No. 2 January 2012 Publication of Albanian Association of Banks
Banks & governance
www.aab.al • BANKIERI • 1
AAB seeks to promote the most up- to-date banking standards of its member banks, the development, stability and efficiency of Albanian banking system in general, thereby contributing to the advancement of the Albanian economy.
www.aab.al
No. 2 January 2012
Contents
Publication of Albanian Association of Banks
&Banks governance
BANKIERI is the newest official publication of the Albanian Association of Banks which will mainly focus the Albanian banking industry. BANKERI will provide readers with valuable information on the financial industry's developments in general, and of commercial banks in particular.
EDITOR’S DESK …and the Award goes to:Governance & Competition!!! by Dr.Elvin MEKA
p. 5
FRONTLINE Changes and amendments in the law about bank governance by Dr. Spiro BRUMBULLI Improvement of corporate governance at banks by Rezarta CENAJ
Publication of Albanian Association of Banks Editorial Team:
p. 6
Elvin Meka Editor– in–Chief
p. 7
Klodian Tomorri Correspondent
INTERVIEW Corporate Governance in banks
Bankieri No. 2, January 2012
p. 9
EXPERT FORUM
Junida Tafaj (Katroshi) Coordinator Sonila Krashi Design & Layout Besa Vila Editor
Crisis and the need to improve financial reporting in the public sector by Prof.Asoc.Dr. Hysen ÇELA, CPA
p. 13
Gert Hoxha Photographer
Project financing and its role in the economy by Flutura Veipi
p. 15
Editorial Board: Seyhan PENCABLIGIL AAB Chairman and Chief Executive Officer, Banka Kombëtare Tregtare
BANKING SYSTEM Decentralisation of e-money services by Endrita XHAFERAJ
p. 17
Fraud prevention and monitoring in the card industry by Enkelejda BALLIU
p. 20
Banks: This is how physical security is ensured by Klodian TOMORRI
p. 21
ECONOMIST CORNER From Basel I to Basel III - three decades in pursuit of banking stability by Prof.Dr.Adrian CIVICI
SOCIAL CAPITAL
p. 24 p. 28
FINANCIAL AUDITORIUM Debt Problems - Learn how to deal with them boldly by Junida TAFAJ (KATROSHI)
p. 31
HTML E-banking Security by Akil NDRENIKA
p. 33
BALKAN NET Interbalkan News
AAB
p. 35 p. 39
Ioannis KOUGIONAS AAB Vice Chairman and General Manager, National Bank of Greece - Albania Christian CANACARIS AAB Executive Committee Member and Chief Executive Officer, Raiffeisen Bank- Albania Flutura VEIPI AAB Executive Committee Member and Spokesperson of the Management Board, Procredit Bank Andrea GALATOULAS AAB Executive Committee Member and Country Manager, Alpha Bank - Albania Endrita XHAFERAJ Secretary General Albanian Association of Banks Hysen CELA Executive Director Institute of Albanian Authorized Chartered Accountants Adrian CIVICI Director of the Doctoral School European University of Tirana Spiro BRUMBULLI Rector - Tirana Business University ALBANIAN ASSOCIATION OF BANKS Bulevardi: “Dëshmorët e Kombit”, TWIN TOWERS Tower 1, Floor. 6, A3, Tirana Tel: +355 4 2280 371; Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org | www.aab.al
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EDITOR’S DESK
…and the Award goes to: GOVERNANCE & COMPETITION!!!
…by following and implementing a best practice within (banking) system’s everyday activity, just puts a building block, if not a cornerstone, in the high-rise building of longterm quality management, creation of value- added for shareholders, as well as valuable social responsibility.
Dr. Elvin MEKA Editor-in-Chief
T
hese popular showbiz words seem to suit well to the latest changes and amendments at the Law on Banks in Albania. Typically, all the media lights were focused on proposals like “bridge bank” and conversion of branches of foreign banks into subsidiaries, given the real and ongoing sensitivity of banking and financial crisis, especially in Eurozone and European Union, and the major place they occupied on the set of the proposed changes. Finally they were not “awarded”. Not a surprise at all, given their “ad hoc” nature of occurrence (a bridge bank may (and hopefully) never see the sunlight in Albania). Technically, they fall in the category of “pre-emptive” mechanisms and measures, intended to handle systemic risk or other complex situations, usually following certain crisis within financial or banking system. The “quiet” amendments, as regards (1) the mandate of the members of banks’ Board of Directors and (2) composition of this board, with a majority of the members being independent outsiders (non-executives), along with (3) practical decentralization of the market for financial instruments, typically the e-money, are the real stars of the
set. And these changes (now part of the law in force) must be applauded, at least for two reasons. First, changes in the corporate governance components tune the banking system with the right and core requirement for a healthy system, that is, quality and responsible corporate governance. As OECD puts it: “…that, corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally”1. So, by following and implementing a best practice within (banking) system’s everyday activity, just puts a building block, if not a cornerstone, in the high-rise building of long-term quality management, creation of value- added for shareholders, as well as valuable social responsibility. Second, quality governance components and the decentralization of e-money services indicate that, the Albanian banking system has definitely left its teens behind, and now has entered another level of development: THE NEXT LEVEL – MODERN BANKING!!!
CORPORATE GOVERNANCE AND THE FINANCIAL CRISIS - Conclusions and emerging good practices to enhance implementation of the Principles, 24 February 2010 - Directorate for Financial and Enterprise Affairs, OECD Steering Group on Corporate Governance.
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FRONTLINE
CHANGES AND AMENDMENTS IN THE LAW ABOUT BANK GOVERNANCE he Law no. 10 481, dated 17.11.2011 “On some changes and T amendments to the Law no. 9662,
by Dr. Spiro BRUMBULLI Rector Tirana Business University
The change in the number of bank’s non-executive board members “at least one third” to “the majority of”, is a novelty in the Albanian experience of corporate governance, thus marking a new advanced standard, in the field of management and administration of joint stock companies in the banking industry.
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dated 18.12.2006”, has enacted several amendments to the Law “On Banks in the Republic of Albania”. Article 8 of this law specifies certain changes to article 35 of the law on banks, typically, at point 2 the wording “at least one third” is replaced with “the majority”. It refers to the number of board members, with no conflict of interest, in a bank’s Board of Directors. This change, which was tacitly passed, in the course of discussing and approving the amendments, is a novelty in the Albanian experience of corporate governance, marking a new advanced standard, in the field of management and administration of joint stock companies in the banking industry. There are several important aspects that should be highlighted regarding this change. Firstly, the amendment transforms “one third” into “the majority”. Thus, the law on banks already prescribes the presence of members with no conflict of interest in the board of directors, that is, those with no conflict of interest with shareholders, with the bank and the executive directors, pursuant to stipulations in the law about bank’s administrators. The novelty of this amendment is not the presence of external members in the board of directors, instead, their number. Secondly, a question arises naturally as to why such importance is given to such issue? Banks are the largest financial intermediaries that use extensively the principle of financial leverage, which means that the shareholders’ capital of a bank makes up for 8 to 10 percent of the total assets. The rest consists of liabilities. Given that about 90 percent of liabilities are deposits and other obligations, the presence of a third party, interested in the usage and administration of their assets is quite significant. Thus, besides shareholders, there is a strong interest on the banks also from stakeholders
(those affected by the activities of the corporation as a whole). This party can not be indifferent and uninterested on the performance of the company to which they have entrusted their financial funds. From this derives the necessity for representation of this interest in the board of directors. The ‘2008 crisis in the financial industry, among other causes, brought to light the conflict of interest between achieving aggressive results by the executives in order to obtain bonuses and the long-term risk associated with the commercial company in its business. The financial crisis threatened the depositors more than the financial corporates’ shareholders. Immediate interventions by governments of various countries aimed not merely bailing out certain corporate, but were concerted actions, undertaken to calm depositors and closing the playing field for any repetition of crisis phenomenon of 1929 - 1933. This intervention did come at a cost. There were public costs, which might seem beneficial to the shareholders of companies in risk of bankruptcy only, but on a broader perspective, it was aimed to rescue the depositors. The lesson drawn from this situation was clear: policies and aggressive strategies to achieve objectives and growth of the market share contradicted the financial stability, and the public interest. The public interest should have a more sound representation. The change in the law comes precisely in this historical context. As a precautionary measure against the risk of financial stability, the legislator has considered also this important shackle, in the chain of banks’ management. The aim is to increase the independence of the board of directors in its judgement and decision-making process. Thirdly, as part of amendments to prevent phenomena and actions that may threaten financial stability in the future, this change should also be linked with the concerns that have been observed in the practice to
Banking industry once again demonstrates the high standard of organization, operation, administration and management of banks. date from the banking supervisory authority. Theoretically, in the situation before the last changes, a bank with only one shareholder, regardless of the appointment of board members, could be run indirectly by the same shareholder, since the majority of board members belonged to him. This is a very dangerous situation, and now, by establishing the majority of boards with individuals who have no conflict of interest with the shareholders, the bank or executives, the shareholders’ pressure on members is diminished, if not completely eliminated. By having no prejudice about the quality of members to be elected by the shareholders during the appropriate period (yet to be established by Bank of Albania) to implement this standard, and given that the appointment will be professional and impartial, then it is a step forward towards the real independence of banks’ management. This means that, the law itself provides the premises for a solution and the theoretical solution, but in practice the law must be completed with the appropriate regulatory framework to make this change effective and with positive outcome. The natural concern and hesitation, regarding the method of selection and appointment of these candidates with no conflict of interest with shareholders, should be addressed through proper monitoring of this process by the relevant supervisory authority. The replacement of board members should not be formal, but real and effective. Finally, the banking industry once again demonstrates the high standard of organization, operation, administration and management of banks. The banking system is notably more well-organized, controlled and supervised, as compared to other industries. The good will, authority, prestige and Bank of Albania’s professionalism have been key ingredients to the successful development and continuous improvement of the banking system.
