social development of the last 25 years, all stakeholders have worked hard to turn informality from a rule to an exception, and here banks have been definitely the key factor and mechanism in such a transition, through their "soft power" of documents’ regularity and by satisfying, at best, the established lending standards.

Obviously, not all battles are won, both by government and by banks, but it is more than certain that the "war" is way long, if not an everlasting one, because it is based upon a simply right principle and the challenge now is to switch from the concept of formalizing the economy as the word-of-the-day to that of the rule of thumb, so having formal businesses and economy, as part of the rule of everyday life and activities.

In this context, no one more than the banks has been long waited for the anti - informality campaign by the Albanian government, but in their role

as cool-minded decision-makers they want to see calm, motivated, informed, highly entrepreneurial clients, with adequate and relevant financial and fiscal knowledge. Banks will continue to provide their valuable and unconditional contribution, not only in this battle, but in the whole “war” for formalization, in their unique role of a partner at arms’ length with government and businesses.

However, it should be clear to everyone that the formalization of economy is a system of necessary, but painful and complex, reforms, especially in the frame of Albanian economy and society, but in any case it cannot be reduced and identified as a simply taxmen’s campaign, which produces more tax revenues and tax receipts. The latter is just one of the battles of such everlasting war, but frankly speaking not the only and the most important one, when placed beside battles against unemployment, poverty, economic and consumption growth, competitiveness of the economy and nation’s welfare, as part of formalizing national economy and its development upon solid and sustainable foundations.

This is a long road and all have to accept that Roma non fuit una die condita (Rome wasn't built in a day)!

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Vice Rector for Academic Process, UET.

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Frontline

Banks facing informality What is the role to play?

by Mr Gideon Van Den BROEK Chief Executive Officer INTERNATIONAL COMMERCIAL BANK (ICB)

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irst of all, I will present the opinion of International Commercial Bank as a financial institution but can’t speak for the other financial institutions active in Albania. As an institution we welcome the efforts taken by the Albanian government to reduce informality in the Albanian economy.

Transparency in daily activities is critical when dealing with financial institutions; this goes not only for businesses but also for individuals. Banks will have a significant role to play in this transition process, but are pieces of the puzzle.

Achieving the targets set in the campaign against informality it will undoubtedly require collaboration amongst all stakeholders.

Addressing informality in the banking sector predominantly focuses on crediting the businesses in Albania.

It is critical for any credit analysis to have a detailed understanding of the financial performance of a company, and the mere fact that banks had to adapt their current credit assessments by analyzing both management and declared accounts, doesn’t justify the

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We should be aware of certain pitfalls, that it is clearly difficult to attain the target of achieving 100 % formality in January 2018, unless business owners are not sufficiently and properly equipped and guided with necessary tools to attain a defined status of formality.

existence of an informal economy. In fact, it reflects that businesses – and I’m generalizing – are unwilling to evolve from the early days of a free market and to accept the mere fact that tax payments, in line with the performance of their businesses, is a citizen’s duty, which ultimately contributes for a better economic position of the whole nation.

It displays the “Albanian sport” of minimizing taxes paid at any moment in time, which probably leads back to the simple fact that business owners are skeptic towards the use of tax-funds by government. Why pay if you’re unclear on what you receive in return of the taxpayments. This is an essential element to address in conjunction with the effort to fight and reduce informality.

Migrating from an informal to a formal economy is a road which deserves to be taken seriously, as it will require a clear roadmap, with specific targets for all stakeholders involved. An alignment between all stakeholders (Tax Directorate, the Albanian Association of Banks, Bank of Albania, the Albanian FIU, other governmental bodies, bu-

siness owners, etc.) is a must, as this is to be addressed as a multi-year program.

On July 2nd, 2015, the Ministry of Economic Development, Tourism, Trade and Entrepreneurship, set the target for banks that, from January 2018 they must solely rely on businesses’ Tax Office declarations, when making their credit assessments, only.

Banks are a vehicle to enforce the use of declared statements, but this will only

Overall, the move to a greater formality will have a positive impact on the health of the economy and the ease of credit to businesses.

Currently, the assessment of a business by applying both management and declared accounts is cumbersome and doesn’t always provide the full picture on the financial stability of the company.

apply to those businesses with actual financing needs. Under the auspices of the Albanian Association of Banks, and in collaboration with Bank of Albania, we can set simple measures determining under what level banks are allowed to accept management account vis-a-vis declared statements.

Currently the benchmark is set at 10 per cent of capital held by a bank, meaning that any loan greater than 10 per cent of the capital will be granted based upon fully declared financials, only. We can build on this, and rather than linking it to the capital levels of any financial institution one could look at the level of formality of the potential customer. On the other hand, to reduce informality by 2018 is a clear target but one can’t just go from 0 per cent to 100 per cent formality overnight. It requires diligent planning and stakeholders should clearly communicate the annual expectations to the businesses.

We need to coach business owners to increase their formality at a predefined pace (it is up to the business owner to move faster), by defining a maximum percentage of acceptance of management accounts, for example starting by January 2016 banks will only take into consideration management accounts up to 50% of declared, January 2017, 25% and by January 2018, 0%!

This practical approach will need to become the market practice (accepted by all banks), to ensure an even playing field. Furthermore, the adoption of these measures by banks can be validated by the Central Bank, in its role as a regulator, during its regular audits of commercial banks in Albania.

While this simple approach will facilitate the acceptance of banks to recognize declared accounts, it will only impact customers with financing needs. Hence, there is need to align all stakeholders to ensure that such measure must have a 100% reach of the businesses. Business owners will require support in dealing with this increase in formality, they will need to be supplied

with tools and skills – especially the small businesses (most likely those recently registered but active in the market for multiple years) will lack the mere capacity to implement proper book-keeping. Education is therefore key to success, which must be combined with simple off-the-shelf accounting tools, in order to provide businesses with proper tools in this regard. Banks can play a coaching role on this matter, when dealing with credit requests from potential customers; yet one need to think of other methods to educate the business owners.

Overall, the move to a greater formality will have a positive impact on the health of the economy and the ease of credit to businesses. Currently, the assessment of a business by applying both management and declared accounts is cumbersome and doesn’t always provide the full picture on the financial stability of the company. The analysis process is therefore fairly lengthy (depending on the loan size) the move to formality will simplify the crediting process and thus reducing the turnaround time for banks and customers.

A very positive spin-off effect of

Migrating from an informal to a formal economy is a road which deserves to be taken seriously, as it will require a clear roadmap, with specific targets for all stakeholders involved. An alignment and coordination between all stakeholders is a must, as this is to be addressed as a multi-year program and conveyed as a unified message and clear roadmap with annual auditable targets.

the fight against informality will be the improved registration of salaries.

Business owners will need to include in their reporting the wages and social security contributions, paid for their staff. It is quintessential to stimulate consumer spending, i.e. consumer lending, it is the ability for the individual to show proof of income. The current situation of salaries being paid in cash, or a hybrid of cash and bank transfer (normally for the minimum income) not only harms the protection of the salaried employee (social security if any not in line with the actual salary levels), but it also hinders them when applying for a consumer credit. Given that banks will only recognize the income generated and routed through bank accounts, as the actual monthly earning power of the individual, even if customer receives additional income in cash, it is not recognized and therefore reduces the eligibility of obtaining any consumer loan. It is a self-fulfilling prophecy, since better declared wages through bank accounts will facilitate consumer lending, which at the end facilitates consumer spending, the impacts positively the economy and the businesses operating within it.

In conclusion, the actions taken against informality, although at their early stages, are essential for the economic development of the country. Yet, we should be aware of certain pitfalls, that it is clearly difficult to attain the target of achieving 100 % formality in January 2018, unless business owners are not sufficiently and properly equipped and guided with necessary tools to attain a defined status of formality. Coordination amongst stakeholders, a unified message and a clear roadmap with annual auditable targets, will facilitate the success. It will fuel not only the business lending activities, but also will further the growth of lending for individuals.

Banks will definitely play a significant part in this process, but success will only be achieved in collaboration with all other stakeholders.

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Frontline

Formalizing the economy A very complex endeavor A series of academic research have argued that, the reduction of informality should be based upon a well-studied strategy, it should be a mid-to-long-term one, should aim at focusing on easing side, should be integral and include as many factors and stakeholders of economic and social developments.

by Prof. Asoc. Dr. Arben MALAJ President INSTITUTE FOR PUBLIC POLICIES AND WELLBEING, IPPM

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here are many references and classifications about what is included in the informal economy. The common ground is that of paying a part portion or all fiscal obligations. Generally, informal money are found in a number of businesses, mostly small and individual ones, whereas the criminal money in an ever smaller number of them. The former pose a tiny threat for democracy, but the latter are a real and a growing threat.

Money from the black economy become even more dirty and threatening, when invested in politics, with the aim of state capturing. The high level of informality in our economy puts its respective reduction as one of the top priority structural reform, for any government. Positive effects are related to better transmitting of monetary, financial and structural policy, toward a large part of the economy.

If we accept that informality in our country is at 33-36%1 of the formal one, this means that more than 1/3 of economic activity is out of reach

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to take advantage of supportive and encouraging economic policies. More than 1/3 have limited access to credit resources of their business; they do not benefit from schemes for the SMEs incentives schemes. If 1/3 of the economy has such obstacles toward development, then the overall economy will grow below its potential, thus

Gradual reduction with a facilitating logic towards the informal economy is a win – win approach for the banking system. This is so, as the formalization, on its first steps, is recommended to be handled through facilitating financing schemes, which requires cooperation between banking system, which provide loans with commercial terms, and government which facilitates trading costs through risksharing schemes.

producing problems with the stability of public finances and economy’s productivity.

Currently, developing the country's economy in new phase will be conditioned significantly in its growth, sustainability and quality of economic growth. The increase of our economy’s competitiveness is conditioned by several significant structural reforms, such as: (i) efficiency of public services, energy, water, transport, lighting which should eliminate subsidies, either directly or indirectly, because they have severely limited state budget resources to finance better education, health, infrastructure, agriculture and tourism; (ii) reduction of subsidy level for unbalanced schemes of health and social security, which are a heavy burden for Albanian taxpayers.

Roughly USD 460 million of tax payers money do not go to increase public investments in sectors that determine the quality of economic development and for a gradual reduction of public debt, instead they subsidize the deficit of social security and health schemes; (iii) the reforms in managing public companies and agencies - their illmanagement causes huge losses to our economy, not only financial ones, but also with poor quality of services and supplies they must guarantee; (iv)

IMF - An Empirical Study of their Impact on Taxpayer Compliance and Administrative Efficiency, May 2015, https://www.imf.org/external/pubs/ft/wp/2015/wp1573.pdf.

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the group of most difficult reforms, but the most necessary ones, such as those which the business environment.

The weak rule of law, lack property freedom, endemic levels of corruption and state capture – continue to put reins on the potential for higher and quality economic growth.

If we refer to some of major indexes which scan various economies in the world, they will help us to clarify the main issues and spot real obstacles and will understand repeated failures, during our difficult transition. Some of these indices include: (1) economic freedom, (2) corruption perception, (3) transition indicator, (4) doing business and paying taxes, and especially (the) global competitiveness index.

But what is the impact such actions cause on the overall business climate and furthermore, what is the impact and consequences of such undertakings, in terms of business applications for bank loans? As cited above, the fight against informality is indispensable and worthwhile. So, the diagnosis phase of the critical situation should be followed by the next step, the therapy, the degree of intervention, necessary means and medical care, before, during and after the intervention/action. The reform would facilitate: (i) clarifying the vision (i.e. a reform or an action); (ii) setting practical and measurable objectives and indicators; (iii) the type of chosen intervention at three levels, legislative - laws and regulations, relevant institutions responsible for reform’s implementation and improvement of relevant authorities’ efficiency; (iv) the pace of action, to achieve sustainable results; (v) the ratio between sticks and carrots – international studies show that the reduction of informality will ask for giving priority to facilitating (carrot), rather than penalizing (stick); (vi) would clarify the time frame for achieving the objectives and practical goals; would provide the monitoring scheme and terms, as well as the time frame for review, e.g. a 5 – 7-year reform needs to be reviewed twice a year and to be updated once a year and finally, would clarify, within the functioning government scheme, and

also within that of non-governmental institutions, who does what and when.

