Bankieri No.6 - January 2013

Publication of Albanian Association of Banks

ISSN 2225-2959

Nr. 1 Tetor 2011

No. 6 January 2013

Building new bridges toward financial education!

New year, new initiatives!

AAB will be a strong promoter of activities on financial education.

AAB members

www.aab.al

Editor’s desk Evergreen vs. Evergreening

by Elvin Meka

Interview

Veneto Banka …unfurls!

by Mr.Lucio Gaita

p.6 p.9 p.11

p.13

p.14 p.17

p.19 p.22

Editorial Team: Elvin Meka Editor-in-Chief Eftali Peçi Coordinator Junida Katroshi (Tafaj) Collaborator

Anduena Manushi Editor Gert Hoxha Photographer

Editorial Board: Seyhan PencaBligil AAB Chairman & Chief Executive Officer, Banka Kombëtare Tregtare Ioannis Kougionas AAB Vice Chairman & General Manager, National Bank of Greece

Economist corner European Banking Union - between reality and utopia by Adrian CIVICI

Publication of Albanian Association of Banks

Printing by:

Experts’ forum Building blocks of interest rates for bank products

by Spiro BRUMBULLI Communication Working for Banks

by Frida Krifca

No. 6, January 2013

Sonila Krashi Design & Layout

Banking system Operational Risk - a complex risk to be managed carefully by Erinda DOÇI The challenge of bank loan information for individuals in Albania by Gentiana DUKA

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

Bankieri

FRONTLINE Bank Loan Quality: the cornerstone for a healthy banking business by Bledar SHELLA Loan quality at Albanian banks The everlasting challenge of banking sector Lending decline – the “culprit” not to be found among banks by Aurora SULÇE

Nr. 1 Tetor 2011

No. 6 January 2013

p.5

ISSN 2225-2959

Contents

Publication of Albanian Association of Banks

p.25

Social capital

Christian Canacaris AAB Executive Committee Member & Chief Executive Officer, Raiffeisen Bank - Albania

Auditing the corporate social responsibility in the Albanian banking sector by Holtjana BELLO

p.28

Flutura Veipi AAB Executive Committee Member & Spokesperson of the Management Board, Procredit Bank

Banks' activity

p.30

Bozhidar TODOROV AAB Executive Committee Member & Chief Executive Officer, First Investment Bank - Albania

p.33

Periklis DrougKas AAB Executive Committee Member & General Manager Alpha Bank Albania

a banker in first person Plator Ulqinaku, a passionate banker for poetry

Balkan Net Interbalkan news

Tech Topics “aab-ankande.com” – the new AAB online portal

by Brunilda KOSTARE

p.35

Endrita XHAFERAJ Secretary General, Albanian Association of Banks

p.39

Hysen ÇELA Chairman at Albanian Institute of Authorized Chartered Auditors Adrian CIVICI President & Head of Doctoral School European University of Tirana

Financial auditorium Five Cs of Credit Analysis

by Junida TAFAJ (Katroshi)

p.40

Enkeleda Shehi Chairman of Albanian Financial Supervision Authority

Special “Historical view of banks in Albania”, the promotion of the book, 4 December, 2012

AAB AAB ACTIVITIES

Spiro BRUMBULLI Rector - Tirana Business University

p.41

p.42

Albanian Association of banks Bulevardi: “Dëshmorët e Kombit”, Twin Towers Tower I, Floor 6, A3, Tirana Tel: +355 4 2280 371; Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

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Editor’s DeSK

EVERGREEN vs. EVERGREENING

The winds from the west and south are icy, and we still taste the bitterness of the spillover effect from mortgage and real estate sector; but the quality of loan analysis still remains the cornerstone of banking activity, and it is in a permanent symbiosis with the quality risk management.

by Dr. Elvin MEKA1 Editor-in-Chief

H

ere we are at the year-end and the beginning of the new one, but we still hear the same bell chiming: bad loans… loan decline! Yes, it’s a bell’s chime, you heard it right! It is heard and commented everywhere you open and read a newspaper, navigate the internet, or at the TV station displayed, at any press of the button of the remote control. Now it’s a fact of life, the life goes on and we have to put up with it.

The banking system is going long through hardships, as the economy continues to sail in shallow waters, and the quality in several asset classes, especially in mortgage and real estate, but not only, has been deteriorating to the point of causing the bad rate to climb above 23 per cent. Typically, banks have been striving so hard, for four years in a row, to deal with the issue of poor loan quality, meager earnings and even losses, the everlasting collateral enforcement procedures and working out problem loans and above all, the uncertainty of future economic conditions. Sure, capital adequacy is a buffer, but banking is not a mechanism that always keeps incessantly pumping money, out of shareholders pocket. It is the business of money, with money, for money.

But because it’s a business of money, mostly with others’ money, prudence rules, as a rule, must take stage. Banks in Albania cannot escape such 1

golden and universal rules and they could easily explain everything, anytime and everywhere. The economic development and history of the last onehundred years taught us about classic elements of a financial crisis: (1) excessive use of leverage, (2) abnormal investment and exposure in real estate, and (3) weak risk management and analysis.

Fortunately and practically, our banking system is far away from being highly leveraged, as it is deep rooted into mortar and bricks business style and funding model, but when it comes to other elements, the reality stands out boldly, in flesh and blood.

The winds from the west and south are icy, and we still taste the bitterness of the spillover effect from mortgage and real estate sector. However, the quality of loan analysis still remains the cornerstone of banking activity, and it is in a permanent symbiosis with the quality risk management.

This is the wild card for a successful, robust and long-lasting business, but the issue is not to join the game, but playing cool, wisely and winning it.

Put is simply, an evergreen loan portfolio is the key to endure the economic tides, and the try of evergreening it, won’t be a long journey!

Head of Department of Finance, EUT-UET

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FRONTLINE

Bank Loan Quality: the cornerstone for a healthy banking business Best lending standards, quick and coordinated monitoring and acting, the whole system may at least try to come out of this difficult situation with minimal losses and pave the way to a more healthy banking system

by Bledar SHELLA, CFA Head of Risks Societe Generale – Albania

T

oday, as never before, everyone’s attention has turned into poor quality of loan portfolio. This is partly due to the global financial crisis, mainly caused by banks’ lax lending practices, but rather because of nonperforming loans in the Albanian banking system, which reached 23%, in November 2012. This high level of non-performing loans, along with the actual unfavorable economic situation and not-so-positive forecasts for the coming year, have incited many banks to be reluctant in lending and spend most of their energies on collecting these non-performing loans.

Ironically, this is exactly the right time when the economy needs most the stimulus and a continuous lending.

Recent years were difficult for all banks of our banking system and such difficulties are expected to continue at least during this year. Despite the problems they had to bear and those which may come in the following times, one thing is certain, however, that we are all going

6 • BANKIERI • www.aab.al

through a process of change and the way anyone handles it, shapes the identity of each bank.

In his speech about the importance of risk management, Mr. Andrew Sheng, one of the well-known experts of global financial crises, quotes: “The financial crisis is an event, and bank restructuring is a

In the dynamics of such rapid lending growth the basic principles of lending were “forgotten”, like: (1) the cyclical nature of the economy, (2) the requirement to avoid concentration and (3) extending the risk management practice throughout the organization.

process which follows it.” In my opinion, all the banks of our banking system is currently going through this complex, but necessary, process, specifically more or less, all banks are in touch with today’s changes.

It is far important, for each bank, to analyze all the factors that brought us to this negative situation, draw respective lessons and implement them so that similar mistakes not be repeated, hereafter. If we make a diagnosis of the factors that led to current situation of the quality of bank loan portfolios, some of them are easily identifiable, as follows: The moderate economic growth during recent years and the significant decline in the construction sector, as the most important factors, where the latter, is especially creating a vicious circle, which threw the market into a vortex of liquidity shortage and inability to repay debts and liabilities. But such deterioration brought to the surface one of the biggest problems related to loan concentration in the construction sector. Perhaps, this is due to the so-called large businesses, which were unavoidably found within this sector with high margins, but as widely understood, was plunged into a deep hole of liquidity shortage, where the way out of it is fairy difficult.

In his speech about the importance of risk management, Mr. Andrew Sheng, one of the wellknown experts of global financial crises, quotes: “The financial crisis is an event, and bank restructuring is a process which follows it.”

Weak lending standards conducted by some banks, during the lending boom, which favored rapid and uncontrolled loan portfolio buildup.

These loans, granted to financially weak borrowers, were “masked”, as long as lending grew rapidly, but turned into problemloan, right when lending rates fell and the economy started to contract. Most banks capitalized on the situation by trying to capture market share, thus increasing their loanportfolios and “forgot” the quality riskmanagement.

In the dynamics ofsuch rapid lending growth the basic principles of lending were “forgotten”, like: (1) the cyclical nature of the economy, (2) the requirement to avoid concentration and (3) extendingthe risk management practice throughout the organization, thus making it a powerful instrument. It’s ironic to stress, it has been exactly the negligence in providing proper position to risk management, as a determinant of loan portfolioquality, in favor of gaining as much market share, thatled many banks suffer today from the mounting issue of non-performing loans, and sharp reduction of fresh lending.

Actually most of the damage is done, however, and what remains is drawing proper conclusions and taking timely measures to repair damages.

The conclusion that is easily de-

rived by anyone is that the high quality of loan portfolio is an indispensable and permanent factor for a sustainable development of the banking system and banks need to implement the risk management cultureat the organizationlevel. Banks need to orient and develop, at the same time, risk selling and management, probablyaligning those two elements by the same line, by bounding them tight together. Also, there is a need for a coordination of policies, strategies and strength, aiming at achieving the required quality.

Having a healthy loan portfolio requires everyone to feel part of such activity, by managing risk in every aspect of their daily work. In order to implement it, all employees of an organization must clearly know what is expected of them, along with the organization’sdesire and ability to accept and assume the risk to be clearly and openly conveyed to everyone. There is nothing worsefor a business organization, in our case a bank, than the existence of confusing internal signals, which means uncertainty in actions and decisions. Everyone must know what is expected of them and then consider the best way to achieve this. Loan portfolio quality is preserved if the risk selling and management share moments of reflection and simultaneous action.

The Albanian banking system has gone through difficult times, which are a bit far from over, but if everyone returns to basic principles that should govern the work of bankers, namely best lending standards, quick and coordinatedmonitoring and acting, the whole system may at least try to come out of this difficult situation with minimal losses and pave the way to a more healthy banking system.

The high quality of loan portfolio is an indispensable and permanent factor for a sustainable development of the banking system and banks need to implement the risk management culture at the organization level. www.aab.al • BANKIERI • 7

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FRONTLINE

Loan quality at Albanian banks The everlasting challenge of banking sector Interview of BANKIERI’s Editor with some bankers How important it is for banks to create a new stock of quality loans? Is just the global financial and economic crisis the main culprit for the deterioration of bank loan portfolios in Albania? loans, as well as the crisis in the energy sector, which has increased pressure costs for banks and business in this sector.