IMPROVEMENT OF CORPORATE GOVERNANCE AT BANKS
E
ffective practices of corporate governance are essential for achieving and maintaining public trust and confidence in the banking system, both very crucial for the proper functioning of the banking sector and economy as a whole. Poor corporate governance leads to bankruptcy of the bank, which may cause public costs and consequences considering the impact on the deposits system, and the consequences may spread on a wider macroeconomic scope, as may be the risk and impact to the payment systems. In addition, weak corporate governance can lead markets to lose confidence in the bank’s ability to manage its assets and liquiby Rezarta CENAJ dity, including deposits, which may Director Corporate Governance Institute in turn lead the bank toward a liquidity crisis. Albania OECD principles define corporate governance as the group of relations between the corporate (company) management, its board of directors, its shareholders and other partners. Corporate governance also provides the structure through which the objectives are defined, and necessary means to accomplish these objectives as well as the ways of monitoring their performance. The presence of an effective system of corporate governance within a company and in the entire economy helps in providing a level of confidence, that is necessary for the well-functioning of the market. Given the perspective of an industrial banking system, corporate governance involves the way the bank’s business and matters are managed by the Board of Directors and senior executives, which influences how they: - establish the objectives of the bank; - operate daily the bank’s business; - carry out their fiduciary responsibilities towards the shareholders and take into account the interests of other partners; - interrelate the bank’s activity and approach with the expectation for banks to operate in a safe and sound mode and in compliance with applicable laws and regulations, and - protect the interests of depositors. The bank must have an adequate number of directors, who should be able to give independent opinions, on the bank’s management perspective, political interests or inappropriate external interests. The Board of Directors has the responsibility to protect the bank from illegal actions, as well as from the influences of dominant or controlling shareholders, which may be harmful or not in the best interest of the bank and its shareholders. Independence and objectivity can be improved by including qualified non-executive directors on the board, or by setting up a Control Board, separate from the management board. This is very
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important, especially in those areas where there is a risk that the board could influence to undertake actions which are not in the best interests of the bank (although in the personal interest of internal individuals or shareholders), or where there may be a potential for conflict of interest in key areas. Examples of key areas include ensuring the integrity of financial and non-financial reporting, reviewing transactions with concerned parties, the appointment of board members and key executive directors, remuneration of board members and executive directors. As members, the qualified independent directors can bring new perspectives from other businesses that can improve the strategic managing direction and can be important sources of management expertise, but it is very important that they are familiar with the banking system. The recent changes to the law “On banks in the Republic of Albania” stipulate some of the principles of good corporations governance, one of them being the composition of the board of directors. Stipulating in the banking law the principles of “loyalty” and “conflict of interest”, not only with regards to managers and directors but also to members of the management or directors board and shareholders, is the concrete expression of the principle of the reliability obligation of the above mentioned persons to perform their duties, set out in the law and charter, trustworthily and in the best interests of the society as a whole. If
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the function as manager or member of the Board of Directors puts the person into a position such that the obligation towards the company is in conflict with his own or other related persons’ interests, there is risk of violating the function and trustworthiness to the company. This rule is the concrete expression of the rule of legal transactions pro se, as specified in the Civil Code, which are by no means absolute. The Board of Directors has the main duty “to prevent and avoid” present or potential cases of conflict of personal interests with those of the company, by adopting internal acts, which define the basic methods for preventing and resolving conflicts of interest. Board members must have the right qualification for their positions, a clear understanding of their role in the governance of the bank, and be able to provide a sound judgment about its matters, and this does not apply only to financial institutions. Shortcomings in the composition and authority given to Boards have been evident and widely disputed. The remuneration of board members and senior managers also remains a very controversial issue in many OECD countries. This is one of the issues that emerged in the OECD report regarding the lessons learned from the 2008 financial crisis, where the banking sector was hit most. The crises in the financial institutions in 2008 have been described as the most serious financial crisis, since the Great Depression. By mid 2008 it
As members, the qualified independent directors can bring new perspectives from other businesses that can improve the strategic managing direction and can be important sources of management expertise, but it is very important that they are familiar with the banking system. was clear that the crisis in the USA along with the lack of liquidity had a major impact on financial institutions and banks of many countries. Bear Stearns was bought by JP Morgan Chase, with the support of the Federal Reserve Bank of New York, and financial institutions both in USA (Citibank, Merrill Lynch) and in Europe (UBS, Credit Suisse, RBS, HBOS, Barclays, Fortis, Societe Generale) continued to raise substantial volumes of additional capital, to finance, among others, major losses in their assets, undermining meanwhile, in many cases, the existence of shareholders. Freddie Mac and Fannie Mae, had to be taken over by the government, when it was realized that their capital position was weaker than expected. The collapse of Lehman Brothers deepened the crisis, causing a general loss of confidence, and subsequent bank failures and recapitalizations, throughout Europe and USA. All these failures highlight the need to review and analyze the adequacy of corporate governance principles on the items where most weaknesses were evidences, especially regarding the risk management system, and the remuneration of executive directors, both being competencies of the Board of Directors.
INTERVIEW
CORPORATE GOVERNANCE IN BANKS Interview of BAnkieri's Editor-in-Chief with some Banks' CEOs Q1: Some new changes and amendments were recently enacted in the Law on Banks in Albania, specifically in the area of corporate governance in banks. How do you see these changes? SEYHAN PENCABLIGIL The first amendment in the framework of corporate governance of banks is on the mandate of the members of Board of Directors (supervisory board), the decision making and the supervisory organ of banks. It has become fix “for a period of 4 years” instead of “for a period not longer than 4 years” that was before. This amendment has an important consequence on increasing the responsibility of the members of the board of directors. The existing law would allow for a shorter mandate of the members. In this case, their decision making could be focused more on short-term consequences of the bank not taking much care for the long-run effects. Whereas, the four year fix mandate, obliges them to take care of longer term consequences in the bank. Moreover, it increases the effectiveness of the board of directors that could be threatened with continuously changing members. The second amendment has to do with the composition of the board of directors that makes mandatory the majority of the members to be independent – not connected with interest to the bank, the shareholders
or its executive directors. Increasing the number of independent members (from one third of the members that was before) contributes in getting objective and un-biased economic decisions that would protect the bank and its shareholders against possible conflict of interest. Of course, this creates ground for protecting more the interest of other stakeholders as well, like depositors. STEFANO FARABBI R1: The new changes and amendments made with the Law no. 10481, dated 17.11.2011 into the Law no. 9662, dated 18.12.2006 “On banks in the Republic of Albania” aim: (i) to ensure the stability and a closer supervision of the implementation of the policies and strategies of the bank and a higher level of risks management, by introducing a fix mandate of 4 (four) - years of the Board of Directors’ members, and establishing that the majority of BoD member should not be connected through private interests with the Bank, shareholders, and executive directors;
(ii) to increase the control and supervision of the Central Bank to the other banks operating in Albania, by introducing “bridge” banks; (iii) to increase the credit risk assessment level, by providing that not only banks but other financial institutions as well may be obliged by BoA to disclose information on their borrowers through and with the Credit Registry. GAZMEND KADRIU The recent changes to the Law on Banks were clearly focused on few remaining details about bank resolution and, to a lesser extent, e-payment issues, corporate governance changes were secondary.
Q2: Are these changes coming in the right moment for banks in Albania? Do they tell us that, now it’s time for banks in Albania to be headed toward the next (higher) level of quality corporate management? SEYHAN PENCABLIGIL There exist many studies that conclude that though not being a source, the corporate governance plays a key role in development of crisis. So far, we have over passed successfully the first wave of the crisis starting in United States. However, the ongoing problems
in the European financial markets transfer their negative effects to Albania in different ways especially considering the fact that biggest share of the banks here is owned by European banks. Moreover, all the latest financial problems have contributed to negative reputation
“Improvement of corporate governance definitely will contribute to the creation of a better, stronger and more sustainable banking system in Albania.” Seyhan Pencabligil
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of banks and loss of trust by the public. Eventually, improving the corporate governance of the banks can be considered an important measure beside others. Improvement of corporate governance definitely will contribute to the creation of a better, stronger and more sustainable banking system in Albania. However, though the corporate governance principles guided by best practices are globally sound their application in markets like Albania poses considerable challenges. STEFANO FARABBI Given the international financial crisis, the changes made in the Law no. 9662, dated 18.12.2006 “On banks in the Republic of Albania” seem to further strengthen the Albanian banking system position. As for the corporate management quality, the current membership of the corporate governance bodies is composed of members whose professional skills, experience and capacities, have been
controlled and approved in advance by the Bank of Albania, and who give guarantees for a professional and quality management level; however it is to be underlined that the changes of Law no. 9662, dated 18.12.2006 “On banks in the Republic of Albania” are to ensure the further stability of these bodies. GAZMEND KADRIU One possible quick answer would be that maybe this moment, a moment of renewed upheaval in the international scene, this time squarely in EU, is not the perfect time for more meaningful changes in bank governance. However, one also has to concede that regulatory changes would be never enacted if the ‘perfect timing’ was always sought. The changes in corporate governance, by their nature, are never a big urgency, especially not in the banking system, one that traditionally has sound corporate governance structure and practices. So, I personally accept
that these intended changes simply occurred at the first practical instance, as simple as that.
…the implementation of legal amendments by Bank of Albania and commercial banks will be effective, by preserving and further enhancing the already good quality of corporate governance in the banking system.
Q3: What is your opinion about the new composition of bank’s management board (with more non-executives - outsiders) in terms of ensuring appropriate and effective quality corporate governance?
“... the implementation of this change by all the actors involved must be accomplished in compliance with the very purpose of this change, and hence prevent any misinterpretation that may lead to deterioration of the existing standards”
Stefano Farabbi
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SEYHAN PENCABLIGIL As mentioned in the first question, the important consequence of this amendment is protecting against possible conflict of interest. Moreover, independent members have valuable constructive contribution to the board decision making because of their knowledge and contacts. More diverse boards likely contain more specialists and therefore should get greater benefits from specialization. Of course this is effective in case that these are people of character and relevant experience. Otherwise, it could have the contrary effect.
Board of Directors’ members who being non-executives (outsiders), avoid/prevent the conflict of interests (set out in the article 44 of Law no. 9662, dated 18.12.2006 “On banks in the Republic of Albania”). However, it is to be underlined that, the implementation of this change by all the actors involved must be accomplished in compliance with the very purpose of this change, and hence prevent any misinterpretation that may lead to deterioration of the existing standards provided by the International Banking Groups present in Albanian Banking System.
STEFANO FARABBI As previously stated, the main goal of this change is to ensure a close supervision and monitoring of the bank activities in terms of implementation of the policies and strategies of the bank and a higher level of risks management; while this main goal is proposed to be achieved through the majority of
GAZMEND KADRIU It happens that our bank chose to undertake a specific consultation with IFC on corporate governance just a few months before these changes of the Law on Banks were enacted. Consequently, among other things, we had extensively discussed this particular issue of a majority of independent members in bank
Board of Directors. Personally, I certainly respect that a number of relevant international institutions recently have upgraded their longtime joint recommendation of having ‘sufficient number of’ independent Board members to ‘majority’ of such members. I am sure that their internal process was sound and their intentions certainly aimed at the public good. However, I also voiced my own reservations about the appropriateness and overall logic of this recommendation. In my opinion, this concept faces the following weaknesses/challenges: 1) It is difficult in practice to find ‘independent’ members technically able to take such an important seat in a bank Board. Individual banks struggle to find even one or two such qualified people, not to mention dozens of such people required for the whole system. 2) Technical ability is not enough. Such people should be predisposed to serve as bank Board members, to feel that responsibility and be prepared to fully take it. An effort is required for such members to avoid a formal honorific role and embrace an active leading role in a bank. 3) After finding such technically able and responsible independent members, we come to the key challenge to this idea: can a group of such people be entrusted with the power to make the most important decisions in a bank?
By definition, independent Board members have no connection to the bank beyond occasional Board meetings, at most monthly. They are crucial and required as independent voices just for that quality of detachment. But, entrusting bank direction to a majority of such ‘detached’ people, with insufficient stakes, seems somewhat extreme to me, a risk of wishful thinking removed from day-to-day reality. 4) At the extreme, a theoretical Board comprised only of independent members runs the risk of being strongly self-serving, or only capricious, or, almost as the best version, to put it bluntly, happily and successfully manipulated by the CEO, hopefully to the best of the bank. If the Board has ‘only’ a majority of independent members, the hope is that such members, while continuing to be independent and responsible and active, will recognize the superior stakeholder feeling of Board members directly representing the bank shareholders and will reserve themselves to a supporting instead of a leading role. But, then, that would fully defeat the notion of a Board with a majority of independent members, would it? Of course, with the law enacted, all this is just theory. Whatever the concept dilemmas, I am confident that its implementation by Bank of Albania and the banks will be
proficient, preserving and further enhancing the already good quality of corporate governance in the banking system.