Gradual reduction with a facilitating logic towards the informal economy is a win – win approach for the banking system. This is so, as the formalization, on its first steps, is recommended to be handled through facilitating financing schemes, which requires cooperation between banking system, which provide loans with commercial terms, and government which facilitates trading costs through risk-sharing schemes. Formalization puts into economic circulation the individual wealth, which is meant to facilitate borrowing, by way of stepping into a high degree of activity and profits. In this regard, the Bank of Albania, the Albanian Association of Banks, together with other business associations or potential donors could finance a comprehensive study about causes and size of informal economy, as well as a national strategy of reducing it. Experiences of such studies are found everywhere.

Regarding the threat for banking activity, loan demand and economic growth such actions may pose, should they be ill-studied and not accompanied by other facilitating measures in the economy, we must distinguish between the immediate effect and the sustainable effect. The most important aspect here is the so-called "timing" - the time chosen for launching a reform, an action, or an endeavor.

In this context, the time chosen for

Business and banking associations should promote comprehensive studies, as they should be stakeholders in designing and implementing successful structural reforms in the economy; they need to improve their management and their professional relationship with businesses.

the action against informality was inappropriate. It was proper time to start a reform that eases informality, because the reduction of informality, based on an ease of formalization, could have created new sources of growth, at a time when economic growth is the most difficult objective for any government, especially during current times, when social challenges are really tough. The action against informality created pressure for closure of informal activities; it has caused a temporarily increased unemployment and other social wounds, whereas the formalization through easing would have not created such situation.

Even in case of lending, it seems that "timing" was not considered, since the fight against informality gained momentum in the period when, for many reasons, our commercial banks were under severe restrictions, in terms of new lending. It is not a coincidence that, in the global competitiveness index of 2014-2015, the main obstacle for business was the access to financing sources.2 If we go through a retrospective analysis of results produced by the action against informality, some troubling consequences are easily evidenced, ranging from the serious violation of the principles of proportionality and the rule of law, which means separation, balance and control of powers. The Constitutional Court's decision to freeze the Law On Tax Procedures is an additional argument in this public debate and a positive step in clarifying the constitutional limits, every government faces, in governing its own country.

Repressive measures have fueled uncertainty and, according to Bank of Albania, they have depleted the consumption resources, by displaying even decreasing levels of anticipated economic growth. Such measures prompted mass migrations and increased applications to emigrate.

The reduction of human resources and social capital is the most serious challenge, each country faces, as more countries will face with not easygoing demographic challenges, in the near

World Bank: Shadow Economies All over the World New Estimates for 162 Countries from 1999 to 2007, Policy Research Working Paper 5356, https://openknowledge.worldbank.org/bitstream/handle/10986/3928/WPS5356.pdf?sequence=1

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future. Albania has still better chances to use its demographic dividend, before facing the European plague of demographic deficit and increasing structural unemployment.

Our criticism (www.ippm.al) for the government action against informality, and how the action could have been better oriented and implemented, as well as the potential benefits to all stakeholders, including banks, relied on studies by international financial institutions, which had studied the informal economy in 188 countries, during the period of 1999-2009 and an IMF study on issues with actions of reducing the informality, by imposing the absolute use of cash registers.3 Not only these two studies, but also a series of academic research have argued that, the reduction of informality should be based upon a well-studied strategy, it should be a mid-to-long-term one, should aim at focusing on easing side, should be integral and include as many

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factors and stakeholders of economic and social developments.

Business and banking associations should promote comprehensive studies, as they should be stakeholders in designing and implementing successful structural reforms in the economy; they need to improve their management and their professional relationship with businesses. Banks must not seek and support the legal initiatives, even up to the Civil Code, which affect fundamental principles and vital rights of every individual, in their contractual relationship with banks and other entities, be a public or private one.

If commercial bans’ problems are intended to be solved by limiting or disregarding these rights, then the respective benefits will be limited and temporary. Based on personal study experience and the public mandates, it has come the time for some bankers to realize that there are no healthy banks without a healthy economy.

The economy grows better through structural reforms, which focus on quality of institutions and the rule of law.

Financial intermediaries could handle better the positive restructuring of our country’s economy, by distributing and redistributing savings/deposits and profits toward more productive public and private investments.

Finally, the government must fulfill its obligations in reforms that enhance and guarantee the freedom of property, which reduce the obstacles of corruption and state capture, by eliminating additional costs of critical shortages for business, such as: the access to normal electricity and water supply, physical, legal and commercial infrastructure. The more relieved and improved the business environment is, the less time for red taping and the more time to succeed. The less the cost from barriers to business are, the more sources of funding for growing and modernizing the economy will benefit.

World Bank Doing Business 2016 Measuring Regulatory Quality and Efficiency http://www.doingbusiness.org/data/exploreeconomies/albania/~/media/giawb/ doing%20business/documents/profiles/country/ALB.pdf

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Interview

American Bank of Investments (ABI) A new synergy between the bank and non bank

Mr Andi BALLTA Chief Executive Officer AMERICAN BANK OF INVESTMENTS (ABI)

BANKIERI: What does it mean, for the Albanian banking market, a private equity fund buying a commercial bank?

The Albanian banking system has a long and very positive experience with banks acquired by private equity funds. Undoubtedly, the American Bank of Albania was the first success story of investment funds and the bank which laid the foundation of modern banking in Albania. Furthermore, that bank brought the American spirit of doing business (such as trust and confidence in the banking system, as well as respect for the client), at a time when walking out of economic crisis and restoring trust in financial institutions, following the failure of pyramid schemes in 1997, was more than indispensable for the Albanian market. Another success story is Banka Kombëtare Tregtare, BKT, which has become now the largest bank in Albania. It is no coincidence that BKT has one of the lowest levels of non-performing loans. An investment

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Our first objective is to prepare the bank to operate according to the new shareholders’ strategy, which relies on the existing branch network in all major cities of the country, the advanced information technology systems, qualified and long-experienced bank’s staff and the unique relationship with 'Tranzit Finance".

fund has a very close shareholder – employee – customer relationship.

Employees feel more motivated to serve customers, as they are treated very differently, so there is greater trust and greater responsibility put with employees, by shareholders.

"NCH Capital" expansion in Albania brings a very positive diversification of banking market investors and expands the existing positive experience with investment funds. As a large fund, with a long regional and global experience, and with a time-long knowledge of the Albanian market, "NCH Capital" intends to use the American Bank of Investments, ABI, as a platform for other investments in the Albanian economy. Our country and region is gradually stepping out of a protracted economic crisis, caused by the aftermath of global financial crisis of 2008. The time we are going through has a cyclical similarity with early 2000s, although the reasons causing the crises of 1997 and 2008 are di-fferent. We do expect an positive

economic growth in the coming years and it is worth mentioning that, even EBRD predicts a 3.8% GDP growth in 2016.

BANKIERI: What kind of innovations ABI aims to bring in the Albanian banking market?

ABI aims to be fast and flexible in the banking market, by providing traditional banking services and also some other new services, which will be communicated to the public, during 2016. Our first objective is to prepare the bank to operate according to the new the shareholders’ strategy. This strategy relies on the existing branch network in all major cities of the country, the advanced information technology systems, qualified and long-experienced bank’s staff and the unique relationship with 'Tranzit Finance". ABI is definitely the most liquid bank in the market and creates the highest banking confidence for depositors and greatest opportunities for borrowers.

BANKIERI: What will be ABI’s distinguished feature in this market?

We aim to be more willing and quicker at meeting customers’ needs, which are not so interesting for big banks, as well as providing some additional services that are not currently provided in the Albanian banking market. We will bring back confidence, optimism, rhythm, customer care and respect, which are highly correlated with being "American".

BANKIERI: Why Albania is an attractive market for NCH private equity fund?

Albania has been the center of NCH for Western Balkans and Greece, since 2008, as Albania is a country with the most interesting investment opportunities in the region. It remains a very significant and impressive fact that the Albanian economy has progressed, despite small demographics and historical economic isolation.

Albanians are the most optimistic nation and the least pretending one.

This is a very important competitive advantage, which is often overlooked.

Many of the most advanced labor markets’ features (e.g. New York), are currently noticed in Albania. The regional and global exposure of senior and mid-level professionals brings a permanent improvement of the performance quality, which keeps on growing faster than the claims’ level.

As I mentioned earlier, the economic growth in 2016 will be approximately 4%. During 2015 we experienced a satisfactory economic growth in Albania. The successful Eurobond re-offering in 2015 indicates a high confidence of foreign markets on the Albanian economy. The antiinformality reforms and focusing on important sectors of the economy will produce a lasting positive impact on the banking system and the economy, as a whole. Albania continues to be an interesting and developing market, with clear objectives towards joining the European Union.

The Governor of Bank of Albania, Mr Gent Sejko, officially concedes the license to the American Bank of Investments During the ceremony, held on 4 December 2015, at the premises of National Art Gallery, Mr Gent Sejko, the Governor of Bank of Albania, conceded the banking license to Mr Lorenzo Roncari, Head of Board of Directors and to Mr Ballta, Chief Executive Officer of the American Bank of Investments, after the approval of Credit Agricole Bank’s purchase from the American Bank of Investments, in October 2015. The ceremony was attended by special guests, like: Mr Edi Rama, Prime Minister of Albania, Mr Donald Lu, Ambassador of the United States of America in Albania, Mr Gregory Katz, senior representative of American investors from NCH Capital Inc, Mr Rezzo Schlauch and Mr Mark Crawford and other members of the Board.

During his speech, Mr Edi Rama, Prime Minister of Albania stated: “This investment will be a strong driver of crediting and turns the newly licensed bank into an attractive example for investors, which will further encourage others to follow suit”.

Meanwhile, Mr Ballta, Chief Executive Officer of American Bank of Investments, underlined that ABI aims at becoming a significant factor in the Albanian banking market, with competitive and innovative products and services for customers.

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Banking System

Trade Finance: Is there any demand in Albania?

“Without trade finance, there will be no expansion of trade; without trade, there is no need for trade finance.”

Vincent O’Brien1

Ms Ardita SEKNAJ Secretary General INTERNATIONAL CHAMBER OF COMMERCE – ICC ALBANIA

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oth international trade and the financial sector are important engines of growth in today’s economies. Trade is probably one of the oldest human activities, but its basic function remains unchanged, throughout history. Financial sector is critical to the functioning of the economy as a whole, and banks are central to the financial system.

Albania is part of a globalized world and uncertainty is present at every aspect of the economic and daily developments.

The growing importance of these two sectors in Albanian economy is highlighted by their respective share in output, over the last decades. According to INSAT and Ministry of Finance’s data, the ratio of international trade of goods & services to GDP has risen from about 38 % in 2003 to about 58 %, in 2014. The ratio of financial transactions (including banks & insurance and real estate) to GDP has maintained a sustainable portion through the last five years, at approximately 7%. The International 1

Center for Trade of the World Trade Organization (WTO) recognizes that Albania, despite achieving some of the strongest growth in South Eastern Europe, its trade is still hampered by limited financial access, underdeveloped transport and energy infrastructure, and cumbersome regulatory and business environments. So, stemming from what above mentioned, it is important to note that the well-functioning of the financial system supports the international trade by minimizing and covering its

Trade finance is a complex process, including from 6 to 12 parties in a typical transaction, with different responsibilities, interests and risks, and trying to get all those elements generally in one or two pages of letter, is a very difficult thing.

main risks, such as: exchange rate risk, transportation risk, and political risk.

