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BANKING SYSTEM
Alternative Collaterals Another opportunity to spur credit to economy The lack of a proper collateral management service hinders the use of inventory pledge, as a genuine collateral.
Admira Llazari (Mlika)
ranks among the markets with the highest growth rates in the Western Balkans and Central & Southeast Europe. According to the Bank of Albania, in Q3 2019, the loan portfolio recorded an average growth of 6%, out of which the private sector lending grew by 7.5%, significantly higher than the average growth for the Western Balkans and Central & Southeast Europe. This tendency is explained, inter alia, by factors such as: the completion of banks’ sale process and the entry of new
Manager, Credit Risk Department BANKA KOMBĂ‹TARE TREGTARE
I
n any emerging economy, lending has an enormous importance and role to play in developing and enhancing its capacity. In Albania, the modern banking sector marks almost 28 years, since its establishment and currently it remains the most important sector of the country’s financial system, whose assets score about 90% of it, implying at the same time the weak or non-existent role of the capital market. How has the lending evolved in the system, which can be called a relatively new one? Developments in the global economy, and especially the global economic crisis of 2008, produced a negative impact on the Albanian market, by shrinking the credit market, and slowing it down, progressively. However, despite the many challenges, for 2019, Albania
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Bankieri
January 2020
The simplest collateral alternatives would be: inventory pledge, equity shares, metals and commodities, Letter of Guarantee and Letter of Credit, which although their formal existence, their widespread use dictates the need for an efficient execution, along with a cooperative approach between the guarantee issuer and its final beneficiary.
investors in the market, which has led to a more favorable approach to businesses and fostered banking competition; loan restructuring, or write-offs; investment plans and economically acceptable business requirements; as well as the long timespan of historically low interest rates. However, the loan-to-deposit ratio stands at 49.2% (December 2018) and banks in Albania still
consider collateraloffering a certail coverage for the loan, as one of essential elements, when analyzing and approving a lending practice. Property collateral ranks 3rd, among the factors to be analyzed during lending. the. 5 C's, (Character, Capacity, Collateral, Capital and Conditions), each of which having its own impact on decision making. Whilst the main consideration during the lending decisionmaking should be given to the customer character,credibility and his repayment capacity, the main reason why banks take collateral is to reduce the credit risk, especially in the event of debt default, various crises and failure to obtain/secure funds by the borrower. On the other hand, collateral is a risk mitigation technique for loan losses and allows banks to increase their portfolios, achieve adequate levels of capital adequacy and offer better pricing for loans. While each bank's motivations for collateral requirements are interconnected, the overwhelming driver for its use is eventual desire for credit risk protection. The need for protection against credit risk becomes even more significant, in an environment where the ratio of nonperforming loans is relatively high. Depending on each bank policies, in the Albanian banking sector the collateral coverage requirement ranges from 100% to 150%. According to the Bank of Albania, in December 2018, most of bank loans portfolio (78.2%) is collateralized. Regarding the collateral type, the majority of