“…regulatory changes would be never enacted if the ‘perfect timing’ was always sought. The changes in corporate governance, by their nature, are never a big urgency, especially not in the banking system, one that traditionally has sound corporate governance structure and practices.” Gazmend Kadriu
Q4: What is the expected impact of such a move in promoting the best practices of corporate governance within Corporate Albania (joint-stock companies in Albania)? SEYHAN PENCABLIGIL It is known in the best practices that the primary responsibility for good governance rests with the board of directors of that company. However, there are many other stakeholders such as shareholders, employees, governments, stock exchange etc. that can promote it through different mechanisms. Stock exchange is an important one that can promote good governance through disclosure and
listing requirements. In every stock exchange operating throughout the world the companies listed are required to fulfill the criteria related to the application of corporate governance principles and make the required information disclosed to the public. Moreover, a written disclosure is required every year on the criteria not fulfilled explaining the reasons for that.
STEFANO FARABBI Given that the changes made into Law increase the independence of the supervising council’s members preventing any potential conflict of interests, it is expected that this action improves the implementation of the corporate governance principles i.e. approving and controlling of the policies and strategies, monitoring the effectiveness of the management practices, protection of shareholders and stakeholders’ interests, depositors’ etc.
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EXPERT FORUM
CRISIS AND THE NEED TO IMPROVE FINANCIAL REPORTING IN THE PUBLIC SECTOR
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Hysen ÇELA, CPA, Prof.As.Dr Executive Director IEKA
Although the roots of the crisis lie elsewhere, the problems have worsened due to both regulatory and accounting failures. This is clearly illustrated in the Greek case, where government’s statistical data on deficit and debt were revised several times.
n an era when the crisis in the Euro area keeps pursuing and sovereign debts are increasing, the more impending duty for the governments of EU countries is the reforming of their accounting practices. At the annual meeting of the IFAC Council held in Berlin on 16-17 December 2011, Steve Freer, chief executive of CIPFA (The Chartered Institute of Public Finance and Accountancy) called for joint efforts of all the accounting profession to transform public financial management globally. The crisis of sovereign debt has deepened continuously over the last two or three years, reaching its peak in Greece, Spain, Italy, etc. It originated in the financial failures, and the global collapse of years 2007 - 2008. In reality, the sovereign debt is just the last chapter to this crisis, which is blowing like a major financial hurricane threatening everyone. In such an unfavourable climate, it is important that public expenditures, revenues, assets and liabilities are controlled and managed with proficiency, that government policies have strong grounds, and that decisions are taken responsibly and at the long-term public interest. Although the roots of the crisis lie elsewhere, the problems have worsened due to both regulatory and accounting failures. This is clearly illustrated in the Greek case, where government’s statistical data on deficit and debt were revised several times. Markets hate uncertainties. But what could be more uncertain then the financial situation of a government which enters into complex transactions to save the banks, while its accounts are being kept at a cash basis?
Only few governments in Europe and world are properly organized to meet the requirements of modern public finances management. Most governments, from the accounting point of view, keep on budgeting and handling events and transactions according to the principle of receipts and payments – thus on the cash basis. This is also how it is actually done in our country; although in recent years there has been a tendency to set up a disclosure and reporting system on a modified cash basis, whereby efforts are made to recognize and report obligations. It is time for governments to face the inherent risks of their accounting shortcomings and begin to take seriously the responsibilities of public finances management. This would mean for budgeting and accounting to be handled on accrual basis, be reported consistently and transparently in accordance with contemporary standards, and have independent and professional audit. Without these measures, accountability, transparency and, most importantly, confidence will remain low. The risks and consequences of failures and weaknesses, wide spread in the management of public finances, are extremely serious. They have an impact on a variety of important variables, such as: economic performance, development and opportunities, living standards and quality of life, service delivery, accountability, trust in government, and much more than that. This is why people react emotionally through protests and demonstrations, whenever governments announce public expenditures cuts, as we have seen in Greece, Italy, etc.. The current situation requires
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the development of a common global campaign, which should include, alongside the profession, all other partners and stakeholders. Within five years, important improvements could be achieved in public (government) accounting, auditing and financial management practices, only if welldefined and carefully coordinated actions will be carried out. In the case of our country, I think it is the right time when better arrangements are needed to be made to the public sector accounting, with the objective of shifting within several years from the current system toward designing and implementing the National Public Accounting Standards, which should converge with the International Public Accounting Standards (IPSAS). The principles, systems and national public accounting methodology, should aim at fully converging with the “Acquis Communitair” of European Union, and the best international and European practices. The primary objective of public accounting is to enable users to assess the transparency, efficiency and accountability in all public transactions and understand
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the public financial information. Transparency is achieved through the presentation of complete and true information for decision making purposes, providing information to the Parliament, to the general public, policymakers, civil employees and international community, other countries, agencies and international organizations, foreign investors and financial markets. Most probably this would require the Ministry of Finance to assess the feasibility of organizing and regulating the public accountant profession, whereby to stipulate not only the accomplishment of the title, but also the obligation of its members to comply with professional standards and code of ethics. Perhaps it is time to reconsider the draft law prepared earlier on public accounting, in order to guarantee the relation that should exist between public accounting and the system of internal financial control in the public sector, and to better regulate public internal control procedures regarding documentation, verification, monitoring, organization and monetary controls. Reliability of financial information
increases when they are subject to audit, performed by both the supreme audit authority (Supreme State Control), and the independent external auditors. The efforts to improve public financial management (PFM) and to develop international frameworks for reporting and auditing at a global level, which are the basis for transparency and accountability, have been many. We could mention the efforts undertaken by the two independent boards of the International Federation of Accountants (IFAC) that are: • The International Public Sector Accounting Standards Board (IPSASB), which along with the development of a full package of international accounting standards for public sector entities, also deals with addressing challenges such as measuring and reporting of longterm fiscal sustainability, and • The International Audit and Assurance Standards Board (IAASB), which has drafted a set of clarified international auditing standards and other standards, which are widely accepted. Even the International Organization of Supreme Audit Institutions (INTOSAI) has accepted the IAASB and the IAS, and in addition has developed a further series of professional standards for public sector entities. In order for the transformation and improvements to have long-term effects, it is necessary that governments build a broad national and global consensus, which guarantees a high level of commitment and energy for a long period of time. This is also what should be done by managers of public services organizations and influential individuals, such as accountants in general, general auditors and financial managers in public organizations. As Freer emphasizes: “There is no doubt that these are historic times. In 20, 30 or 40 years’ time people will talk about the global crisis at the beginning of the twenty-first century...”.
EXPERT FORUM
Project financing and its role in the economy
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by Flutura VEIPI Spokesperson of Management Board ProCredit Bank
Large projects, either public or private, offer great opportunities for the development of the economy in which the project is developed, by providing employment, profits and technology transfer for enterprises, tax income for governments, increased domestic consumption or/and exports.
roject financing, as a method of financing long-term loans, is based on cash flows generated by the project and is an innovative financing technique that is used in many large projects. Traditionally, large public projects are financed by governments or international institutions, while major private projects are financed by loans from the banking system. The engagement in processes of privatization and regulation, in many economies has driven an increase of the role undertaken by the private sector in project financing. In the traditional way of financing a project, the key important aspect is the identification, analysis, allocation and management of any risk associated with the project. This financing scheme may include many types of economic agents, as well as private companies, central and local government units, banks and other financial institutions. The implementation and functioning of large projects, either public or private, offer great opportunities for the development of the economy in which the project is developed. These projects promote economic development by providing: employment, profits and technology transfer for enterprises, tax income for governments, increased domestic consumption or/and exports. At the same time, when the government is involved in these projects it is advantaged by more income, which will be used for other projects in the public area such as education, health care, etc.. In addition, this mechanism increases the likelihood for the privatization programs undertaken by the government to be more successful, given that project financing is a clear mechanism that links
many parties, not linked otherwise, in sharing risks and benefits. Simultaneously, it would help the central government and local government units in improving primary and secondary infrastructure. Endorsement of this type of financing by the financial system may attract foreign strategic investors, who committed through long-term investments, in the host country.
ProCredit Bank and project finance
The involvement of ProCredit Bank in project financing should be regarded in close relationship to the objective and vision that the bank has to promote domestic economic growth through financing local businesses. Improvement of the energetic capacities and exploitation of natural resources related to agriculture, are important areas related to the sustainable development of the country, the bank has been involved over a long period of time, by creating necessary skills and capacities.
Energetic Industry
ProCredit Bank has long been involved in investments in energy efficiency and renewable energies. In addition to financing for the enhancement of capacities of businesses operating in the energy efficiency industry and improvement of housing conditions for families, ProCredit Bank has also financially supported investments in the hydropower industry. Hydropower offers many advantages and interest for several reasons: • It’s a key area that affects the overall growth of welfare, and the support to this venture means a direct assistance for the development of the industry, and consequently of the economy. • Reduction the inevitable carbon emmisions in the environment.
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negative impact on the generation of sustainable income, hindering the timely repayment of contractual obligations. Amongst the range of products to suit agribusiness, ProCredit Bank has designed its newest product to finance new businesses in their start off - “Start-up” loans. A loan shall be considered as such (Start-up), when the financial analysis is done based on the expected income from the investment and the project to be developed, whether such income may be regular or seasonal. The purpose of these loans is for the bank to support the starting of a new activity or the development and the significant expansion of a current activity, aiming at doubling or tripling it.
So far, we have witnessed a limited involvement of the banking system in this area of business. It should be mentioned that the government, with the support of some international financial institutions, has undertaken several initiatives towards improving and completing the legal framework, by making it more acceptable both for the investors, and for the financial institutions. One of the banks’ advantages in supporting financially the hydropower projects is that these investments contain a limited risk in terms of return, at least for the first 15 years of operation of the power plant. This assurance, from the perspective of financial institutions, comes for two reasons: • The nature of the country is such that it favours the energy industry, which could provide enough income to cover financial obligations and to generate satisfactory profits to concessionaires. • Under the concession contracts signed with the contracting authority, in the first 15 years of operation of the power plant, the concessionaire is obliged to sell all generated electricity to KESH and the latter is obliged to buy this power, at a price calculated by a formula favourable to the concessionaires. However, like in any business activity, the involvement of financial
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institutions in this industry contains risks. Some of the most prominent risks are as follows: • Loopholes in the legal framework, • The settlement of payments by KESH to the concessionaire for the purchased power. • The concession contract’s expiration term for starting off or terminating the construction and operating of the plant. Agriculture
The development of rural areas is a very important process, which directly affects the living conditions of people resident in these areas as well as that of the entire population. Rural areas are very important factors in the economic development, since the primary activities in these areas, agriculture and livestock, employ almost half of human resources in the country and use significant capital resources. Furthermore, agricultural production is the basis that supports the activity of food processing industry. Rural development enables rural areas inhabitants to manage their own development, enabling sustainable use of rural facilities. Agribusinesses have been the less credited sector by banks, because it is considered a risky activity. Lack of economies of scale, high seasonality of production, limited market access due to lack of infrastructure, have a
Improvement of the energetic capacities and exploitation of natural resources related to agriculture, are important areas related to the sustainable development of the country. This facility will assist and will be a further opportunity in motivating and faster integrating Albanian citizens who live abroad. This opportunity will make it possible for them to reconsider returning to Albania and take active part in the development of our country. In addition, “Startup” loans will give to the Albanian citizens residing in Albania one more reason not to emigrate, but instead take advantage of the offered opportunity to open their own business. I am sure that the development of such businesses will increase employment, income, and without doubt, will increase the welfare and rural development.