Financial institutions, acting as intermediaries, play a crucial role in facilitating international trade, by developing instruments to provide the so-called trade finance. Trade finance is recognized as the provision of any

form of financing that enables a trading activity at taking place. Trade finance includes such activities, like: lending, issuing letters of credit, factoring, export credit and insurance. Trade finance is provided by commercial banks, official export credit agencies, multilateral development banks, insurance firms, suppliers, and purchasers in various forms. Direct forms include: loans to finance trade – related purchases, prepayments by buyers, and delayed payment by sellers. Indirect support comes through financial intermediaries’ instruments, in the form of insurance, guarantees, and lending with accounts receivable as collateral. Most of these contracts require some form of collateral.

Trade finance is a process that includes not just the buyer, the seller and the banks, but also insurance companies, freight forwarders, shipping companies, consolidators, inspection companies and government units, involved with each shipment. Thus, financial institutions while assessing the process of a trade finance transaction have to consider multiple factors and parties. The instruments offered for financing trade vary between financial institutions, depending on the perception of the type and size of the risk involved in the transaction; the distribution of risk and risk reduction efforts between exporters,

Member of the ICC Executive Committee & Chair of ICC Banking Commission Market Intelligence Task Force.

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importers and their banks; and the costs of risk reduction.

Banks provide financing through their credit lines for working capital, or other short – term lines, by issuing bank guarantees, letter of credits, and discounting documents, or other related structured trade finance instruments.

Insurance companies, as well, provide insurance against certain risks involved in the trading process. Insurance instruments involve freight and export credit insurance, but also forward contracts (to insure against exchange rate changes). Certain other provisions can insure against non-compliance by the seller and risks arising from government policy changes. Without these financial instruments, international trade would be much more risky and impeded.

As mentioned above, trade finance is a complex process, including from 6 to 12 parties in a typical transaction, with different responsibilities, interests and risks, and trying to get all those elements generally in one or two pages of letter, is a very difficult thing. The factors which have helped all stakeholders talk on common terms and standards are the governing rules of the said documents. The International Chamber of Commerce has been playing a very important role, for more than 80 years, in facilitating international trade and finance by producing international uniform rules and guides to help all related parties perform better. Uniform rules for demand guarantees, uniform rules and practices for documentary credits, uniform rules for documentary collection and to the latest forfaiting rules or payment obligation rules have all served to improve the international trade transactions.

In the Albanian context, trade finance is generally considered as a complimentary business line to corporate, or SME banking. Financial institutions, whether banks or insurance companies, do not have developed strategies or priority lines with special focus on supporting trade, specifically.

Nevertheless, it must be stated that, during the last decade most banks

operating in Albania have dedicated structures and staff within their organization, dealing with trade finance transactions. The reasons behind this might be of different aspects; it might be a cultural background of making business, or due to the fact that the risk perceived by banks to small scale lending is high, because of administering costs, allocation of collaterals and other reasons, might be business and economic environment in the country, trade policies, human resources and many other reasons.

When started drafting this article, one of the objectives was to provide some trade finance data of financial institutions operating in Albania and make a more relevant analysis on the current developments in this field. But, the lack of national data on trade finance

Acording to INSTAT, SMEs make up more than 90% of total businesses, so that it can be clearly stated that trade finance, or loans tied directly to international trade transactions, would make a relevant contribution to development and access to trade finance, which is of particular importance for small and medium – sized enterprises (SMEs) in our country.

remains big constrains that impede an in-depth review of the market. In fact, the lack of data is not solely an issue of Albania, but has been a concern in global level, as well. Historically, the global trade finance market was considered liquid and well-functioning and did not attract much attention from policymakers, accordingly. However, the sector has experienced periods of stress, most notably after the Lehman Brother’s bankruptcy and also in late 2011, when funding strains at European banks raised concerns about possible disruptions. Many international and

industry organizations observing the trends in international trade, economic developments and financial sectors started to conduct surveys in this field, to better understand the different relationships between relevant factors.

Albania is a small developing economy with international trade making a large portion on the domestic production, as reflected in a high ratio of trade-to-GDP, noted above. According to INSTAT, SMEs make up more than 90% of total businesses, so that it can be clearly stated that trade finance, or loans tied directly to international trade transactions, would make a relevant contribution to development and access to trade finance, which is of particular importance for small and medium – sized enterprises (SMEs) in our country. Quantitative information would promote the empirical evidence as a good support for the trade-related strategy development. It is strongly suggested that, industry associations enhance multilateral collaboration with other international organizations, in conducting specific studies on trade finance and providing policy makers and players with a richer background on country’s trade finance potential and further developments.

The 2015 ICC Global Survey on Trade Finance and Register, show an increasing demand for trade risk coverage products, meaning increased business and fee income for trade finance banks. Trade finance is mainly a business for SMEs, but the underlying key message is that there is an increased perception of commercial, bank, and country risks in global trade markets.

Such kind of report adapted to a national level, would become a useful tool allowing policymakers, regulators and financial institutions to identify gaps in the availability of trade finance for local banks and their clients. It is crucial to state that the collaboration to be provided by the information sources, such as businesses, financial institutions and related governmental institutions, is an imperative to accomplish such objectives.

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Banking System

Banks' profits…in the line of fire!1 Should the dominant position be proven, then the Competition Authority must prove the abuse with such position, in the form of unfair prices, which have led to a higher profit margin. This is so, because the high profit margin alone is simply not enough to prove an anticompetitive behavior!

by Attn. Ermal NAZIFI, LLM, PhD2 Legal consultant AGENCY FOR DEVELOPMENT OF INTEGRATED SERVICES, ALBANIA (ADISA)

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he Competition Authority is conducting a general market inquiry for opening a general inquiry procedure in the banking sector. Such inquiry is expected to be completed within the first quarter of 2016. Such investigation is driven by motivation that the banking market displays relatively high profit margins.

Specifically, the Decision no.373, dated 09.16.2015, "For the opening of general inquiry procedure in the banking sector", it is cited, inter alia, that: "During recent years the banking market displays the characteristics of a market with relatively high profit margins, under the conditions of a stagnating credit process; low interest rates on deposits (up to 0.55% on an annual basis below the inflation rate); relatively high spread between loans and deposits’ rates; growing trend of

government papers’ yields, mainly long-term (bonds) ones, in the frame of an accommodative monetary policy and when key interest rate on deposits experiences and downward trend; commissions on domestic payments have been increasing, etc. " What does a general inquiry represent?

General inquiries, in contrast to preliminary and in - depth ones, carried out by the Competition Authority, do not primarily intend at detecting violations of competition and punishment of "culprits" (the international terminology does not use the term "investigation", but instead the term "inquiry", in terms of collecting information).

The main purpose of these inquiries is to improve the market functioning for consumers and competitors themselves, by identifying competition issues in the market. Such general inquiries reveal and analyze these problems, by studying, in particular, the market structure, the nature of competition and, if any, any grounds of restrictions on competition. Such an investigation may produce some results, such as:

a) identifying issues that need to be addressed, in order to improve competition in respective market, or b) noticing that the market may display signs of restriction or distortion

Proving the individual dominant position appears to be extremely difficult, given the changes experienced in the market shares of major banks, with strong competition between them, or other factors that determine such position. On the other hand, proving a collective dominant position is highly problematic, both in theory and in practice.

Such a position cannot be taken for granted by the Competition Authority, as it requires proving the lack of competition and a uniform behavior of companies.

DISCLAIMER! This article provides information about the Law No.9121, dated 28.7.2003, “On Protection of Competition” (updated), with the aim of ensuring a better understanding, but it does not, in any case, represent an exhaustive interpretation of the law and it does not replaces the professional and legal consultancy.

Ex-adviser of Competition Commission at COMPETITION AUTHORITY. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any institution.

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of competition, in the form of anticompetitive practices, leading to the opening of a preliminary and in- depth inquiry.

Eventually, if anti-competitive behavior is therefore evidenced, the responsible subjects may be subject of heavy fines, up to 10% of their annual turnover of previous year.

Do "relatively high profit margins" of Albanian banks constitute any violation of competition?

The Competition Law prescribes two main violations of competition: abuse of dominant position and prohibited agreements. According to this law, all agreements which have as their object or effect the prevention, restriction or distortion of competition, are therefore prohibited.

Given that the banking market is characterized by a fierce competition among banks to get clients from each other, crowded with very serious operators, which understand the consequences of infringing the competition law, I think that the likelihood of prohibited agreements are small, or nonexistent. With regard to abuse of dominant position, the law prohibits any abuse by one or more enterprises. The reasoning behind the decision of opening a general inquiry by the Competition Authority implies that the Authority’s main doubt pricing is the unfair price fixing for banking "products", given the relatively high profit margin.

It should be noted that, in this regard, it is primordial proving that certain market operators have a dominant position, which may be individual, but also a collective one. Proving the individual dominant position appears to be extremely difficult, given the changes experienced in the market shares of major banks, with strong competition between them, or other factors that determine such position. On the other hand, proving a collective dominant position is highly problematic, both in theory and in practice. Such a position cannot be taken for granted by the

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Competition Authority, as it requires proving the lack of competition and a uniform behavior of companies.

Should the dominant position be proven, then the Competition Authority must prove the abuse with such position, in the form of unfair prices, which have led to a higher profit margin. This is so, because the high profit margin alone is simply not enough to prove an anti-competitive behavior! Practically, in case of the banking market, high profit margins may have come for a variety of reasons,

Each bank must have its own effective mechanisms of corporate management, to ensure compliance of their activities with the competition law, as they practically do with ďŹ scal or regulatory legal framework for commercial banks. Also, consulting with experts of the competition right is critical in such cases, as it helps a great deal in avoiding violations of the competition right.

linked to this specific market, such as: the reduction of non-performing loans, the sale of real estates, pledged as collateral, etc. Moreover, the profit growth may have been generated as a result of the need to improve financial indicators of previous years, where non-performing loans reached very high levels, and therefore, the bank loan loss provisions contributed significantly to a reduction of their profits. Also, the cut of key interest rate by the Bank of Albania has contributed in this regard.

Proving whether established prices by an operator are unfair remains also not an easy task and undertaking for any competition authority, particularly in the banking market. The jurisprudence

of the European Court of Justice points out that the high margin between the cost and profit is not enough to determine the price as being unfair.

Only in cases when this profit has been produced due to lack of competition, then we may talk about unfair prices.

What must operators do in these cases?

These general inquiries are beneficial even for market operators themselves (in this case, commercial banks), because they depict a clear panorama of level of competitiveness in the market. In this way, operators need to be cooperative with the Competition Authority, by providing any information it may be requiring. Undoubtedly, the Competition Authority cannot require unnecessary information for the inquiry, or require any information, document, and data, the operator has in possession (the so-called "fishing expeditions"). This may even turn into an abuse of power by the authority.

However, the Competition Authority may request data, which constitutes a trade secret or other confidential data. The operator must clearly define which part of information is a trade secret, or of confidential nature. The Competition Authority may require meetings to discuss about necessary data and information, but this stage of inquiry has nothing to do with proper inspections, where inspectors may enter the premises of the operator, to obtain data and documents, information stored in an electronic way, etc.

However, operators should be duly diligent, in order to prevent anticompetitive behavior, conducted by their staff. Each bank must have its own effective mechanisms of corporate management, to ensure compliance of their activities with the competition law, as they practically do with fiscal or regulatory legal framework for commercial banks. Also, consulting with experts of the competition right is critical in such cases, as it helps a great deal in avoiding violations of the competition right.