Ndue Maluta

Jola DIMA Head of Risk Administration Division, Intesa Sanpaolo Bank

Creating a new stock of quality loans is important for banks and also for the economy as a whole, as regards credit to economy and costs.

Jola Dima Creating a new stock of quality loans is important for banks and also for the economy as a whole, as regards credit to economy and costs. Quality credit is the key element in reducing the cost of lending to the economy. Global crisis, albeit at a moderate level, has undoubtfully affected the economy, through the decline in remittances, high cost of imports (fuels, electricity, etc.). However, Albania has got its internal problems, regarding the inefficiencies of real estate registration system, tax barriers to clearing bank portfolios from non-performing

Creating new quality loan stock is of multidimensional importance for the economy, and for banks in particular, as a healthy loan portfolio has a positive effect on banks’ balance sheet; it reduces the level of non-performing loans, increases the bank rating in the international arena, which translates into an increase of depositors’ confidence and increased opportunities for lower-cost funding resources from international partners. One of direct consequences of the crisis is a deteriorating financial situation of Albanian immigrants, which leads to a decrease in the solvency of some borrowers, within Albanian banking sector.

Aida Lala Expanding a new quality loan portfolio makes the overall loan portfolio healthy, as the bank conducts careful financial analysis to new customers.

Regarding the actual period, when the financial and debt crisis has a tight grip on euro zone countries, the Albanian economy feels its burden, as it is reflected in the economic growth rate, the financial situation of individuals/households, businesses and contracted consumption. Moreover, individuals and businesses obviously express reluctance to undertake longterm commitments, which means a real contraction in lending activity by banks.

Serdar Egeli It is very important to create new and high quality credit stock for the banks, as is the main driver of profit

Ndue Maluta Risk Management Group Head, Banka Kombëtare Tregtare, BKT

In the process of creating a quality loans portfolio banks must be prudent in selecting and analyzing new customers, as well as improving existing portfolio management.

for them. The global financial and economic crisis is a major contributor to the deterioration of the loan portfolios, as it has created the environment of low consumer confidence, which in turn, has substantially reduced the demand for goods and services that the real sector of the country provided. It is important to note that, during the booming years of 2000 - 2008, an excess supply has been created in the real estate development sector.

Many sectors that have been directly and indirectly associated with the developments in this field have been seriously harmed by the sudden and drastic reduction of demand after the global crisis set in.

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What kind of efforts your bank is making to ensure a stable performance of loan portfolio’s quality, and how could this be achieved?

Jola Dima The Bank is working in two directions: (1) reducing the current stock of nonperforming loans, through collection agencies and dedicated improved structures within the bank and (2) building a new quality loan portfolio, by addressing previously identified issues of the past, along with careful monitoring. The bank is developing new loan processes, rules and products for major segments, which are supported with dedicated technological assistance and developments.

Also, the increase of bank’s knowledge about needs of different sectors of the economy and their related risks will be reflected in most appropriate forms of financing for such sectors of the economy and for different sizes and segments clientele.

Ndue Maluta In the process of creating a quality loans portfolio banks must: (1) be prudent in selecting and analyzing new customers, through portfolio diversification and by focusing on less risky sectors with high growth potential, and (2) improve existing portfolio management techniques, through reviewing and adopting non-performing loans repayment plans, using techniques of restructuring, rescheduling, grace periods for the principal repayment, or additional repayment plans, partial sale of collateral, not necessarily going directly to compulsory enforcement phase.

Serdar Egeli Our bank has employed improvements, both procedurally and organizationally, in order to contain and improve the deterioration of loan portfolio, as well as to ensure stable creation of high quality lending practices. aida LALA In 2011 the bank reorganizated its Credit Division, by adapting to the difficult economic situation and new market conditions. Now each bank branch has a dedicated specialist, specialized in following up procedure and finding a solution, so that the situation does not deteriorate. Special

Aida Lala

Head of Debt Recovery Department, Credins Bank The crisis is pushing businesses to pay more attention to increase productivity and efficiency, reduce labor costs and making smart movements to attract customers with lower costs, whereas there are no aggressive investments in technology. attention is paid to prevent delays, through: (1) managing the situation since the first moment the problem occurs, (2) visits of bank representatives at business premises (3) finding solutions, aiming at maintaining the future cooperation with the client.

How difficult this challenge could be, given current conditions of a continuing economic and financial crisis in Europe and its respective effects in the Albanian economy?

Serdar Egeli

Chief Corporate Officer, NBG Bank Albania The debt-related issues, low economic growth related problems in the world and the deleveraging process in the developed countries’ banks with the purpose of strengthening the capital adequacy levels will be an ongoing phenomena that will keep on suppressing the Albanian economy, in terms of Foreign Direct Investments.

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Ervin Xhomo

Ndue Maluta

Head of Corporate Division, Intesa Sanpaolo Bank In material terms, it is closely related to the fact that Italy and Greece are two economies with the largest share in foreign trade activity for Albania, in terms of FDI and by being the main destination for export-import of Albanian products. In psychological terms, the European perspective has impacted negatively the business climate and its plans to undertake new investments, as well as the consumer climate, in the frame of households’ daily consumption and personal investments.

Although the economic crisis in Europe is slowly coming to an end, the situation for the Albanian economy is forecasted to remain almost within the same boundaries, at least in the mid-term period; it will be characterized by high levels of unemployment and an increasing trend of public debt, which is one of main causes for an elevated budget deficit. There are, also, moderate forecasts for the level of direct public investments, due to lack of liquidity, reduction of individual consumption, decline in exports, particularly in contract manufacturing and raw materials industries,

and contraction of FDIs, as well.

Lending decline – the “culprit” not to be found among banks

Serdar Egeli We expect challenges to continue in 2013 internally and externally.

The debt-related issues in the euro zone, low economic growth related problems in the world and the deleveraging process in the developed countries’ banks with the purpose of strengthening the capital adequacy levels will be an ongoing phenomena that will keep on suppressing the Albanian economy, in terms of inflow of the very much needed Foreign Direct Investments. The situation in Europe will continue to affect the declining trend of immigrants’ remittances in 2013. This may create pressure on the exchange rate and lead to a mild devaluation of Lek in the coming year. aida LALA Tashmë jemi në një situatë ku njihen We are now in a situation where issues and problems, in individual and business level, are well-known.

Government unpaid obligations to construction firms, engaged in construction of public infrastructure, has put them in difficulties. Some businesses are handling such situation by diversifying their investment portfolio, others are diversifying their partners and the rest have “frozen” economic activity, or otherwise have reduced the number of employees.

The crisis is pushing businesses to pay more attention to increase productivity and efficiency, reduce labor costs and making smart movements to attract customers with lower costs, whereas there are no aggressive investments in technology. In this way, it is an imperative for banks to stand by their clients with viable solutions that preserve their investments and generate income for the repayment of their own debt obligations.

The “culprit” of lending decline is essentially not to be found among banks, as their increased level of prudence, spurred by the slowdown of country’s economic activity and worsening business economic conditions, is not to be blamed, too.

by Aurora SULÇE

T

he decrease in lending levels has been the most widely, rather wildly, news reported by media throughout the last quarter. The phenomenon raised eyebrows, as it happened just for the first time after many years and, furthermore, for the first time since end-2008, the moment when the economic and financial crises broke out in Europe and around the globe. The Albanian banking system endured such tides, rather it enjoyed the confidence of citizens, along with supporting and funding the economic growth, during a difficult period for the whole world. Lending continued its growth path, albeit at quite moderate rates, bank deposits increased, as well as the profit of the banking system. Under these circumstances, lending decline needs a thorough and comprehensive analysis, rather than just making superficial comments about figures which went out of the trajectory.

We all agree that the Albanian economy is currently digesting the effects of the European crisis, which has particularly hit our two main trading partners, Italy and Greece, respectively. Foreign demand has fallen and business is living through rainy days, thus forcing many companies dishonoring their contracts with banks, and nor repaying the obligations. According to AAB, in November 2012, problem loans reached 23 per cent, an increase of 0.2 percent from previous month and an increase of 4.3 percent, compared with the same period of last year. On the other hand, consumption has shrunk; so did private investments and remittances. Consumers and businesses have uncertainties about the future and this is the environment banks have to put up with, although not their fault, and which will inevitably be reflected in their lending activity. The prudence accompanying their lending activity is entailed by the slowdown of country’s economic activity. Given the circumstances, it takes to Corporate Albania submitting reliable and stable projects, in order to obtain funding from the banking system. It’s crystal clear that lending is the main area of business interest for banks, especially under current conditions, when the level of deposits has been increasing quite steadily. According AAB, in November 2012, the banking system deposits reached at ALL 993.8 billion, an increase by ALL 76 billion compared to the same period, a year ago. These figures show that the banking system has sufficient liquidity to lend, but it is for the business to show up as a reliable partner.

So far, banks have been the dominant funding partner within the Albanian economy and the key contributor to country’s strong economic growth, but they are still a business like other one, and must be careful to protect themselves from any kind of negative impact, coming from the general economic climate in the country. Moreover, banks have financial, moral and public responsibilities to all customers who have deposited their savings with them. Consequently, banks should produce sufficient profit to meet all interest payment obligations to customer deposits, to cover non-performing loans and to meet the expectations of their shareholders. In this way, banks cannot tolerate funding projects which are not reliable and of high quality.

Therefore, it is fair to stress that the “culprit” of lending decline is essentially not to found among banks, as their increased level of prudence, spurred by the slowdown of country’s economic activity and worsening business economic conditions, is not to be blamed, too. Being prudent is one of the lessons learned from the crisis, and this applies particularly to financial institutions that manage our money.

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INETRVIEW

Veneto Banka …unfurls!

The DNA of all banks of Gruppo Veneto Banca, wherever the group have operated traditionally for years, is the direct relationship, by offering quality banking services to its clients.

Mr.Lucio Gaita General Director, Veneto Banka

BANKIERI: We

have been witnessing the opening of new bank outlets with a relatively short period of time, at a time when the overall banking network is making a very sharp correction, in terms of expansion. What’s the rationale behind this move?

Veneto Banka is a relatively new bank in the Albanian banking system, as it is just purchased in 2009 by Veneto Group Banca, based in Treviso, Italy. One of the main goals for this dynamic group in Italy is to expand to new territories with established banks. Perhaps, it might be a bit little courageous, given the actual moment, when the effects of the crisis are still obvious anywhere you go, and in a time when, in my opinion, other banks are in a reflection mood. The emphasis of our strategy is put on the use of commercial capacity, mainly in selecting the clientele. Specifically, we aim at a development potential, intertwined with market operation expansion, mainly through opening new branches in “untapped” territories. This is so, thanks to a careful selection of the place-to-operate, by coupling together values ​​of dedicated customer service and devoted highly professional staff.

