Bankieri - Nr 26, January 2018 by Shoqata Shqiptare Bankave

DE-EUROIZATION in Albania

Publication No. 26 January 2018

Bankieri

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Regulatory Framework Digital banking Trainings and Financial Education Public Relations

AAB MEMBERS

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CONTENT Editorial De-euroization - A contribution to national economy and Albanians’ well-being Prof. Asoc. Dr. Elvin MEKA

Bankieri Nr.26, January 2018

Bankieri

Viti i VI i botimit Publication Nr. 24 No. 2017 26 Korrik January 2018

Publication of Albanian Association of Banks

Frontline De-Euroization - A complex & difficult, but a necessary process! Gent SEJKO We will take appropriate measures to encourage the use of domestic currency Arben AHMETAJ

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Special Banks in Albania - 2017 achievements and outlook for 2018 Interview with CEOs of banks in Albania

Banking System Contribution of banking sector to the Albanian economy and society Stjepan ANIĆ

DE-EUROIZATION SNRF 9: SFIDA in Albania

Experts' Forum Challenges of finance lease activity Mirjeta EMINI From euroization to de-euroization Blerina HOXHA Anisa KADRIA

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Economist Corner Financial Stability - Banking System' s Challenges and Risks Prof. Dr. Adrian CIVICI

Corporate Social Responsibility

EDITORIAL TEAM:

AAB Activities

Elvin Meka Editor-in-Chief Eftali Peçi Coordinator Junida Tafaj (Katroshi) Collaborator Andis Rado Photographer Design & Layout: FCB Afirma

AAB Trainings

AAB Financial literacy - An essential life skill for young people Junida TAFAJ

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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

EDITORIAL BOARD: Periklis DROUGKAS AAB Chairman & CEO of Alpha Bank Albania Silvio PEDRAZZI AAB Vice Chairman & CEO of Intesa Sanpaolo Bank Albania Dritan MUSTAFA AAB Executive Committee Member & CEO of Tirana Bank

Frederic BLANC AAB Executive Committee Member & CEO of Societe Generale Albania

Ervin KOÇI Chairman of Albanian Financial Supervision Authority

Andi BALLTA AAB Executive Committee Member & CEO of American Bank of Investments

Adrian CIVICI President of European University of Tirana

Bozhidar TODOROV AAB Executive Committee Member & CEO of FIBank Albania

Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IKEA) Spiro BRUMBULLI Secretary General, Albanian Association of Banks

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EDITORIAL

De-euroization

A contribution to national economy and Albanians’ well-being De-euroization is not, and will not be, an easy task; instead it is a very complex challenge. So far, we managed to ensure and maintain a stable macroeconomic environment and low inflation, thanks to Bank of Albania’s determined and effective policies, whereas there is work in process towards reversing fiscal deficit and developing and deepening the national capital (and securities) market.

Prof. Asoc. Dr. Elvin MEKA1 Editor-In-Chief

e-dollarization, and de-euroization after it, as another “de”, is a highly cited term within the academic universe for a long period, as well as a much attempted and sought practice in the developing world, in different periods and realities. Practical results offer both success and failure, as the measures and actions taken have been varying from one country to another, or even within the same country in different times (Peruvian case). Albania has been one of the countries where dollar/euro/ization has been driving on the fast track, since the change of the political & economic system, back in 1991. Such process was particularly fueled by macroeconomic instability and 1

high inflation during the early years of transition and the turbulent period of 1997-1998. Such events carved in the Albanians’ minds the status symbol of US$, and later the Euro, as a store of value for their savings and investments. Such status got a hit after the global financial & economic crises outbreak in 2008/2009 and since then such role was relativized, up to now days. Albanians and their economy had to pay dearly the foreign exchange risk, which was reflected at the fast increasing of NPL rate, as ALL was depreciated a bit fast during the whole 2009. However, Euro and to a lesser extent the US$, still stand strong within the Albanian financial system and economy, as a considerable amount of savings, loans and highvalued investments and expenditures (real estates, cars, vacations, etc.) are still using them and not the Albanian Lek, and this is not in favor of the economy and the financial industry. So, the time has come to think and work for a further de-euroziation of them. But why do we need de-eurozation, in a time when we aspire and are striving to join EU and when Albania will join Euro zone afterwards? There is more than one answer, but the very first one is: Heaven can wait – Albania will have to wait a bit (in fact many years from now) until it joins Euro, as usually such integration is not based on desire and aspiration, but on a substantial reshape of the economy,

as a structure, model, competitiveness, sustainability and functionality. The second answer is that we need to work hard for a well-functioning economy, where monetary and fiscal policy are implemented effectively and for the Albanians’ well-being, by offering them better protection from foreign exchange risk and a deeper and quality financial intermediation. Surely, de-euroization is not, and will not be, an easy task; instead it is a very complex challenge. So far, we managed to ensure and maintain a stable macroeconomic environment and low inflation, thanks to Bank of Albania’s determined and effective policies, whereas there is work in process towards reversing fiscal deficit and developing and deepening the national capital (and securities) market. This challenge would, unavoidably, ask for a strong and continuous commitment and cooperation between Government, Bank of Albania and Financial Supervision Authority (which have already signed a Cooperation Memorandum), in order to implement the much needed structural and institutional reforms, which will lead to another key element for a successful de-euroizaton: the sustainable high economic growth!

Administrator, “LUARASI” University College.

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FRONTLINE

De-Euroization

A complex & difficult, but a necessary process! De-euroization process of the Albanian financial and economic system, although being difficult and complex is necessary for improving the effectiveness of economic policies and for making our economy more sustainable.

Gent SEJKO Governor BANK OF ALBANIA

The euroization1 phenomenon and consequences To begin with, let me point out that some studies by domestic and foreign authors confirm that there is a high level of financial euroization in Albania, i.e. the public's preference to keep a significant part of its assets and liabilities in foreign currency. This is directly reflected in banking sector’s assets and liabilities, where lending in foreign currency (public’s liabilities) and deposits in foreign currency (public’s assets) are relatively high. Banks themselves facilitate this process, by complying with the supervisory obligation to have a more balanced foreign exchange position. Also, these studies suggest that in Albania there is both a monetary and real euroization, i.e. the foreign currency serves as a means of payment in financial transactions, or when prices for 1 2

some products/goods (mainly durables and high valued ones) and salaries in certain sectors, or strata, are paid in foreign currency (euro), or indexed at its exchange rate. The experience of various countries has shown that the high levels of dollarization/euroization are consequences of a combination of several factors, including: economic and financial crises, a wrong mix of local macroeconomic policies and high inflation periods, close economic/ financial ties with important foreign currency economic centers, and so on. With few exceptions, the reasons for high euroization in our country are to be found among such factors. The euroization presence in the economy has important implications for the effectiveness of economic policies. In terms of macroeconomic policies, the high level of euroization leads to a reduction of monetary policy’s effectiveness, limits the role of free exchange rate, as an automatic stabilizer in case of macroeconomic shocks, in the frame of higher susceptibility of economic subjects towards large fluctuations in the exchange rate, and undermines the fiscal policy’s effectiveness, by way of possible increase in the cost of debt service and the unwanted change in its structure. Also, the high euroization level is usually accompanied by costs to the central bank, in the form of an opportunity cost to maintain a relatively higher level of foreign exchange reserves and the loss of income (seigniorage) accompanying the replacement of the domestic currency by the foreign one. In terms of financial stability, euroization increases the

exposure of the financial system and economic operators to unfavorable developments in the exchange rate and foreign exchange liquidity stress situations.

Why it is currently the right time for de-euroization? Referring to the banking sector, which dominates the country’s financial system, the high euroization level is obvious on both sides of the sector's balance sheet. The narrowing of positive difference between average interest rate on ALL and FX loans, following the Bank of Albania's easing monetary policy, as well as a more passive attitude of foreign banking groups2 to lending, have reduced the share of FX loans at approximately 57% of the total loan portfolio (from approx. 72% in 2008), although this weight remains high. As part of such loan category, the unhedged FX loans (unhedged against unfavorable exchange rate movements, where borrower’s main income are in ALL), remains at high levels, despite the decline in recent years, too. On the other hand, the narrowing the spread in interest rates has supported, at a certain extent, the growth of FX deposits on the liability side, which accounts for almost 53% of the total (compared to about 43% at the end of 2008). The euroization of banking sector’s assets and liabilities is closely interlinked. In accordance with principles and requirements for a mitigation of the exchange rate risk, the banking sector intends to maintain a more balanced position, in the composition of balance sheet items by currency. Consequently,

'Euroization' means the use of a foreign currency, which is not necessarily the euro currency itself. "De-euroization" should be understood as the process aimed at reducing the use of foreign currency, and as a result, an increasing use of the domestic currency. Recommendation on lending in foreign currencies, 2011, European Systemic Risk Board.

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the increase of foreign currency funding sources can be reflected, over time, on the asset side so FX deposits may again boost FX lending. On the other hand, FX lending is reflected in the FX liabilities of the banking sector, in a time when the loan use from the borrower to make investments, or purchases from other entities, increases the value of deposits of these entities in the banking sector. When euroization persists for a long time, the difficulties for handling and addressing it become bigger because the structure of the economy, the economic and financial relations between entities, the concept for the way of approaching such phenomenon, have found a certain equilibrium, whose displacement would be very difficult and could be associated with substantial costs for economic operators. On the other hand, de-euroization measures are likely to be more successful if they are undertaken in periods of economic and financial stability, when currency exchange rate stability can be interpreted as an indicator of the confidence of economic entities and the public in general in it. For these reasons, it is necessary and appropriate to take action to control and reduce euroization in the country’s economy and the financial system.

What is the objective? In the framework of de-euroization, any zeroing of euroization level should not be aimed at all. Given Albania's conditions and the current structure of the Albanian economy, this could be an impossible or even economically unjustifiable, objective. On the other hand, any undertaking of strong actions, aimed at a rapid outcome, could be associated with significant costs for entities subject to these measures and could cause undesirable effects on certain economic and financial indicators. What is intended in this regard is that the levels of euroization could be decreased to those that exist in other countries with a similar economic profile.

What about the approach to such phenomenon? The realistic objective for this phenomenon reflects its complexity, too. De-euroization is not an objective for the financial system only, as long as the use of foreign currency by the general public in various transactions, remains widespead. For this reason, the de-euroization approach should be

When euroization persists for a long time, the difficulties for handling and addressing it become bigger because the structure of the economy, the economic and financial relations between entities, the concept for the way of approaching such phenomenon, have found a certain equilibrium, whose displacement would be very difficult and could be associated with substantial costs for economic operators.

comprehensive, whereby other local authorities could identify and undertake certain measures that encourage the public and economic agents to increase the use of domestic currency in their transactions. Therefore, Bank of Albania intends to approach such phenomenon strategically, and has sought cooperation from other authorities in the country. For this purpose, a Memorandum of Cooperation was signed, on 18 April 2017, with the Ministry of Finance and the Albanian Financial Supervisory Authority. The Memorandum urges each authority to identify, within its respective field of competence and in a more harmonized manner, the necessary actions to be taken for a more general economic de-euroization, including communication with the general public. The document also contains

monitoring mechanisms, to assess and report regularly about the effect, the authorities’ undertaken measures could produce, on various financial and economic indicators. In addition to the Memorandum, Bank of Albania is also assessing the need for drafting and adopting an institutional policy to express its long-term commitment to address this phenomenon.