Particularly establishing, either directly or indirectly, unfair prices of purchase or sale or other unfair trading conditions.

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Special

Financial education: An essential investment with Mr Wim MIJS

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he banking sector across Europe will celebrate European Money Week for a second time in March.

Mr Wim Mijs, Chief Executive of the European Banking Federation, invites Albania to actively join the initiative and encourages it to develop its own financial education program.

BANKIERI: Why does the banking sector need to invest persistently in financial education?

We can all see that society is changing; with the rise of mobile phones and branded clothing we see that young people are increasingly becoming indebted and at a younger age than previously. That is why we need financial education programs in schools. These are essential. Academic research clearly shows that, if children learn the basic values of money and interest, then they are less likely to become over-indebted at a later age. It is a role for society, not only for governments, but also for the private sector, including banks, and schools to join forces and do financial education. Furthermore, at a later age, as people get older, retirement provisions become more of an issue. People will do their own planning and their own financial planning, investments and saving. So, they need to be able to make informed decisions, and they

Chief Executive EUROPEAN BANKING FEDERATION

need to know what they are talking about. Again, also at that age, financial education is essential. So, it is essential for all of us to continue to invest and I am very happy to see that Albania and the Albanian Banking Association now have a program investing in financial education.

The success of EBF in financial education is not because of what we do as a federation, but comes from the national financial education initiatives of our members, each one active in their own national context.

The EBF is merely a platform for exchanging experiences and to let us all learn from each other.

BANKIERI: What are the most effective mechanisms and techniques used for financial education?

There is no one-size-fits-all approach.

Many countries have proven to be quite

effective with many different approaches.

But if you look at the targeted audience – younger people through schools and older people through other mechanisms – you see that it pays off to work through schools. You see that the teacher is the key, together with the parents. The first step in financial education always goes through the parents, and schools need to be supported. This can be done by creatively developing, together with them, financial education programs that can be used in mathematics, or calculus, or economics lessons. Additionally, it can also be done by organizing a visit by a banker into a classroom, who may explain the basics of interest and savings.

So there are many different approaches possible. Many roads lead to Rome. There are also many well-known established practices, throughout the community of the European Banking Federation. In our groups we share best practices and we look forward to sharing them also with our associates, including Albania.

We cannot decide what works best in your country, but together we can find something that will work also for you.

BANKIERI: What are the main difficulties in the process of financial ed-

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ucation, especially in developing countries?

The first main difficulty is actually that it is sometimes seen as, either a competitive tool between banks, or as a reason to lower consumer protection standards. Both are not true. In financial education everyone has a role, government, as well as the private sector.

There is no competition here; we all have the social responsibility to make it work. Funding and money is another challenge. Of course, the best way to make it work in a country is to start a platform that includes the Central Bank, the Ministry of Finance, the main banks, the Banking Association, maybe also the Ministry of Education. You need a broad platform of public and private parties that come together to develop these tools, and these tools need to be funded.

What you need is a dedicated budget for financial education. One thing, that is very clear, is that the education system usually is strapped for cash. We need to help them develop programs for financial education. Another obstacle that sometimes appears is the mistrust between the public and private sector, as we have seen in some of the countries in the European Union. Again, the only way to overcome this is by starting the work. Start working small, develop a nucleus, and then you will see that every year, your program will grow bigger and will become more interesting for more and more people.

BANKIERI: How can academia help and support financial education?

Most of what we do is based on academic research. It is the only way that will actually deliver measurements that will be the basis for a program that really works well. Very wellknown is the Italian-American professor Annamaria Lussardi, who has done a lot of studies on financial literacy at the Global Financial Literacy Excellence Center in Washington1. These studies have been instrumental in helping us develop a program that works. But it is not only one. Ms. Flore-Anne Messy at the Organization of Economic Cooperation and Development, the OECD2, has collected data on financial literacy and education for many years, 1 2 3

not only in Europe, but throughout the world. On the basis of this data you see the trends, not only in financial literacy; it also shows where you can be effective and you also can see what works well. Measurements are essential not only to develop the projects, but also to demonstrate what works and what not, and to serve as an incentive for developing future programs.

BANKIERI: How can Albania learn from Europe in terms of financial education?

To be honest, it is not about learning; it is about passion. It is about starting somewhere. Albania has shown us that it is interested and that it has a good program. We are there to help. What can help is learning from the best practices and experiences, within the EBF community. You know best what works in your country. You can select and talk to the other countries in our network to see what you can use. I invite Albania to actively join our working group on financial education, so that you can be as close as possible to the exchange of best practices. It always starts with seeing the importance and with the social responsibility of all us. What I hope to achieve with our European Money Week, starting on Monday the 14th of March, is that we can provide inspiration. Inspiration not only for starting something during that week, but for beginning a program that keeps going throughout the year, and that then is repeated again year after year. The success of EBF in financial

The only way to overcome the obstacles in the process of financial education is by starting the work. Start working small, develop a nucleus, and then you will see that every year, your program will grow bigger and will become more interesting for more and more people.

education is not because of what we do as a federation, but comes from the national financial education initiatives of our members, each one active in their own national context. The EBF is merely a platform for exchanging experiences and to let us all learn from each other.

This platform is also open to our associate members, like Albania.

BANKIERI: Does EBF have an outreach program for its associate members?

What we learned from the first European Money Week in 2015 was that there was a great collective power of bringing together all the activities of our members, working and exchanging best practices. Our first European Money Week gave tremendous energy to all involved across Europe and reached far. For 2016 of course we are more ambitious, so in our association meeting in Brussels in December we discussed what we call the “outreach program” for our associate members, where you are fully able to feel and share the energy and this collective power, not only of the members of EBF, but also of the other associate members. We hope that this will not only help you but also that European Money Week this way will reach out far into your country, and to your governments, and to your people.

BANKIERI: What can Albania do during European Money Week?

There is one European Money Week.

Let me reiterate again that you are very much invited to take part. If we can help with materials, with anything else, let us know. We hope that you can make a start. As I said, you don’t have to start big. It usually starts with a nucleus.

Maybe you can do lessons on financial education at just a handful of schools, or a presentation at your Ministry of Finance, or Ministry of Education.

Otherwise, you may organize a seminar at your own association. The small nucleus is where the inspiration starts.

That is what will bring it further. It is a great honor and pleasure to invite Albania to actively participate in European Money Week 20163!

Global Financial Literacy Excellence Centre, Washington DC: http://gflec.org/.

OECD’s International Network for Financial Education: http://www.oecd.org/finance/financial-education/.

European Money Week 2016 will run from Monday 14 March to Friday 18 March. For more information: www.europeanmoneyweek.eu Twitter: @EUMoneyWeek.

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Experts' Forum

The Albanian Eurobond A successful reissue The government issued successfully the new Eurobond with an increased nominal value and a much lower cost, compared to the old one. This auction was considered as successful, also due to the fact that the order book reached EUR 750 million, from which some EUR 450 million were accepted, with a coupon rate of 5.75%, while the Initial Price Thoughts (IPT) was 6%.

by Ms Suela TOTOKOÇI Head of Finance and Capital Market Division INTESA SANPAOLO BANK ALBANIA

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he Albanian Government has successfully closed the process of reissuing the new Eurobond, in November 2015, by raising new funds, which were big enough to cover the matured Eurobond, along with obtaining fresh ones. Considering the weight of the Albanian Eurobond, at approx.

3% of GDP in 2014, its recent reissue was expected to impact significantly government debt portfolio and its respective debt management strategy.

As a result, the Ministry of Finance was engaged, since the beginning of 2015, in contacting and discussing with different international financial intermediaries, from which later would be chosen two Lead Managers: Deutsche Bank and JP Morgan Chase, which would lead the process of issuance of the new Eurobond.

In his way, the government intended

to benefit in general from favorable terms in international financial markets, during the first half of 2015, and more specifically from low interest rates offered in EUR and USD and to potentially reduce the pressure from investors, by issuing the new Eurobond prior to its maturity date.

Apart from issuing the Eurobond in the European financial market, the option to access the American financial markets was also on the table, due to their higher risk appetite, since latest developments in the Eurozone made European investors more conservative and risk averse. On the other side, the pressure on the government relieved significantly, when it received a new loan of EUR 250 million, with 10-year-tomaturity and an interest margin of 1.3% over benchmark rate, from Deutsche Bank, with a guarantee (PBG) of EUR 200 million from World Bank. This long – term loan, with very favorable terms, helped the government assess present market conditions and served as a benchmark for the reissue Eurobond, even that both risk and tenor were different for these two instruments.

In June 2015, despite its commitment and the fact that the roadshow start was imminent, changes in European financial markets, due to the crisis

The pressure on the government relieved significantly, when it received a new loan of EUR 250 million, with 10-year-to-maturity and an interest margin of 1.3% over benchmark rate, from Deutsche Bank, with a guarantee (PBG) of EUR 200 million from World Bank.

This long – term loan, with very favorable terms, helped the government assess present market conditions and served as a benchmark for the reissue Eurobond, even that both risk and tenor were different for these two instruments.

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unfolding in Greece, forced the Albanian government to postpone the issue of the new Eurobond. Nevertheless, this didn’t cause any problem for the government, since the maturity of the existing Eurobond was in November and it didn’t have urgent needs for liquidity, thanks to the new loan with Deutsche Bank and the successful domestic borrowing.

The approaching of the maturity date resumed the attention of investors on the issue of the new Eurobond, while market players were aware that government had sufficient liquidity to repay the existing Eurobond with no need to reissue it.

As a result, the government was in a very comfortable position to issue the Eurobond, at very favorable market terms. This is what typically happened on 5 November 2015, one day after full repayment of the existing Eurobond, according to its terms.

The government issued successfully the new Eurobond with an increased nominal value and a much lower cost, compared to the old one. This auction was considered as successful, also due to the fact that the order book reached EUR 750 million, from which some EUR 450 million were accepted, with a coupon rate of 5.75%, while the Initial Price Thoughts (IPT) was 6%.

To assess whether the coupon rate of 5.75% was the best the market could offer for such a security, we need to make a comparison of issue spread 592.4bp, over the benchmark for the new Albanian Eurobond with the benchmark spread of a Montenegrin government Eurobond maturing in 2019 of 471.02bp. If we consider the better ranking of Montenegro (B+) and shorter remaining maturity (4 years), we think the Albanian Eurobond got a fair market price, despite the fact that it was issued during high volatility in European markets for countries such as Albania.

This was further confirmed when Macedonian government issued a 5-year Eurobond on 1 December 2015, with a coupon rate of 4.875%, and a nominal amount of EUR 270 million. Considering

a better ranking by S&P for Macedonia (BB-), compared to Albania (B) and the smaller issue value, we believe the Albanian government has obtained very good terms the international market could offer to lower-rated countries, such as Albania.

Another factor impacting these favorable terms is the fact that Albania has been assessed from rating agencies with Stable Outlook (Moody’s) and

Thanks to the latest changes in the Bank of Albania’s Regulation: "On the Risk Management from Large Exposures of Banks", where the percentage of the asset risk weighting for the Albanian government securities, issued in foreign currency, decreased from 100% to 50%, Albanian banks could double their original portfolio in foreign currency. Furthermore, such instrument was considered very lucrative for Albanian banks, as it paid a coupon of 5.75% for EUR, at a time when money market rates were into negative territory and bond yields at their historic low.

Positive Outlook (S&P), partially also thanks to the reforms undertaken during the last couple of years and bilateral agreements with IMF and World Bank.