BANKIERI: As part of one the largest banking groups in Italy, could you briefly explain the bank business strategy to expand operations in Albania?

Gruppo Veneto Banca has been present for years in Eastern European countries, by possessing controlling interests at banks in: Romania (Banca Italo - Romenia), Moldova (Eximbank) and Croatia (Veneto Banka). The bank serves its customers outside Italian territory, through a large number of subsidiaries, as Gruppo Veneto Banca is the third Ital-

ian banking group with more subsidiaries abroad. Numerous Italian small and medium size enterprises operate for a long time in Eastern Europe, whereas many of them are quite active, with strategic investments. These businesses have chosen Gruppo Veneto Banca as their partner for developing operations in these territories; not to mention Albania, which is currently Italy’s main trading partner with approximately 45% of total international trade. In this way, Gruppo Veneto Banca identified Albania as a potential market for Italian - Albanian business development, which frankly speaking, has been witnessing certain stability, year after year, in terms of international trade. I think that this market possesses vast development and growth potential in the future, as regards certain strategic sectors, which will experience positive changes in Albania, compared to other countries in the region, typically, investments in the tourism sector, natural resources, energy, infrastructure, etc.

BANKIERI: What,

in the eyes of the Albanian consumer, distinguishes your bank from the others; why they choose Veneto Banka?

As all banks, part of Gruppo Veneto Banca, Veneto Banka, has shaped the profile of direct relationship with the client, dedicated to him with all its management options. Veneto Banka services are, at any time, quality and real time services. So far, its dynamism, combined with staff professionalism has come to fruition. Today we are facing a crystal clear reality where Veneto Banka, thanks to its dedication and 360o customer service, has made significant qualitative development steps by ensuring a well-positioning within the dynamic Albanian banking market. The DNA of all banks of Gruppo Veneto Banca, wherever the group has operated traditionally for years, is the direct relationship, by offering quality banking services to its clients.

BANKIERI: How do you see the positioning of Veneto Banka within the Albanian banking sector and financial system?

It is important to highlight the fact that Veneto Banka is not to be compared with other large banks, which have been operating for years within Albanian banking system, as well as with their considerable network, operating almost in every town and city in Albania. However, given the different experiences found in the eight cities where we our subsidiaries operate in Albania, I think everything looks so positive. Certainly, there is a noticeable increase in our banking activity, as reflected in AAB reports, too. In the capacity of CEO of Veneto Banka, I would like to confirm that our strategy will be that of maintaining the same current performance.

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BANKing INTERVISTA SYSTEM

Operational Risk: a complex risk to be managed carefully The major challenge for Albanian banks is, rather than building systems and policies, introducing operational risk as a new culture in managing every day and every kind of activity

• •

by Erinda DOÇI Operational Risk & Credit Fraud team leader Integrated Risk & Portfolio Management Department Raiffeisen Bank

O

perational risk is quiet a new issue in risk management framework, raised and discussed during the last decade, as risk management culture have been extended beyond traditional concepts such as: financial risk, credit risk, market risk, etc.

Each business bases its activity on people, who are organized through working processes/ procedures, the latter being increasingly supported by systems/ technological platforms.

Failure of any of these components, due to internal or external causes, can cause losses to the business – and this is what operational risk is; it is a systematic risk that co-exists with every form of doing business, profitable or not, private or public, local or international.

The operational risk is of multidimensional nature and its profile depends on the industry in which the company operates. Examples of such risk could be as per following:

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• • •

Miscalculating a transaction amount, by adding one zero mistakenly, Failing in meeting deadline regarding reporting to public authorities, Disclosing confidential information, Firing an employee because of his ethnic origin/religion, Falsifying documentation/ signatures required to perform and activity,

In order to identify operational risk in the bank, it is necessary to have a very good knowledge of all key business and internal processes as well, how they are set up, how they are regulated with procedures... along with having a very good knowledge of various types of operational risk.

•

A spread of computer virus into the company software, • Damage caused by an earthquake.

In the banking sector, operational risk is found nowadays in similar ranks with all other important risks that a bank shall mange such as: liquidity risk, credit risk, currency risk, etc. The identification and measurement of operational risk is a real and vital issue for banks, particularly since the decision of the Basel Committee on Banking Supervision (BCBS) to introduce a capital charge for this risk, as part of the new capital adequacy framework (Basel II Accord, 2004). This committee has provided also three broad approaches to calculate the capital charge for operational risk. Such approaches range from basic ones (apply a standard percentage factor over the selected relevant revenue indicator, i.e. gross income) to advanced ones (which are based on internal modeling of operational risk losses and events and are specific for each bank). The more developed the operational risk framework is, the more advanced and accurate is the capital charge calculation. Basel II has also defined eight main types of operational risk events: 1. External Fraud & Theft – theft, misappropriation of company assets for monetary benefit by an external party (customer, third party, contractor),

2. Internal Fraud & Theft – same as external fraud, but with internal implication (employee), 3. Employment practices and workplace safety – non-compliance with employment, health or safety laws or labor agreements, 4. Clients, Products & Business Practices – unintentional or negligent failure to meet a professional obligation to customers or losses caused from the nature or design of a product, 5. Malicious damage – all malicious acts with intention to destroy the company assets and damage, but with no monetary benefit as precondition, such as terrorism, vandalism, virus spread, 6. Disaster and Public Safety – all natural disasters such as earthquake, flooding, fire, 7. Technology and infrastructure failures – failure of infrastructure supporting business, including hardware, software, communication lines and other utilities, 8. Execution, Delivery and Process management – failure of transaction processing or process management, due to human errors, failure of reporting and data management.

In order to identify operational risk in the bank, it is necessary to have a very good knowledge of all key business and internal processes as well, how they are set up, how they are regulated with procedures, how the human element is integrated into them, how customer is approached, how communication channels are established, which are the technical application supporting all activities, how are user’s writes regulated. Additionally, it is more than necessary having a very good knowledge of various types of operational risk as above-mentioned. Combination of each business processes with each operational risk category shall be assessed with a certain grade that corresponds to potential loss in case any failure happens to that specific area.

Risk indicators are one of the main tools recommended to measure and monitor operational risk in business areas where there is high probability for operational risk events to happen; such indicators shall be tailored as

In the banking sector, operational risk is nowadays ranked aside all other important risks that a bank shall mange such as liquidity risk, credit risk, currency risk, etc. per business process, shall be measured periodically and shall be compared to a defined threshold, which represents the accepted portion of risk. Examples of such indicators are: customer claims, number and values of legal sues raised against the company, cash desk differences, internal frauds, staff errors, key IT system outage, incorrect evaluation of collateral, etc. Also the bank shall keep tracking of all operational losses, derived from the so called operational incidents; this activity is required not only for analyzing and mitigating the

risk at hand, but implementing mitigation actions for future prevention of similar losses, and having enough data to build internal models for a self-assessment of operational risk, thus allowing the bank to be more easily transferred in an advanced approach of calculating the capital adequacy for operational risk purposes.

In the Albanian financial and banking sector, operational risk concept is relatively new; Bank of Albania adopted the first regulation on operational risk management in 2011; as a result, all second-tier banks and similar financial institution are now required to comply with such regulation.

The major challenge, however, for Albanian banks is, rather than building systems and policies, introducing operational risk as a new culture, in managing every day and every kind of activity; each type of manager – business, sale, risk, finance, operations, IT – shall be simultaneously in charge of managing operational risk in her/his own area of responsibility – this is the only successful approach ensuring that for each process and activity, proper operational risks are identified, assessed, monitored and mitigated.

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Banking System

The challenge of bank loan information for individuals in Albania Banks now have to deal with “educated” and informed clients about the financial activity and “the most profitable alternative” to them, so it is an imperative for new approaches, in terms of public information.

by Gentiana DUKA, MSc Head of Personal & Consumer Retail Banking Products Alpha Bank

S

ome years ago, obtaining a loan by individuals in Albania, was something complicated, rather to the limits of impossible. Over the years, such a practice became more common and reachable. Back in time, even the customers reflected quite modest knowledge on loan repayment and amortization, and how they could obtain proper funding they were seeking from the bank, simply by submitting some personal documents.

Actually, should someone need a consumer loan, mortgage loans, or loans for other purposes, all s/can do is showing up at the customer service desk of any bank, out of 16 commercial banks, operating in Albania. So, everyone there may express her/his own interest about the type of loan s/he needs, and start procedures.

It must be admitted that, the activity performance and service by bank branches in Albania, is laudable, as it is obvious that the banking system has been developing relatively fast, thus catching up the service level, provided by banks in the region.

But to what extent the Albanian citizens possess the relevant infor-

mation about necessary steps to be taken and the respective procedure to be followed, in case of any loan practice? Maybe many individuals and prospective borrowers may not be in a position of having complete information about the major part of lending process. In fact, going a bit deep in details, it turns that such information is more specific and pertinent to specialists working in the banking sector, or in sectors in the like. It is worth mentioning, however, that a big number of Albanian citizens are not the same people of a few years ago, in terms of relevant information they have on and for the

The banking market in Albania is in a complete different shape, as compared to a decade ago, when getting preliminary information, an individual had to go at the bank, each time s/he wanted any additional information, and apply for a loan, as well.

banking sector. Nowadays they have more complete information about types of loans, and even elements of a loan, along with conditions that must be met to obtain the required loan amount, at their own loan account.

This fact means a lot for commercial banks, or financial institutions operating in Albania, as they have to deal with “educated” and informed clients about the financial activity and “the most profitable alternative” to them, by way of making proper calculations or comparisons of separate details of banking products.

Almost all commercial banks operating in Albania are informing their customers via assorted forms and means, even through “Alternative Banking”. The banking market in Albania is in a complete different shape, as compared to a decade ago, when getting preliminary information, an individual had to go at the bank, each time s/he wanted any additional information, and apply for a loan, as well. Today, individuals may get information from banks’ websites, leaflets for any product, or through other means of information.

Never theless, clients are not still very familiar with the requirement of bringing a set of documents to the bank, which are necessary to obtain the loan they want and maintain the loan account. Such fact is a bit difficult for standard clients to be understood.

Also, other positive facts in this regard, which directly affect customer information about banking products, were Bank of Albania’s ordinances of

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A successful information method, effectively applied by banks in the region, is the real-time online loan application procedure, through bank website, according to the respective terms of the loan; then the client submits necessary documents to the bank, subject of loan approval.

March 2012. Specifically, Bank of Albania Supervisory Council adopted some changes and amendments to the regulation: “On consumer credit and mortgage credit to individuals” and in the regulation: “On transparency of banking and financial products and services.” Such changes had an immediate impact on making the information, released by commercial banks and financial institutions

18 • BANKIERI • www.aab.al

to their customers, more complete, and at the same time, enriching the information found on their website, leaflets and on any other alternative information, aiming at ensuring an optimal transparency for the client.