BANKING SYSTEM
DECENTRALISATION OF E-MONEY SERVICES
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by Endrita Xhaferaj, MA Secretary General Albanian Association of Banks
Electronic money has the potential to replace cash, as the main instrument in small value payments, by making them easier to carry out and less costly, both for the customer and the merchant.
ne of the changes to the Law “On Banks in the Republic of Albania”, approved in November 2011 by the Albanian Parliament, was related to the extension and decentralization of the market of financial instruments other than the traditional ones - in this case “electronic money”. The specific changes are mainly the following: • introducing the definitions of “electronic money institution” and “electronic money”; • redefining “banking activity” by removing the exclusive right of banks to issue means of payment in the form of electronic money; • adding to the list of accepting deposits subjects those entities that receive monetary funds versus immediate issue of electronic money. These changes were undertaken by Bank of Albania in the framework of approximation with the European legislation and more specifically, in alignment with the EU Directive 2009/110/EC1, and aim at expanding the market so that the issuance of electronic money can be done not only by banks, but also by non-bank financial institutions. The above changes in the Law “On Banks in the Republic of Albania” come also as a response from Bank of Albania to the internal developments in the Albanian market, and are the first step towards changing and creating a more comprehensive regulatory framework for electronic money instruments. The expectations from this framework are that it will open the way for new market entrants to offer innovative electronic money solutions, without a loss of protection of consumer funds.
But, what is electronic money?
Electronic money (e-money) is generally understood as monetary value stored electronically as a prepaid mechanism, to perform transactions against a third party other than the issuer. Electronic storage does not always mean a physical electronic device; it can be a card or a mobile phone, but also a computer system. In addition, the execution of these transactions can be performed in terminals, but also in computer networks, such as the internet. Depending on the type of device and the network used, e-money products can be many and various, such as: prepaid cards, electronic wallet (e-Wallet), Mobile Money (M-Money), etc..
Impact on the Albanian financial system
In recent years, in Albania have emerged the first signs of the e-money revolution, which from more than a decade has significantly changed the payment systems in the world. So far, only few companies have adventured into this business, up to a certain extent, and in the absence of appropriate regulatory framework. They have been licensed as nonbank financial institutions, allowed to operate under a general grouping of activities, namely ‘payments and money transfers’. More players are expected to enter into this market, which would bring along many advantages for the Albanian customer, both in terms of reduction of cash transactions, and of further improvement of payment systems. Electronic money has the potential to replace cash, as the main instrument in small value payments, by making them easier to carry out and less costly, both for the customer and the
1 Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions
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merchant. With technology based solutions seen as key to achieving financial inclusion, the role of e-money becomes important in reaching out to the unbanked masses. Thus far, banks have provided the engine to sustain the flow, measurement, storage, growth, and creation of money. By a long tradition, they are the custodians of financial flows and growth, through deposits; facilitate the exchange of goods and services through payment services; provide credit for production and consumption; and, in conjunction with the law of supply and demand and market forces, determine the value of money. Electronic money changes the whole picture due to its advantages against traditional money, in terms of transferability, the information it stores and delivers, the lower costs, etc.. Traditional banking will feel somewhat threatened by the gradual transfer from traditional to electronic money, but only if banks refuse to recognize the inevitability of the new order and stick only to traditional typical products. Technological innovation can bring big promises to those banks that will embrace a conscious transformation of the concept of banking early enough.
Traditional banking will feel somewhat threatened by the gradual transfer from traditional to electronic money, but only if banks refuse to recognize the inevitability of the new order and stick only to traditional typical products.
On the other hand, the becoming of electronic money another important form of currency, in addition to changing the concept of money as we know it, could influence the effectiveness and implementation of monetary policy. The increased use of electronic money would limit the central bank’s ability to control money supply. While the payments technologies evolve and consumers increasingly rely on trusted third parties to look after their money (often in a nonbanking context), the legislative framework faces the tough challenge of keeping up with these technological and commercial developments. In such circumstances, new laws and regulations need to be clear for banks and other service providers, so that all parties may clearly understand how to establish or maintain their competitive positions in this new field. Issues that would need to be addressed by Bank of Albania in this context may include how to:
•
effectively supervise the nature and scope of application of e-money; • ensure the efficiency and safety of e-payments; • effectively carry out e-money statistical measures and monitoring activities; While there are substantial advantages to allowing non-bank operation related to certain e-money services, consideration must be given to the risk of erosion of the strength of the banking system. In particular, there should be thorough analysis of the impact on bank accounts and deposits which serve as consumer and commercial lending resources. Strengths of traditional and welldeveloped bank-based payment systems need to be reproduced or adopted in a non-bank e-money environment. These strengths include “know your customer” requirements, traceability, and a restitution structure that is consistent and understandable.
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BANKING SYSTEM
FRAUD PREVENTION AND MONITORING IN THE CARD INDUSTRY
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by Enkelejda BALLIU Chairwoman AAB Anti Card Fraud Committee
The implementation of new technologies clearly assists so much in fighting against frauds. Using cards with “chip” and PIN in the transaction level, is quite effective. 20 • BANKIERI • www.aab.al
ard fraud is one of the most worrying issues of the card industry. Each year the card industry suffers significant losses due to card fraud, ranging from occasional unscrupulous individuals to organized criminal groups operating throughout the world by stealing and cloning bank cards. The activity of the card industry is so important for criminals because an unauthorized access, even at a fraction of the total volume of the business of cards industry, translates into billions of dollars. While card issuing companies have invested hundreds of millions of dollars to develop sophisticated anti-fraud technologies, the cards industry remains in a constant conflict with the world of organized crime of card fraudsters, which focus their efforts on developing and finding new ways to steal and manipulate bank cards information. Card issuing companies have taken measures to prevent these fraudulent activities. They have also set risk parameters, which through sanctioning and verification of the card holder and the transaction, reduce opportunities for fraud. These companies also work closely with each other, and also with the law enforcement and protection bodies, to constantly fight organized criminals.
Risk management policies
For a card issuer it is crucial to have clearly defined policies of fraud risk management, which are understandable not only by risk
management staff, but also by all employees. Fraud risk management policies need to be comprehensive and in line with other policies of the company. They should include as well the types of authorization parameters to be used, but also the persons that set the data, which should be carefully monitored, with the aim of detecting possible cases of fraud. Policies for card fraud risk management should properly define procedures and controls, which should minimize exposure in all aspects of business operations and specifically regarding the: - the application process for opening new accounts, - cards production and distribution, and customer service (help desk or call center), - purchases on the Internet, etc.. Regarding customer service, for example, the application of risk controls makes possible the validation and verification of the identity of the customer who is being called. Regarding cards distribution, the application of an effective risk policy means choosing a special distributor for the distribution of cards, or having the customer withdraw it in the agency. This applies also to the administration and distribution of PIN, which is always done by different persons from those who administer the cards. In both cases, the chances that new cards are compromised before they reach the legitimate customer are minimal. Furthermore, fraud risk policies determine the physical
security procedures for plastic cards, such as setting up the access control to the safes were the cards and PIN-s are stored, stock inventory processes, production of new cards and the destruction of old cards. The application of new technologies helps significantly the fight against fraud. Cards with “chip and PIN” are very effective at a transaction level. The application of zero limits, at a transaction authorization level, would mean that the chances of identifying fraudulent activity would increase with each transaction. It often happens that the issuing bank refers to or contacts their clients, calling them for confirmation of transactions that they perform. Moreover, the receiving banks require verification of customers’ data during the process of authorization of certain transactions, through the issuing bank. Online transactions require a more advanced security protocol, to show the true validity of the transaction, using various security technologies. For the authentication of transactions via phone, or for those performed “online” via the Internet, there are other tools that can be used, which help to reduce fraud to a minimum, such as the service of verification of the address of the card’s holder, which allows the virtual trader to verify compliance of the card’s holder address with the address where the goods will be shipped at. Another tool is the application of the system “CCV” (Card Code Verification), referred to as “CSC” (Card Security Code), which is a three-digit number used for carrying out a remote transaction. Fraud in remote purchases, or as it is called in the terminology of cards business, card not present transactions (CNP), is an increasing and worrying issue. The clarity of the risk policies of the institution helps the departments of information technology to plan adequately their future investments. This is necessary in order to make sure that all software and equipments used are in accordance with the established security controls.
BANKS: This is how physical security is ensured
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by Klodian TOMORRI AAB Correspondent
o the inquiry as to why he robbed banks, Willie Sutton, one of the biggest robbers of banks in the history of the USA, simply replied: “Because that’s where the money is”. Commercial banks, but not only them, manage, process and circulate substantial monetary values, constantly creating the premises for attracting the “attention” of robberies and criminal actions. In 2010, according to the official figures of the Federal Bureau of Investigation (FBI), more than 4.997 robberies were registered in the USA commercial banks. Estimates show that through those were stolen over 43 billion dollars, of which over 95 percent were cash amounts. Physical robberies have been an all-times problem for the banking system, dating back to its creation. For this reason, banks worldwide pay special attention to physical security measures, not only to prevent theft of monetary values, but also to avoid damage or terrorizing to the their staff and customers.
Safety of Albanian banks
Albanian Banking system is relatively new, but private banks give special attention to the physical security and currently follow and apply the highest world standards in this regard. “The security of banks has advanced far more than the criminal attackers,” says Qirjako Taçe, chief of security at Union Bank. Security is a priority for any bank, as it relates not only to the guarding of monetary values, but also to the physical security of staff and customers. “The structures assigned to perform security services, be it departments, divisions, or units, in collaboration with physical defense and security companies, the State Police, and other specialized bodies, are at all times committed to preventing threats and providing normal working conditions to the banking activity,” says Sokrat Dylgjeri, chief of security at Raiffeisen Bank. Nevertheless, the battle goes on. The studies performed on attacks to banks show that each time banks implement new methods or technologies for physical protection, initially criminal attacks tend to draw back for a while, but then attacks return more fiercely. “This was the case with the application of alarm systems, and surveillance and registration systems. Initially there was some recoil and then there were attacks more violent and more severe” admits Taçe. Intesa San Paolo Bank has employed 45 people in the department of Physical Security Services. “But this is only one part of our security network” says Barjam Ibraj, security chief at Intesa San Paolo. “In addition, we have implemented the most modern systems of high security, and on the other hand, our security service is supported by 11 SHRSFs in Tirana and other districts, with which we have signed service contracts,” he adds. Some of the banks “pass on” the service and also the risk of the external physical security of their branches, monitoring of the alarm signal and physical security during transportation of monetary values and ATMs loading, to the contracted SHRSFs. “But we urge them for correct observance and high quality service towards our bank,” says Ibraj.