Bank of Albania’s proposed measures Focusing on Bank of Albania’s proposed measures for the banking sector, they include banks’ balance sheet assets and liabilities, as follows: in the banking sector’s balance sheet liabilities, they include requirements related to the increase of required FX reserve, compared to that in ALL, in order to control the performance of FX deposits, which have the potential to be associated with growth of FX loans and to aggravate credit, market and liquidity risks, associated with such loans; In the banking sector's asset side, measures include requirements related to raising the awareness of borrowers in foreign currency about the risk of such borrowing and to mitigate the risk associated with the deterioration of the borrower’s solvency, as well as imposing a relatively higher requirement for liquid assets in foreign currency, compared to those in ALL, to mitigate the liquidity risk in foreign currency. These measures intend to have a minimal impact on banking sector’s liquidity conditions, so to be as neutral as possible from the monetary policy viewpoint. These measures are fully in line with the recommendation by European Systemic Risk Board (ESRB / 2011/1): "On lending in foreign currencies". Should further developments require, additional measures will be taken.

The consultation process A full consultation process with the banking industry was conducted, about measures identified by the Bank of Albania, through the Albanian

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Association of Banks, AAB, during May – August 2017 and November – December 2017. I am thankful to AAB and banks for their opinions and their professional cooperation in this process.

Implementation of measures Following the preparatory work by Bank of Albania’s technical staff, regarding the drafting of necessary regulatory acts, the proposed measures will be soon proposed to the Supervisory Council for review and approval. According to the proposal, measures are projected to be implemented during the first half of 2018. Such approach, as well as early consultation with the banking industry, reflects the need for a gradual implementation of measures, thus enabling the necessary adaptation of the banking sector with them.

WE WILL TAKE APPROPRIATE MEASURES TO ENCOURAGE THE USE OF DOMESTIC CURRENCY Our goal is to possess a full set of instruments that support and guarantee the continuity of the country's financial stability, so it is necessary that both fiscal and monetary policies are effective. partners, have worked on a strategy that promotes the use of domestic currency (ALL) versus the use of foreign currencies, or otherwise "de-euroization of the Albanian economy", even not necessarily related to the European currency, but to all foreign currencies, in general.

Conclusion To conclude, I think that deeuroization process of the Albanian financial and economic system, although being difficult and complex is necessary for improving the effectiveness of economic policies and for making our economy more sustainable. It requires a continuous commitment and harmonization of actions between public authorities that regulate the financial market and guide the economic developments. The proposed measures to be undertaken by Bank of Albania for the banking activity represent a first attempt to make a real contribution to this process. They will be accompanied by a close monitoring process and, if necessary, with other subsequent measures. It is important that similar measures be identified in other areas of economic activity, so that economic operators and the public are oriented towards a greater use of the domestic currency (and lowering the use of foreign currency) in their financial activity.

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Our goal is to possess a full set of instruments that support and guarantee the continuity of the country's financial stability, so it is necessary that both fiscal and monetary policies are effective.

Arben AHMETAJ

Minister MINISTRY OF FINANCE AND ECONOMY

he Ministry of Finance and Economy, in cooperation with other country’s financial regulatory institutions, and with the support from international

In the first four years of our first term, we undertook a difficult, but successful, macroeconomic and fiscal consolidation program. In the framework of the fight against informality and the promotion of formal transactions, we will also take appropriate measures to promote the use of domestic currency.

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SPECIAL

Banks in Albania

2017 achievements and outlook for 2018 Interview with CEOs of banks in Albania BANKIERI: The year 2017 is closing and the Albanian Banking System is preparing to enter a new business year. What is your opinion on your bank’s performance during 2017 and the outlook for 2018?

Seyhan PENCABLIGIL CEO and Board Member BANKA KOMBËTARE TREGTARE

Christian CANACARIS CEO RAIFFEISEN BANK

017 was a positive year for the banking system in Albania. There was a further improvement in the financial situation and banks continued

Maltin KORKUTI CEO CREDINS BANK

redins Bank has many reasons to be proud of, during the whole 2017. Today, we are the second bank in the country in terms of lending, and we have consolidated our position as the third largest bank in the country, by deposits and assets. The Bank

he Albanian banking system improved in 2017, especially with regards to the non-performing

loans. Another area of major progress was profitability, which for years had been very unsatisfactory. The system continues to be well-capitalised and liquid. BKT has outperformed its compe-

titors in growth and profitability, securing its leading position in all segments by a wide margin. 2017 has been yet another year where we received all major international banking awards. In 2018, we plan to continue to grow and make reasonable returns to our equity, while our investments in technology remain our focus.

to be well-capitalized. It is also worth mentioning the reduction in the level of non-performing loans compared to the previous year. Raiffeisen Bank also had a positive year with very good results in all performance indicators. We wish and believe that 2018 will be the same, where we will further develop crediting and optimize costs. One of our achievements

in 2017 was the launch of the digital banking platform for both business and individuals. Thus, our digital transformation will continue through offering more products and services online, making banking more convenient for our customers”.

has provided a capillary expansion, throughout the country, and continued its expansion during this year, with the opening of a new branch in Lezha, as well as an extensive investment in revitalizing the existing branches, by creating optimal conditions for an effective service to customers. Investment in human capital, through staff training program to increase sales effectiveness (SFE), came to fruition, reflecting the creation of a new working culture and an increasingly proactive attitude of

employees toward clients. The quality of deposits and loans was also our main focus for this year and this is reflected in the pace of their growth, but we strived to turn Credins Bank into the number one choice for Albanians, for all banking products. Today, Credins Bank offers a range of products with 3600 coverage for individual, institutional, or business needs. During 2017, an agreement was reached with SSI for the pensions’ transfer through the SSI portal, a technological development dedicated

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Ju Ju përfitoni përfitoni norma norma interesi interesi të të favorshme favorshme dhe dhe nuk keni nevojë të prisni, pasi interesi i fituar nuk keni nevojë të prisni, pasi interesi i fituar kalon kalon çdo muaj automatikisht në llogarinë tuaj rrjedhëse. çdo muaj automatikisht në llogarinë tuaj rrjedhëse.

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Për më tepër informacion, ju lutem kontaktoni me Qendrën e Kontaktit

January 2018 Për më tepër lutem kontaktoni me Qendrën e Kontaktit +355informacion, 4 2 389 389,ju informacion@procredit-group.com +355 4 2 389 389, informacion@procredit-group.com

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to retired clients, both domestically and internationally; we launched Mastercard in Euro for businesses, debit and credit card and Mastercard Gold for Elite customers of Credins Bank. In 2017, we signed agreements with other institutions, such as: Albanian Post and AK Invest, in the field of payments, to extend clients’ access to Credins Bank and in areas where we do not yet have a physical presence. Credins Bank continued to be ranked as one of the largest supporters in corporate social responsibility projects, by contributing through donations and sponsorships in many social, infrastructural, institutional, cultural and environmental

Silvio PEDRAZZI CEO INTESA SANPAOLO BANK ALBANIA

would say 2017 has been a quite fruitful year for Intesa Sanpaolo Bank Albania, since we were able to achieve all our targets, both from quantitative and qualitative point of view. In summarizing the main achievements, I would mention: significantly increase of lending activity (double digit growth in all segments), strong reduction of NPLs (which ratio is now at single digit level), deep review and update of the financial and technological offer to the customers, huge investments in technology and security; at the same time, we were able to maintain a quite significant level of profitability. No doubts, these results were

happenings. Looking at the perspective for 2018, the bank’s pace of expansion will continue and its position in the market will be consolidated. Customer satisfaction will remain our focus, and in this regard, we anticipate significant investments in the increasingly integrated technology in banking services. The technological challenge in banking services is enormous, as investment per se is not enough, but there is also a complex regulatory and legal context, a growing competition from non-bank institutions, not to mention that such investment becomes a necessity, as it has become a priority for the current

consumer generation, and we intend to propose our solutions. Also, during 2018, we expect the finalization of some investments in bank’s database, which will enable us for more qualitative analysis in customer evaluation and more accurate orientation of products to their real needs. In 2018, Credins Bank marks its 15 years of activity and looking back on the days when the establishment of the first Albanian bank was decided, we have all the reasons to believe that we made the right choice. The institution that we created responds to the expectations of our founders, shareholders, staff and our clients.

underpinned by a comprehensive positive economic environment (also at international level) but I’d like to stress the great support provided by our Parent Company and, on top of everything, by all the employees of the bank, to whom I’m particularly grateful. It is for the awareness of being an important and successful bank in the country that commits us to further develop the long-lasting relationship with clients, to increase our customers’ base, to teamup with all stakeholders including the International Financial Institutions and the State Institutions in a constantlyincreasing win-win cooperation. The investments in “digital” and “innovation” have started to give effective impact on the customer experience and I consider our internet and mobile services as competitive, safe and user friendly. The physical network has been improved continuing to roll-

out the new lay out, aiming to make our client enjoy a comfortable environment like they were at home offering as well opportunities to socialize; all the areas open to the public have been equipped with free WIFI and new cutting-edgetechnology ATMs were deployed. As far as 2018 is concerned, we will be consistent with the current growth strategy, aimed to increase our presence in Albania, effectively supporting the “real economy” and providing lending within Albania, only. Special focus will be the integration of all ISP Group operations in the country, coming from the recent acquisition of Veneto Banka. For sure we will keep on being very demanding toward ourselves and committed to serve the country for the general prosperity of the Albanians. Finally, let me thank once more all our customers and all our people, being them the real key factors of our success.

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Frederic BLANC CEO SOCIETE GENERALE ALBANIA

e have to acknowledge that the Albanian economic environment has been improving gradually, while major economic indicators are on a positive trend and the expectations are for a larger improvement. However, informality is still at a very high level, while the rule of law and collateral enforcement are still very weak and uncertainty for the future from both businesses and individuals is still very apparent. Any decision aiming at decreasing uncertainty and/ or comforting predictability will be welcomed by business community. In such environment, the commercial development of Societe Generale Albania (SGAL) continued in a positive trend throughout 2017. The bank continued to acquire good qualitative clients through an excellent customer service supporting our large range of products and services matching with our clients’ needs. This trend enabled us to gain one market position over the last 12 months. Over the past years, we have been steadily growing and now SGAL stands

Dritan MUSTAFA CEO TIRANA BANK

he performance of banking system in general follows the trend and performance of local economy. The year 2017 was a year of further consolidation of the financial standing of Tirana Bank, in alignment to the strategic objectives set for this year, consisting mainly in the substantial reduction of troubled financial assets, rebuilding our performing portfolio, through development of a sound lending

at the expectations for 2017. Through its excellent corporate culture and high lending standards, the performance of SGAL was positive in 2017 with the bank being ranked the 4th in the market in term of lending portfolio, continuing in a sustainable profitable growth. In this context, our strategy for the future is to consolidate our position while intensifying the quality of relationship with our clients, whether they are individuals, Pro and VSB, SME or large corporate. Our plans and expectations are to continue stable and sustainable growth of overall banking aggregates. In 2018 we will continue in the same path, increasing our presence in the capital city and intensifying our efforts in the digital area to better serve our clients maintaining high ethical and lending standards. Our full range of products and services as well as the expertise of our staff will be decisive factors to support efficiently our clients’ needs. For this reason, as we did last year, we intend to open new branches in order to be closer to our customers. We will particularly focus on the sectors where we see stable potential growth like the traditional ones related to advanced agro business development or energy related contribution including the energy efficiency. During the last

years, we have been financing some of the most promising sectors in Albania: tourism, clean energy, agriculture and infrastructure, since we see positive expectations for them. A master plan for tourism development would pave the way for a structured and larger scale development. Regarding agriculture, we are one of the main banks participating in the program of Government and EBRD (Albania Agribusiness Support Facility) for financing the agribusiness sector and we expect to finance significant amount in the coming years. As for the banking sector in Albania, it will face on the medium term - but maybe sooner than expected - the challenges this industry is already addressing in other parts of the world. Non-banking competitors rise, client’s expectation of better service through digital solutions, pressure for more efficient processes and operational model, all together will require more investments in the banking industry and a progressive adjustment of the traditional business model. As far as Societe Generale Albania is concerned, we are prepared to face these challenges.