Another form of transparent information is the Pre-contractual Form for Credit to Individuals, which was included within the new regulations of Bank of Albania, as mandatory information made available to the client at any bank branches, at the time the client applies for a consumer loan, mortgage loan, or any other loan for individuals. Such pre-contractual form contains all necessary information about banking products, including relevant documents to be submitted and respective timings, respective commissions, or loan repayment methods. Certainly, customers are better informed now, clearly favored by technology, which enables information availability and accessibility in different forms, given that even bank products are becoming more flexible, within Albanian banking market.

Despite admirable and impressive developments within banking system in Albania, which stands at comparable service levels with banks in Balkan region, there are still rooms for improvements. Typically, Albanian banks websites may consider the idea of providing consulting or online services (“Online Chat”), by

responding to questions from customers, a process quite common and basic in other countries. Such communication method brings more customers to the bank, without any need for them to walk out of their work and daily commitments, and coming to the bank premises. Another innovation in the Albanian banking market, with an obvious positive impact is the presence of loan calculator (such item must, at best, be present in all webpages of Albanian banks, not in just some of them.) This actually helps the client with preliminary information and enables comparing her/him income with future obligations, as well as being informed about loan amortization methods.

Additionally, a successful information method, effectively applied by banks in the region, is the real-time online loan application procedure, through bank website, according to the respective terms of the loan; then the client submits necessary documents to the bank, subject of loan approval.

Notwithstanding the space for improvements within Albanian banking market, it should be noted that, banks are doing their best in handling all financial and operational activities with their utmost competence and professionalism, as well as striving to improve their performance and services, thus becoming more competitive.

EXPERTS’ forum

Building blocks of interest rates for bank products

There will always be rejected loan applications, as there will always be projects which have no economic justification, and there will be always individuals whose application will be refused because of their failure to meet the qualifying requirements

by Dr. Spiro BRUMBULLI Rector, Tirana Business University, TBU

here is a frequent public discusT sion on interest rates. Are loan interest rates so high? Are interest rates reflecting market’s supply & demand equilibrium? Do they put any burden on the economy, or otherwise give it a momentum?

Before illustrating with a simplified example the calculating method of interest rate build-up, for a commercial (bank) loan (apologizing, anyhow, for certain factors bankers face in real life, and also for the fact that cost of deposits is left out of discussion), let us have a look at four main methods of calculating interest rates.

Firstly, let see the method of calculating loan interest rate, according to the cost-based pricing model (loans are assumed as the only interest - bearing asset). Suppose that a bank has ALL 10 billion of equity capital and ALL 90 billion in deposits, so total liabiliteds plus capital stand at ALL 100 billion. The bank has granted loans at ALL 80 billion (interest – earn-

ing assets) and ALL 20 billion are invested in non – interest earning assets. Bank pays for deposits an average interest rate of 4%; administrative and operations expenses are ALL 2.2 billion and loan loss provision are calculated at ALL 0.4 billion.

Bank’s costs, in absolute terms, would be as per following: 1. Interest expenses: ALL 3.6 billion (90 x 0.04) 2. Operating expenses: ALL 2.2 billion 3. Loan loss provisions: ALL 0.4 billion Furthermore, the required rate of return for invested capital by shareholders is 20%; non-interest incomes (fees) are estimated at ALL 0.5 billion. Under these con-

ditions, what would be the interest rate the bank must set for its own loans, in order to satisfy all above requirements? In terms of our example, the interest rate build-up must consider: a) the cost of collecting funds: ALL 3.6 billion; b) operating costs: ALL 2.2 billion; c) the risk of granting loans: ALL 0.4 billion; d) the required rate of return for shareholders: ALL 2 billion (0.2 x 10).

A total of ALL 8.2 billion needs to be covered by bank’s income.

Now, if we subtract ALL 0.5 billion from commissions income, an amount of ALL 7.7 billion must to be produced from interest - earn-

The interest rate must: • cover the cost of interest for raised funds, • cover the cost of interests for raised funds, • consider the risk of lending activity, • consider shareholders’ required rate of return.

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20 • BANKIERI • www.aab.al

ing assets (specifically: 7.7/80 = 9.63%). Consequently, the interest rate level for loans must be set at 9.63%.

Summarizing, the above illustration shows that the interest rate must: 1) cover the cost of interest for raised funds. The cheaper funds raised, the greater are opportunities to reduce the level of certain interest rates on interest - bearing assets, 2) cover the cost of banking activity (administrative and operating expenses). The review of expenditures, based upon a detailed analysis is an opportunity for cost reduction, which affects any possible reduction of the overall interest rate for loans, 3) consider the risk of lending activity. This premium on interest rate compensates the bank for the default risk, which associates the loan application. This risk may be calculated as a general provision, in compliance with the standards set by Bank of Albania and those required by international accounting standards. When such risk is low, there is a downside effect on the general level of interest rates for loans, 4) consider shareholders’ required rate of return. No investor will invest his/her money in a business, if it fails to produce a return at a certain level, necessary to cover the risk taken.

In addition to cost-based pricing model, there are three other models for pricing (estimating) loan interest rates.

Benchmark (base rate) pricing model. This model is important, as it takes into account the competition.

In a competitive environment, the calculation of interest rate, according to cost – based pricing model may be accurate, but out of market (reality). As a result, the bank must make proper calculations, by considering the market, too. In this case, the use of benchmark (base rate) brings differences between banks within a smaller and closer circle, within the market. The base rate could be one of benchmarks as the main rate (reference) in respective currencies (e.g.: TRIBOR or T-Bills for loans in ALL, EURIBOR for loans in EUR, LIBOR for

lonas in US$). The bank adds a premium, or the required spread, on the base rate. This rate is used in all cases when the bank grants floating interest rate loans.

Credit-based pricing model. This model aims at assessing borrowers, based on their individual credit characteristics. According to this model, borrowers with low credit risk cannot subsidize the cost of high credit risk borrowers. Such categorization is realized through the credit scoring system, as the basis for this model, which is used as a tool to establish the interest rate premium (spread).

Other factors risk- based model.

According to this model, two other factors, affecting the size of interest rate spread are additional guarantee and loan maturity. The better and more liquid the additional guarantee, the lower the interest rate (e.g.: the interest rate of a mortgage loan is lower than that of a secured loan and much lower than the interest rate a unsecured loan). The shorter the loan maturity, the least the probability of any change in the borrower’s environment; therefore, the lower the interest rate, and vice versa.

So, are loan interest rates high?

There is more than an answer to such question. So, if we say “high”, the next question would be: “high compared to what?” If an interest rate of 11% sounds high in absolute size (e.g.: 11% > 7%), this is not a clear cut argument, in favor of a costly loan, as the inflation rate may be at 6%. Thus the real interest rate results in a low level.

Also, if we talk about interest rates in Lek, they are unique, because Lek is a unique currency and its cost stems from the domestic economic factors, it is related to. If we talk about foreign currencies, the interest rates comparison with the country where they are a local currency, is still not relevant and with a single answer, as the impact of the exchange rate and economic conditions, which determine the interest rates in each country are quite different. But should any costs, offered by the bank, be accepted? This question has an answer: every business must, as any bank does, conduct its own cost analysis, whether the cost of funds produces any profit, necessary to cover these costs. If the project is

acceptable, the relativity of the size of loan interest rate is vanished; if the project does not result positive in economic terms, the project’s rate of return is lower than the loan interest rate. The same logic is applicable in case of retail loans: if s/he is able to repay the loan with her/his income, then her/ his need for borrowed funds is satisfied; otherwise, s/he does not qualify for the loan. Alternatively, if the situation and analysis presented in the business plan is far from the reality, then the information asymmetry is likely to convert the loan into a bad loan, due to the bank’s negligence of analyzing all relevant factors, at the time of granting the loan. The size of loan

Every business must, as any bank does, conduct its own cost analysis, whether the cost of funds produces any profit, necessary to cover these costs. If the project is acceptable, the relativity of the size of loan interest rate is vanished. interest rate is relative in another aspect, too. There will always be rejected loan applications, as there will always be projects which have no economic justification, and there will be always individuals whose application will be refused because of their failure to meet the qualifying requirements. By applying such principle in selecting less risky projects and individuals, banks play the role of preserving and strengthening the economy’s efficiency, by funding projects that are based upon the economic logic.

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EXPERTS’ forum

Communication Working for Banks

A successful combination of what’s communicated with where it is communicated, along with tackling the right target audience could be the source to create competitive advantage for a bank in the market

T

by Frida Krifca Manager, Marketing and PR Department Tirana Bank

he structure of the banking system in Albania up to 1991 reflected a typical centralized economy that included the State Bank of Albania, the Savings Bank, the Agricultural and Development Bank and the Albanian Bank of Commerce. The twotier banking system established in April 1992, allowed for a complete functioning of a full banking system, according to Western models, where commercial banks could collect deposits and granting loans to individuals and businesses.

This change brought about the need to communicate and at the same time, educate customers about what banking products and services are and how to make use of them. Certainly, in terms of communication, it took some time to understand the paradigm shift that was happening with the state banks being privatized, while private banks showed a more aggressive and flexible approach and were able to quickly gain market share. An increasing number of banks tried and still focus to develop the image that wins feelings. In a market like Albania, where personal contact and interaction is critical, a

22 • BANKIERI • www.aab.al

brand image attracts customers, and it’s the main reason why specific relationships are established between a customer and a bank brand image.

The longer this relationship lasts, the more valuable the name of the bank in the market is. Banks in Albania try to position into customers’ minds with messages of various forms, aiming at reaching feelings and perceptions such as: “Now You Can”, “We Speak Your Language”, or “Win Every Challenge”. It is noticed, however, that many advertising campaigns are increasingly focusing on emotions rather than perceptions.

The shape of a bank’s image is a product with adequate internal and external communication and advertising with the public. Every time a bank interacts with customers in any form, it represents an opportunity to create a stronger relationship, thus making public relations and advertising the two key elements of communication for banks, as they connect the bank to the general public in the fastest way possible. Media is the main carrier of this information and if used wisely, it can create the necessary effective frequency. The successful combination of what’s communicated with where it is communicated and tackling the right target audience that responds to your communication could be the source to create competitive advantage for a bank in the market.

Looking at some data provided

by MC Monitoring (www.mcmonitoring.org), we can get an idea of the budget split by media referring to year 2011 and 2012: Although media dynamics has changed significantly, TV still remains the main communication channel with the widest audience reach. Outdoor follows, as it provides an opportunity to impress and create immediate awareness for tactical campaigns. Quickly picking up is Digital, since more than one third of the population is found browsing daily on the internet. Banks have started to recognize the value of digital solutions, as the cost-benefit analysis makes sense and it’s a medium that allows for engagement opportunities with clients. Banks are adjusting their priorities to meet consumer demand and focus on consumer engagement through new and better solutions e.g. internet banking and mobile banking where anyone can perform all kinds of transactions and added extra features, such as ATM locator applications, that are more adapt at reaching mobile customers, providing self-service options, etc.