Security measures
The main purpose of the security services in banks is to provide a safety environment for the staff and, of course, for the customers. “We deem to have achieved the objective. Bank customers should know that they are safe to the maximum extent within the practical potential of a bank,”
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says Ibraj. The premises are subject to maximum supervision. A bank’s branch of a surface of 100 m2 or more, is secured with a minimum of about 10 internal and external cameras, and several security systems. The same internal area of the bank is divided in different security zones where not even the personnel have competences and possibility to enter and exit, if they are not provided access through special identification cards issued by the security units. In addition, banks have internal security staff, which is qualified mainly in the area of security and is well experienced. Security personnel also includes security employees of SHRSFs, while the monitoring of the alarm signal is done via telephone combinatory with two communication options, and via the radio system through
“ The security of banks has advanced far more than the criminal attackers” Qirjako Taçe the bank and the operating room at the contracted SHRSF, and its task force ready to intervene. The same connections are also in place with the structures of the local State Police, which consistently deploy their service units in areas where bank branches are concentrated, in order to provide a better protection. Overall Security “Banks security is present and can be felt in and out of the bank, by the personnel and by the customer while carrying out banking transactions,” says Ibraj. He explains that in addition to the abovementioned systems, there are also other tools,
“... each time banks implement new methods or technologies for physical protection, initially criminal attacks tend to draw back for a while, but then attacks return more fiercely” Sokrat Dylgjeri
Throughout in the world banks pay special attention to physical security measures, not only to prevent theft of monetary values, but also to avoid damage or terrorizing to the their staff and customers.
which enable the minimization of the actions of robbers, and make them leave identifiable traces for police and prosecutors to document the evidence of their crime. The monetary values held by banks in their drawers or minisafes are minimal, and meanwhile other advanced cash equipment are being set, such as cash rollers - minisafes, which take a long time to extract large denominations, what is not favorable to the robbers. “The risk undertaken by a person who plans to rob a bank is too big, while the amounts that can
... we have implemented the most modern systems of high security...” Bajram Ibraj be robbed are small and the evidence taken against them is aggravating, especially taking into account the fact that the crime they are carrying out can be prescribed after many years, and they will be always attentively pursued by the police in the country and abroad,” says Ibraj. On the other hand, citizens do not risk anything. The banks are insured for their monetary values, and the values that can be robbed will be refunded immediately ensuring that customers shall not be jeopardized. It is rather the robbers who face a maximum risk, since in the collision with the State Police they may even lose their lives and health, in addition to the consequences of the crime for which they pay until the last day of the sentence, and even after getting out of prison by repaying for the damage caused to the bank and to the insurance company that insures the monetary values.
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ECONOMIST CORNER
From Basel I to Basel III -three decades in pursuit of banking stability
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by Prof. Dr. Adrian CIVICI Director of the Doctoral School European University of Tirana
Time and events that occurred in the period 1990-2000 showed that the 8% capital adequacy ratio could not provide the expected effects, especially due to the fact that this rule did not apply to off-balance sheet activities of banks, which would hide or disguise the true level of risk of many “initiatives”, undertaken by banks and financial institutions. 24 • BANKIERI • www.aab.al
he international efforts to identify a prudential regulatory system able to prevent banks failure, and especially its consequences on other sectors of the economy, had begun in the seventies of last century. But, it was the whacking collapse of Herstatt Bank in West Germany in 1974 that seriously hit the financial and monetary markets not only in Germany, but also paralyzed the interbank payments system in New York, that turned on the alarm signal on the need for harmonization of banking supervision and safety measures. Although a small bank, the spectacular collapse of Herstatt highlighted the systemic risk related to increasing internationalization of banks and financial markets. Only a few weeks later, Peter Cooke, director of supervision at Bank of England, proposed the creation of a committee of central banks and banking regulatory and supervisory bodies of 10 countries (France, Belgium, Canada, Italy, Japan, Luxembourg, Germany, Netherlands, Spain, Sweden, USA, and England). Cooke’s proposal was quickly transformed into a Committee that would meet regularly every 4 years in the city of Basel, Switzerland, under the “Bank for International Settlements”, whose main goal was the issuance of recommendations and suggestions of best practices on banking safety matters, aiming at an audience much wider than the 10 founding countries. The “Basel Accord” published for the first time in 1975 and completed in 1983, set out the principle of consolidated supervision of banks and financial companies that were not subject to the supervision of the national supervisory authorities. This was the first step towards an
international supervision of banks. Meanwhile, the 1980s emerged as golden years for banks and their profits, but also as very turbulent years for financial and monetary markets. It was the era of unlimited profits and high-risk but very lucrative bonds, the famous “junk bonds” issued in the USA to pay the debts of new emerging developing countries (economies), led by Mexico, but classified as very “speculative”. The turbulences and crisis of this bonds system showed, among other things, the weaknesses and limitations of the “Basel Accord” in preventing such practices in the name of a better harmonization of the banking regulation, and in prohibiting the “financial adventures” or unfair competition. Faced with this challenge, in 1988, the Basel Committee processed and released a new agreement labeled “Cooke ratio”, which became “the cornerstone” of the banking regulatory system that was called “Basel I”. The “Cooke ratio” was based on the principle that the financing of any risk should imply or be guaranteed by an amount of capital or funds of the banks in order to guarantee the global security of markets, to minimize risks of systemic nature, and avoid “domino effects”. This amount of capital was fixed at 8%. Was it enough to warrant the regulation and safety of the banking system? Time and events that occurred in the period 1990-2000 showed that it could not provide the expected effects, especially due to the fact that this rule did not apply to off-balance sheet activities of banks, which would hide or disguise the true level of risk of many initiativesof banks and financial institutions. Banking scandals or their
spectacular failures followed in a series. In 1995, there was the scandal of Barings Bank, a bank of the royal family, and one of the oldest and most reputable banks in England. A 25 years old “golden boy”, Nick Leeson, a speculator in the financial markets that gambled with “financial derivatives” caused the bank a loss of 850 million Pounds, about 1.3 billion USD, or more than half the capital of Barings! All this was due to the fact that Leeson “was allowed” to both order and register his transactions, thus being at the same time “front office” and “back office”. Other banking and financial scandals such as “Enron”, “WorldCom”, the audit company “Arthur Andersen” etc., showed that “Basel I” was insufficient, therefore a more advanced and more comprehensive accord was indispensable, that would respond to the new developments, especially to the necessity of new accounting rules applicable internationally, namely the IFRS (International Financial Reporting Standards). In 2004 was created “Basel II”, which, in response to all the banking and financial turmoil
and instabilities, proposed the “integration of operational risk” in the analysis of credit risk (reliability), as well as information transparency on the quality of borrowers. This new accord was based on three main pillars. First, the requirements on banks’ equity capital taking into account the operational risks and market risks, rather than focusing only on credit risk. The “Cooke ratio” was replaced by “McDonough ratio”, the name of the President of Basel Committee at the time, which required that the rate of banks’ capital was higher than 8% not only considering credit risk, but higher than 8% separately and weighted by three components (85% credit risk, 5% market risk and 10% operational risk). Secondly, the “supervision of management” of banks’ equity capital or funds. Banks could set high prudential levels in areas of interest to their activity, but on the condition that they would prove in transparent manners that their level of capitalization was sufficient relative to these ambitions. Thirdly, the “markets’ transparency” which meant standardized transparency of
banking best practices, transparency of risk portfolios by making them more clear and understandable to all stakeholders, directly or indirectly related to the banks. “Reading” of risk portfolios should be identical for all banks included in the zone or area where Basel Committee was operating. One of the key aspects of the “Basel II” was the requirement for a financial assessment or grading, as an essential element in assessing the level of risk. This accord stipulated that the assessment would be accomplished by specialized agencies internationally accepted for this role, such as: Standard & Poor’s, Fitch, Moody’s, as well as by the same banks with their established methodologies. However, despite the confidence of banking and financial circles on the guarantee granted by the package of measures of “Basel II”, the outbreak of the financial crisis in 2008 would bring up once again the necessity for completion and expansion of banking supervision instruments. In a global crisis situation, the main impetus came as a result of the famous bankruptcy on September 15,
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The new rules of Basel III and the requirement for an increase of banks’ capital can lead to a tightening of loans portfolios to finance businesses and consumers, which would have a negative impact in stimulating and supporting economic growth and dismissing fear of recession or depression.
with in the financial and monetary markets, as well as on the liquidity risk level. Designed to take effect in 2013, the “Basel III” accord focuses on some basic objectives: (1) setting a definite level of liquidity for banks, by introducing two new elements “LCR” (Liquidity Coverage Ratio), which enables banks to resist short term liquidity crises, up to 1 month, and “NSFR” indicator (Net Stable Funding Ratio), which enables banks to resist for 1 year to specific crisis situations of the system or of the same banks, (2) setting a certain level of “leverage effect (usage of financial leverage)”; (3) redefining the notion and composition of the banks’ equity capital, (4) reviewing the methods and manners of coverage of some types of risks, especially those directly and indirectly related to liquidity, (5) application of anti-cyclical measures. The indispensability of “Basel III” accord imposed an almost full consensus regarding its practical implementation. Even the USA, so far indifferent and very little involved in these accords, agreed to apply its standards, in order to avoid facing a crisis similar to that of 2008-2009 in their banking and
financial sector. However, even “Basel III” has been subject to several reservations, especially regarding the macroeconomic risks that its application may provoke. OECD published a study a few months ago, according to which “the new rules of Basel III could cost up to 0.15% of GDP, yearly, to the countries that will implement them”, which is a considerable amount if we refer to the minimal growth figures that many countries worldwide are currently experiencing. On the other hand, requirements for an increase of banks’ capital can lead to a tightening of loans portfolios to finance businesses and consumers, which would have a negative impact in stimulating and supporting economic growth and dismissing fear of recession or depression. However, there is still a long time before “Basel III” is expected to enter fully into function. Banks will have time until 2019 to take all the measures provided for in this accord. This date is considered adequate for banks to tranquilly design their strategies and measures to increase their capital, but on the other hand it is considered a long time to dispel fears of new crisis or tensions in the banking and financial markets.
2008 of the multinational investment bank Lehman Brothers, one of the greatest American actors in the credit, stock and bonds market. It was accused of deliberate disguise and concealment of its debts and abusive use of the accounting technique Repo 105, which led to the disclosure of false financial statements. Although Americans had never strictly applied the rules of “Basel II”, the banking and financial crisis erupted in the USA and then spread in many countries and regions in the world, proved the weaknesses of the supervision system and urgently called for its review and completion, as a follow up on the lessons from the crisis. The new accord “Basel III”, impelled mainly by the Financial Stability Board, established in London in April 2009 in the framework of the G20 summit, was finalized on December 16, 2010. Its focus was set on off-balance sheet activities of banks - particularly on derivative products, on the adequacy of banks’ capital in relation to the risks they are involved
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SOCIAL CAPITAL
INTESA SANPAOLO BANK When there is a will there is a way! –- “Eko-Mobility Bike Contest” Intesa SanPaolo Bank makes efforts to incorporate environmental issues and eco-friendly ways of living into the everyday life of its employees. On the occasion of the World Environment Day the bank organized a Bike Contest with its employees in the Tirana Park, near the Artificial Lake willing to develop this ecologic initiative, further.
Voluntary Blood Donation Initiative The employees of Intesa SanPaolo Bank participated, in 25 November 2011, at the voluntarily blood donation initiative, organized by Bank Blood Donators Group of Intesa. The bank has already made three blood donations, during 2011. This initiative is aimed to support children with “Thalassemia” in their everyday life needs and struggles. There are up 500 people in Albania, living with “Thalassemia”, where of them needs at least 50 package of donated blood within a year. The bank is committed to serve to the living society at its fullest possible, relying on the common values people share in the Bank and within the Group; “Acting Responsibly” is one, out of many.