activity, as well as the return of the bank into positive results. The Bank continues to hold a quite solid capital and liquidity position, being among the safest financial institutions in the market. We are proud to serve to our clientele, which, over the years, has shown loyalty to our bank and to the “brand” name, despite the challenges over time, due to strategic and industry developments. The bank remains committed towards investments in new products and services, aiming to diversify and expand our offer to the clientele, as well as for modernizing our infrastructure. The macro environment was characterized as stable, providing for

stable to positive outlook over mid-term. GDP growth rate remains in positive area, with an expected increase over mid-term, while inflation remains within the Bank of Albania’s expectations. The gradual, but steady, improvements of business and economic conditions in the region provide for positive expectations, as far as business climate and opportunities for banks to expand their business in general. We have noticed that consumer demand is taking a gradual rising pace, which is a positive indication for further economic development. A gradual shift of consumers’ behaviors, from the savings attitude (noted during the last several years and coming mainly from

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the individual depositors) towards the investment mode will help a further increase of consumer demand, which is instrumental for incentivizing the local production and trade volumes. Certain factors, like low-risk profile political landscape (with EU integration processes in the loop), the economic stimulus estimated to come mainly from increased and diversified FDIs in the country, as well as from investments in new public works to be promoted from the Albanian Government, remain pivotal for a sustainable economic development during 2018 and over mid-term. The local banking industry remains solid, as far as liquidity and capital, while banks are gradually increasing their credit risk appetite with more lending injected in the economy, although at relatively low growth rates. During 2018, as well as over mid-

Georgios PAPANASTASIOU CEO ALPHA BANK ALBANIA

s data from the Bank of Albania show, the annual pace of economic growth rose to 3.94% at the end of the first quarter of 2017, mainly due to the positive indicators from the market. Many sectors such as services, manufacturing and agriculture, especially the branches of trade, construction, transport and industry have contributed in a such grow rate. The banking system was developed in line with the macroeconomic policy and the prudent supervisory policy and also with the respective banking groups policy. At the end of the first half of 2017, the banking sector's capital adequacy ratio was 16.3% - notably higher than the minimum required ratio of 12% while the profitability performance ratios of the sector, Return on Assets (RoA) and Return on Equity (RoE), resulted at 1.6% and 16.7%, higher than in the same period in the previous year. The activity of the banking sector increased

term, the banking industry is expected to undergo a consolidation process. A materialization of such expected structural changes may lead to a positive momentum for banks in improving the return rates (i.e. return on assets, return of equity), being incentives for expanding the investments towards expansion and new business opportunities. Tirana Bank estimates a positive outlook for 2018. Our key objectives stand for an active presence in the market, through increasing further the lending to individuals and businesses, under a non-performing portfolio to meet the market rates by end-2018. Our expectation is that the bank will consolidate the profitability margins and book positive results. In line with our Group strategy, our efforts are addressed towards improving further the financial position of the bank and remain a valuable asset in all aspects.

by 4.8% (year on year). The outstanding credit (which has remained unchanged from the previous year) reflects the write off of loss loans from the balance sheets of the banking sector, and a still sluggish credit demand. Non-performing loans fell by 15.2% during the first half of 2017 and by 22% from the previous year. As a result, the ratio of non-performing loans fell by 2.7 percentage points during the period, to 15.6%. Banks efforts to collect, restructure, and write them off from the balance sheet contributed to the reduction of the nonperforming loans. During 2017, Alpha Bank Albania confirmed in the loans’ market share of 5.70%, by continuing to finance the most important sectors and projects of the economy, supporting financially the households’ needs, providing qualitative services, as well as supporting the Albanian Government funding needs. In line with the sector development, the Bank safeguarded the capital position, as shown by the Capital Adequacy Ratio of 18.36%, as well as preserved the liquidity base, via prudent business expansion, reflected in the Liquidity Ratio of 45.99%. The Balance Sheet structure confirms

that Alpha Bank Albania is a wellcapitalized and liquid bank, capable to perform expanded business activities. The loan portfolio records a moderate increase compared to the previous year, standing at € 352 million, as of September 2017. In addition, the Bank has managed to preserve its top 5 position in the market, with 8.92% share in the retail lending activity, as of Q3 2017. On national level, the reduction of non-performing loans during 2017 is a notably positive development, which will release resources of banks engaged in the management of non-performing loans, gradually improve the perception of the banking sector on the credit risk, and eventually give a stronger boost to credit growth in the period ahead. Yet, the process should be carried out in a prudent and professional manner, in order for the credit restructuring to be effective, the chances for improving the borrower’s repayment capacity to be real and incentives for a regular credit repayment to remain strong. Positive signals, such as the increased demand for credit in 2017 Q3, supported by both large enterprises and the small

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and medium-sized enterprises, will serve as a strong stimulus for the sector to ease the credit standards for small and medium-sized enterprises, more specifically for investments and working capital. Furthermore, in an increasingly competitive sector, it is our perception that credit standards on loans to households will continue to be eased both on consumer and on house purchase loans. On regional and international level, the economic environment has shown improvement, although economic growth remains moderate and is surrounded by uncertainty. The major short and medium-term threat the banking system is facing in

Gazmend KADRIU CEO UNION BANK

Andi BALLTA

CEO AMERICAN BANK OF INVESTMENTS

e are very pleased with the performance of the American Bank of Investments during 2017. The strong economic performance of the entire economy during the past few years, the more mature attitude of the banking system and business community, and the constructive and proactive position of the regulating entities have made it easier for our bank and the banking system to perform well in 2017. During the past two years the American Bank of Investments has maintained a leading position in the industry regarding growth, profitability,

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Albania is related to the undergoing a restructuring process by some of the European banking groups that operate in Albania, for improving their financial situation. We are confident in the commitment of the Bank of Albania in monitoring the developments and coordinate potentially necessary actions with the relevant domestic and foreign authorities in terms of safeguarding the stability of the financial system, for a smooth process, which includes operations such as: restructuring the network, change of shareholders and merging with other institutions. During 2018, Alpha Bank Albania will continue to be a prominent actor in the banking system, by accomodating

households’ needs with consumer and housing loans; offering more complex financial services tailor-made for businesses, small,medium and large enterprises, as well as providing financial advising, which stands at the core of our day-to-day business operations. We will still continue to foster non-cash culture and optimise personal finance management, via the prestigious collaboration and exclusivity with the American Express® brand, the nationwide technical infrastructure of ATMs, as well as our web and mobile platforms (both for Android and iOS users).

nion Bank's performance in 2017 was very, very satisfactory. We achieved our main targets early in the second half of the year. Yet again we will achieve our desired "Double

Double" under BoA accounting standards: double-digit growth in total assets and double-digit ROE. Although it's difficult to ask for more, we firmly expect 2018 to be better than 2017.

liquidity and capital adequacy ratios. We want to grow and we are growing our business. ABI Bank is now positioned to have the cleanest loan portfolio in the banking system as of year 2017. We are very proud of this achievement considering that two years ago we inherited some of the worst NPL ratios in the industry. The synergy with Tranzit Finance has not only provided for cleaning up the balance sheet but has also become an important source of income. Tranzit will continue to give a unique competitive advantage in maintaining a clean portfolio. We are fully committed to keep an npl ratio below 5pct. We are especially proud for building an exemplary corporate culture of transparency and meritocracy. During 2018 ABI Bank will continue to consolidate its business. While the

bank will continue to benefit from the monetization of several remaining legacy inefficiencies, the results will be more in line with the asset size of the bank as said inefficiencies are exploited to a great extent. Our involvement in custodian business, as well as the Albanian Stock Exchange are expected to start contributing to our bottom line during 2018.

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Adela LEKA

Spokeperson of the Management Board PROCREDIT BANK

he role of banks is very important, in terms of our country’s development, by way of their continuous support mainly to business clients, as well as to households. Since the beginning of ProCredit

Bozhidar TODOROV CEO FIRST INVESTMENT BANK ALBANIA

ibank Albania is about to close its best year by far since its presence in Albania. This is our best year in lending to both businesses and individuals. Bank’s portfolio increased with more than 30%, by far highest growth rate in the banking system, even

Gideon Van Der BROEK CEO INTERNATIONAL COMMERCIAL BANK (ICB ALBANIA)

he bank continued the upward trend after bottoming out in 2016, we expect to see a loan portfolio increase of approx. 20% balanced between our key segments of consumer, small business, and medium businesses. Especially Q2 and Q4 of 2017 has been a very productive quarters for ICB Albania. The bank also

Bank's activity, more than 20 years ago, we have supported businesses in strategic sectors, such as: manufacturing, agriculture and Eco investments, by positively impacting on the development of businesses and the country’s economy. Also, with regard to lending, the bank has managed to maintain a good quality portfolio, during a dynamic and challenging year, like 2017, thus placing the bank in a very good position in the market. Considering

here the technological revolution we are going through, ProCredit Bank has been focusing during this year on the implementation and ongoing investments in advanced and secure online services, through 24/7 facilities, e-banking and the newest concept, dedicated to households – the ProCredit Direct. All these elements will continue to be an integral part of ProCredit Bank’s business model.

taking into consideration only banks having an increase in net loans their average growth rate is just above 4%. Outstanding results in lending were accompanied by improvements of all bank performance indicators as return on assets and return on equity. In 2017 we will record more than EUR 3 mil net profit making this year our best ever in all aspects. In 2018 we cannot expect other than a continuation of positive developments and further growth. We are targeting 2018 to be even better than 2017 and

that is based on our efforts of offering customer’s tailored and innovative products for which we have proved to be good at. Considering we are a regional bank, we are trying to benefit from experience and know-how of mother bank in similar market like Albania. Fibank has shown to be eager in increasing its market share in Albania not only through organic growth but also in showing interest in possible mergers.

managed to further reduce their NPL ratio to single digits. Furthermore ICB Albania reached an important milestone with the introduction of their mobile banking app Zing, the bank is working hard to enhance the service offering provided through this App which will be announced shortly. The Zing App forms a cornerstone to the ICB strategy for the years to come. The bank is looking to continue the positive momentum in 2018, yet concerns related to the ambition of the government to confine lending by allowing the application of official financial statements in the lending

process only without clear guidelines dampen the potential positive outlook. It is imperative for the banks to clearly understand how the enforcement of this new rule will be followed and how to apply them in their day to day business. Whilst being one of the smaller Financial Institutions active in Albania, ICB will continue to look to bring innovation to the market with the aim to improve customer convenience and experience, 2018 will showcase a strategic collaboration which will specifically address these specific topics.