With the growing number of internet users, smartphone and tablet owners it’s clear that the trend will shift to evolve cross channel interaction to optimally reach this increasingly pool of digital customers.

Banks in Albania usually choose to work with an advertising agency that has a pool of creativity and could provide media buying services for

OOH 32%

Print 7%

Banking Sector Budget Split per Media

TV 58%

Radio 3%

the bank’s account and not only. This relationship is crucial when it comes to creating the best communication strategies and tactics and producing the best creative solutions that surprise the market and create the right engagement. The bank - agency relationship is like a marriage, extremely happy (read fruitful) for both parties when both parties put the right effort and share a common goal and objective.

Research shows that bank customers believe that advertisement is effective for a bank. Banks provide consumers with information on the variety and characteristics of their products in order to attract them.

When customers are getting good

terms and a good product, they do wish that these terms come from a bank that has made its presence clear within a competitive environment, follows the sector development, and offers differentiated and improved products from its competitors. However, advertising is not the determinant factor in the customers’ final choice. Selecting a banking institution is based on the products, services and the relationship the bank nourishes with its client. As a key element of communication, but also corporate image, advertising needs

segmentation, positioning and

marketing

Advertising is not the determinant factor in the customers’ final choice. Selecting a banking institution is based on products, services and the relationship a bank nourishes with its client.

Advertising, however, as a key element of communication, but also corporate image, needs to be carefully tailored and not misleading.

need to make. If you then found that the interest offered was not the actual interest provided and there was an unmentioned commission applied to the deposit scheme, would you feel short changed? Would you even go as far as to file a complaint inside the branch? Probably not; but you would talk to your friend about this and probably would remember next time to be far more cautious about that bank and what that bank communicates to you.

Banks in Albania are regulated

by Bank of Albania’s regulations for transparency of products and banking services and the request for minimal public information. Banks also develop internal compliance procedures in order to avoid misleading advertising and provide transparency in their communication. Surely, not all “puffery” is illegal, and some banks may argue that they are bound to respect the law, despite conducting gray communication, where information is extracted purposely or crucial information is omitted from the poster. More hidden fees may provide greater earnings in the short-

marketing mix Planning

Prices Distribution

Integrated marketing communications Products Services

to be carefully tailored and not misleading. If we see a poster outside a branch claiming unusual high interest rates – would you enter the bank and ask for information? You might well do, particularly if you felt the need to make a safe investment and you were also offered to get the interest in advance which serves your needs for some cash expenses you

customers behavior market research

term but will remain a long-term drag on customer confidence; and they give a real business opening to new competitors.

It is certainly best to argue for product innovation that serve customer needs and advertising that is based on true promises and pure creativity that generates genuine customer interest.

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EConomist Corner

European Banking Union between reality and utopia

In order to ensure a steady functioning of the euro area, the proposed banking union must be accompanied by the creation of a “budget transfer union”, which requires the establishment of a supervisory structure of national budgets and a real coordination of economic policies, throughout the whole euro area

by Prof.Dr. Adrian CIVICI President & Head of Doctoral School European University of Tirana, UET-EUT

F

inance ministers of 27 EU member countries agreed, in 13 December 2012, to establish a “unified banking supervision for the euro area”, by conceding the national supervision power of each member state over banks, within its own territory. This “compromise” decision, expected to enter into force in March 2014, resulted after a long row of discussions, debates, disputes and dilemmas that kept it in the pipeline, such as: Would the European Central Bank (ECB) exert the direct supervision, all by its own? Would be any cooperation established between the European Banking Authority, EBA (that is, the whole EU) and ECB (which exerts its authority within 17 euro zone countries, only)? Would it be possible to separate the two basic functions of ECB (i.e. euro area monetary policy and supervision that will affect all EU member countries)? Would banks, with asset size under EUR 30 billion, enter under the ECB authority? Finally, would various savings and credit associations and regional banks be subject to ECB oversight, or they would be left out of this system?

The decision about joint (unified) supervision was seen as “the first major step towards European banking union”, “as a key element of EU plans

towards a European banking system and resolving euro zone problems”, as a mechanism “which will restore confidence, and give a clear signal to the whole world, about European vitality.”

The EU objective is already clear: the creation of a European banking union, as one of the challenges, but also as a major structural problem for the euro zone and the future of the European Monetary Union. During a three-year period, 2008-2011, the support for EU banks reached

The key difficulties and doubts to be overcome are those like “eliminating political influence, which could be exerted by certain European countries”, which has created numerous problems in the history of the European banking system, related to the delicate issue of conceding sovereignty by member states.

a cost of EUR 1,600 billion, or 13 % of its annual GDP. The public debt and budget deficits crises in general, as well as all the problems of European banking system in particular, highlighted many “arrows”, targeting and threatening its sustainable future. First, pressures, tolerance and additional support required by “too big to fail” reality, which in a way leaves not enough room for drastic corrective actions for these banks; second, difficulties to mitigate and neutralize future financial and banking crises, which may be triggered by big insurance companies (AIG in the U.S. was a perfect example); third, possible implications from a radical reform or “banking revolution”, regarding the proposal for a “limited purpose banking”, which anticipates a drastic reduction of banking “leverage”, by way of transforming credit institutions into open-end investment funds; fourth, issues related to the so-called “colossus with feet of clay” banks, such as: Dexia, Fortis, ABN AMRO, Royal Bank of Scotland, etc.; fifth, the guarantee to ensure stability for very small banks, but “aggressively grown” with an apparent lack of balance between loans and deposits, such as: Northern Rock, Icelandic banks, Irish banks etc.; sixth, solving the problem of regional banks, which are often under political and nationalistic pressure, as in the case of many regional banks in Spain; seventh, banks which are destabilized, due to high exposure to

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sovereign debts, specifically some largest Greek, French, Irish banks, etc.

The most frequent question circulating around is: What must be done to reduce at minimum level the costs of such crisis, thus increasing the resistance of banking system against crisis, or the other future crises? Some of the most important measures proposed in this regard, include: 1. Creating a European structure, or supervisory authority. It seems that proposals and projects are converging towards a similar model with FDIC (Federal Deposit Insurance Corporation) in U.S., with a pan-European supervisor, with initial relevant authority on largest European banking groups, and in furtherance, shaping it as a sole supervisor for the entire European banking system.

Such supervision, which will be conducted by ECB as the sole supervision authority, should include: the European Banking Authority (EBA), entitled with banking supervision, especially bank recapitalization; European Securities Markets Authority (ESMA), entitled primarily with capital markets oversight; European Authority for supervision of insurance and pension sector. By taking out about 200 large banking groups (about 1,000 banks), which will be under ECB direct supervision, there will be almost 6,000 euro zone banks, which will

26 • BANKIERI • www.aab.al

continue to be supervised by national authorities. However, ECB may intervene, should any structural and systemic problems be noticed. The key difficulties and doubts to be overcome are those like “eliminating political influence, which could be exerted by certain European countries”, which has created numerous problems in the history of the European banking system, related to the delicate issue of conceding sovereignty by member states.

Germany, for example, made it clear since the beginning that “a clear difference must be articulated between approving this measure and its entry into force.” The most acceptable solution seems to be “the creation of a supervisory committee, consisting in a mixed membership from ECB and representatives from national supervisory authorities,” which will amortize conflicts of interest.

2. Building a clear mechanism for “uniform regulation” of the banking sector. The financial crisis revealed the danger of existing divergences, or “differences in national governance rules” for the banking sector, especially with regard to the level of bank capitalization. Along with FSB (Financial Stability Board) and G20 recommendations, the reform aims at amending the legislation by adapting to new international requirements, known as: “Basel III agreement.” These rules will ap-

ply to over 8,000 European banks (6,000 in euro area, alone), which represent 53% of global banking assets. This set of measures include also those which deal with “financial regulation”, such as: structural reforms of the banking sector, parallel banking systems, non-performing loans, derivative products, negotiation rules for financial instruments, remuneration practices in the banking sector, accounting and audit sectors reform, etc.

3. European guarantee for deposits.

Pursuant to European legislation, bank deposits in any EU country are guaranteed at EUR 100,000 per depositor, in each case of bank bankruptcy. Progress in this element relates to the harmonization and its simple operation, in a European level. Specifically, if a national system exhausts its resources, it could be supplied by other national systems. Put another way, it should be considered as the first stage towards building a European deposit guarantee system. Such system creates a better protection for deposits at European level, provides European citizens with the opportunity to choose between EU countries for depositing their savings, without being subject to national rules.

Banks may propose and introduce competitive products, with EU-wide reach, without being limited by national differences.

Finally, a European funding for deposit guarantees limits the need for intervention with public funds in the system. Guaranteeing bank deposits, at EU level, avoids panic in case of national crisis, and will contribute to “break” the nexus between sovereign debt crises and banking crises.

4. The creation of a European fund for emergencies, or resolving banking crises. This fund, partially financed by banks and partially by public funds, will help resolve critical problems of those banks, which are in trouble. However, the consensus and opportunities for an immediate creation of this fund still seems difficult and is viewed rather as a measure to strengthen the capacity of the European Monetary Union to resolve prospective banking crises.

5. Balancing the relationship between bank assets and GDP. This measure requires the establish-

ment of some “normal” proportions between bank assets relative and GDP, because in many EU countries large differences and imbalances are found, such as: in case of Ireland and Iceland, where bank assets were 5 and 7 times larger than the GDP, respectively, etc. Under these conditions, crises’ prevention and management become quite tough and difficult.

Is the European Banking Union a realistic and easily implementable?

This question continues to produce lively debate among European institutions, banking experts and leading European politicians. They do consider the European banking union as very ambitious. Arguments are numerous. First, ECB remains the sole reference that is shouldering the burden of financial support responsibility for indebted countries, such as: Greece, Italy and Spain. ECB is weakening its balance sheets and, in some cases, in the name of euro interests, is going beyond its statute and traditional role. Second, the blanketing the ECB supervisory jurisdiction over 6,000 banks, throughout the euro area, seems a “tremendous

task”, at least for its institutional standing and actual structure. Third, European deposit guarantee fund would have more sense if it was only for classic banking activities (loans - deposits), while many questions could be raised when it comes to cover the risk of speculative derivative product portfolios. Fourth, the difficulties of structural reform to rapidly create a more homogeneous structure of banks in Europe. To complicate things, it should be noted that countries like: Sweden, England, etc., continue to express doubts about the banking union project, stressing that they could stay out of such system. Fifth, the issue of recapitalization of banks through the “European Stability Mechanism” (ESM), faces a hilly path because of two elements: (1) ESM has a macro-prudential role for the stability of sovereign debts and not for banks’ ones; (2) EU states cannot become direct shareholders in banks, during a crisis. Sixth, the euro area still does not have all the regulatory elements of an optimal monetary zone. In order to ensure a steady functioning of the euro area, the proposed banking union must be accompanied by the creation of a

“budget transfer union”, which requires the establishment of a supervisory structure of national budgets and a real coordination of economic policies, throughout the whole euro area.