Albanian banks had in their portfolios the Eurobond maturing in November 2015 and were interested in rolling it over. Since it paid a coupon of 5.75% for EUR at a time when money market rates were into negative territory and bond yields at their historic low, this instrument was considered very lucrative for Albanian banks. Furthermore, thanks to the latest changes in the Bank of Albania’s Regulation: "On the Risk Management from Large Exposures of Banks", where the percentage of the asset risk weighting for the Albanian government securities, issued in foreign currency, decreased from 100% to 50%, Albanian banks could double their original portfolio in foreign currency.

Albanian banks are heavily exposed to Albanian government securities in local currency. This exposure is not subject to limits from Bank of Albania regulations, being weighted with zero risk factor. Meanwhile, as stated above, the Albanian government securities in foreign currency have a risk weighting factor of 50%, thus being riskier than securities in LEK. Despite all this, for as long as this exposure is closely monitored, it is not believed that it will pose any high risk for Albanian banks.

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Experts' Forum

Big Data and the Albanian banking system A challenge faced by banks in Albania, when dealing with big data, is the inappropriate organizational structure.

There is a lack of concerted efforts to aggregate analytics bank-wide and bring the knowledge-based decision making to the next level.

by Mr Alban BURAZERI Operations and IT Business Unit Manager ALPHA BANK ALBANIA

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he term “big data” is relatively new and like any other new term we may find various definitions.

In open sources big data is defined as data sets so large or complex, structured or unstructured, that traditional data processing applications are deemed as inadequate to process them. While the term “big data” is relatively new, the act of gathering and storing large amounts of information for eventual analysis is ages old. The concept gained momentum in the early 2000s, when leading industry analysts articulated the now-mainstream definition of big data as the three Vs: Volume - Organizations collect data from a variety of sources, including business transactions, social media and information from sensor or machine-tomachine data.

Velocity - Data streams in at an unprecedented speed and must be dealt with in a timely manner.

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Variety - Data comes in all types of formats, from structured, numeric data in traditional databases to unstructured text documents, email, video, audio, stock ticker data and financial transactions.

Nowadays, is common to consider two additional dimensions when it comes to big data: Variability - In addition to the increasing velocities and varieties of data, data flows can be highly inconsistent with periodic peaks.

Complexity - Today's data come from multiple sources, which make it difficult to link, match, cleanse and transform data across systems.

The sources for big data generally fall into one of three categories: Streaming data - This category includes data that reaches IT systems from a web of connected devices. We can analyze this data as it arrives and make decisions on what data to keep, what not to keep and what requires further analysis.

Social media data - The data on social interactions is an increasingly attractive set of information, particularly for marketing, sales and support functions.

It's often in unstructured or semi

structured forms, so it poses a unique challenge when it comes to consumption and analysis.

Publicly available sources - Massive amounts of data are available through open data sources, like the European Union Open Data Portal.

After identifying all the potential sources for data, we have to consider the decisions needed to make, once beginning harnessing information. These include: How to store and manage it Whereas storage would have been a problem several years ago, there are now low-cost options for storing data if that’s the best strategy for our business.

How much of it to analyze - Some organizations don't exclude any data from their analyses, which is possible with today’s high-performance technologies, such as: grid computing, or in-memory analytics. Another approach is to determine upfront which data is relevant before analyzing it.

How to use any insights we uncover - The more knowledge we have, the more confident we will be in making business decisions. It is smart to have a strategy in place, once we have an abundance of information at hand.

The final step in making big data work for the business is to research the technologies that help us make the most of big data and big data analytics. We should consider: r $IFBQ BCVOEBOU TUPSBHF r 'BTUFS QSPDFTTPST r "GGPSEBCMF PQFO TPVSDF EJTUSJCVUFE big data platforms, r 1BSBMMFM QSPDFTTJOH DMVTUFSJOH .11 virtualization, large grid environments, high connectivity and high throughputs, r $MPVE DPNQVUJOH BOE PUIFS áFYJCMF resource allocation arrangements.

The minority of the banks have hands-on experience with live big data implementations, while the majority of banks are still focusing on pilots and experiments.

Big data affects organizations across practically every industry including here: banking, education, government, healthcare, manufacturing, retail, etc.

How banking can benefit from this onslaught of information? With large amounts of information streaming in from countless sources, banks are faced with finding new and innovative ways to manage big data. While it is important to understand customers and boost their satisfaction, it is equally important to minimize risk and fraud, while maintaining regulatory compliance. The importance of big data doesn’t revolve around how much data you have, but what we do with it. We can take data from any source and analyze it to find answers that enable: 1) cost reductions, 2) time reductions, 3) new product development and optimized offerings, and 4) smart decision making.

When we combine big data with highpowered analytics, we can accomplish business-related tasks such as: r %FUFSNJOJOH SPPU DBVTFT PG GBJMVSFT issues and incidents in near-real time. r (FOFSBUJOH DVTUPNFST PGGFST BU UIF

point of sale based on the customer’s profile. r 3FDBMDVMBUJOH FOUJSF SJTL QPSUGPMJPT in minutes. r %FUFDUJOH GSBVEVMFOU CFIBWJPS before it affects our organization.

Worldwide studies show that financial institutions believe that big data analytics offers a significant competitive advantage and additionally, they believe that successful big data initiatives will determine the winners of the future.

However, knowledge of the impact of big data has not translated to on-theground investments. Still, the minority of the banks have hands-on experience with live big data implementations, while the majority of banks are still focusing on pilots and experiments. Why are banks unable to exploit big data? Researches show that “organizational silos” are the biggest barrier to success in big data.

Dearth of analytics talent, high cost of data management, and a lack of strategic focus on big data are also major stumbling blocks. Finally, privacy concerns – which are high on many bank executives’ agendas – are also a significant issue.

How can banks realize greater value from big data? There are two broad areas: 1. Customer analytics including here pricing, marketing analytics, sales analytics, and channel analytics.

2. Risk management consisting of financial reporting and fraud analytics.

Customer data analytics is a relatively low priority area for banks. Most banks have not focused significant energy on using analytics to enhance customer experience. Surveys indicate that risk management has been a high-priority focus area for most banks, mainly to comply with regulatory requirements, while customer analytics has largely been neglected. How can banks realize greater value from customer data? Banks can maximize the value of their customer data by leveraging big data analytics across the three key areas of customer retention, market share growth and increasing share of wallet: (1) Acquire customers by improving credit risk estimation and maximizing lead generation potential,

(2) Retain customers by limiting customer attrition and improve customer satisfaction, (3) Grow share of wallet by driving efficiency of marketing programs and increasing sales through predictive analysis.

Big data initiatives are typically time and resource-intensive. To pave the way for a smooth implementation, banks should follow a three-step approach that begins with an assessment of existing analytics capabilities and is followed by the launch of pilot projects, which are subsequently expanded into full-scale organization-wide programs.

Alpha Bank Albania, is making use of big data in two main areas: customer relationship management (CRM) and fraud detection. The CRM project has been successfully piloted and now is being deployed full scale. The fraud detection project, which may be seen also as forensic analytics in general, is in a more advanced stage and currently is being enhanced and fine-tuned.

What makes it more challenging in Albania when it comes to big data is the lack of public available sources. On top of that we have to add the lack of a periodic, formal, and organized exchange of information between the participants of the banking industry. Hopefully, such gap will be bridged in the near future, otherwise the efforts of the individual banks will remain isolated, their relevant know-how won’t be shared, the adequacy levels of the applied customization and personalization on imported (from their Groups or off-the-shelf) solutions will be low, and somebody might end up of investing heavily, by employing precious financial and human resources, to simply reinvent the wheel.

Another challenge the banks in Albania are facing is the inappropriate organizational structure to deal with big data. Data analytics as a function is commonly seen as part of MIS, part of risk management, and part of business.

There is a lack of concerted efforts to aggregate analytics bank-wide and bring the knowledge-based decision making to the next level.

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Experts' Forum

T

he Albanian market of electronic payments and products (cards, ATM, etc.) commenced during 2002-2003 by a few banks, through proprietary cards, used within a small ATM network. The development of this market experienced an explosive growth during the past decade, especially during the years 2005 - 2006. State institutions, including Bank of Albania, have always appreciated the contribution of technology and innovation in financial services, as a support to achieve their strategic objectives, such as: financial inclusion of the public and cash reduction in the economy. Basically, such objectives serve not only at ensuring proper transmission of monetary policy, but also at maintaining the financial stability. International experience has shown that the use of innovations in banking and financial system contributes to the reduction of social costs in the economy, approximately by 1 - 2% of GDP. This figure, in case of Albania, may be even higher, because the use of cash in the economy remains at relatively high levels.

Compared with other countries in the region, the growth of cards usage displays a satisfactory trend, considering the active population in Albania, which is reported to be around 1.1 million, with an internal market which accounts for 900,000 cards, issued by the banking system, thus having a specific ratio of 82% of cards issued per active population. Given this, it can be said that there are a number of segments and opportunities, which may spur a positive momentum to such business. There are still some areas to improve and narrow the gap between the Albanian market and developed countries’ markets, including those in the region. Moreover, the reduction of cash in the economy through specific projects managed and coordinated by government or local

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Ms Irida HUTA

Mr Dritan MOLLANJI

Business Development Manager PAYLINK

Chief Technology Officer PAYLINK

Electronic payment systems in Albania Increasing efficiency through projects and innovation Local operators of electronic payment schemes aim at focus at supporting banking and financial system, in terms of providing modern, innovative, low cost and high efficiency services.

authorities, remains a challenge for the banking system and the government, as well.

PayLink and projects for electronic payments PayLink, which is operational in the Albanian electronic payment system for some years, aims to provide solutions and payment facilities in Albania, given that a substantial part of them are executed outside the banking system.

The payment solutions provided by this company in Albania play an important role in approaching the regional countries’ standards, which have an advanced level in this regard, by channeling these projects through banking/financial system and targeting a potential group of customers, of more than 600,000 cardholders. Specifically, PayLink undertook the initiative to propose and deliver the technical

The growth of the number of cards - The market

solution and support for two projects, as part of the government program, to serve and to meet their obligations towards citizens, such as: the pensions’ project, in the framework of pension reform, and the transport project for Tirana Municipality.

Pensions’ Project Pension card is a product offered to the Albanian market for a certain segment of customers: qualified retirees/ pensioners, according to the guidelines of the Social Security Institute (SSI).

The primary purpose is to create opportunities for pensions’ reform to fit into required frames, by channeling this process through the banking system, educating the local market, as well as formalizing the process. This project will offer the possibility of withdrawing pension amounts, through a bank card with a financial function. This process will be governed by SSI, in cooperation with commercial banks, as the main stakeholders in the process, by enabling technical and operational solutions, through PayLink. This project provides a number of benefits for all stakeholders, such as: Pensioners: Providing pension delivery in optimal conditions, with no waiting rows, assuring easy access to pension fund, at any time (24/7/365) and a wide use of it for different purposes, such as: payment for urban transport, invoices, price discounts, or various benefits from merchants nationwide.

SSI: Providing citizens with a dedicated and contemporary service, reducing the operational costs and increasing service efficiency, by having the ability and comfort of an immediate or online reconciliation, controlling the actions and high security authentication of transactions, through advanced technology systems.

Banks: They will have the opportunity of increasing profitability through the introduction of a new product and market segment, as well as more opportunities for cross - selling, use of low-cost operations and products, with a potential of 500,000 customers.

Urban Transport Project for Tirana Municipality Current transport process is entirely manual and ill-controlled. What PayLink intends to provide consist in a longterm and low cost automated technical solution, efficiency in services provided and profitability, either for issuers (banks), or their holders. The solution is intended to enable the use of transport cards in current banking infrastructure, such as: POS and ATMs, by offering citizens the facility of card use in the transport system.

It should be noted that, in a large part of European countries and beyond, these products are combined with other services, provided by respective municipalities, which allow access to extensive use of cards payments’, wherever banks have placed equipment

for card payments. They are named as city card, especially those which include the "Contactless" functionality, used in case of low value and immediate payments.