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Muhamed PRLJA CEO UNITED BANK OF ALBANIA (UBA)

s for United Bank of Albania (UBA), 2017 has been another year of progress, in all aspects of business activities. The trend of positive and stable growth we have recorded during the last couple of years indicates for the appropriate strategy implementation along with strong support by our board members and major shareholder (Islamic Development Bank â&#x20AC;&#x201C; IDB). Various measures and

willingness to support Albanian economy through financing of different projects, for both Corporate and Retail clients, has ensured stable incomes and profitability. Being the only Shari'ah compliant bank in the Albanian market, UBA has taken on the responsibility and important role to provide Islamic bank products and services to the local community. Thus, we have initiated activities towards introduction of several new products and services. At the same time, a continuous attention is given at ensuring high service quality and transparency. For the coming business year, 2018, in light of positive economic signals,

we plan to continue with positive approach to the market. The efforts of Bank of Albania, relevant governmental institutions, and business community ensure future with optimism. UBA shall expand presence in the market through opening new branches, establish new distribution channels, and hire new employees. All our efforts will be directed towards achieving profitability and contribute to development of Albanian economy. By being an Islamic bank, we must not forget to make contribution to support those in need, through various Corporate Social Responsibility activities.

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BANKING SYSTEM

Contribution of banking sector to the Albanian economy and society Banks formalize the economy and play the role of fiscal agents, fundamental in contributing to reduce the tax evasion, and lowering transaction costs by creating an environment optimal for business development.

Stjepan ANIĆ

Managing Director Op2M

inancial sectors in all the countries of SEE Region are overall bankcentric; with relatively minor levels of capital market activity, negligible penetration of insurance products and generally insignificant non-bank financial institutions. We can say that in this part of the world, banking sector really stands at the epicenter of the financial intermediary business, which is clearly visible from its contribution to gross domestic product and level of its support of economic activities within each of the countries within the Region. Economic importance of banks in a society starts with their structural role of pooling savings and allocating resources in the economy, towards financially reliable economic agents. Interest rates applied by financial institutions reflect the competitiveness and completeness of financial markets. Furthermore, banks provide the private sector with highly qualified expertise making so possible financial intermediaries to contribute

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in reducing risks in the economy. Also, banks serve as key players in formalizing the economy and enhancing positive impact, by exercising their role as fiscal agents, which is crucial in contributing to reduce the tax evasion phenomenon. Banks help in reducing transactions costs for the economy and create a more enabling environment for the country’s business development in long term. Banks in Albania. Banks in the Albanian economy serve to economic agents in offering all financial services available, in support of their productive activities. This has been a major reason why banks (by their service to the society and economy) have kept a substantial pace of growth, in terms of assets. Even though banking sector in the region is still dealing with the aftershocks of the global financial crisis that have weakened sector’s asset quality and profitability, banking sector in Albania has increasingly become of paramount importance for the sustainable development and social welfare in the country’s economy. Strong evidences provide sufficient arguments in support of such conclusion that is widely recognized by local and international institutional actors. With a value added of 3.1% of GDP from the financial sector and a total volume of financing to economic agents that counts for 40.5% of country’s total economic production, banks now can be considered macroeconomically systemic and an engine of growth for the economy. Total lending to private sector and individuals has grown 8.8 times, from 2004 to 2016, while banks’ assets have reached 95% of GDP. Total contribution of banking sector in the state budget in 2016 only peaked at ALL 6.7 billion, a

time when Albanian banking sector is profitable, well-capitalized and liquid, guaranteeing continuous financing to economic activities. An important employer, regarding working conditions, career development opportunities and providing a solid basis for social benefits for employees, the banking sector in Albania is more than ever before considered as an indispensable driving force behind a harmonious qualitative growth for the economy and the society. Crisis aftershocks. Financial sectors’ contribution to the GDP declined, following the sovereign debt crisis in Greece and Italy, the two main economic and trading partners of Albania with Italian and Greek banks in the system, this being manifested in lower value added by 2012 and 2013. However, from 2013 the value added of the financial sector to GDP rebounded to reach the highest level in five years regarding the gross value added. After that, local banking sector managed to preserve its’ upward growth trend during 20042016 period. Due to sound financial conditions of the banking sector, the financial crisis did not affect its growth with assets amounting nearly to the total value of country’s GDP. Albanian banking sector has managed to keep a positive profitability outlook, despite financial and the sovereign debt crises that affected neighboring countries. Of course, negative economic spillover effects were transmitted throughout the economy, but this did not affect the banking sectors’ overall soundness and stability. However, the financial crisis has negatively impacted profits of the banking sector in 2008-2009, with repercussions also in 2011 and lower

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profits in 2016, and reflected a slower lending activity from the side of banks. Financial crises made banks more prudent in their lending activity in Albania and this is seen from 2010 onwards, while the debt crisis was followed by an increase in deposits levels and loans-to-deposits ratio remains still lower than 2009 peak in time. Due to that, as well as to the package of measures introduced by the Bank of Albania, local NPLs ratios have lowered onwards. After the financial crises of 2009 the banking sector in Albania closely cooperated with Bank of Albania and Ministry of Finances to make possible a minimization of crises effects in the economy. This collaborative attitude supported efficient management of liquidity situation of the banking sector, oriented lending towards national currency and influenced the preserving of parameters for financial stability and capitalization of activity. Eventually, the situation entered a qualitative improvement stage, following the resumption of the process of public deposit growth in the banking sector, which took place gradually and steadily in the second quarter of 2009 and continued at satisfactory paces. During this period, banks showed due diligence and accountability. Banking and economy. Banking sector in Albania has served as the primary lending source for the economy; banks in Albania are the main and nearly the only source of funding to the private sector in the Albanian economy. Banks’ lending to the economy as a ratio to GDP reached peak in 2011, prior to sovereign debt crisis of main trading partners. Since then lending activity has plateaued, manifesting a downward tendency but banks and the central bank are committed to increase financing. At present, the Albanian banking sector is well-capitalized and its liquidity has been constantly above the regulatory level of liquidity adequacy ratio of 20%, hence consolidating confidence in banking sector. However, comparing to other countries in the region it can be seen that Albania has the lowest rate of domestic

credit to private sector in proportion to its GDP, even though Albania keeps being one of the best performing economies in SEE. Its economic growth is forecasted to average 4.1% of GDP in the coming four years, an optimistic projection comparing to other neighbors, and it is worth stressing that banks will be in support of productive activities to make this growth forecast be matched

Banking sector in Albania has increasingly become of paramount importance for the sustainable development and social welfare in the country’s economy. An important employer, regarding working conditions, career development opportunities and providing a solid basis for social benefits for employees, the banking sector in Albania is more than ever before considered as an indispensable driving force behind a harmonious qualitative growth for the economy and the society.

Banks and Government. Banks continue to be the main debt-holder in the country with a substantial part of the sovereign debt being held by them, nearly 60% of the total burden. Banks play an instrumental role also in facilitating citizens’ purchase of the public debt. Due to continuous lowering of interest rate in recent years, T-Bills have become less attractive, in terms of returns and as a result, banks’ purchases of these debt titles have sharply fallen. Instead, banks have shifted their attention to Government bonds, and thus becoming the main debt-holders in the economy. Financial system’s and banks’ contribution to the state budget has maintained its positive incremental path, reflecting in this way a continuous growth of the banking sector, that came as result of the support that banks give to productive activities of the economy

and households. Banks and technology. When it comes to quality standards of the offered services, investments in new technologies gradually became one of the priorities of local commercial banks, during the last decade. Consequently, banks invested significant amounts of their annual budgets in hardware and software upgrading. Banks will continue to serve as innovation hubs for adapting new technologies that will enable them to improve the overall quality of service offered to customers. One of the main functions, the local banking sector managed to fulfill outstandingly well, was to facilitate a shift from a cash economy to a non-cash economy, at a relatively high pace during the last 7 years. The fast-increasing number of ATM and POS devices throughout the country, as well as rise in number and overall value of e-banking transactions, is the best example of this movement and the clearest indicator of the fundamental switch that banking customers are making when it comes to payments. One of the main services modern banks provide to their customers and citizens is a reliable electronic payments service that is affordable. The role of electronic payments in society is crucial in increasing the efficiency in payments execution; i.e. in saving time and costs. Various empirical studies have identified a positive relation between the increase in overall spending for goods and services in society and the spread of electronic payments systems offered by banks. In this way, consumption and economic growth are boosted, while transaction costs are reduced because of competition in the banking sector. Banks and regulation. Financial sector authorities across the region are making progress in strengthening banking sector regulation and oversight. All supervisory agencies in the SEE region are moving toward risk-based supervisory regimes, as well as implementation of Basel II/ III requirements. Moreover, all have encouraged implementation of the International Financial Reporting Standards (IFRS) in the entities they

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regulate and supervise. However, different countries in the region are at different stages of implementation of these standards. Thus, further progress is still needed in implementation of the risk-based regulatory and supervisory practices as well as in linking regulatory capital requirements to commercial banksâ&#x20AC;&#x2122; risk profiles. The main challenge for regulators across the region is finding the right balance between a need for a more stringent approach to banksâ&#x20AC;&#x2122; supervision (i.e. a need to enforce loan classification rules, realistic valuations of collaterals, and loan loss provisioning requirements more stringently), capital cost of their (still relatively high) NPL levels, and a need to promote

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efficient debt restructuring (for viable businesses). With the level of NPLs still not decreasing and a feeble economic growth, supervisors need to find a balanced approach to incentivize banks to restructure viable borrowers, eliminate NPLs, and foster recapitalization where necessary. Banks in Albania conduct their activity in full synchrony with most updated trends in the banking industry. Also, banks have been supportive toward economic agents in financing real estate purchases and investments. However, from 2012 onwards the trend has slowed. Another paramount crucial factor for contributing significantly to the overall economy is the function

of mitigating risks and enhancing fair competition. Banks provide the private sector with highly qualified expertise and sound advice, inducing optimal operational management in support of higher productivity. Plus, banks formalize the economy and play the role of fiscal agents, fundamental in contributing to reduce the tax evasion, and lowering transaction costs by creating an environment optimal for business development. During the last ten years, banking sector in Albania has become an indispensable factor for growth and development for countryâ&#x20AC;&#x2122;s economy and society.

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EXPERTS' FORUM

Challenges of finance lease activity Finance lease companies have portfolios amounting in tens of millions of Euros and the VAT credit balance is now reaching considerable levels. Certainly, the lack of VAT reimbursement creates liquidity problems, because these funds remain immobilized as VAT credit balances, whereas they may be utilized to finance new contracts for further portfolio expansion.

lease activities, like any other area of economic activity, has been accompanied by new challenges and problems. As a profitable economic activity, finance lease is subject to fiscal legislation, as a whole. On the other hand, this activity is supervised by Bank of Albania and as such, it is subject to regulations for nonbank financial institutions. This article aims at pointing out some key issues that may be part of further discussions.