ECB remains the sole reference that is shouldering the burden of financial support responsibility for indebted countries, such as: Greece, Italy and Spain. ECB is weakening its balance sheets and, in some cases, in the name of euro interests, is going beyond its statute and traditional role. www.aab.al • BANKIERI • 27

SOCIAL CAPITAL

Auditing the corporate social responsibility in the Albanian banking sector The “audit guidance” should exist to support internal audit functions to audit social, ethical and environmental risks in a consistent way, but also it enables banks to modify and tailor the guidance according to bank-specific characteristics (such as internal audit function size, audit skills and knowledge).

(2) adoption of CSR policies implemented by mother-corporate/international banks which have branches or subsidiaries operating in Albania.

But, are internal auditors providby Holtjana Bello, PHD Candidate 1 ing assurance about CSR-related activities given the new dimension of Business Consultant in the CSR practices worldwide? The Corporate Governance and Internal Audit interviews with directors of internal audit of various banks in Albania (66% of banks, in terms of assets), about the extent of internal audit in-

C

hanges during last decade in Corporate Social Responsibility (CSR) have enabled corporations, especially banks, to alter and adapt their business practices with focus on ethics, social and environmental issues, along with profit maximization. The increased focus in the CSR worldwide has impacted the Albanian private sector, as well. As Albanian market is considered a developing one, it is well influenced by international best practices. Focusing in the Albanian banking sector, there are two major components that have influenced in the development of CSR practices: (1) international awareness which has played a an important role in increasing awareness of such practices either in Albania; and 1

volvement in social, environmental, and ethical areas, have produced the following findings:

Results of Survey The Size of Internal Audit Functions The size of internal audit functions is thought to be one the reason for the existence of CSR auditing or the intention of auditing social, ethical and environmental risks. Figure 1 shows the breakdown of different sizes of

Size of Internal Audit Service expressed in Productive Audit Days

2500 + Days 33%

500-1500 Days 50%

1501-2500 Days 17%

Fig.1. Analysis of the survey by size of the bank’s internal audit functions

This survey is part of the personal research of the author introduced in the international Conference of Accounting and Auditing of University of Tirana, in September 2012.

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internal audit functions within Albanian banking sector. The chart indicates that 50% of interviewed banks allocate 500-1.500 man days to audit activities, while the rest allocate more than 1.500 productive days.

The Extent of Audit Activity within Albanian Banking Sector

Regarding the extent of auditing social, ethical and environmental risks within Albanian banking sector, the responses indicate a low level of audit activity in social and environmental area. The highest level of audit activity is found in the area of ethical risks, due to the law enforcement (labor code, BoA’s transparency regulations), the requirements imposed by parent banks and/or shareholders, operating outside Albania, which enforce their subsidiaries in Albania to comply with recognized CSR standards (see Figure 2). Meanwhile, the interviews confirmed the mod-

based on recognized standards such as ISO 14001. A general characteristic for CSR audit is that these risks are not seen and audited quite isolated, instead they are seen as embedded with audit activities e.g. HR audit includes dedicated days to audit ethical issues, assess the system which manages the complaints raised by customers, assess the employees’ health insurance scheme, etc. This important point reinforces the principle of integration, that is, the audit of social, ethical and environmental risks should be aligned with existing bank objectives.

Audit Resources

Regarding the extent of resources planned to audit social, ethical and environmental risks, the estimated audit resources range from 1% to 7%, whereas the average value of planned workforce in auditing those risks stands at 3%. There is a correlation

planning and resources, in order to align with priorities of management.

Voluntary proach?

vs.

Regulated

Ap-

Half of respondents indicated that their preferred model for auditing CSR areas is the voluntary approach.

This approach is applied successfully, due to the fact that such risks are seen as important from their management. However, they mention that the “audit guidance” should exist to support internal audit functions to audit social, ethical and environmental risks in a consistent way, but also it enables banks to modify and tailor the guidance according to bank-specific characteristics (such as internal audit function size, audit skills and knowledge). Supporting narrative to the other half of respondents in favor of “regulated” approach indicate that a standardization of CSR auditing

IA Reources Allocation upon CSR Risks

Social, Ethical and Environmenal Risks audited 10

100% 100 83%

8 7.0%

80 67%

6

60

4.0%

4 40

3.0%

33%

2 20

2.0% 1.0%

17% 0%

0 Social Risks

Environmenal Risks

0

Bank 1

Bank 2

EthicalRisks

1.5%

Bank 3

Bank 4

Bank 5

Bank 6

Non applicable - audited by another agency Please indicae an approx. %

PO

Don’t know

JO

Fig.2. Analysis of banks internal audit departments that audit CSR

est effort of audit activities in social and environmental risks, because these risks are perceived to have less importance, due to the focus of Albanian banks to short-term financial performance rather than socio-economic indicators aiming to the longterm bank sustainability. Additionally, some respondents confirmed they do not have enough skills and expertise to audit environmental risks,

Fig.3. Analysis of planned resources in 2012 to audit Social, Ethical and Environmental risks

between the internal audit resources to audit these risks and the audit productive days. As a general characteristic, banks with a highest productive days 2.500 + have planned 3% - 4% of audit resources for social, ethical and environmental risks, while the bank with the highest percentage of 7% has 1.200 productive man days.

Nevertheless, the latter has rebalanced the priorities within the audit

model would enforce assurance from assurance providers. Such a model promotes a consistent and uniform practice, aiming to benchmark this service, to exchange experiences and share know-how between banks.

One respondent said that a consistent practice will assist banks toward lobbying to promote social responsibility in Albanian banking sector and beyond. (to be continued)

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Social Capital

Alpha Bank Albania International Marathon of Tirana - On 21 October, 2012 he International Marathon of Tirana was organized for the first time in Albania. Alpha Bank Albania was one of the supporters of this activity, by sponsoring the third place of the 42 km Marathon for both male and female runners.

Scholarships - On the occasion of the 100th Anniversary of Independence of Albania, the Greek Albanian College Arsakeio in Tirana organized in 26 November, 2012, a special event. One of the most special moments of hte event was the donation of two scholarships for two students of Arsakeio College by Mr. Periklis Drougkas, CEO of Alpha Bank Albania.

The Silent auction of World Vision - World Vision organized in 5 December, 2012 a silent auction. Mr. Periklis Drougkas, CEO of Alpha Bank Albania, attended the auction and bought two pictures, made by children themselves. The fund raised from the auction will be used for future projects of this foundation.

Gifts for End-of-year festivities - The Board of Directors of Alpha Bank Albania, decided to allocate the fund for greeting cards, in support for certain institutions. The fund was donated to the House of Elders in Fier, Children Kindergarten No.1 in Përmet and to the two Children Houses, in Shkodra.

BKT BKT to help families in need of 50 pupils of “Mustafa Kemal Ataturk” School and Roma community BKT, in cooperation with the Embassy of the Republic of Turkey in Tirana, in the frame of BKT’s corporate social responsibility policies, donated food and other cleaning materials for 50 families of pupils of “Mustafa Kemal Ataturk” school, in Zall Herr. Also, BKT in cooperation with the Embassy of the Republic of Turkey in Tirana and the Roma Integration and Children Anti-trafficking Association donated food and other cleaning materials for 50 families in need from the Roma community in Tirana. The materials were donated in the presence of Vice Ambassador of Turkey in Albania, Ms. Bengu Tetik and BKT representatives.

Credins Bank People in need – As an annual tradition, Credins Bank supported people in need by providing substantial food assistance for Red Cross in Shkodra. Also in this year-end period, Credins Bank provided a festive lunch for about 100 retirees in Tirana.

Community - Over the last two months of 2012, Credins Bank offered support fo the construction of a park in Kavaja city entrance.

Sport - On the occasion of the 100th Anniversary of Independence, the bank supported the National Boxing Championship, along with donating a considerable amount of balls for “Flamurtari” basketball team.

Children - Gifts for 3.000 children of 0-3 years, to all public kindergartens in Tirana is the considered the greatest activity of the year-end, conducted in cooperation with Tirana Municpality.

Awards - On the occasion of the 20th anniversary of the Faculty of Social Sciences, Credins Bank was honored, in a special ceremony, with the Certificate of Appreciation, for its contribution in supporting the development of Social Work in Albania.

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First Investment Bank Fibank supports children of SOS Village For the third consecutive year Fibank supported children of SOS Village. Funds provided for buying greeting cards will be used with for a warm home for every child who needs shelter and family. Such activities are always on the focus of Fibank, and it is aiming at intensifying these activities during 2013.

International Commercial Bank ICB employees donates blood The Staff of ICB in Tirana followed the Red Cross appeal for voluntary blood donation for children suffering from thalassemia, and people in need. This is the second time this year for ICB employees to donate blood, voluntarily.

ICB contribution on the occasion of Christmas and New Year’s Eve ICB donated 120 packages for two daily centers for homeless children. This initiative was realized thanks to ICB donation to CRCA ​​ and ALO 116, to help the most vulnerable people. On the occasion of end-year festivities ICB supported the SOS village children.

Intesa Sanpaolo Bank “Children in the Office” at Intesa Sanpaolo Bank “Children in the Office” was the initiative undertaken

by Intesa Sanpaolo Bank ,as part of its social coprporate responsibility. The purpose of the initiative was to host children in the bank premises and let them live a special experience, together with their parents. At the end of visit, children were distributed special gift packages.

Children’s drawings and paints, related to this visit were used as the image of bank’s Seasons greeting postcards, and the funds raised in this regard were given to SOS children village.

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NBG Bank Albania NBG Bank Albania donates books to 100 students in Saranda On the occasion of the 100th Anniversary of the independence, “Adem Sheme” school in Saranda organized a special spectacle at school’s premises. Special guests were 100 best school pupils, who organized various performances to their friends, relatives and teachers. NBG Bank Albania donated books to them. During 16 years of its activity in Albania, NBG Bank Albania has always supported education development projects, considering education as a central pillar for society development.

ProCredit Bank ProCredit Bank confirms its social commitment in the field of Agribusiness and Energy Efficiency The “Triangle Business Cooperation” project of ProCredit Bank is an innovative project in the agriculture sector, which aims not only to link and coordinate agro processors with raw material manufacturers, but also to introduce the agribusiness models at the agricultural and livestock farm level with high profitability; to improve farm technology through investments in new techniques in livestock farming and in advanced technologies in agriculture, as well as to increase productivity and competitiveness. In the frame of this project, several meetings were held in many agricultural areas in Albania, like: region of Durrës, Tirana, Fier, Korca, Berat, Vlora, Shkodra, Gjirokastra, Saranda, etc.

Another area where ProCredit Bank has been socially active is promoting “Energy Efficiency”, not only as a financial product, but as a way of investment that directly affects the quality of life for individuals, reduces monthly energy expenses and decreases the negative impact of pollution to the environment.