Customer Satisfaction University Award During 2011, Intesa Sanpaolo Bank Albania launched the University Award program, an international initiative of Intesa Sanpaolo Bank. In the frame of customer satisfaction program: “Listening 100%”, the University Award Program aimed at involving bright students in improving Bank’s products and processes. Organized as a special cooperation between the Bank and some Economic Faculties, the program selected 12 students. They created real customer satisfaction projects, which started to be implemented in a real working environment, enabling them gain an excellent international experience.
Cooperation with CARITAS about children education in the area of Kasalla Intesa Sanpaolo Bank Albania joined the project of CARITAS to build up a kindergarten, attended by 30 children, between 3 – 6 years old. The kindergarden provides education through creative activities for children, assists their parents and helps them on how to better understand their children needs, thus contributing to a better relationship with their children. Also, the kindergarten provides regular meetings of children with two social workers.
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PROCREDIT
RAIFFEISEN BANK
ProCredit Bank cooperates with Ecovolis initiative, for environment protection.
Raiffeisen Bank awarded with the Philanthropy Prize, for its contribution in local level
ProCredit Bank supported the Ekovolis initiative of using bicycles, instead of cars. The Ecovolis station at “Elbasani” Street is particularly supported by ProCredit Bank, as one of most high-traffic areas in the city. In November 2011, 50 employees and the director of ProCredit Bank, together with members of Ekovolis initiative, cycled along the Boulevard, as dressed in green, to increase public awareness. This was not a special day, but a longterm commitment, of ProCredit Bank towards the environment protection, as part of its social responsibility.
FIRST INVESTMENT BANK
Fibank is consistently attentive in funding special activities, dedicated to Social Responsibility. For the end-year 2011, Fibank has donated a special fund to “SOS Village”, intended to be used as a direct help for every child who seeks shelter and family at this institution. Also, another fund was kindly donated to “State Police Martyrs” Association, to be distributed to families of police officers killed in the line of duty.
Raiffeisen Bank was awarded with the Philanthropy Prize, for its contribution to local community, in Shkodra. The prize was awarded to Mr. Christian Canacaris, Executive Director of Raiffeisen Bank with the motivation: “For the contribution in supporting the development of education and culture in the city of Shkodra”. Raiffeisen Bank has supported financially some schools in the city. ”We are a community bank and we mean our contribution to support its welfare. This is not a one- single year work, as we will continue to do our best in the coming years “, said Mr. Canacaris. The competition, among individuals or businesses that contribute to the community, was organized by Partners in Albania, Centre for Change and Conflict Management. Price was awarded by a comprehensive jury of representatives form civil society, media and other institutions, supporting economic and social development programs in Albania.
TIRANA BANK
The exhibition Following it’s philosophy of supporting and developing the social and cultural life, Tirana Bank is engaged in sponsoring some of the most important cultural events, in different cities of Albania. The bank supported in the city of Fier the opening of a personal threeday exhibition, by one of the most known intellectual personality of the city, the painter Vullnet Alushaj. The exhibition was visited and attended by many art-lovers. SOS Village Tirana Bank has a long history of supporting and cooperating with “SOS Village”. Tirana Bank helped the village to organize the EndYear Party, and supported it financially. Last year Tirana Bank supported and helped Tirana SOS Village with the New Year gifts, for 83 children. The gifts were kindly delivered to children by Tirana Bank employees, at the party organized by SOS Village.
“International day for the fight against poverty” On the occasion of “International day for the fight against poverty”, in 17 October 2011, Tirana Bank supported the Tirana Red Cross Initiative: “Help those who are different form you!” Tirana Bank prepared and provided 100 food packages, which were donated to 100 families in need.
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FINANCIAL AUDITORIUM
Debt Problems - Learn how to deal with them boldly
by Junida Tafaj (Katroshi) AAB
You will be given every opportunity to agree satisfactory conditions for repaying your debt. If you can make a satisfactory agreement with your bank about repaying your debt, it is important that you keep in touch with the bank throughout the repayment process, especially if your circumstances change.
Debts become a problem when you don’t know how to manage it and the way out of it. Human desires are unlimited; there is no saturation point for the satisfaction level. An individual has limited funds with him and to meet all the desires at one time is impossible. Thus, one tends to borrow money from the market; it could be in the form of loans or using credit cards. But, while it is good wanting to meet all needs and requirements to the best, one should borrow money only for the amount he or she will be able to repay easily. However, the picture in real life is totally the opposite; people tend to spend more than what they earn, by borrowing money from outside. These debts may become a big problem when it comes to repaying them and they may become too big and complicated to cope with. Debt is a serious problem, and it is always best to deal with it since the developing stage. The longer debts are ignored, the worse the situation
will get. So, the first thing one need to do is to sort out how much is owed and to whom. The next step is to find the solution to this problem. There may be a lot of solutions but, it is imperative to look for the best assistance. Debt is a significant tool to finance personal loans, but it should not be misused. Debt carries a charge on it in the form of interest and repayment of the loan amount; therefore it should be used wisely. Possible solutions one can opt for are a debt consolidation loan or debt settlement. Consolidation of debts is done to make it easier for the borrower to manage debts effectively. The purpose of debt consolidation loan is to make the monthly payment affordable at better terms. It is always better to keep the expense in limits to keep away from problems that debts can cause. A little effort today will help save heaps of money in future.
How you can get help? Banks are here to help you run your finances smoothly in a complicated world. You can get help in good and bad times. Banks understand that you can face unexpected changes in your circumstances, for example if you become ill or lose your job, and these can upset your financial plans and your ability to pay back any money you have borrowed.
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You may find yourself in financial difficulties if your lifestyle changes and your disposable income (the difference between your income and essential spending) falls, due to circumstances such as: • loss of employment • disability • serious illness • relationship breakdown • death of a partner • parental/career leave • starting a lower paid job You may be facing financial difficulties if you start experiencing one or more of the following: • you cannot keep up with your loan repayments or other commitments, • you repeatedly exceed your credit card or overdraft limit without agreement, • you make frequent cash withdrawals on a credit card, • you regularly request increased borrowing or repeatedly reschedule your debts, • you borrow more money to pay off existing debts, • you receive notice of insolvency or court proceedings. What can I do if I think I am getting into financial difficulties? The more open and honest you are about the problem and its causes, the more your bank will be able to help you. For example, when you know that your circumstances are going to change, get in touch with your bank. Banks will not usually be aware that your circumstances have changed until you tell them – and they will try to assist you if you are facing financial difficulties. They may put you in touch with another team within the bank that specialises in this area. Different things will be important to different people. Show your budget to your bank and try to agree a course of action with them. This might involve rescheduling repayments until you get back on your feet. How do banks deal with customers who are in financial difficulty? If you are in genuine financial difficulty, it is in the bank’s interest, as well as yours, to find a solution. Generally, a bank will want to do the following: • Contact you if they think or become aware that you may be heading towards financial difficulties. • Provide you with information on sources of free, independent money advice.
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• Discuss the matter with you. They are looking for information that will help them to identify the best course of action. • Keep in touch. If you want them to deal with you in writing, by fax or over the phone, they will be happy to do so as long as you keep in touch. • Give you clear information about the amount you owe. • Develop a plan with you for clearing your debts in a way you can afford, with your help and co-operation. Such a plan may range from an informal arrangement to restructuring your debt so you can repay it over an extended period. They will give you written confirmation of what is agreed. • Tell you beforehand about any action they may take, for example, going to court, and what extra charges you may have to pay if they do so. How can my bank help me? The sooner you discuss your problems, the easier it will be to find a solution. Banks will try to come to the fairest solution. This will involve working out what assets you have available, working out what you need to repay and going through your income and spending in order to agree a reasonable plan for repaying the debt. Banks treat each case individually and will not encourage you to commit or agree to a repayment arrangement which, from their knowledge of the situation, it is clear you cannot afford. The bank can only make a decision about what you can reasonably afford to repay when they have a full picture of your financial circumstances. They may also be willing to accept smaller payments. You will be given every opportunity to agree satisfactory conditions for repaying your debt. It is important that you keep in touch with the bank throughout the repayment process, especially if your circumstances change. When no agreement has been reached with the Bank, then try, after its approval, to sell by yourself the collateral (guarantee pledged with the bank for the loan), in order to obtain the maximum satisfactory price in the market. If this is achieved, then with the revenue from the sale you may repay all obligations to the bank, and may have an amount of cash left for personal use. If you can not do it on your own, then the bank will sell the collateral through external actors (executor) and the price obtained from the sale may not be satisfactory (adequate) and therefore you may remain debtor to the bank.
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E-banking Security
E
By Akil Ndrenika Chairman AAB Committee for Information Security Banka Kombëtare Tregtare
“…there is not any single strategy that covers all the different dangers threatening the e-banking platforms.”
lectronic banking platforms have been implemented as an ever more efficient channel through for banking transactions. However these web-based applications are exposed over the Internet making their users a very appealing target for mal-intentioned individuals. Albanian Banks Association IT Security Committee ( hereinafter ITSECOM) recommends implementing robust authentication strategies to strengthen the authentication process, not only for meeting with the regulation, but also for the high exposure of e-banking platforms to attacks. For several years now, electronic banking platforms have been implemented as an ever more efficient channel through which banking transactions can be done without having to leave the house or office. In the end, however, these e-banking platforms are web-based applications that are exposed over the Internet making their users a very appealing target for mal-intentioned individuals. These are some reasons why ebanking platforms are such an alluring objective for criminals to attack: • E-banking Platforms are openly exposed over the Internet; • The users are very appealing, since ultimately their intention is to carrying out a financial transaction; The evolution history of these attacks began years ago initiating what quickly became known as phishing. Its sophistication has increased on par with the new security technologies adopted by the bank industry intended to mitigate the problem. For ITSECOM, some of the issues that make us conclude that the war against cybercrime against e-banking apps is far from over are the following:
• The authentication schemes are mainly basing their robustness on the end-user’s decisions, which make them vulnerable to social engineering attacks. For example, in authentication schemes based on One Time Password (OTP), the end-users should determine that they’re connected to the right website and consequently log in using their OTP; • The authentication gap, which is the technical term, commonly used for referring to the intrinsic vulnerability of the authentication process. In highly exposed environments, such as the e-banking platforms, this gap is reflected in the little or total lack of control the authenticating institution (financial institution) has on the authenticating elements (users) since no control exists on the medium (the Internet and computer connection used in accessing the e-banking platform); This opened the doors to malicious people who carry out attacks against e-banking platforms, who focus their efforts on pharming attacks + malware that allows: • Poisoning the hosts file to add redirecting entries; • More sophisticated attacks involving malware + pharming + man-in-the-middle Proxy, in which the targeted e-banking sites are re-directed to the loopback address 127.0.0.1 or local host; where a man-in-the-middle Proxy is running listening to the communications between the client and the server which enables the attacker to modify the messages in real time. Once the user enters his/her credentials, the Man-in-the- Middle Proxy captures them.