TAX ISSUES Mirjeta EMINI

Tax Reporting & Strategy Leader Tax and Legal Department PricewaterhouseCoopers Albania

inance lease is a relatively new activity in Albania. The Law "On financial leasing" came into force in 2005, and since that, the Bank of Albania has licensed several companies to carry out this activity. Currently, there are some companies that provide financial leasing services, as their primary activity, and some banks which offer financial leasing as a secondary activity within their financial activities. Finance lease activity has been gradually increasing; companies have expanded their portfolio every year trying to diversify it into various areas such as: motor vehicles, machinery and equipment, movable and immovable properties, etc. This portfolio includes individuals and commercial entities, which have seen the economic advantage of such product. The growth of finance

VAT credit status Finance lease activity is the financing of non-current assets, which in most cases are taxable supplies, for VAT purposes. The Law on VAT provides clear modalities on regulating financial leasing activities. Under these provisions, the lessor has the right to input VAT on the purchase of the asset, which will be subject to financial leasing in the future. The lessor may, through the application of this scheme, deduct the VAT for the whole amount of the asset, at the time of the purchase. This creates a credit amount of VAT. Upon the activation of the lease, the lessor issues invoices for monthly installments, as per the leasing contract, whereby the principal is subject to VAT, whilst the interest is exempt from VAT. Therefore, the issuance of monthly installment invoices “reduces” the input VAT, previously credited by the lessor when purchasing the asset. As a consequence of the adoption of the above scheme by financial lease companies, the VAT credit balance is continuously increased, as they expand their financial leasing portfolio (a VAT

credit balance which arises as a result of the difference between the input VAT in the purchase of the assets and the output VAT arising from the issuance of the monthly installment invoices). The approach of tax authorities, with regard to the VAT credit balances, has been varying. Initially, some companies that have submitted a reimbursement request for their VAT credit balances have received positive responses from

In some countries of the region, the lessor issues a fiscal invoice, at the beginning of the leasing period, for the total value of financial leasing, whilst the lessee pays this invoice in monthly instalments. This scheme allows the lessor to reduce the VAT credit balance arising from the purchase of the asset, within the period in which the financial lease starts. This enables for the VAT credit balance to be transferred from the lessor to the lessee.

respective regional tax directorates, and VAT has been reimbursed accordingly. However, during recent years, tax authorities have been increasingly seen to refuse VAT reimbursement for some companies. In fact, although VAT legislation has changed (from 1 January 2015, the new VAT Law No. 92/2014 is in force), the requirements and conditions for VAT reimbursement have remained unchanged. In fact, there

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are not any changes in the new VAT legislation, regarding the provisions regulating VAT reimbursements. Consequently, tax administration should maintain the same attitude that it has maintained with the old VAT law, thus approving VAT reimbursements. Finance lease companies have portfolios amounting in tens of millions of Euros and the VAT credit balance is now reaching considerable levels. Certainly, the lack of VAT reimbursement creates liquidity problems, because these funds remain immobilized as VAT credit balances, whereas they may be utilized to finance new contracts for further portfolio expansion. The situation of VAT credit balances may be improved, by amending invoicing scheme in case of financial leasing activities. In some countries of the region, the invoicing of finance lease is not made on a monthly basis. Instead, the lessor issues a fiscal invoice, at the beginning of the leasing period, for the total value of financial leasing, whilst the lessee pays this invoice in monthly instalments. This scheme allows the lessor to reduce the VAT credit balance arising from the purchase of the asset, within the period in which the financial lease starts. This enables for the VAT credit balance to be transferred from the lessor to the lessee, and thus avoiding the built up of VAT credit balance in only one company. The above scheme also simplifies administrative procedures as the lessor issues a single invoice for each leasing contract rather than an invoice for every monthly instalment.

Interest treatment Actual VAT legislation, similarly to the previous laws, provides that interest on finance lease is VAT-exempt. In the previous VAT law, this treatment was based on the argument that finance lease is a financial activity, and as such, the interest should have the same treatment as the interest in other financial activities, such as: banks and similar institutions. With the adoption of the new VAT law it seemed that the Ministry of Finance would treat the financial leasing interest

as a supply subject to VAT. This is so, because the VAT law itself does not include financial leasing interest in the list of VAT-exempt items. But that was not the case, since the publication of the Instruction on VAT (Article 17) clarified

IFRS 9 provides a new model for recognition and measurement of the impairment of financial assets, including finance lease receivables. The new model requires the measurement of the loss allowance considering the 12-month expected credit losses and the lifetime expected credit losses of the financial assets. As a result, generally the impairment that will be recognized in the financial statements starting from 2018 is expected to be higher with the implementation of IFRS 9. that the treatment would continue to remain the same, thus interest is a VAT â&#x20AC;&#x201C; exempt supply. The experience of European countries, especially those in the European Union, shows that in most countries, interest from finance lease is a standard VAT subject supply. Given that the current law was drafted with the aim to harmonize the latter with the European VAT Directive, interest in Albania must also be treated in the same way. This would allow finance lease companies to deduct VAT on all supplies (currently VAT is deducted only for the purchase of the financial leasing asset). However, based on the experience so far in the Albanian market, finance lease companies prefer the current way the interest is treated. One of the main reasons for this is that under the same conditions, the application of VAT on interest would make the overall lease more expensive, especially for individuals who do not benefit from crediting input VAT, as compared to a bank loan, where the interest is VAT â&#x20AC;&#x201C; exempt.

Impairment of financial lease Article 25 of the Law "On Income Tax" recognizes provisions (loss allowance) created by banks and insurance companies as the only deductible expenses, for purposes of calculating income tax, thus excluding other non-bank financial institutions, such as: finance lease companies. In fact, the Bank of Albania requires finance lease companies to calculate and report provisions in a similar manner as banks. On the other hand, the second paragraph of Article 24 of the law, which prescribes the 365-day conditions for the cancellation of bad debt, also includes non-bank financial institutions. In our view, there is no reason why finance lease companies would be subject to Article 24 and not subject to Article 25. Writing off a bad debt in financial institutions is related to de-recognizing the asset from the financial position statement, for which a provision was previously created. Then, why is this provision not recognized for finance lease companies, while the relevant debt is recognized? Finance lease companies perform an activity that, like banks, is under the Bank of Albaniaâ&#x20AC;&#x2122;s supervision. These companies calculate provisions for the impairment of financial assets (receivables from finance leases) in accordance with NAS 36 & 39 (from 1 January 2018 the SNRF 9), i.e. based on the same standards as banks. In practice, the risk of finance lease losses can be estimated to be generally lower than that of banks, as the leased asset is recovered more easily by the lessor than collateral, in the case of banks. The provisions reflect this lower degree of risk and the amounts of these provisions in finance lease companies is seen to be lower. Nonetheless, this does not provide an argument to consider these provisions as non-deductible expenses. The implying risk is similar in nature to the risk associated with banks and therefore the provision should, for tax purposes, be treated in the same way as it is treated for banks.

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BANK OF ALBANIA REQUIREMENTS Foreign currency exposure Based on the regulation of the Bank of Albania on credit risk management, finance lease companies should calculate the open foreign exchange position, which is defined as the ratio of the difference between assets and liabilities in foreign currency to capital (currency limit). Bank of Albania has extensively collaborated with these companies to find an optimal solution. In September 2017, Bank of Albania has adopted several amendments to the regulations, including the currency limits. However, the amended ratios introduced by the Bank of Albania are lower than those proposed by companies. Therefore, these companies need to take actions, in order to comply with the requirements of the central bank. They have to review their capital structure, and probably increase the share capital with cash injection, or review the structure of assets and liabilities in foreign currency, to reduce the difference through the partial or total conversion of long-term loans from shareholders into equity, through use of derivatives, etc.

NEW ACCOUNTING CHALLENGES IFRS 9 - Financial Instruments Financial entities are already prepared for the application of IFRS 9, starting from 1 January 2018. This standard is also applicable for financial leasing. Specifically, this standard covers the following: Finance lease receivables (net investments in finance lease), recognized by the lessor are subject to the impairment and de-recognition requirements. Leasing liabilities recognized by the lessee are subject to the de-recognition requirements. Derivatives that are embedded in leases are subject to the embedded

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derivatives requirements. IFRS 9 provides a new model for recognition and measurement of the impairment of financial assets, including finance lease receivables. The new model requires the measurement of the loss allowance considering the 12-month expected credit losses and the lifetime expected credit losses of the financial assets. As a result, generally the impairment that will be recognized in the financial statements starting from 2018 is expected to be higher with the implementation of IFRS 9. This is the main concern of the banks. However, given that both the 12-month and lifetime expected credit losses of the finance lease receivables are smaller, the effects from the application of this standard with regard to impairment may be smaller than in the banks.

IFRS 16 - Leases The new standard is effective from 1 January 2019. It seems that there is still time to prepare for its application and effects but the time runs fast. The standard provides substantial changes in the accounting treatment of leases on the lessee's financial statements. Meanwhile, this standard has no major effect on the lessor, which means that the accounting of leasing companies in the role of the lessors will not have any substantial changes. However, these companies may be affected by changes related to consumer behavior (as lessees), which will affect their business models and the nature of the products they offer in the market. Also, in cases where the lease contract includes non-lease elements, the standard requires the lessee to divide two elements (lease and non-lease). If the division is not directly apparent, the lessor should cooperate with the lessee to provide him with the necessary information for the proper measurement and presentation of each element in the financial statements.

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EXPERTS' FORUM

From euroization to de-euroization1 In order to reduce foreign currency loans, it is important to increase public awareness about the exchange rate risk from Euro use, instead of the domestic one. Surely, the development of domestic capital market is a prerequisite for a higher use of domestic currencies, even in Albania.

Blerina HOXHA Assistant Lecturer, Faculty of Economy, TIRANA UNIVERSITY

he official euroization of the economy means substituting domestic currency (ALL) with the use of the new European currency, euro, as one of the main currencies used in international transactions. In this way, the euro is used in all classical functions of money. Currency substitution occurs when assets denominated in a foreign currency are used as a means of payment, whereas asset substitution occurs when assets denominated in a foreign currency are used as a means of storing value. The year 2017 raised question marks not only on the Euro but also on the existence of the European Union, with major events, such as: presidential elections in France, BREXIT (England’s decision to leave the European Union), presidential elections in US in late 2016, etc.

What is happening to Euro?

Anisa KADRIA

Business Relations manager, Commerical Banking Division, NBG BANK

Although there is a decline in the use of Euro all over the world, again it continues to be the second most used currency after the US Dollar. The Euro continues to remain the second most important currency used in the international monetary system, but with a significant margin with the US Dollar. Unofficial euroization is a typical feature of the banking system in many EU candidate countries, as well as in countries aspiring to join the EU, particularly in Albania, Bosnia & Herzegovina, Macedonia and Serbia. The Euro is also present in Turkey, but at a lower currency substitution rate, as

the US Dollar still has a significant role in the country. Unofficial euriozation may result in an increase in the risk of financial stability and limitations for monetary policy decisions. Unofficial euroization occurs for several factors, as follows: • Confidence in domestic currency; • Trade relations with European Union member countries (Euro zone); • Remittances. The first factor that has led to an unofficial euroization is the lack of confidence in the domestic currency.

In terms of financial stability, unofficial euroization and, above all, the high level of foreign currency loans poses a risk per se. In case of exchange rate depreciation, the unhedged borrowers will find it difficult to payback their loan in foreign currency. The exchange rate risk for banks is automatically added to the list of risks associated with the lending process, thus affecting the issue of non-performing loans.

This is due to macroeconomic instability during the past years, mainly from periods characterized by high inflation, or hyperinflation, the sharp devaluation of the domestic currency, which leads

This article is an excerpt of the study presented at the International Scientific Conference: “Socio–economic perspectives in the age of XXI century globalization”, 1-2 December 2017, organized by Faculty of Economy, at Tirana University.