Raiffeisen Bank Raiffeisen Bank supports the activity for orphans during the end-year festivities Raiffeisen Bank supported the activity: “We celebrate in the community the end-year festivities - the passion of orphans,” organized by ‘Orphans in Focus” Association, at the premises of National Puppet Theatre in Tirana. More than 220 children from Tirana, Berat, Kavaja, Çorovoda and Policani attended the activity. At the end, gifts were distributed to all children.

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Tirana Bank Tirana Bank donates blood for the Albanian Red Cross – It is the fourth consecutive year for Tirana Bank employees to support the Albanian Red Cross. Over 200 employees donated blood to assist children suffering from thalassemia and leukemia. Mr. Savvas Thalassinos, Managing Director of Tirana Bank, delivered a message of solidarity and support for this annual initiative.

“Ndërmendje 2012” - The classical music concert “Ndërmendje”, clearly reflects the artistic spirit of the city of Shkodra, bringing at every end-year period some wonderful pieces of famous classical authors, both foreign and domestic ones. Tirana Bank continues to support this event year after year.

Partners Albania grants a Special Award to Tirana Bank - For the second consecutive year, Partners Albania, The Center for Change and Conflict Management, organized the “Philanthropy Award 2012” Ceremony. A Certificate of Appreciation was awarded to Tirana Bank with the motivation: “For the valuable and humanitarian act of voluntary blood donation of its employees, in continuous support of the Blood Bank and Blood Transfusion Centre covering all the branches where Tirana Bank operates”.

Wines Party - In a very happy EndYear atmosphere, the “Wines Party 2012” was organized in the town of Pogradec. Tirana Bank supported again this year the event, with the aim to show tradition and provide support to local entrepreneurs that promote local wine production.

a banker in first person

Union Bank Union Bank supports “Gjergj Fishta” regional literary awards Union Bank supported “Gjergj Fishta” regional literary awards, given by the Literary Club “Ndoc Gjetja”.

The activity was organized in 3 November, 2012 in Fishtë, by by Union Bank, Lezha Country Council, and “Ndoc Gjetja” Literary Club. During the event, well-known Albanian poets and writers, such as: Agron Tufa, Bardhyl Londo etc, were awarded on this occasion.

Plator Ulqinaku, a banker passionate for poetry

H

Veneto Banka “Marina Orikum. Sailing for entertainment and marine tourism” In October 2012, the Italian Embassy in Tirana, in collaboration with the Italian Chamber of Commerce in Albania, and with the support of the Veneto Banka, organized a conference on the development of marine tourism, in the frame of the project “Marina Orikum”, a very useful and valuable investment for the development of marine tourism and sailing in Albania. Promotional work has just kickstarted with this first conference and it is expected to follow up with other interesting activities for promoting Orikum Marine.

e is typically known as a man focused on his work, who is facing the challenges, stress and satisfaction of the banker’s profession, for more than 12 years. This new column brings into spotlight Mr. Plator Ulqinaku, not in his capacity of Head of Department of Risk Management at Union Bank, but as a poet and winner of a national prize for literature.

National prizes for Literature were awarded in December 2012 and were intended to award the best literature works, on a nationwide basis.

Mr. Plator Ulqinaku was awarded with “Migjeni” Prize, in the category of best debut author for 2011.

His work: “Book of resistance” was awarded as “a mature and promising first step in the Albanian poetry.” This is the first book of the author.

This is a voluminous book, for which the author prescribes as chaotic, in terms of themes, but simultaneously as colorful and difficult. Mr. Ulqinaku is fond of writing phraseological poesies with semantic blocks, which do not go through verses. He also writes esthetic poesies on ideas and themes of creation, God, love, illusion, utopia, etc.

“Literature is a noble act and rather disadvantaged, compared to other arts. If other arts use the subject

transformation to convey a certain theme, the literature does not possess such luxury. Literature uses sublimation and the word, only. Sublimation should be at the absolute level, in order for the literature to be of the like,” said Mr. Ulqinaku, at the awards ceremony. “Man is a simultaneously a rational and irrational creature”, Mr. Ulqinaku told in a media interview.

It is because of such contradiction – he stresses – where one could find the possibility of coexistence between the passion for poetry and banker’s profession.

Mr. Plator Ulqinaku is a banker fully focused on his own work, but in the same time a spontaneous person, who knows pretty well how to turn artistic details in poetry.

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balkannet

interbalkan news

BOSNia - HERZEGOVINA

Sarajevo

Bosnia and Herzegovina record 5% growth in citizens’ deposits Balkans.com - 31.10.2012 According to the Central Bank of Bosnia and Herzegovina (CBBH) data, at the end of September 2012, the growth of citizens’ deposits by or 5% is recorded compared to the end of 2011, in spite of difficult economic situation and financial crisis. The largest share in continuous increase of citizens’ deposits, as seen by the maturity structure, has been the long-term deposits. This is the best indicator of confidence in the banking sector, and the result of the existence of insured deposits scheme, whose primary goal is to increase the stability of the banking sector and to protect the depositors.

Croatia

Zagreb

BULGARIA

Croatia’s central bank predicts 0.3% economy growth in 2013

Sofia Bulgaria will be part of a single system of banking supervision Focus Information Agency - 19.10.2012 Bulgaria will be part of a single system of banking supervision, because it is a country which wants to enter the eurozone. That is what Foreign Minister Nikolay Mladenov said for Bulgaria On Air television channel. “The more uniform and stable EU rules are, the more effective is the economic relationship between Bulgaria and other countries in Europe”, Mladenov said.

Bne - 14.12.2012 Croatia’s economy should return to growth after four years of decline in 2013, expanding a modest 0.3%, although risks including a possible credit rating cut remain, its central bank governor said, Reuters reports. The bank’s forecasts is significantly less that the government hopes for growth of 1.8% next year, and lower that a poll by Reuters of a median projection of just 0.4%. However, central bank chief Boris Vujcic said even their modest growth expectations may be vulnerable given the reliance on investments to drive the economy, warning that public companies’ investment plans might prove “a bit ambitious”. Shrinking personal consumption and lower public spending, mainly in the form of cuts in public sector wages, would have a negative impact on growth next year.

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GREECE

Athens

country’s financial sector. Te presentation was preceded by a video material on Kosovo, prepared by IMF, which was delivered transmitted exclusively on the occasion of IMF and World Bank annual meetings in Tokyo, in October 2012. Also, during the event, CBK distributed prizes for the best study, submitted by young economists.

MACEDONIA

Skopje

Greece credit sector’s losses predicted at EUR 46.8 bln Ekathimerini - 28.12.2012 The combined losses of domestic banks due to bad loans in Greece and abroad add up to a staggering 46.8 billion euros, while the recapitalization needs of the local credit sector are estimated at over 40 billion, the Bank of Greece announced. The report on the recapitalization and restructuring of the Greek banking sector drawn up by the country’s central bank estimates the credit risk as defined by the BlackRock evaluation at 36.8 billion euros, while another 8.2 billion euros comprises losses from portfolios of loans abroad and 1.8 billion euros from loans to companies related to the Greek state. This 46.8 billion along with the 37.7 billion euros from the debt restructuring (PSI) in March add up to losses of an unprecedented 84.5 billion euros, which amounts to 42 percent of the country’s gross domestic product.

KOSOVo

FYR Macedonia’s Central bank loosens monetary policy MIA - 30.11.2012 Reduction of the interest rate by half to one percentage on loans for exporting companies and projects related to electricity production will result from the new measure by the National Bank of the Republic of Macedonia (NBRM), passed at the bank’s Council session.

NBRM Governor Dimitar Bogov said this was an unconventional measure in the monetary policy, aimed at mitigating crisis effects.

MONTENEGRO

Pristina Podgorica

Cenrtral Bank of Kosovo (CBK) presents Kosovo’s Financial Stability Report

Revival of lending and reduction of non-performing loans remain the key challenges in Montenegro’s banking sector

CBK - 19 december 2012

MNNews - 05.10.2012

Cenrtral Bank of Kosovo (CBK) presented the third edition of Kosovo’s Financial Stability Report. By informing the general public about the financial sector stante of affairs, CBK aims to increase transparency and promote professional debate on developments and challenges of

It was concluded at a meeting of representatives of the Central Bank (CBCG) and the International Monetary Fund (IMF) that Montenegro s financial stability had been strengthened by new recapitalizations, while revival of lending activities and reduction of non-performing loans

36 • BANKIERI • www.aab.al

remained the key challenges in the banking sector. It was concluded at a meeting the CBCG Governor Radoje Zugic had with the IMF representatives Nadeem Ilahi and Matthew Gaertner that Montenegro saw a continuous recovery of saving and deposits, as well as that the inflow of foreign direct investments was still at a high level.

ROMANIA

Bucharest

EBRD grants Banca Transilvania a EUR 30 million loan for financing projects of SMEs in Romania Ovidiu Posirca - Business Review - 24.10.2012 The EBRD has granted Banca Transilvania (BT) a EUR 30 million loan that will be used to finance projects of small and medium-size enterprises (SME) in Romania. A third of the financing will be provided under EBRD’s RoSEFF facility for energy efficiency and small scale renewable energy projects. The EBRD, which holds a 16 percent stake in Banca Transilvania, has in so far invested about EUR 6 billion in Romania.

Serbia

Beograd

stitutions in support of the projects of small and mediumsized enterprises (SMEs) as well as infrastructure schemes promoted by local authorities. The loans are designed to assist Serbia in its efforts to integrate into the European Union. “The Bank of the European Union supports projects in Serbia with the objective to help the country on its path towards EU accession and integrate rapidly into the Union. The loans signed with the two local banks will improve the access of Serbian SMEs and mid-cap companies to long-term financing provided on favorable terms” said Dario Scannapieco, the EIB Vice-President responsible for the Western Balkans, “and I am really pleased with our cooperation with Serbian Authorities and Serbian financial institutions: these loans represent a continuation of the very successful relationship between the EIB and both Raiffeisen Banka a.d. Beograd and Erste Bank”.

TURKEY

Istanbul

Turkey’s banking sector attracts more international players Balkans.com Business News Correspondent - 25.12.2012 The Turkish banking sector is attracting more and more international players as the country’s sector regulator, the Banking Regulation and Supervision Agency (BDDK), has approved The Bank of Tokyo-Mitsubishi UFJ. Local Anadolu Endüstri Holding has said in a filing to the Istanbul Stock Exchange (İMKB) that it has started talks with the Commercial Bank of Qatar to sell its controlling shares in Alternatifbank.