In conclusion, it is worth mentioning that Albania, as well as other countries in the region and beyond, has a great potential in terms of developing and channeling the market through electronic payments in all areas, ensuring mutual benefits for all participants and stakeholders, associated with these schemes. It is believed that now is the right time that automation and formalization of processes related to consumer services, be fully implemented in Albania.

PayLink remains at disposal of the banking/financial system to support any initiatives or proposals in this regard.

PayLink in Albania The Albanian Paylink Processing Center is established as a joint-stock company in September 2012 and is licensed by the Bank of Albania on 4 October 2013 as the National Operator of Card payments, starting operations in 2014. This new entity in the Albanian market aims to initiate, develop and maintain electronic payments in the provided platform, creating a complete and genuine system in providing such products and services in the domestic market. This is achieved based on the support provided by advanced technology and systems, powered by qualified personnel.

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Economist Corner

Messages and effects of FED decision to raise key interest rate Monetary policy experts and central bankers think that we are not dealing with a simple decision that may be limited within US, instead it is a decision expected to produce international effects, causing turbulences in many countries

by Prof. Dr. Adrian CIVICI President EUROPEAN UNIVERSITY OF TIRANA, UET

T

he recent unanimous decision, dated 18 December 2015, by FED’s FOMC Committee to increase the key interest rate for the US dollar with 25 points, thus moving from 0 – 0,25% range to 0,25 – 0,50% confirmed, in a symbolic way, that the global financial crisis, which broke out in 2008, may be considered as over. Unlike many predictions of doubts, such increase of key interest rate after a 10-year period, the first increase since 2006, did not provoke any panic on stock exchanges and other financial markets. In 2008 it was described as the "FED experiment: an accommodative monetary policy with a minimum dollar cost, close to zero".

Many other central banks around the world followed suit. The entire world, almost unanimously, thought that it was the right response to the

global financial crisis. This cycle was interrupted on 18 December, by FED decision on the change in the stance of monetary policy, towards interest rate hike.

Analysts and experts of financial markets assess that key messages and "lectures" drawn from such a decision can be synthesized as follows: First, the communication manners by central banks represent a very efficient instrument, to channel expectations and decision of different investors. Following the surprising abandonment of NBS (Swiss National Bank) in January 2015 of its longstanding Swiss franc cap against the euro, fixed in 2011 in at EUR 1 = SFR 1.20, in order "to break away from solidarity with Euro, on building fears of a continuous euro devaluation, which could adversely affect the SFR sustainability and its respective exchange rate with US dollar"; following FED’s lost opportunity to raise dollar interest rate since September 2015, and its preference to preserve the status quo, based upon the reasoning that: " the US economy is yet at appropriate levels of economic

growth and employment"; especially after the uncertainties of financial markets caused by recent ECB stance, in the frame of its policy of "monetary easing”; decisions by major central banks came in the spotlight, in terms of impacting the direction pursued

Seen in a broader perspective, in relation to recent decisions by central banks in Japan, Europe, UK, Russia, China, etc., it is admitted that all are being convinced about the fact that the era of “cheap money” is ending, where emerging economies are threatened by instability, as a result of the risk of investment and investors departure towards the US dollar and US.

by financial markets, exchange rates and stock exchanges. The lack of panic and tensions in these markets, after the FED decision, shows how important the faith of investors and

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their monetary and financial strategies is, on the message and attitudes of central banks.

Second, the clear and convincing content and explanation of FED decision’s communiqué to the public appeared as an important guaranteeing element, in confirming the fact that the process of interest rate normalization will be gradual and progressive. Basically, it evidenced the consensus with the wish and expectations of money and financial markets that other increases of key interest rate will follow, till the end of 2016, until it reached the 1% level. The practical implementation of such scenario is translated within banking and financial environment as an opportunity that "lending conditions will continue to remain accommodative", which would create the possibility to avoid the burst of speculative bubbles, which may have been formed in several segments of financial markets, since the launch of the quantitative easing program, back in December 2008. With this move FED wants to avoid price fluctuations of corporate bonds in the energy and mining sectors, which are especially sensitive to such movements.

Thirdly, the new path of key interest rate for US dollar is expected to cause, during the following months, a series of adjustments in monetary policies of many countries, particularly those pertaining to the group of emerging economies, such as: China, Russia, Brazil, India, Turkey, Mexico, etc.

Many central banks of these countries have stated that, "in response to the recent FED decision, they are ready to pay in the same coin", thus starting a spiral of increasing key interest rates of their currencies, in order to prevent capital outflows and devaluation of their own national currencies, although some of them are faced with the dilemma whether to follow the path of FED, or otherwise accept the devaluation of their currencies, for the sake of stimulating economic activity and exports. Although FED decision

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cannot be equated with the effect of a new monetary paradigm for the world economy, yet it proves that global economy and finance are entering a new post-crisis economic cycle.

Questions which dominate the banking environment after this “expected” FED decision are: why now... what are its main goals and objectives...what are the expected

A general conclusion, which seems to form a consensus, is that "such move must be conceived as a serious signal that the global financial crisis of 2008 seems to be over, the serious risks which threatened international financial and money markets have been significantly reduced, and the fact that FED did not take this decision in October, when it seemed to be more than reasonable and expected by all, shows that the concerns regarding the Chinese economy and currency are overcome.

effects on other economies and currencies, be they large, developed, small, or poor countries...what would be the expected reactions from other major central banks, etc.? The first general reaction in international banking and financial communities was like: "... finally they decided, after a long time of implying that they will take that decision, following 10 years of decreasing or constant key interest rates". In explaining its decision, FOMC stressed that, "the key interest rate hike reflects FED's belief in the continuing process of strengthening the economy. The economic recovery has made significant progress, although it has not reached the

satisfactory levels yet...as it requires substantial improvements in the labor market, while inflation continues to perform under our 2 percent longrun objective. Given the stable current economy current and a positive trend for the future, the Committee decided to raise the target range for the federal funds, taking into account that the stance of monetary policy remains accommodative after this increase ".

FED notes that "the significance of this first increase of interest rate, after 10 years, should not be overestimated", while many experts associate this FED attitude with the question: "does this move send a message for the future of the American monetary policy, the future of dollar in the international arena of currency wars and in determining global financial flows"?

Analysis and responses are more than moderate.

A general conclusion, which seems to form a consensus, is that "such move must be conceived as a serious signal that the global financial crisis of 2008 seems to be over, the serious risks which threatened international financial and money markets have been significantly reduced, and the fact that FED did not take this decision in October, when it seemed to be more than reasonable and expected by all, shows that the concerns regarding the Chinese economy and currency are overcome. Markets seemed to have been prepared for this move and showed a positive and calm reaction toward it. Since the key rate of UD dollar has a direct impact on interest rates of commercial banks’ loans, the first effects are expected to appear on businesses and companies, which in predicting an increase in the cost of loans in the coming months, are expecting to increase and multiply their investments. While Mrs. Janet Yellen, FED Chairwoman, predicts that the key interest rate is expected to reach 1.4% in 2016, 2.5% in 2017 and 3.5% in 2018, the main effect of such hike is expected to be an increase in the employment rate in the US, since

FED objectives on economic growth and employment, are as important as the price stability.

Does this decision mark "the end of a relaxing accommodative monetary policy by FED, undertaken in the context of a necessity to support and stimulate the American economy and credit, following the outbreak of the crisis and recession of 2008 – 2009"? Monetary policy experts and central bankers think that we are not dealing with a simple decision that may be limited within US, instead it is a decision expected to produce international effects, causing turbulences in many countries. It appears that FED did not consider this fact when, in the interest of improving the US economic and financial health, it decided to increase the key interest rate and announced a new upward trend for the next 3 years.

Seen in a broader perspective, in relation to recent decisions by central banks in Japan, Europe, UK, Russia, China, etc., it is admitted that all are being convinced about the fact that the era of “cheap money� is ending, where emerging economies are threatened by instability, as a result of the risk of investment and investors departure towards the US dollar and US. Even a series of poor and developing countries, including Albania, which are highly dependent on FDIs and international funding,

fear a similar scenario and with the beginning of 2016 they risk being quickly oriented towards US dollar, by increasing significantly the future investment costs, as well as debt costs.

With near-zero key interest rates, the US monetary policy of the past 10 years, encouraged many investment funds, driven by a greater profit margin, to invest in countries, like: Turkey, Brazil, South Africa, Mexico, Nigeria, Morocco, Egypt, Ghana, Indonesia, India, Russia, Argentina, South Korea, Chile, Central and Eastern Europe, ex-Soviet republics, etc. Now that course of US monetary policy has changed, all these countries risk being regarded as unattractive and face a massive capital outflow, by jeopardizing their economic growth and socio - economic development, especially their poverty reduction policies. The World Bank has recently rung the alarm bell on this danger by "advising these countries to tighten the belt and be prepared to cope with financial and social turbulences".

The economies of many countries are already highly dependent on interest rates of loans in US dollar and prices of commodities, which also quoted in US dollars. Should such scenario of capital exodus from these countries be fulfilled, the consequences would have been scary: costly and reduced lending, difficulties in managing the balance of payments, permanent fiscal

constraints, lower credit ratings from rating agencies, etc.

Another expected effect of FED decision is the risk which emerges from the strengthening of the US dollar in international financial markets and trade. Typically, the strengthening of US dollar affects the competitive power of US exports, but in furtherance, this appreciation impacts all businesses and corporations, around the world, which have entered into long-term contracts in US dollar, when the dollar was weaker, and therefore, they will be obliged to settle their obligations by buying US dollars, more expensively.

The same applies to countries that have borrowed in US dollars, which should repay in more expensive US dollars, besides the fact that the strengthening US Dollar will further aggravate the debt burden on their macroeconomic balances. Individuals and businesses, which have borrowed in US dollars, but with activities and incomes in local currencies, or in other international currencies, will be also affected in this regard. Loan repayment in US dollars for such category means an immediate price increase for their loans. In contrast, businesses that have contracted their sales and payments in dollars for the next 3-4 years will have leverage on a strengthening US dollar, as well as European enterprises that export to US, or in US dollar trade areas.

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Social Capital Alpha Bank Albania wins the 2015 “Philanthropy” award On December 4th, 2015, the bank received the 2015 National Philanthropy Award for its remarkable performance in the CSR approach and activities. Mr Gent Sejko, Governor of Bank of Albania, handed over the National Philanthropy Award to Mr. Periklis Drougkas, Chief Executive Officer of Alpha Bank Albania, with the motivation: “For the continuous support in healthcare sector, education, environment, art and culture, especially for the support and initiatives for the fight against breast cancer, purchase of the X-ray equipment for early diagnose donated to the Hospital “Mbretëresha Geraldinë” in Tirana and reconstruction of “Zërat e Jetës” kindergarten, in Kamëz”.

supporting children with Down Syndrome. Alpha Bank Albania greeted all the colleagues, bank customers and its collaborators with a greeting card, painted by Irma Nika.

“Zërat e Jetës” kindergarten On 31 December, offered them some presents to the children of “Zërat e Jetës” kindergarten in Kamza, which the bank adopted in September, joing the initiativ: “Adopt a kindergarten”.

Independence Day, by promoting Albanian art and culture abroad.

FASTIP Graduation Ceremony BKT continues to support the FASTIP program, in cooperation with “Aleksandër Moisiu” University, Durrës. The fifth generation of FASTIP students, graduated this year, were employed at BKT.

“Mustafa Qemal Ataturk” School BKT, in view of its mission to support education and to improve conditions in school premises, contributed financially to the reconstruction of “Mustafa Qemal Ataturk” School.