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to be the country with the highest level of euroization in the Balkans, 30 especially regarding loans. For this reason, Macedonia has taken a number 25 of measures for the de-euroization of its national economy, which include: 20 identifying unhedged foreign borrowers, 15 changing the required reserve in foreign currency, etc. 10 In Albania, a "de-euroization" policy of national economy is underway, 5 too. Practically, in April 2017 Bank 0 of Albania signed a cooperation agreement with Ministry of Finance and the Albanian Financial Supervisory Loan 1-3 years (ALL) Loan 1-3 years (euro) Authority, AMF, on expanding the use of domestic currency, by focusing on three Source: Bank of Albania, 2017 main pillars/group of actions: the first Ashtu siç vihet re dhe nga paraqitja e mësipërme grafike, ekziston një diferencë e konsiderueshme midis normës së is related to fiscal policy, which should to a losstëfor individuals holding thehuanë othernëhand, thetëlabor market interesit huas në lek dhe asaj nësavings euro, duke eOn bërë lek më shtrenjtë. Natyrisht, kjo diferencë ka filluar të ngushtohet ngaInviti 2013 the e nëlow vijim. is another important factor, where the create the appropriate macroeconomic in domestic currency. return, confidence in the domestic currency high level of unemployment in countries situation, to promote the use of domestic Integrimi lartëuse në of tregti, emigracioni, dërgesat emigrantëve dhe kanalet financiare gjithashtu një rol të leads to ithe another currency, of ethe region (Albania) has broughtluajnë currency; the second relates to monetary rëndësishëm në përdorimin e euros në vendet kandidate për në Bashkimin Europian. Integrimi tregtar i Shqipërisë or the Euro, for accomplishing some emigration to the countries using Euro, banking system control, in order me vendet që përdorin euron është ndihmuar edhe nga disa faktorë, duke përfshirë këtupolicy, largësinë gjeografike, money historike, functions,etj. including thus euro giving migrants remittances of së to lidhjet Tregtia the me holding shtetet e zonës përbën rreth 51% të tregtisë mallrave, vendet e rate within the increaseqëALL usage the deposits or borrowing. Ballkanit Perëndimor të përmendura më sipër,high zhvillojnë me këtoas vende. importance, a source of income banking system, and the third includes On the other hand, the difference in the country. As for the financial all activities not mentioned in the Nga ana tjetër, tregu i currency punës përbën një tjetër faktor të ku niveli lartë i papunësisë në vendet e between the foreign interest channels, therëndësishëm, high number of foreign rajonit (Shqipëri) ka sjellë emigrimin në vendet që përdorin euron, duke i dhënë dërgesavesecond të emigrantëve kështu group, but deemed necessary for rate and the domestic currency interest banks (for which the “parent” bank in një rëndësi të lartë si burim i të ardhurave në vend. Ndërsa për sa i takon kanaleve financiare, numriofi de-euroization lartë i the progress process. rate is one the main drivers“mëmë” leading etokanëone Union countries) bankave të of huaja (që bankën në of një the nga European vendet e Bashkimit Europian) ka nxitur përdorimin e order reduce foreign currency foreignNga currency lending. has fueled the use ofmbi Euro. In terms euros. pikëpamja e stabilitetit financiar, euroizimi jozyrtar dhe të gjitha niveliofi lartë i In huave në to monedhe të huaj, vetvete një Në rastinfinancial e zhvlerësimit të kursit të këmbimit, huamarrësit e pambrojtur do e to increase public loans, it is important As përbën noted në above, byrrezik. graphical stability, unofficial euroization kenë të vështirëthere të shlyejnë e tyre në monedhë të huaj. Rreziku i kursit të këmbimit për bankat i shtohet presentation, is a huan considerable awareness about the exchange rate risk and, above all, the high level of foreign automatikisht listës së rreziqeve që shoqërojnë procesin e huadhënies, duke ndikuar kështu mbi normën e huave difference between the loan interest currency loans poses a risk per se. In from Euro use, instead of the domestic me probleme. rate in ALL and that in Euro, thus case of exchange rate depreciation, one. Surely, the development of domestic making the ALL lending relatively more the unhedged borrowers will find it Çfarë masash po ndërmerren? capital market is a prerequisite for a Në vitin 2012 Serbia ndërmori politikën ekonomisë, Banka Qendrore dhe qeveria expensive. Certainly, such difference hase “dinarizimit” difficult to të payback their sipas loan të in cilës foreign higher of domestic currencies, in morën masa për një situatë të and përshtatshme makroekonomike synonte të nxiste në njëuse shkallë më të been narrowing from 2013 on. currency. The që exchange rate riskpërdorimin for lartëHigh të dinarit. Maqedonia konsiderohet si vendi me nivelin më të lartë të euroizimit në Ballkan, e sidomos për sa each of the above mentioned countries integration in foreign trade, to the e ekonomisë kombëtare, i përket huave. Për këtë arsye, Maqedonia kabanks marrë is njëautomatically sërë masash përadded de-euroizimin (even in Albania). Currently, the emigration, remittances and financial list of tërisks withndryshimi the lending ndër të cilat përmenden: identifikimi i huamarrësve huajassociated të pambrojtur, i rezervës së detyrueshme në channels also play an important role process, thus affecting the issue of non- Albanian Stock Exchange, ALSE, a valutë, etj. in using Euro in candidate countries performing loans. private entrepreneurship was opened in Në po fillon të ndërmerret një politikë e “de-euroizimit” të ekonomisë kombëtare. for Shqipëri Europeangjithashtu Union. Albania's trade Albania a few months ago (still not yet What measures aremarrëveshje being taken? Konkretisht, në prill të 2017-ës, firmosi një bashkëpunimi me Ministrinë e integration with countries usingBanka Euro e Shqipërisë operational), and it may be thought to Financave dhe me Autoritetin e Mbikqyrjes Financiare (AMF),Serbia për zgjerimin e përdorimit In 2012, undertook the të monedhës vendase, e has been helped by several factors, the të de-euroization process. In cila fokusohej në tre shtylla/grupe kryesore të veprimit: E para lidhet me politikën fiskale,support e cila duhet krijojë "dinarization" policy of ethe economy, includinge përshtatshme geographical proximity, për situatën makroekonomike, të nxitur përdorimin monedhës vendase; e dyta lidhet me the meantime, lending in local currency according which theeCentral and historicalmonetare, ties, andkontrollin so on. Trade withbankat, politikën e sistemit lidhurtome rritjen shkallësBank së përdorimit të lekut në sistemin remains important bankar dhe e countries treta përfshin të gjithë for veprimtaritë që nuk përmenden në grupin e dytë, por qëangjykohen të part of promoting the government took measures for an Euro area accounts de-euroization policy, as well as the nevojshme e procesit të de-euroizimit. about 51%përofecurinë the commodity trade for appropriate macroeconomic situation, countries of Western Balkans mentioned aimed at promoting the use of dinar at development and deepening of primary a higher rate. Macedonia is considered and secondary bond markets. above. Interest rate loans in euro and ALL in Albania, 2000-2017

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January 2018

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ECONOMIST CORNER

Financial Stability

Banking System' s Challenges and Risks A problem that asks for higher attention from the banking system remains the issue of the impact of interest rate fluctuations and system exposure to this phenomenon, especially at a time when the gap between assets and liabilities sensitive to interest rate according to re-pricing periods, is relatively high.

Prof.Dr. Adrian CIVICI

President, EUROPEAN UNIVERSITY OF TIRANA, UET-EUT

inancial system stability is defined as the capacity, or the ability of the system to be sustainable and to function efficiently in response to destabilizing factors, or circumstances. Financial instability could provoke shocks of macroeconomic nature, could produce a dangerous contraction of monetary supply, or failures in the payment system, could lead to significant losses for banks, while compromising key parameters of their stability and sustainability, and could lead to a loss of confidence in the banking system. Financial stability is indispensable for guaranteeing economic growth and country’s welfare, because thanks to financial system channels, the banking system could function efficiently, savings are converted into investments, money circulates freely without bottlenecks and excesses, the credit system develops under favorable conditions, the risk remains in control and minimized, etc.

In the frame of an intensively developing financial sector, notably financial innovations, a rapid growth of assets and their respective volatility, globalization and financial market integration, the creation of many new instruments and asymmetric information, the financial stability assurance becomes the most important concern for central banks, government and the banking system as a whole. In this context, it is important to demonstrate the level and issues regarding the exposure of the Albanian banking sector to risks, this sector’s activity is currently faced with. As per the analyses made and conclusions drawn in this regard by Bank of Albania, the Albanian Association of Banks, various commercial banks operating in Albania, IMF and the World Bank, or other institutions which analyze and study the banking system situation in Albania, in front of financial stability’s requirements and standards, it is concluded that the Albanian banking sector risk is low and it is in the process of a continuous adaptation and improvement. Let us analyze, in detail, some of current risks or risks faced by banks in Albania. Credit risk. Although the loan growth for the whole Albanian banking system continued to be meager throughout 2017, following a long period of handling problem loans, reaching 2224%, a high and worrisome figure in October 2017, the non-performing loans ratio fell to 14.3%. A number of measures and decisions by Bank of Albania, Ministry of Finance, commercial banks and IMF recommendations, affected such very positive downward trend, where the

most important ones are as follows: specific actions of banks for a faster and complete loan collection, restructuring, and write-off of lost loans from balance sheets; the package of specific measures to facilitate the collateral enforcement; regulatory changes related to the clarification of the concept of nonperforming loans write off and those related to administration of properties recovered out of collateral enforcement process; reviewing the regulatory framework for licensing companies that buy bad debts; strengthening the regulatory and reporting requirements for banks, in terms of quality credit risk management, in compliance with European practices; payment of arrears to businesses by government; improving the coverage of non-performing loans with provisions and capital; continuous improvements in the quality of collateral for new loans; positive changes during recent months and years, regarding the criteria for granting FX loans, business loans and especially the treatment of long maturity loans, a better control for new lending flows, better quality study of borrowers’ solvency; increased cooperation between banks for better management of non-performing loans, etc. Specifically, the Albanian banking sector is also exposed to developments in the real estate market. Data on this market performance for 2017 show an obvious increase in available spaces, building permits and their costs, accompanied with a surplus of the real estate loan stock. A very positive sign here is the fact that, non-performing loan ratio pertaining to such problematic sector, often discussed as a potential crisis sector, have fallen to levels of 8.2 - 8.5%,

January 2018

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KREDI PËR SHTËPI

Lumturi është të jetosh në shtëpinë tënde! Jemi gjithmonë pranë jush dhe vazhdojmë të plotësojmë kërkesat tuaja! Kredi për blerje, ndërtim dhe rikonstruksion shtëpie me normë interesi fikse për vitin e parë 3.5% në Lekë dhe 2% në Euro.

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whereas banks also report an increase in collateralized loans with real estate at the level 50%. About 67% of this loan stock belongs to individuals, while 43% of business loans are collateralized with real estate. The weighted average interest rates on real estate loans fluctuate around 4.5%. These indicators show to good credit management in this delicate sector, thus adding guarantees for the elimination of credit risk in real estate loans. Liquidity risk. Regarding banking system activity data for 2016 – 2017 period, it is clearly evidenced that the liquidity ratios in ALL and FX are significantly above the minimum required levels imposed by Bank of Albania’s regulatory framework. The main source of funding remains deposits, which cover (almost) in double the volume of sector's loan portfolio, while the dependence on foreign funding lines remains low. According to Bank of Albania," the share of its assets stood at 95.8% of the Gross Domestic Product (GDP), up by 4.5 percentage points compared with the previous year. Loans and deposits grew by 2.5% and 5.2%, respectively". The indicators of the first six months of 2017 show an even greater improvement, as regards banks’ capitalization and profitability. The banking sector's capital adequacy ratio reached 16.3%. The profitability indicators of the sector, Return on Assets (RoA) and Return on Equity (RoE) resulted at 1.6% and 16.7%, respectively. The most positive effect on these indicators seems to have come from the decline in credit risk provisions. Meanwhile, according to BoA, "the financial result from the core activity of financial intermediation, as reflected in net interest income continued to decrease." This trend is due to return on investments falling faster than the respective expenditures, against the backdrop of operating in an environment of low interest rates for a relatively long period of time. These indicators prove that capitalization and profitability of banks is adequate and stable to withstand the activity risks.