EIB grants EUR 100 million loan to two banks for SME support European Commission Press - 27.11.2012 The European Investment Bank (EIB) signed two loans totaling EUR 100 million in Serbia with two local financial in-

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Tech Topics

“aab-ankande.com” – the new AAB online portal Now all interested persons may get information, through “aab-ankande.com” webpage, about auctions on real estate properties, pledged as collateral, as well as the sale of properties ownd by banks.

by Brunilda KOSTARE Legal adviser, AAB

T

he Albanian Association of Banks (AAB), is completing its own project on building an online portal, which will provide complete information about the ongoing auctions for real estate properties, which are pledged as collateral, as well as properties owned by banks, which are put for sale. This project is finalizing several months of work,

supported by AAB Secretariat, with the special participation and contribution of member banks’ representatives.

The portal aims at increasing the transparency of auction procedures for the sale of real estate properties, pledged as collateral for bank loans, by bailiffs so helping for a more efficient collateral enforcement, which means increasing the number of sale auctions, collection of obligations past due, increased liquidity, and therefore a credit growth to the economy.

Also, its creation could be utilized as a new source of information for general public, who has interest in

purchasing real estate properties, and there it may get information about all real estate sale auctions, pledged as collateral for bank loans, according to relevant legal procedures, in cases of loan defaults. Useful information will be found, also, in the portal on all real estate properties, owned by banks and put for sale. This website will contain complete information about the auctions held by bailiffs, such as: start date and auction day, bailiff’s name and address, type, structure, space and address of the property to be sold through the auction, as well as the initial auction price. There are also plans to obtain detailed information about the auction, by contacting the “Contact Person”.

In addition to information on the auctions, the page will contain information on properties owned by banks, which are put for sale.

Each interested person may find complete information about property for sale and may also get further information about sale conditions of property, by way of contact number.

Currently AAB member banks have commenced posting relevant information in this website, and it will be fully operational for public use. An advertising campaign, conducted by AAB, is planned on the occasion of launching the online portal.

www.aab.al • BANKIERI • 39

Financial Auditorium

Five Cs of Credit Analysis By standardizing the steps taken to investigate a new or existing account and determine its desirability, the credit department minimizes the potential for slow payments " / "(38 and/or bad debt losses involving that customer Capacity This refers to the borrower’s legal and financial capacity to borrow. The first consideration in assessing a loan request is whether the person requesting the loan is legally capable of borrowing. Apart from legal consideration, capacity refers to borrower’s financial ability. To repay is the most critical of the five factors, it is the primary source of repayment - cash. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial - is considered an indicator of future payment performance.

Character means the borrower’s ability to repay debts and the desire to settle all obligations within the terms of the contract. This requires a careful examination of the borrower’s past record in debt repayment and related behaviors. Including character in credit analysis makes sense because the better a borrower’s credit reputation, the less incentive it has to de-

defaulting on this bank loan leads to a loss of that NPV. Clearly, this NPV increases as interest rates on future loans decline. Further, the longer the borrower keeps repaying its loans, the better its credit reputation gats

"' 1 "3$1

LDMS

by Junida TAFAJ (Katroshi) Operations Officer AAB

egardless of where you seek fundR ing - from a bank or other credit institutions - a prospective lender

will review your creditworthiness.

The preliminary credit investigation is a fairly standard process. By standardizing the steps taken to investigate a new or existing account and determine its desirability, the credit department minimizes the potential for slow payments and/or bad debt losses involving that customer. The key qualitative and quantitative mea-

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Credit analysis examines factors that may lead to default in the repayment ".++ 3$1 + of a loan. The principal objective of credit analysis ".-#(3(.-2 is to determine the ability and willingness of the borrower to repay the loan. The analysis looks at the borrower’s past record (reputation) / "(38 as well its economic projects.

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sures examined in a credit analysis are known as the “C’s of Credit”, capacity, character, capital, collateral and conditions. The explanation that follows is summarized in this diagram.

40 • BANKIERI • www.aab.al

fault. The gain from defaulting is the amount the borrower does not repay the bank, but gain from repayment is the net present value (NPV) of all the investment projects that might be financed with future bank loans,

and the lower its future loan interest rates. Consequently, the benefit of repaying the loan (or equivalently, the cost of defaulting) is greater for a borrower with a better reputation. To put it a little differently, the benefit of maintaining or building a reputation is greater the better the reputation is to start with. Hence, borrowers with better reputations (repayment records) tend to be better credit risks.

Capital How much equity capital (as a fraction of total assets) the borrower has invested in the firm is an important factor in the assessment of that firm’s credit risk. There are two

effects at work here. First, a higher amount of capital lessens the moral hazard problem. Second, the higher the capital, the better is the signal sent by the firm’s owners about the confidence they have in the firm’s future prospects. This helps to resolve the private information problem. Capital helps to resolve moral hazard by imposing a greater loss on the borrower for poor project outcomes. This is because capital acts as the “first line of defense” against project losses and provides a cushion of protection for the lender. The other function of capital is an information communicator.

The entrepreneur’s own contribution of equity can signal the profitability of his/her project.

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan. Using collateral is not costless, however. Since the borrower may undertake actions that undermine the value of the collateral to the bank, ongoing monitoring of the collateral is required. Moreover, when collateral is transferred to the bank upon default, there are liquidation costs, including the legal costs of ownership transfer as well as the bank’s costs of initially carrying and then selling off the collateral.

Conditions describe the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within the borrower’s industry and in other industries that could affect your business. Debts are repaid from four sources: income, sale of assets, sale of stock, and borrowing from another source. All of these should be assessed in determining the desirability, price and other terms of the loan. The borrower’s ability to generate income depends on: the selling prices of its goods, costs of inputs, competition, quality of goods and services, advertising effectiveness, and quality of management. Analysis of the borrower’s financial statement as well as its management should inform the bank about the borrower’s ability to create income.

Special

“Historical view of banks in Albania”, the promotion of the book, 04 DECEMBER 2012

T

he Albanian Association of Banks (AAB), on the occasion of the 100th anniversary of the Declaration of Albania’s Independence, promoted its newly published book entitled “Historical view of banks in Albania”, during a ceremony held in Sheraton Hotel, Tirana. Authored and edited by renowned bankers and academics, the book covers the history of banks in the country from the beginning of the nineteenth century to present days. The ceremony was attended by personalities in the economic and banking system, politics, businesses and foreign representation in Albania.

Mr. Seyhan Pencabligil, AAB Chair-

man, briefly introduced the book and its authors and thanked all the collaborators who helped in realizing the book. Also, he expressed the confidence that the centuries ahead which will be brighter and more prosperous for the Albanian people, and banks will continue to contribute to such prosperity.

The participants were greeted by Mr Nezir Haldedaj, the deputy Minister of Finance, Mrs Elisabeta Gjoni, First Deputy Governor of Bank of Albania and by Mr Petraq Milo, Economic Advisor to the Prime Minister, who emphasized the importance of the book.

In this occasion, AAB honored with a special recognition award the following ex-bankers, for their valuable contribution to the Albanian banking system development: Mr Dhimitër Pasko aka Mitrush Kuteli, Mr Sofokli Memo, Mr Kamber Myftari, Mr Thoma Semi, Mr Llazi Balliu, Mr Andon Thimjo, and Mr Fori BICI.

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AAB

AAB ACTIVITIES AAB - on Financial Education AAB and Bank of Albania made possible the “Personal Finance on Your Hands” textbook, 30 October, 2012 AAB, in cooperation with Bank of Albania, provided during this academic year the distribution of “Personal Finance on your hands” textbook, the free of charge. The presentation of the book was held on the premises of the high school “Partizani”, in Tirana. The event was attended by Mr. Ardian Fullani, Governor of Bank of Albania, Mr. Seyhan Pencabligil, Chairman of Albanian Association of Banks and CEO of BKT, and representatives from Ministry of Education and Science.

AAB and IFC promote the energy efficiency website, 18 December, 2012 AAB and IFC organized the event: “The promotion of Energy Efficiency website”. This site is created by AAB, in cooperation with IFC, aiming at informing and educating the general public about Energy Efficiency and Energy Efficiency Financing, in terms of definitions, benefits, practical rules, and Energy Efficiency investments.

The event was attended by banks representatives and representatives from businesses which offer energy efficiency products. Credins Bank, ProCredit Bank and Societe Generale Albania introduced their products related to investments in homes, buildings and business premises, aiming to an efficient use of energy and an increase of electricity savings.

AAB - TRAININGS Training course on “Documentary Credit Operations”, 8-10 October, 2012 AAB, in cooperation with BACEE, organized a threeday training course on: “Documentary Credit Operations”, lectured by Mr. Pavel Andrle, Secretary to the Banking Commission of ICC Czech Republic and Member of ICC Banking Commission. This seminar was mainly focused on procedures, risks, international rules and their practical usage. The training was attended by 16 bankers, from 12 member banks.

Training course on “Guarantees Operations”, 11-12 October, 2012 AAB continued its cooperation with BACEE by organizing the two-day Trade Finance training on Guarantees Operations. The course was attended by 14 participants from 10 member banks. The main objective of the course was to identify Bank Guarantees and Standby Letters of Credit with focus on practical usage of independent banking security undertakings.

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Workshop on NPL resolution techniques, 29 October, 2012 AB Secretariat, in cooperation with Bank of Albania and with the support of Vienna Financial Sector Advisory Centre (FinSAC), World Bank, organized a workshop on NPL Management techniques, presented by McKinsey experts. The workshop was attended by more than 50 participants from member banks and Bank of Albania. .

Training course on “Security issues and experience exchanges”, 14 November, 2012 AAB and ICTS Albania, which conducts operational activities in “Mother Teresa” Airport, organized a training course on: “Security issues and experience exchanges”. The course was attended by physical security representatives of all member banks. The main focus point was about the organizations of civil aviation and their objectives

Project Management preparation course according to PMBOK® Guide, 22-26 October, 2012 AAB, in cooperation with MDA Kosovo, PMI representatives organized in Tirana a 5 full days PMP Preparation Course, worth 40 PDU, which provided all necessary knowledge required to pass the 4th Edition PMP or CAPM Exam. The course was attended by 9 participants of member banks and the AAB Operations Specialist.

AAb - OTHER Training course on: “The role of the courts in the execution procedure of executive titles – bank loans agreements”, 23 November, 2012 AAB Secretariat, in collaboration with the Magisterial School, organized a training course on “The courts role in the execution procedure of executive titles - bank loans agreements”, in Vlora. The main objective of this course was the bank loans agreement as an executive title, issuance of orders of executions, and specific procedures on execution. The course was attended by judges from courts of first instance and Court of Appeal.

AAB New Year Dinner, 19 December, 2012 AAB organized the traditional annual event of End Year festivities. Mr Ardian Fullani, BoA Governor, representatives from Bank of Albania and Mr. Marko Skreb, ex-Governor of the Croatian National Bank were among special guests at that evening

Training course with economic issues journalists, 08 December, 2012 AAB organized a training course on: “Key issues of statistical analysis for journalists”. The course, moderated

by Mr. Neritan Sejamini, was attended by journalists who cover economic issues at printed and visual media. The main focus point was how to read statistical information and to distinguish the misuse of such information.

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