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Next, a hypothetical example is presented that shows the process of stealing credentials in this type of attack. The capture platform provides the attacker with all the necessary information to: hijack the session, using the session cookie, and the access credentials including the OTP, with which they’ll have 30 to 60 seconds to use it before it expires. A point worth mentioning is that this same platform allows the attacker to manipulate the data moving between client and server. That way the attacker can wait for the moment a transaction takes place in order to manipulate the data of the account receiving the funds while the transaction is on its way to the e-banking platform. On the web reports, it is considered that these types of attacks will be copied and improved as criminals continue innovating on unauthorized access to financial accounts. ITSECOM recommends implementing robust authentication strategies to strengthen the authentication process not only for pressure in meeting with regulations but also for the high exposure of e-banking platforms to phishing and pharming attacks which can compromise the organization’s image and produce financial losses. When defining authentication strategies, it is important to keep in mind the different vectors of phishing and
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pharming attacks. Some are presented here: • Social Engineering attacks that mislead the end user. • Man in the Middle attacks that listen to the communication between client and server. • Man in the Browser attacks that re-direct the end-user to counterfeit sites with the intention of stealing the end user credentials • Malware attacks that poison the hosts file and/or DNS to re-direct the user to counterfeit sites with the intent of stealing the end user’s credentials; • Trojan Proxy that installs a http redirector running in the local address 127.0.0.1 that re-directs all of the browser’s traffic to this Proxy making a copy of the messages and sending them to the attacker; etc. From all of the above, it can be concluded that there is not any single strategy that covers all the different dangers threatening the e-banking platforms. On the contrary, focusing on a multi-layer protection approach is the best alternative for massive authentication processes of applications that are highly exposed on the Internet, including a mix of different factors that allow: • Providing user-to-site authentication strategies which allow the end-user to verify that the connection is indeed established with the correct site;
• Implementing authentication factors that eliminate user decisions from the authentication equation; • Implementing authentication factors based on knowledge (what the bank knows about the enduser); • Implementing authentication factors based on something that the user has (OTP, USB Device, etc); • Offering complementary protection for the end-user’s station; • Communicating the occurrence of potential transaction frauds to the end-user; etc. To summarize, it is important to define an authentication strategy which grows on the foundation of a platform that can add multiple security factors and/or methods for the authentication of applications exposed on the Internet. The above factors should be combined with “behavioral monitoring” that protects users on a per transaction basis. A certain user has its normal activity based on his normal transactions therefore has a certain behavior, thus it makes us able to study and define the behavior of the user. This combination increases the ability to protect sensitive customer transactions and data while complying with business regulatory compliance issues. ****Source different articles on internet
Balkan Net
Interbalkan News BOSNJA & HERCEGOVINA
Bosnians increased their savings Balkan Business News 19.10.2011 The value of savings in Bosnian banks at the end of August this year stood at 6.79 billion marks (around 3,37 billion euros), which represent an increase of about 300 million marks compared to the previous year. From the central banking authorities have confirmed that BiH citizens’ savings in the structure of deposits in Bosnia amounts to more than half of the total deposits in Bosnia, which is at the end of August was 12.81 billion marks.
BULGARIA
Bulgarian non-performing loans will peak at the end of 2012 or early in 2013 Balkan Business News 04.11.2011 UniCredit Bulbank’s chief executive Levon Hampartsoumyan said that Bulgarian non-performing loans (those more than 90 days in arrears) will peak at the end of 2012 or early in 2013, when they will rise to 17 or 18 per cent. Hampartsoumyan said that the first segment to reach its peak would be retail banking, where growth in non-performing loans occurs at a faster rate. At the end of September 2011, bad loans amounted to 14.45 per cent of the gross credit portfolio, according to data from the Bulgarian National Bank.
Fitch: Weak bank asset quality in Bulgaria, Romania, Croatia could result in sector outlooks turning negative Balkan Business News 16.12.2011 Fitch Ratings said continued weakening of banks’ asset quality in Bulgaria, Romania and Croatia, without strengthening of their capital, could result in sector outlooks turning negative. Fitch has assigned a stable outlook for the banking sectors of Bulgaria, Romania and Croatia. “In the near to medium term, funding constraints will probably restrict loan growth and pressure margins, particularly in markets more reliant on foreign funding, such as Hungary, Romania and Slovenia.”
CROATIA
Hypo Alpe Adria Bank denied media reports about its plans to withdraw from Croatia Balkan Business News 20.12.2011 Hypo Alpe Adria Bank on Monday denied media reports about its plans to withdraw from former Yugoslav countries, emphasizing that such reports of foreign news agencies were a result of the misinterpretation of Hypo Alpe-Adria-Bank d.d. International executive board chairman Gottwald Kranebitter’s interview with the Austrian “Trend” magazine. Kranebitter reiterated what had been stated during the bank’s nationalization by the Republic of Austria, when it was announced that the bank
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would be re-privatized, once it was stabilized, reads the statement. Hypo Alpe Adria Bank holds a 10-percent market share in Croatia. The Austrian government took control over the Hypo bank in 2009 in order to prevent a collapse that could have rocked central and eastern Europe. The Croatian National Bank decreased its Lombard lending rate to 6.25% Balkan Business News/Bloomberg 28.11.2011 The Croatian National Bank decreased its Lombard lending rate by 275 basis points to 6.25% from 9.00% previously. Meanwhile the bank held its other interest rates unchanged. The Bank said: ”In addition, the central bank is allowing commercial banks to use their reserve funds under certain conditions,”… “The central bank has to approve the usage of reserves and will charge an interest rate of the Lombard rate plus 1 percent for periods up to 3 months, and Lombard plus 2 percent for longer periods.” according to Bloomberg.
GREECE
ECB funding to Greek banks fell by 3.46 billion euros in October Balkan Business News/Reuters 09.12.2011 ECB funding to Greek banks fell by 3.46 billion euros in October from the previous month while emergency liquidity assistance (ELA) from the Greek central bank rose to 36.25 billion euros, Bank of Greece data showed on Thursday. Greek banks tapped 9.69 billion euros in ELA funding in October after drawing 20.14 billion in September. The Bank of Greece did not provide details on which banks made use of the facility. Greek bank fund head says depositors should feel safe Balkan Business News/Reuters 26.10.2011 The head of Greece’s bank stability fund,Mr. Panagiotis Thomopoulos said on Wednesday that deposits held at Greek banks were not at risk because his fund stood ready to recapitalize lenders hit by a restructuring of the country’s sovereign debt.
“The capital that will be provided to banks through us means that depositors should feel safe. This should lift the fear that exists today about deposits”, Mr. Thomopoulos said. Greek business and household bank deposits are down by 48.8 billion euros or 20.5 percent since January 2010 when Greece’s debt crisis began. French banks able to absorb Greek write-down Balkan Business News/Reuters 16.10.2011 French banks will have no difficulty in absorbing any losses from a writedown on Greece’s debt, Bank of France Governor Christian Noyer said on Sunday, adding they should also be able to raise capital reserves without public funds. “Greece is not a problem for the French banks,” Noyer said. French banks had 8 billion euros of Greek debt on their books, whereas they posted profits of 11 billion euros in the first-half of 2011, he said.
KOSOVO
Kosovo banking system has proved to be a stable system - Governor Gërguri. The financial sector, banking system in particular, continues to grow strongly, recording double-digit growth of loans and deposits, CBK’s Governor, Gani Gërguri said. He added that: “While the capitalization of the banking system remains high (over 17 per cent), non-performing loans move within modest levels (less than 6 percent), while at the same time banks profit continues to be strong”. Banks in Kosovo have consistently maintained high rates of liquidity and capitalization, surpassing even the regulatory requirements of the Central Bank and some international standards regarding this field. Kosovo: Fastest Growing Economy in Eurozone BalkanInsight 01.12.2011 The IMF’s recently released predicted growth rates for 2012 show that Kosovo, Europe’s poorest country, will also experience the highest growth rate in the Eurozone of which
it is an unofficial member. According to IMF, the economy is projected to grow by 5 per cent in real terms this year, and inflation is likely to fall next year.
MONTENEGRO
Montenegro won’t abandon the euro, despite Eurozone crisis Balkan Business News 29.11.2011 Montenegro’s Prime Minister Igor Luksic said Monday his government won’t abandon the euro as its currency, despite concerns that the Eurozone crisis could damage the small Balkan economy. Luksic said in an interview that he does not believe the Euro will collapse, or that his country of some 650,000 people will suffer an economic crisis like Greece’s, even though both nations rely heavily on tourism and foreign investment. Montenegro adopted the euro when it was launched in 2002, circumventing the rigorous economic criteria imposed on nations already in the bloc but not yet ready to adopt its common currency. Montenegro’s Central Bank doesn’t want gold Balkan Business News 03.10.2011 The Central Bank of Montenegro (CMB) for the past ten years, since when it’s an independent monetary authority, is not buying gold, and how they announced, doesn’t plan to buy it even in the future. “Investing in gold have a significant element of speculative transactions, so it carries a significant risk of realizing capital losses in the future. Gold now has a very high price and it is realistic to expect that after stabilizing at the global level and to solve debt crisis came to a drop in the value of the metals,” the CBM officials told.
MACEDONIA
Macedonia Bank Chief Calms Euro Fears BalkanInsight 06.12.2011 Following a trend seen in much of the rest of the world, some Macedonians
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are selling euros and buying US dollars and Swiss francs while some are switching investments to Macedonia’s own currency, the denar. To calm fears, the head of the National Bank of Macedonia, NBM, Dimitar Bogov, insisted that people’s savings were secure in spite of the euro uncertainty. “There is no place for fear,” Bogov said. Macedonian Banks Are Resilient to Greek Crisis, Bogov Says Balkan Business News/Business Week/ Bloomberg 26.10.2011 The Republic of Macedonia’s banking industry will probably withstand the threat of contagion from the debt crisis in neighboring Greece, central bank Governor Dimitar Bogov said. Macedonia introduced regulations to prevent banks from relying on their parent lenders for more than 10 percent of their capital, Bogov said. The two Greek-owned banks in Macedonia are Stopanska Banka, a unit National Bank of Greece SA, and Alpha Bank Skopje, owned by Alpha Bank AE Banks in FYR Macedonia reported the highest assets growth of 11 percent in Central and Eastern Europe Balkan Business News 04.10.2011 Banks in FYR Macedonia posted a rise in assets value by 11 percent, which is the fastest growth among countries of Central and Eastern Europe in 2009 and 2010, although these are worth a mere EUR 6 billion, reads a report of Danish consultancy “Interlace Research”.
ROMANIA
Several foreign banks may pull out of the Romanian market in 2012 Balkan Business News 13.12.2011 Several foreign banks may pull out of the Romanian market in 2012 as they do not have the support of their parent banks in order to go on working
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on the financial and banking market, Cezar Furtuna, partner of KPMG Romania and Moldova, said. It is less likely that dividends from Romania should be distributed next year, but there are more and more numerous discussions on several foreign banks going on working in Romania. Big banks do not intend to leave, but there are 40 banks in Romania and their parent banks do not support all of them, said the KPMG representative. Romanian banks reported a combined net loss of RON860m in the third quarter Balkan Business News 21.11.2011 Romanian banks reported a combined net loss of RON860m (roughly EUR200m) in the third quarter, versus a profit of RON95.4m a quarter earlier, Mediafax reported, quoting unnamed banking sources. According to the quoted sources, net risk costs continued to increase and broke through the RON30 billion threshold at the end of September, on rise in non-performing loans. Romania’s banking system switched to a combined loss of RON516m in 2010, the first negative result in 11 years.