During 2017, the banking sector has been careful in controlling the performance of direct and indirect exposure to exchange rate movements. Meanwhile, in 2017 BoA has been showing a more intransigent approach, by drawing attention and suggesting practical actions to reduce the use of foreign currencies, mainly the euro – a warning against the euroization process - in the financial system and economic activity in Albania. Banking system exposure to market risks. In the BoA's Financial Stability Report for the first six months of 2017, it is underlined that "the banking sector’s net open position in foreign exchange to regulatory capital ranged within long-term levels, pointing to a limited and downward exposure of the banking sector to the direct impact on the balance sheet, from the exchange rate volatility”. The 2017 statistics show that the unhedged foreign currency loans, especially in cases where borrowers have basic income in another currency - mainly in ALL - has remained stable, in terms of both total loans and foreign currency loans. Specific analyses show that during 2017, the banking sector has been careful in controlling the performance of direct and indirect exposure to exchange rate movements. Meanwhile, in 2017 BoA has been showing a more intransigent approach, by drawing attention and suggesting practical actions to reduce the use of foreign currencies, mainly the euro – a warning against the euroization process - in the financial system and economic activity in Albania. Another problem that asks for higher attention from the banking system remains the issue of the impact of interest rate fluctuations and system exposure to this phenomenon, especially at a time when the gap between assets

and liabilities sensitive to interest rate according to re-pricing periods, is relatively high. Referring to BoA’s grouping of banks in Albania, it turns out that large banks group has the lowest level of exposure, or a higher rate of coverage of foreign currency liabilities with foreign currency assets, while medium-sized banks show a higher exposure or lower coverage of foreign currency liabilities. Small banks show greater volatility to this exposure. The resilience of the banking sector – stress test. The assessment of the resilience of the banking sector for the period 2017-2018, in the framework of applying the three-scenarios "stress test" - the baseline, moderate and adverse scenario - shows that the Albanian banking sector is stable and resistant, especially in terms of capital adequacy and liquidity indicators. Referring to the baseline scenario - a progressively positive economic growth, credit growth and significantly improved loan portfolio quality - it results that the capital adequacy ratio for 2018 is expected to increase to 16.6%. In the moderate scenario – a positive economic growth but at a slower growth rate, the more anemic loan portfolio - the capital adequacy ratio is estimated to reach 12.8% by the end of 2018, requiring that some banks, which account for 35% of sector’s total assets, will need additional capital injection. In the adverse scenario – a contraction of economic growth, depreciation of ALL exchange rate, credit contraction and interest rate hikes - the capital adequacy rate is estimated to decrease to 10.1% at the end of 2018, and the number of banks assumed to be in an undercapitalization situation goes to 10, and they own 50% of the sector's assets. The same tendencies are also noticed in the context of liquidity stress test, which aims at assessing the individual ability of banks, and the banking sector in general, to withstand possible shocks in financing their activity. The results show that, the banking sector successfully withstands the liquidity stress test in ALL, Euro and USD.

January 2018

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CORPORATE SOCIAL RESPONSIBILITY

Goal #3 • ABI Bank, together with Tirana Municipality and "Studenti" Sports Club, co-operated in organizing sports classes at social centers of Tirana, during October - November 2017. • On 15 October at Tirana Marathon, the most important sports event of the year, ABI Bank and its team were there to promote healthy life through sport. Goal #3; #5 "Together Against Breast Cancer - Men Support the Pink Campaign", organized for the ninth year by YWCA association, was closed in October in the city of Lezha. Representatives of state and international institutions joined the symbolic awareness march. Goal #10 • The American Bank of Investments celebrated the New Year's Day, together with the children of Pediatric Hospital in Tirana, where over 200 different toys and gifts were donated, voluntarily collected by bank’s staff. • The bank celebrated Thanksgiving Day with people in need at Social Center no.6, Tirana, along with representatives of the American Chamber of Commerce and the American Embassy Youth Council. Goal #17 On 21 October, the American Day was organized for the first time in Korça, where ABI Bank was the main sponsor. An exhibition of letters and photos preserved by Korça families, traditional American dishes, music and children's games at Korça Old Bazaar, were organized on this occasion. The event was attended by the Mr. Donald Lu, US Ambasssador and Mr. Andi Ballta, ABI Bank Chief Executive Officer and bank employees. Art, Sport & Culture On 29 September - 01 October 2017 at the premises of the National Historical Museum, TI Institute and the Ministry of Culture organized "Ethno Vibe Style Museum", with the support of ABI Bank, in the frame of National Cultural Heritage Days.

Goal #4 • BKT made a donation for Malatya Education Foundation (Malatya Egitim Vakfi - MEV) to meet their financial needs for 60 students, during the school season. Malatya Education Foundation was founded in 1985 with the honorary chairman of the eighth President Turgut Ozal to give scholarships to university students who are successful in economics. • BKT has launched the Student Loan to help those who are in the Bachelor and Master study programs afford their education expenses. Following the

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January 2018

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initiative of previous months, the presentation of this product continued also during October at the European University of Tirana. • BKT continues to support the improvement of premises in our country’s schools. The next project was “Adem Bedalli” school, Peqin where Banka Kombëtare Tregtare funded the repairment of school signboard. • BKT supported financially the conference: “Socio–Economic Perspectives in the Age of XXI Century Globalization”, Tirana – Albania, 1st & 2nd December 2017, organized by the Department of Economics of Faculty of Economy, Tirana University. • “Aleksandër Moisiu” University, Durrës (UAMD) organized the graduation ceremony for FASTIP students. This academic year corresponds with the 10th anniversary of FASTIP and the cooperation of Banka Kombëtare Tregtare with "Aleksandër Moisiu" University, Durrës. In this ceremony, were graduated 26 students, 13 of them were honored and pleased to be able to get their work contracts along with their diplomas. • In the frame of our CSR program, and giving the fact that it was the end of the year, regarding this seasons holidays, BKT purchased and prepared packs with different types of foods for all the children that are being treated in this center. Goal #9 BKT donated office computers to the Center of Agricultural Technology Transfer of Fushë Krujë, with the aim that such center could offer more qualitative service to the community. Goal #16 BKT sponsored the organization of the 4th Conference on the occasion of the 20th anniversary of the Albanian Institute of Chatered Auditors, on 17 – 18 November with the topic: “Auditor’s challenges in an economic environment in permanent change”. Goal #17 • BKT sponsored the Albanian Embassy in Ankara for the organization of the event in occasion of the Albanian National Independence Day, 28 November. • 2017 has been officially announced from the Albanian Government as part of the 105th year birth anniversary of Albania’s national hero, Skanderbeg. In the framework of different organizations regarding this topic, BKT financed the Ministry of Diaspora to produce promotional items.

Goal #1 • Credins Bank branches in the city of Fier were organized voluntarily by donating clothing and food to the Albanian Red Cross. • For the second consecutive year, Credins Bank stayed close to families in need. At the end of the year, the bank's initiative focused on aid to families affected by flooding during December, in the city of Fier. January 2018

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Goal #3 Credins Bank supported the Ministry of Health and Social Protection in the activities undertaken in the context of awareness raising campign against breast cancer, during October, becoming part of them to provide more information and screening across the country, among which: the sale of flower bouquets near New Bazaar, on October 15, at the Creative Square in Tirana. Goal #4 This year, the bank was part of a tour at public and non-public Albanian universities in Tirana, Durrës, Shkodra, Vlora, Korça and Gjirokastra, to learn more about student challenges and to propose financial solutions offered by the bank. Goal #9 The bank supported Medical Center No.9 in Tirana, by financing the reconstruction and improvement of all internal and external premises of this center. Goal #10 Even this year, Credins Bank cooperated with Down Syndrome Albania Foundation and SOS - Albanian Children's Villages, by buying their postcards for greetings of End-year festivities. Goal #15 Credins Bank supported Tirana Municipality in implementing the "Orbital Forest" project. Thanks to the bank's contribution, the municipality continued planting 150 trees in the dry lake area. Art, Sport & Culture The "Way to Success" sculpture by Butrint Morina comes as a result of the competition "A Bank for Art", organized by Credins Bank in Lezha, in the frame of its policies for development and support to art and community.

Goal #2 This year, Fibank has had as its main focus pensioner and in this regard it carried out a successful campaign by promoting pensions at Fibank #Fibankpensionistet. Following Social Responsibility by demonstrating a special care for this group, Fibank donated to all abandoned pensioners in need, food for holidays near the "Pensioner Association". Goal #5 Campaign launched by the FSNF and sponsored by Fibank aims to raise awareness among Albanian Youth & young adults on Violence against Women and girls especially during the pregnancy period. #celebrateHer #lumturiaesaj January 2018

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Goal #4 In the framework of the year-end festivities, Fibank together with representatives of the Bulgarian Embassy in Albania organized a meeting in Kukes Municipality with Mayor Mr. Bashkim Shehu, Director of DAR Kukes, as well as 5 school directors of Gora area, to donate 10 computers for pupils, as well as gifts prepared by the Bulgarian Embassy for Christmas and New Year.

Goal #10 The Bank continued the donation to SOS Children’s Village to meet the needs of two children of the village. The bank received an Award for being a regular SOS Donator and for the contribution given during the period of 7 years. Moreover, the bank purchased the end of year cards (kid’s designs).

Goal #1 Bank employees supported SOS Village initiative, by buying charity cards prepared by the children of this village. Goal #2 On 2-3 December, 112 employees of Intesa Sanpaolo Bank Albania and Mr. Pedrazzi, Chief Executive Officer, voluntarily collected food to support people living in very difficult conditions, within the framework of the first initiative in Albania, as a cooperation between Food Bank Albania, CONAD and Intesa Sanpaolo Bank Albania, for a simultaneous organization in seven major cities of the country. All branch staff outside the capital, like: Vlora, Shkodra, Elbasan, Lushnja, Fieri and Korça participated in this activity. Goal #3 The second blood donation initiative was organized on 23-24 November at the Barricade Street Branch and Head Office of Intesa Sanpaolo Bank Albania. Goal #4 • The Bank joined the savings museum initiative (Museo del Risparmio) and the Italian galleries (gallerie d'Italia) & the historical archives, to celebrate the World Savings Day (31.10.2017), by organizing several national and international events. • The General Manager of Intesa Sanpaolo Bank Albania shared his experience with Junior Achievement students at “Sami Frasheri” High School on 30 November, by talking about the "Entrepreneur Guide", following the "National Month of Entrepreneurship". Goal #8 • On 17 November, the 8th Edition of the International Day of Small and Medium Enterprises was organized by Italian Confindustria, in cooperation with business associations focusing on fighting false goods. For the second year in a row, Confindustria Albania attended this initiative 34

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and in cooperation with Intesa Sanpaolo Bank Albania organized visits of students from "Our Lady of the Good Council" University at bank premises, near "Training Center" in Lapraka. Intesa Sanpaolo Bank Albania was part of "Albania Soils Land - Consume Albanian!" Fair, on 29 November at "Mother Teresa" Square, following the support through products and services provided to Agri Business.