Holidays together are more beautiful At the year- end, the Bank has joined the initiative by Tirana Municipality to transform ''Mother Teresa” Square in a Christmas market, providing the city, especially children, a festive atmosphere throughout December. On this occasion, Alpha Bank supported the construction of the ice skating pitch, which was one of the innovations of this event.

Security Forum Alpha Bank Albania, supported the first Security Forum, with the topic: "A general approach on safety". The forum aimed at highlighting the need for a comprehensive and coherent approach towards issues related to risk management, by focusing on two levels of security: physical security, associated with objects, commodities, property and individuals, and information security, associated with corporate data, networks, communication and information infrastructure.

Down Syndrome Foundation - Albania The Bank attended the Presidential Ball, organized under the auspicies of H.E. Bujar Nishani, President of the Republic, and the First Lady, Mrs. Odeta Nishani.

Th eincome from the ball was given for

Love Soup The staff of the Bank contributed with numerous packages of food, which were handed over at the "Love Soup" kitchen, which has been operating for 10 years, under the auspices of the Albanian Orthodox Church. This center provides daily food service to more than 150 people in need.

Albanian Embassy in Turkey The Albanian Embassy in Turkey annually celebrates the Independence Day. BKT financially supported the ceremony, organized on this occasion.

“Ismail Qemali” University, Vlorë BKT supported the University, by financing different cultural and academic activities.

The Best Bank In Albania for 2015 by The Banker Banka Kombëtare Tregtare has been selected as "The Bank of the Year in Albania for 2015”, by "The Banker" magazine, a publication of Financial Times.

One of the most prestigious financial magazines, “The Banker” annually nominates the best banks in the world. This is the third year that BKT receives all three major awards (The Banker, Euromoney and EMEA Finance) in the banking industry.

General Consulate in Istanbul BKT supported the General Consulate in Istanbul for the event organized on Albania’s

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Social Capital

During the fourth quarter of 2015, the International Commercial Bank undertook several initiatives: ICB, in cooperation with the Albanian Red Cross, held the second session of blood donation for 2015 at the premises of the bank, respectively on 20 November, 2015.

Help those who are not like you! - October 17 - World Day against Extreme Poverty Intesa Sanpaolo Bank Albania, in collaboration with the Albanian Red Cross and on the occasion of the International Day for the Eradication of Poverty, organized a fundraising campaign, in order to increase the awareness and concrete contribution towards helping 200 families and people in need, with the motto: "Help them that are not like you".

Blood cannot be created in the laboratory it could be donated, only!

For the fifth consecutive year the employees of Intesa Sanpaolo Bank participated in the voluntary blood donation initiative, on 25-26 November 2015, in cooperation with the Albanian Association of Voluntary Blood Donors.

The bank selected SOS Village for sponsoring the Season’s Greetongs cards. Also, bank’s bemployees contributed voluntarily to purchase of a basket of food for a family of SOS Village for holidays.

The Albanian Network for Social Responsibility (Albanian CSR Network), in cooperation with the Ministry of Economic Development, Tourism, Trade and Entrepreneurship, and UNDP Albania, organized for the second consecutive year the Award for Best Companies, in the field of Social Responsibility. International Commercial Bank was chosed by the jury as the winner in third category, and was awarded with the "Best initiative” prize.

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Blood donation for children with thalassemia As every year, the bank organized at the premises of its head office a voluntary blood donation activity, with the support of the mobile unit of Albanian Red Cross. ProCredit Bank’s staff ensured a massive participated in such donation, as they wanted to help children with thalassemia, as well as all the people in need.

"Donate a book! Donate knowledge! Donate love!"

Intesa Sanpaolo Bank Albania organized during November - December 2015 an internal charity initiative. Employees do-

nated books for two institutions: "Zyber Hallulli" Children House in Tirana (70 titles) and Shelter for Women & Girls, supporting STOP THE VIOLENCE initiative!

(30 titles) Donate with heart, give the opportunity to 4 disabled people to celebrate!

Bank employees donated cash, as per their wish and capacity, through direct transfers to bank accounts of four disabled persons, according to a list of names received from the Independent Association for Children Care with Mental and Physical Disabilities, in Tirana, with the desire to donate a bit joy during holidays.

The triangle of success for young entrepreneurs: Civil Society - Business – Education The bank supported one of the projects of Junior Achievement, through voluntary

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engagement of its staff in 3 cities: Tirana, Durrës, Elbasan, for students of secondary schools at 11 and 12 form, by delivering the subjects: "Business Ethics", "Skills for Success" and "How to become Entrepreneurs at Student Societies".

Raiffeisen Bank and Tirana Municipality inaugurated the project of reconstruction "Dritan Hoxha" Street. A part of the project was bicycle lanes, which were financed by Raiffeisen Bank. At the ceremony held on this occasion, Mr. Christian Canacaris, CEO of Raiffeisen Bank and Mr. Erjon Veliaj, Mayor of Tirana, chose to ride bicycles along the new lanes, with a group of young people.

Social Capital

International Operatic Festival “Maria Kraja”, 30th – 31st October 2015 The Bank supported the International Operatic Festival “Maria Kraja” that was held from the 30 – 31 October 2015, organized for the 15th consecutive year, as its general sponsor.

The festival was open to singers from all over the world, who were all under the age of 32.

This year, 15 participants were selected from 170 applications, which were interviewed from various juries in Milan, Vienna, Brussels and Tirana.

Museum of "Themistokli Gërmenji" High School The Bank supported the establishment of the school museum at the premises of "Themistokli Gërmenji" High School, in Korca, to mark the 50th anniversary of the school, which serves as a historical bridge, bringing together different generations of students and teachers of this institution.

Wine Festival in Pogradec Under a joyful atmosphere of the end-year, on 18 - 19 December was organized the “Wine Festival 2015”, in the city of Pogradec, where local wine manufacturers introduced and presented their products. Even this year, Tirana Bank support and assist such activity, which aims to promote the tradition and support local entrepreneurs.

Societe Generale Albania supports young entrepreneurs Societe Generale Albania collaborated with Startup Weekend Tirana in hosting the “Startup Weekend Tirana 5.0”, Smart City edition from 20 – 22 November 2015. This event was hosted at the Tirana Business Park premises.

New ideas came to life by young entrepreneurs.

Societe Generale Albania not only participated as a sponsor to this event, but had a seat at the jury, with Mr Ardian Hasa, Operational Division Manager.

Tirana Bank continues its tradition of blood donation Tirana Bank, in cooperation with Blood Transfusion Centre, on 28 October organized for the seventh consecutive year, the voluntary blood donation.

Supporting YWCA to increase the awareness on breast cancer Even this year, Tirana Bank joined this initiative, by supporting television campaigns, as well as distributing leaflets and posters to increase the awareness and importance of early examinations.

The year-end Concert “Ndërmendje” 2015 Tirana Bank continued to support “Ndërmendje” concert of classical music, in the city of Shkodra, bringing each year-end classical masterpieces of well-known foreign and domestic composers.

Tirana Bank in cooperation with Tirana Municipality supports children of Zall Herr Even this year, the amount of money allocated for gifts’ purchase and distribution to Tirana Bank customers and partners was donated to support people in need. This year-end, in cooperation with Tirana Municipality, the gift of year-end went to 105 families in need in Zall Herr.

Union Bank, in collaboration with the Public Center for Residential Development Berat, supported the End - Year Feast organization.

Thanks to the bank contribute in 28 December 2015 at the premises of the Public Center, was organized the End - Year Feast for the persons with disabilities.

The branch manager Ms Leonora Shosha, on behalf of the bank, conceded to the Center Director the cheque.

Supporting the State Police Veneto Bank continues to support the State Police structures, by becoming a very active partner of the Ministry of Interiors.

After its investment in some border police stations, this time, Veneto Bank supported the Police Academy and Basic Police Academy, by rehabilitating the main entrance of the school, which is expected to be attended by more than 300 students.

Supporting Vocational Education For the second consecutive year, Veneto Bank supported the students of culinary school, who attend their studies at the well-known "Neranxi" Institute. In addition to financial support for professional institutes, Veneto Bank also provides various favorable financing opportunities, to help students attend and complete their studies in such schools, as well as to startup businesses, after graduation from professional institutes.

Veneto Bank supports dentists the Congress of Albania and Regional Dentists, an international event, was held in Tirana and was attended by thousands of dentists from Albania, Montenegro, Macedonia, Kosovo, etc. On this occa-

sion, a Dental Fair was organized, where Veneto Bank, following the cooperation as an Official Partner of Dental Leader Corsi, supported financially the introduction of this institution, by promoting the development of professional education and training in Odontotiatry.

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Tech Topic

Security Operations Center Challenges and Benefits Given today’s ever changing threat landscape - the only way to maintain efficiency of security is to leverage a security operations center to transition towards intelligence-driven security.

by Ms Anila HOXHA, CISSP, CISA Head of Security and Safety Operations & IT RAIFFEISEN BANK ALBANIA

S

ecurity operations center (SOC) is not a new notion or trend, often referred to as a monitoring center, the concept though has seen an increase in attention in the past five years. It comes as a natural step in organizations with mature security functions, where all security components (physical security, information security, and incident response and business continuity) are fully interrelated and integrated to each other. In the local market however this is to some extend an underdeveloped concept. We’ll be visiting briefly the need for SOC, the challenges when designing and setting up as well as the rewards and benefits of it.

We are faced with numerous challenges in security today, such as: - Security operating in Silos mode, most areas security is seen and split

between information security and physical security. In most cases these two functions operate organizationally into different areas or units, lacking synergies in between.

- Numerous point solutions, operating in a standalone mode, such as: antivirus system, firewalls, intrusion prevention/detection, access control systems, alarm systems (controlling physical access, fire detection, intruder), CCTV systems, etc.

Companies in general and in particular Banks invest into numerous security solutions, in mature organizations this is driven by the best practices concept of “layered protection”, or “defense in depth”. Certainly this is necessary in order to build effective protection, however once setup we’re left with all these systems working in a standalone mode, lacking the generic visibility that gives insight into the entire security echo-system and how it operates or inter-operates let’s say starting from the physical access to the building or location up to the accessing the most critical application systems holding and processing company critical

data (crown jewels). At the same time we’re faced with an ever changing threat landscape. There’s an increase in attacks and sophistication, and same time increased compliance controls and regulatory requirements. Security Operations Center finally provides clear and central visibility of the entire security defenses deployed in all layers, tying together all the bits and pieces giving the central missing overview. It is designed to centrally control security operations providing situational awareness and real time monitoring increasing thus the response time, at the same time serving as nucleus of all security operations

Security operations centers are heavily process oriented.

The above can’t really function without a set of well-defined processes, in terms of continuous monitoring and workflows.

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covering all security aspects.

Challenges in building a security operations center Building a SOC has, however, its own challenges. Before starting building a SOC, there has to be a clear definition of scope and requirements, what will the SOC cover in terms of systems/ infrastructure end points in scope of monitoring and controlling (all IT infrastructure: network, systems, applications, databases etc., non IT infrastructure, such as: physical security systems, CCTV, power, utilities etc.).

Once scope has been defined, a clear commitment and support from management is a critical success factor, not only because of the considerable budget and investment required but also because it brings a change into the company culture. Once these have been obtained, may a security team start designing and building a SOC. A phased approach is recommended, due to the major changes it poses as well as the amount of investment/budget required. Security operations center is based on three main pillars: (1) People, (2) Processes, (3) Technology.

People The staff operating the SOC, they are a very important part of the puzzle.

They need to have good mix of analytical skills combined with very good communication skills. Some of the qualities needed for the people operating the SOC include: (i) extremely curious, (ii) can deal with low-level details while keeping big picture view of situation, (iii) can communicate to various groups that have very different requirements, (iv) respond well to frustrating situations.