SERBIA
Serbia Has Room to Cut Rates, Central Bank Chief Soskic Says Balkan Business News/Business Week/ Bloomberg 29.12. 2011 Serbian central bank Governor Dejan Soskic said policy makers may be in a position to cut borrowing costs in the first half to help foster economic growth because inflation will continue to slow. The central bank expects annual inflation to slow in the first quarter toward its target range for the end of 2012 of between 2.5 percent and 5.5 percent, from 8.1 percent in November. Serbia’s central bank lowered its benchmark two-week repurchase rate a quarter-point to 9.75 percent on Dec. 8 for the sixth time since June on concern Europe’s debt crisis will damp export demand and slow economic growth.
The Savings Week of 2011 has coincided in Serbia with the record bank savings of 7.5 billion EUR in foreign currency and deposits Balkan Business News 02.11.2011 The Savings Week of 2011 has coincided in Serbia with the record bank savings of 7.5 billion EUR in foreign currency and deposits in the national currency, the dinar, of some EUR 200 million. The central bank (NBS) analysis shows that savings in dinars have proved to pay more than the foreign currency ones, by 13%. Most banks have also decided to obey the governor’s request and refrain from increasing interest rates.
TURKEY
Growth in assets and loans in Turkey’s banking sector will slow down in 2012 Balkan Business News/Reuters 23.12.2011 Growth in assets and loans in Turkey’s banking sector will slow down and bank profits may decline in 2012, largely due to measures taken by the central bank, state-run lender Vakifbank’s Chief Executive Officer Suleyman Kalkan said on Thursday. Growth in bank loans is expected to slow in 2012 to 16.6 percent on the year, Kalkan said at a news conference. Fitch Ratings says that Turkish banks’ credit profiles have remained sound in 2011 Balkan Business News/ Hurriyet Daily News 09.11.2011 Fitch Ratings says that Turkish banks’ credit profiles have remained sound in 2011 despite considerable market and regulatory challenges. Fitch continues to view the medium-term outlook for the sector as favorable. However, in Fitch’s view, underwriting standards have generally remained robust, and leverage in the system is still contained. Furthermore, credit growth began to slow in the year’s third quarter, due to regulatory measures and the weaker global outlook, reducing the potential for a rapid build-up of risk in the near term.
AAB
Albanian Association of Banks Activitty
during September - December 2011
Operational Issues On the Decision of Council of Ministers on financial services by the Albanian Post The Ministry of Education and Science issued in September an Instruction, stipulating that payments of fees for public universities should be channeled through the Albanian Post, based on the Decision of the Council of Ministers no. 241, which requires that all public institutions shall carry out their financial services through the Post Offices. Following a meeting with banks representatives, AAB raised to the Ministry of Finance (also copying it the Prime Minister, Bank of Albania, and the Competition Authority), the concern that, such a Decision could lead to possible interpretations, about giving the Albanian Post the exclusivity for many banking services. In the official response, the Competition Authority stressed that, after assessing the situation, it recommended to the Ministry of Education and Science to change the Instruction, in order to avoid restrictions to the free competition in providing financial services.
Memorandum of Cooperation with Tirana Municipality AAB Assembly approved the signing of MoC with Tirana Municipality, in the frame of its new project to create a student card, through which students will receive discounted prices and better terms for banking services. Banks will be individually involved, pursuing their best interests, and AAB will coordinate between them and the Municipality.
AAB new website AAB launched its new redesigned website, which is intended to be more interactive, informative and user friendly. It will have a dedicated space for financial education, as well as for the activities of AAB Committees and news.
Cooperation with IFC Following the good experience in cooperating with IFC on its Housing Finance Project, AAB and IFC are set to extend their cooperation in the development of Energy Efficiency market, by adding to AAB website a special link, called: “Energy Efficiency Loans”, where detailed information can be provided for the general public.
Albanian Banking System’s Statistics The publication of the quarterly statistics (Unaudited – banks’ reports, both in NAS and IFRS), was accompanied for the first time with a statement sent to the media by AAB Secretariat, which will be a regular formal notice for each quarterly publication from the AAB Secretariat.
Working group for Converging with Basel II standards Following the process of revising the existing Bank of Albania’s Regulation “On the Capital Adequacy Ratio”, aiming at bringing it closer to Basel II, BoA and AAB created a joint working group, with the participation of specialists from BoA and 6 member banks. In the first meeting of the working group in November 2011, members were acquainted with the concrete details of the project and established the arrangements for further meetings.
AAB Committees’ Activity AAB Legal Committee
AAB Information Security Committee
Members of AAB Legal Committee and the Chairman and Secretary General of AAB participated in October in a roundtable organized by the Ministry of Justice, to discuss the new draft law on the registration of real estate. AAB Legal Committee consolidated all comments of the banking system on such draft law, many of which were taken into consideration by the Ministry of Justice.
AAB IT Security Committee discussed at its December meeting on various topics regarding: the access control (active directory and/or core banking application), risk assessment, cryptography, and on certain BoA’s regulations, regarding the information security in banks.
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AAB Human Resources Committee kicks off
AAB Payments Systems Committee
AAB has now a new permanent technical Committee, namely the AAB Human Resources Committee, which will focus on evidencing training needs of member banks’ personnel and facilitating the training process, organized by AAB, as well as improving staff management policies in member banks. The first meeting of the Committee was held on 23 December 2011, where the Chairmanship was elected, as follows: Ms. Arjana Tushi (BKT), Chairwoman, Ms. Valbona Zeneli (Raiffeisen Bank), Deputy Chairwoman, and Ms. Manjola Angoni (Alpha Bank), Ms. Entela Zigori (Intesa SanPaolo Bank), Ms. Fjoralba Troka (International Commercial Bank), as members.
At the meeting of November, the AAB Payments Systems Committee discussed on AAB Assembly’s latest decision to eliminate domestic transfer commissions for transfers related to employees’ salaries. In this regard, a working group was created within the Committee, in order to work on technicalities and proper implementation of such decision by all banks.
AAB Compliance Committee The Compliance Committee (CC) had a meeting in December, following a request from the Directorate of Taxes of Tirana Municipality, on banks accounts statement and other information about 23,000 taxpayers. Given the large amount and typology of information requested by banks, as well as the complexity and impracticality to respond adequately and timely, AAB Secretariat addressed the issue to this Directorate, expressing relevant concerns and the request for a special meeting.
AAB Bank Security Committee AAB Bank Security Committee gathered twice during the fourth quarter of 2011, mainly to discuss recent banks robberies in Vlora and Tirana, and met also with directors of the State Police in both cities, in order to further increase security measures.
AAB Card Fraud Committee The AAB Card Fraud Committee (CFC) met in November 2011, mainly to discuss on the latest card fraud events happened in Greece, during end of summer, which affected also card payments of Albanian banks.
AAB Trainings and Events Workshop on Money Remittances and Money Laundering AAB in collaboration with the General Directory of Prevention of Money Laundering, organized at AAB premises from 25-27 October 2011, a Workshop for Compliance Officers regarding Money Remittances, with the aim of analyzing the operative typologies on Money Laundering risks. Two EU Experts delivered their presentations and the Workshop was attended by member banks, Bank of Albania and FIU representatives.
Meeting with the Advisor to the Prime Minister AAB Chairman, Secretary General and Legal Advisor had a meeting in December with the Advisor to the Prime Minister, also a Member of the Supervisory Council of Bank of Albania Mr Petraq Milo. AAB’s representatives conveyed the main issues of concern to the banks such as: the execution of collateral and concerns with the offices of Registration of Immovable Properties, the obstacles by blocking orders from both local and central tax authorities, frequent and non consulted changes in the supervisory regulations and the short transition period, the premium rate and the Deposit Insurance scheme, etc.
ATM Security and PCI DSS training AAB Secretariat in collaboration with LiquidNexxus, a specialized and licensed training company, organized a 3 days training course (1-3 November 2011) at AAB premises, covering all aspects of ATM’s physical and logical protection against attacks, as well as compliance with standards designed for card payments systems.
33rd EBF Meeting of the Associates in Brussels AAB, represented by the Secretary General, attended the 33rd European Banking Federation Meeting of the Associates in Brussels, on 8 December 2011. Ms. Xhaferaj delivered a presentation on the latest developments in the Albanian economy and in its banking system.
Farwell Party AAB organized in November 2011 a Farewell Cocktail for Mr. Mahendra Singh Rawat, who CEO at International Commercial Bank, and welcoming to the Association the new CEO of the bank, Mr. Gideon Van Den Broek.
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General Data For the Banking System - November 2010 / 2011 mio ALL No
INDICATOR
1
Total assets
981,459.2
1,108,005.1
2
Total loans
483,199.7
552,576.2
2.1 Retail loans
146,568.9
154,704.0
2.2 Corporate loans
336,630.8
397,872.2
805,179.4
917,846.1
3.1 Retail deposits
681,279.7
789,167.7
3.2 Corporate deposits
123,899.8
128,678.4
5,157.8
3,064.4
91,588.2
95,562.7
16.85
14.64
3
November 2010 November 2011
Total deposits
4
Profit (cumulative)
5
Equity Capital në %
6
Capital adequacy*
7
ROE
6.4
3.6
8
ROA
0.6
0.3
9
Problem loans/Total Loans Ratio
14.4
18.7
10
No. of outlets**
533
548
11
Card with a cash function
673,333
718,988
12
Card with payment function
673,333
718,988
13
- Debit
646,658
687,597
14
- Credit
26,675
31,391
15
No. of ATMs
760
788
16
No. of POSes
4,759
4,991
17
No. of Transactions with Cards***
906,119
970,130
18
Transactions’ Volume with cards (in mio. ALL)***
9,699
9,946
* As of June 2010 / 2011 ** As of December 2009 / 2010 *** Cumulative data for the respective year
42 • BANKIERI • www.aab.al
AAB members
SPECIAL AAB
On 21 December 2011, AAB organized the New Year’s dinner party which was attended by CEOs and GM’s of the Member Banks, the Governor and other special guests from Bank of Albania, and the Editorial Board of Bankieri. AAB Chairman, Mr. Pencabligil, emphasized in his speech the difficulties that 2011 brought for banks, in the shift of the crisis from the USA towards Europe. He underlined the relative immunity of Albania to the happenings, with a still profitable banking system, although with a far from even distribution of the profit. He also stressed that the requirements for increasing the capital to the European banks, and the impossibility of raising fresh capital, are forcing these banks to reduce their risky assets, unfortunately more so in their eastern and southeastern European subsidiaries. Mr. Pencabligil mentioned also the significant amendments that AAB has made this year to its Charter resulting in more funds and a more representative Executive Committee.
In his greeting speech, Governor Fullani stressed the importance of the changes in the banking regulatory and supervisory framework, and highlighted the ongoing monitoring of BoA, to insure at any moment the functioning and stability of the banking sector. He described the performance of the system as stable, with adequate levels of liquidity and capital, as well as that of the country’s economy with positive growth, and good ability of economic agents to absorb external shocks. The Governor emphasized the importance of finding proper solutions to the problems with execution of collateral, and the serious commitment of BoA in this regard. His message to the banks’ Directors focused on the importance of responsible bank management to manage risks and test the ability to face different scenarios of future developments.
www.aab.al • BANKIERI • 43
44 • BANKIERI • www.aab.al