Goal #2 During the end of the year the management decided to allocate the money usually spent for gifts to charity, specifically to the Association of Pensioners. More than 400 packages were distributed to pensioners in extreme poverty. Goal #3 • As part of our principle to support the communities in need, a new center for the treatment of autistic children opened in Durrës. • The bank supported a series of forums and seminars from “Mother and Child” Foundation for the “Evaluation of the situation as regards to the national referral system for the newborns and mothers in Albania”. Goal #11 • Act for society organized the event “Power Up Community", where on December 5th awarded three winning prizes for projects that the students will apply to the respective cities. • The promotion of agricultural sector, under the initiative "Albania soils the land – Consume Albanian". The objective of this activity was to introduce the development and promotion of agricultural sector, to promote domestic production, not only through product exposure, but also the organization of seminars and discussion tables for this purpose. The event was an interactive one, where various activities took place all the time. Goal #15 The bank supported the activity "Economic Mission - Agriculture in Albania", organized by Advantage Austria Albania.

Goal #4 The bank created and promoted recently the "Student Package" product. The mission of this new product is the very first connection between young people introduced with the challenges of an independent adult, and the bank as a financial institution. Societe Generale Albania met with students at the educational institutions where they follow their studies and presented the Student package, which raised interest among them. Through this tailored product for them, the students can have their personal or joint account with their parents. January 2018

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Art, Sport & Culture • Tirana Bank was the main sponsor at "Song Marathon" Concert, organized in the center of Shkodra on 17 August and in the city of Përmet, on 24 August, 2017. • Following the national holidays of November and considering that the year 2018 will be "Skanderbeg Year", the Ministry of Diaspora was involved in the project by producing posters, calendars, and national symbols. Tirana Bank sponsored the production of 1,350 agendas. • Tirana Bank sponsored the Autocephalous Orthodox Church of Albania in organizing cultural activities on 17-18 November 2017 in Tirana, in honor of Mikis Theodorakis the famous Greek composer. Goal #3 • Tirana Bank supported the activity: "Albania Soils Land - Consume Albanian!". • Throughout a year, the bank staff collected funds from personal donations, through a special account, for the celebration of the feast with children of the Oncology and Hemophilia Pavilion and for purchasing gifts, on the occasion of the End-Year festivities. • Tirana Bank’s staff was organized for one of the most beautiful year-end projects: Our Christmas Tree”, an initiative that adorned and made happy many people, unlucky to celebrate at their homes. Tirana Bank donated the Christmas Tree with ornaments and its staff personally prepared gifts on this occasion. Goal #4 "Road to Success" event, presented by Vasil Naçi, was back on 9 November at the Palace of Congresses, where over 2000 people, including BusinessMag, had the opportunity to learn how to be motivated in a special training. Tirana Bank sponsored this event, by baing "Silver" sponsor.

Goal #8 • Union Bank joined the European Bank for Reconstruction and Development (EBRD) Trade Facilitation Program (TFP), by signing an agreement under which Union Bank will be a bank that will issue trade finance guarantees to support the import and export activity of domestic companies. • On 18-19 November, Union Bank participated as the main sponsor at "The Steps for Creating A Successful Business" Startup, organized at Tirana Business University, aimed at encouraging and supporting students in developing business ideas. Among 15 ideas that competed, the contest was won by Megina Laçka, with her idea: Bio Kozmetika, an idea related to the artisanal production of natural cosmetic products. January 2018

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ACTIVITIES Human Resources management in digital banking On 4 October, AAB organized the HR forum: “Human Resources management in digital banking”. This activity brought together international and national HR experts, who discussed the ability to learn and adapt to changes that will continue to characterize bank employees, through digital transformation.

2nd Internal Audit Forum: Responding to the Voice of Stakeholders On 13 October, AAB in cooperation with the Albanian Institute of Internal Auditors (AIIA) organized the Second Internal Audit Forum: “Responding to the Voice of Stakeholders”. This forum was an excellent opportunity for key stakeholders to state their views on insights, perspectives and recommendations required from internal auditors to facilitate achievement of objectives. The activity was attended not only by internal auditors of the banking sector, but also by banks’ CEOs, representatives from Bank of Albania, representatives from the Central Bank of Kosovo, representatives from international consulting companies and other financial institutions.

“EU Supervisory framework and 2017-2018 Priorities” workshop The event, held on 24 October, was an organized by Deloitte Audit Albania with the support of Albanian Association of Banks. The activity was attended by 44 participants.

Workshop on COSME program On 22 November, AAB in collaboration with Ministry of Finance and ICC Albania organized the workshop on COSME program, which is an EU program, implementing the Small Business Act (SBA), running from 2014 to 2020. The program will support SMEs in: Facilitating access to finance; Supporting internationalization and access to markets; Creating an environment favourable to competitiveness; Encouraging an entrepreneurial culture. The program

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was attended by 50 participants.

Workshop on FATCA & CRS On 30 November, AAB, in collaboration with PWC, organized the workshop on Foreign Account Tax Compliance Act (FATCA) certification and the implementation of Common Reporting Standards (CRS). The round table was attended by 22 representatives of AAB member banks.

ATTF Alumni Meeting On 5 December, 2017, AAB organized in Tirana the first meeting of ATTF Alumni. Bankers that have participated at ATTF International Seminars on AML, ACAMS & Compliance, HR – People Management for Team Managers, Executive Program in Luxemburg, attended the event. Mr. Luciele Milani, Project Officer at House of Trainings International Branch in Luxemburg addressed few words regarding the excellent performance that all participants from Albania have shown in all seminars and thanked AAB for excellent cooperation. Also, Mr. Spiro Brumbulli, AAB Secretary General thanked ATTF for the great opportunities Albanian bankers have thanks to this collaboration. The event was also attended by top 2 HR trainers of ATTF team: Mr. Ossona and Mrs. Harnois, who is the head of the HR program in Luxembourg. On 6 December, Ms. Milani met with the AAB Secretary General and discussed cooperation between the institutions and the trainings to be organized throughout year 2018.

The Year-End Dinner On 20 December, 2017, AAB organized the Year-End Dinner, attended by member banks’ Chief Executive Officers and representatives, special guests by Bank of Albania, such as: the Governor, First Deputy and Second Deputy Governor, Director of Supervision and other departments, Chief of Cabinet of Governor’s Office; the Director of Deposit Insurance Agency, and members of “Bankieri” Editorial Board.

January 2018

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January 2018

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AAB organized the 2nd Conference: “Banks for Growth in Albania”

n 11 November, AAB organized the conference: “Banks and the Economic Growth in Albania”. The conference was attended by H.E. Mr. Edi Rama, Prime Minister of Albania, Mr. Arben Ahmetaj, Minister of Finance and Economy, Mr. Gent Sejko, Governor of Bank of Albania. Mr. Enis Aliko, Deputy Minister of Infrastructure and Energy, and the advisor of the Minister of Justice were

part of the panel of discussions. Also, representatives from Bank of Albania, Albanian Financial Supervisory Authority, non-bank institutions, bank executives and high representatives of the banking sector, representatives from international financial institutions IMF, World Bank, EBRD, and representatives from EFSE development Facility (EFSE DF-which was the main sponsor of the conference) attended the conference. The activity was widely covered by media, during the opening session.

January 2018

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TRAININGS CIA Exam Review, 2-3 October The certification for Internal Audit CIA® is a certification issued by Global Institute of Internal Auditors The training was attended by 11 participants from Albania and Kosovo. Leading with Emotional Intelligence, 4-5 October An interactive training held in Tirana attended by 12 participants from member banks. Risk Management Auditors point of view, 10 October This in-depth training course on Risk Management, organized in collaboration with AIIA, and attended by 10 participants. Effective Management, 23-24 October This was a two-day training seminar, attended by 15 participants from Albania and Kosovo and delivered by Dr. Yehuda Hamovitz. Visa Claims Resolution (VCR) Disputes, 25-27 October A highly three-day interactive course was organized, which included group discussions, lectures, quizzes, and group activities. The course was attended by 19 participants. Retail Banking, Internet Finance & E-banking, 1-2 November Some 15 participants received the necessary information for the management of new distribution channels and the way Retail banks manage the evolution of the FinTechs. Quality Assurance Assessment, 6-7 November The training provided insights on key elements of a Quality Assurance Improvement Program and was attended by 10 participants. Treasury Sales Excellence, 21-22 November This two-days training, was provided free of charge by BACEE. The course gave a deeper insight in the human elements of TS people, using presentations, communication practices and facilitated collective work of participants. The training was headed by Mr. Attila Mizsér, Apollo Consulting and was attended by 12 participants. People Management for team managers, 4-7 December House of Trainings Luxembourg offered to AAB one of the best of their training seminar for managers. The 4 days training, started with a mandatory Welcome Dinner the night before the first day of course. The training was headed by Viviane Harnois Gilles and Ossona de Mendez, experts from Luxembourg-based banks with extensive HR experience and locally recognized as leaders in their field and was attended by 18 banks’ representatives.

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January 2018

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AAB

Financial literacy

An essential life skill for young people Obviously to improve financial education, you have to reach children at an early age so they can establish a strong foundation. We need to give financial education the kind of respect that we give to other subjects in the academic curricula.

Junida TAFAJ Operations Officer ALBANIAN ASSOCIATION OF BANKS, AAB

he role of financial education grew rapidly in the 20th and 21st centuries. It is centered around concepts such as budgeting and saving, integrated into financial education programs, aimed both at explaining salary management mechanisms and at presenting financial protection mechanisms and long and medium-term investment tools. Financial education is not just a trend, but an essential life skill in today’s society, which enable us to develop and balance our budget, make more appropriate short and long-term saving decisions, and select the best financial products that could make life easier for us. Obviously to improve financial education, you have to reach children at an early age so they can establish a strong foundation. We need to give

financial education the kind of respect that we give to other subjects in the academic curricula. We teach kids arithmetic at school when they’re little so they can take calculus when they’re in high school. Yet for financial education, we just expect that if we toss something at them in high school, they might be prepared. We should be teaching the concepts, the building blocks, from a very early age. Strong efforts should be done to have qualified teachers to teach financial literacy. Students acquire financial skills from their parents and of course financial skills are strongly related to socio-economic background of their families. Efforts to increase financial education in schools don’t let parents off the hook. Schools are well positioned to teach students what they may not be able to learn from their parents or by themselves. Schools reinforce the parental messages by adding more structured lessons and practices. Financial education programs are sorely needed, as evidenced by the PISA 2015 Results: Students' Financial Literacy report launched this summer by the Organization for Economic Cooperation and Development. The report said just 1 in 10 teenagers around the world are able to make some key — but complex — financial decisions, including choosing among various loans or analyzing invoices and pay slips. On average across OECD countries and economies, 22% of students do not have basis financial

skills. Unless we can force change on these issues, millions of young people who lack the skills to make effective financial decisions will find it harder to become productive and capable citizens. They are already financial consumers and will soon encounter complex decisions, like student’s loans. It is more important than ever for children and youth to be economically equipped and empowered to close inequality gaps and build a brighter future! Money Matters Matter because children and youth need to receive the knowledge and develop skills to make smart financial decisions throughout life.

Save the Date!

Money Week 12 – 18 March 2018 continued on next page!

January 2018

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