Continuous training, a combination of formal and on the job, has to be planned beforehand for the staff operating the SOC. Technology Technology is a crucial part of the security operations center. It basically cannot stand without a system that is able to collect and correlate real time vast amounts of data from different

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numerous data sources (IT systems such as firewall, IPS, network devices, application systems, access control systems, alarm system, etc.). SIEM – enterprise wide data collection, correlation and real time analysis is the core technology of a successful SOC. An effective security monitoring system incorporates data gathered from the continuous monitoring of endpoints possibly including physical security systems, it: -provides a baseline, what is normal in the internal environment -helps detect quickly abnormal/ suspicious activity -provides data to drill down to a particular case -integrates other threat intelligence information (data on the external threat landscape and environment) and use it to spot patterns at the internal end points.

Processes Security operations centers are heavily process oriented. The above can’t really function without a set of well-defined processes, in terms of continuous monitoring and workflows. In case something is detected there has to be a document reaction/response process and proper workflows (including escalation procedures). Basically response process

Security Operations Center finally provides clear and central visibility of the entire security defenses deployed in all layers, tying together all the bits and pieces giving the central missing overview.

is fully integrated into the company incident response procedures. Let’s say for instance unusual activity is spotted over weekend on a remote location (or branch) – there has to be a clear set of steps for the monitoring staff to understand what verifications are needed and in what order (access control logs,

system logs, vault access if possible, list of authorized staff to enter the location and operating times etc) whom to call for further verifications/ checks and whom to escalate it to and when. Is it an incident, does it require invocation of incident team, crisis team, etc., all these steps need to be defined as part of the SOC processes.

Security operations center – the benefits Security operations center provides that missing visibility on the entire security echo-system providing central and realtime monitoring of all the deployed security defenses. Typically, it: - Helps achieve speed of response time. Real-time access to information allows for faster reaction to an external attack (whether technical, such as: malware, or physical one, such as: intrusion or robbery). Quicker detection of insiders’ theft and breaches lowers the overall negative impact of the event – via continuous monitoring and defined baselines/normal behaviors.

- It provides an intelligence based security. Focusing efforts, resources and further investments as the need goes, depending on the overall security posture.

- Delivering security measurable metrics. Defining meaningful metrics in security is already a challenge, however having aggregated information at hand makes it possible to design and deliver meaningful metrics – such as what is the trend Bank operations are complete in the branches network (time people log out of systems and the security systems are fully armed – by correlating data from logical access with physical security systems activation).

Conclusions SOC is indeed imperative to security.

Given today’s ever changing threat landscape – the only way to maintain efficiency of security is to leverage a security operations center to transition towards intelligence-driven security.

This will give the required flexibility and agility to effectively respond to todays and future threats.

Financial Auditorium

Loan restructuring Testing the customer before making the decision on loan restructuring Loan restructuring could be considered a valuable mechanism for reducing nonperforming loans, if it is used efficiently, by emphasizing the use of the "trial" method, before finalizing the process.

by Ms Elsa PECA Head of Risk Department INTERNATIONAL COMMERCIAL BANK (CB)

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oan restructuring is defined as any modification to the original plan of payment, signed by the customer when of borrowing from the bank, as a result of actual or future increase of possibility that such loan could produce problems in the timely repayment of obligation. Loan restructuring is a process which provides bank customers in financial difficulties, with the opportunity to reduce the payment of actual installment through the extension of loan’s remaining maturity. At the same time, the bank can, throughout the restructuring process, improve the collateral’s previous position, as well as revise the interest rate and other loan terms or conditions.

Loan restructuring process could be initiated by the customer, or by the bank.

In order to initiate the restructuring process, two preconditions must be

fulfilled simultaneously: 1. The customer must still generate income, which means that her/his own business is active, in the case of a business loan, or receives salary income or income from other sources, in case of retail (individual) loan. Specifically, the business or the individual must generate incomes, which obviously are less than incomes collected at the moment of loan disbursement, as long as s/he is in financial difficulty, 2. The customer must have shown willingness to pay, that means s/he is ready to repay the loan and that the delays in repayments are caused as a result of financial incapacity to repay the debt and not from the lack of willingness to pay. This condition is very important, because otherwise, the restructuring will result in an inefficient process and the bank will end up being at the same situation with the customer, as it was before restructuring.

The bank must be prudent when deciding on loan restructuring, because it is accompanied with additional costs for the bank. Typically, the bank must provision the restructured loan at

10% of the restructuring amount and maintain this level of provision for at least 6 months after restructuring, should the costumer pays 6 full installments, on regular basis. On the other side, the bill for customer, along with administrative expenses for the new agreement with the bank, which includes legalization (notarization) of the new contract and putting up the collateral as mortgage (if applicable), may include payments

Loan monitoring after restructuring is an important element in this process, and is carried out by Non-Performing Loans Department, or any other department, established for such activity, along with the performance of restructured loans and further actions to be taken, in case of customer insolvency, which are discussed at least quarterly, in the meetings of bank’s respective committees.

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for potential enforcement, if legal procedures will re/start, should the client does not comply with the new restructuring agreement.

The costumer must be informed about these costs in advance, prior to the decision-making about loan restructuring. The restructuring process should be seen as a long-term solution for the bank, so that the bank does not face the same situation within a few months period.

A really efficient method is the method known as “3-month trial period”, used to customers before restructuring, under which they pay a new installment similar to that calculated for restructuring . In this context, a written agreement with the customer and a manual payment plan is drawn up, which defines the payment date and the amount of installment for the next three months. Only in cases when the customer pays on a regular basis for three months in a row and when the financial analysis justifies the new installment, the formalization of restructuring process takes place. At this point, a new contract with the customer is signed, reflecting the new terms and conditions of the new loan. In some cases, in addition to the above reasons, the restructuring can be seen as a way to strengthen the position of collateral, either getting a more quality collateral, or a second collateral, when it is perceived that the current collateral is impaired, or it does not cover the amount of loan, due to its recent devaluation.

As it is explained above, the bank will continue to classify the customer at the same loan category as it was before

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restructuring, for a period of at least six months. If the customer pays regularly and it is verified that her/his financial situation is improved, the bank may reclassify the customer and upgrade his classification at a higher category. Loan monitoring after restructuring is an important element in this process, and is carried out by Non-Performing Loans Department, or any other department, established for such activity, along with the performance of restructured loans and further actions to be taken, in case of customer insolvency, which are discussed at least quarterly, in the meetings of bank’s respective committees.

International Commercial Bank has restructured about 41 loans, granted mainly during the period of 20132015. Some 30 loans, out of 41, have performed successfully, in accordance with terms and conditions of the agreement, whereas 11 of them have continued to show delays in repayments, after restructuring. So, in 11 cases the restructuring process resulted inefficient, only. It is worth noting that, before restructuring the majority of loans has been classified as "lost loans", overdue for more than 365 days. Furthermore, the subsequent enforcement procedure for these loans proved to be ineffective.

The majority of this group of loans is granted in foreign currency, mainly in Euro-s and in amounts ranging from EUR 30.000 to 50.000. During the restructuring process the loan is converted into domestic currency, taking into account the currency in which the customer’s incomes are denominated, in order to avoid or reduce the exchange

rate risk. It should also be noted that, the original loan maturity was mainly up to 5 years, while the period after restructuring is extended up to 10 years, enabling customers to pay a lower installment, depending on its current financial situation. The interest rate of loan is also revised, based on current market rates, which affects positively the reduction of installment for customer. Also, with regard to economic activity, most of restructured loans belonged to customers engaged in construction activity and during the restructuring process, it was noticed that these customers had changed their business activity, due to the liquidity bottlenecks the construction sector has faced over the last year. Furthermore, some customers which underwent the restructuring process were classified as customers receiving business income, at the time of original loan agreement, whereas at the restructuring moment they belonged to the group of customers receiving wage income.

As per above, more than 70 percent of the restructured loans in International Commercial Bank have a positive performance after restructuring, comparing to the banking system ratio, which is 9 percent, only. At the same time, due to the restructuring mechanism, the non-performing loans ratio is reduced more than 5 percent.

In summary, loan restructuring could be considered a valuable mechanism for reducing nonperforming loans, if it is used efficiently, by emphasizing the use of the "trial" method, before finalizing the process.

This is the method actually used by the International Commercial Bank, ICB.

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AAB ACTIVITIES AAB organizes the Fourth National Forum on Bank Security AAB, with the support of its Committees for Information and Bank Security, organized on 26 November 2015, for the fourth consecutive year, the national forum on bank security issues, entitled “Safe banks, protected customers”, held at the premises of Tirana International Hotel. Participants at the Forum included the representatives of commercial banks in Albania and Kosovo, the Bank of Albania, the General Directorate of State Police, the National Security Computer Agency (ALCIRT); the National Authority for Electronic Certification (NAEC); and companies which provide services or products to the relevant sectors.

Even this year, the forum served as a platform to exchange ideas, experiences and the latest national and international developments and dynamics both on banking physical and information security.

In conclusion of the Forum, all the participants once again emphasized the importance of the cooperation between the related parties, in order to protect banking consumers.

Year End Dinner AAB organized on 16 December 2015 the annual year-end dinner, which was attended by the Chief Excecutive Officers and other representatives of the member banks of the Association and other special guests such as: the Governor, the First Deputy Governor, the Head of Supervision Department, the Chief of Cabinet of the Governor of the Bank of Albania, the Head of the Albanian Deposit Insurance Agency, and members of “Bankieri” Editorial Board.

The AAB Chairman, Mr Christian Canacaris, and the Governor of the Bank of Albania, Mr Gent Sejko, welcomed the guests during their short speeches.

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AAB TRAININGS

Training courses, organized by AAB during the period October - December 2015, in collaboration with national and international partners as follows:

Trainings organized with ATTF Luxembourg Back Office Operations, 21-23 October: The first in-house cooperation of AAB with ATTF Luxembourg. The training delivered by Mr Paul Klenbart, a senior ATTF expert, was attended by 17 representatives of member banks.

Basel II and beyond, 2 – 4 November: The training was delivered by Mr Stefano Bragoli, European Investment Fund, ATTF Official Senior Expert, and was attended by 19 representatives of banks in Albania.

HR Management, 9 – 11 December: The training was led by Mr Gilles Ossona de Mendez, ATTF Expert Coach, Consultant and Trainer, and attended by 17 representatives of member banks. This training was financed from the Ministry of Finance of Luxembourg.

Trainings organized with Lincoln Centers of Albania Business Communications: The Art of Conversation, 5 – 6 November: The training aimed to introduce to participants skills for more effective communication. It was delivered by Mr Josh Miekley and attended by 8 representatives of member banks.

Great Negotiators: Achieving mutually satisfying outcomes through winwin negotiations, 12 – 13 November: The program focused on widely agreed-upon foundational concepts of negotiations. It was led by Mr David Turner and attended by 9 representatives of member banks.

Other partners Fraud detection and prevention, 1 – 2 October: The training organized by AAB in collaboration with AIIA aimed the practical approaches in the local environment, through interactive sessions and group exercises. The training was attended by 20 banks representatives.

VISA Business School - Fraud Prevention, 13 – 15 October: For the first time in Tirana was organized a training by Visa Business School, which was attended by 24 representatives of banks of Albania and Kosovo. This workshop focused on key functional areas including operations, fraud risk management, MIS and data, merchant cardholder monitoring and loss controls.

Strategic Leadership and Effective Governance, 23 – 24 November: The training was organized in cooperation with WIFI Albania and was attended by 13 high managers of 5 member banks.

Using Scoring While Managing Risk, 24 – 25 November: The training was organized in cooperation with SBPS Technologies Company. It was led by Mr Ayhan Akay, a risk management consultant, and was attended by 9 representatives of banks in Albania and Kosovo.

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