Bankieri Nr. 24 - July 2017 by Shoqata Shqiptare Bankave

IFRS 9: THE CHALLENGE

VI-th year of publication No. 24 July 2017

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CERTIFICATION PROGRAMME: Risk Management in banking, foundation level 11-15 September 2017

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CONTENT Editorial IFRS 9 - The “scary” challenge not to be scared from Prof. Asoc. Dr. Elvin MEKA

Bankieri No.24, July 2017

Bankieri

Viti i VI i botimit Nr. 24 Korrik 2017

Publication of Albanian Association of Banks

IFRS 9: THE CHALLENGE

Frontline Challenges for the transition towards IFRS 9 Brisilda BALA IFRS 9 - Versus banks and business model in Albania Deniz DERALLA IFRS 9 - Financial Instruments: the most significant change in accounting regulations over the last 10 years PriceWaterhouseCoopers ALBANIA Agreement of convenience Gonzalo GASÓS

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Special Balkans & Black Sea Cooperation Forum in Serres, Greece Periklis DROUGKAS Eralda CANI Brunilda PASKALI

Interview Payment with "Contactless" cards - An innovation in electronic payments Nevila KOVAÇI

Banking System The Analytical Management of Customer Relationship Edi MALA Internal Audit, is it necessary or indispensable? Astrit ALIJAJ

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

Bankieri is the official publication of the Albanian Association of Banks which mainly focuses on the Albanian banking industry. Bankieri provides readers with valuable information on the financial industry's developments in general, and of commercial banks in particular. ALBANIAN ASSOCIATION OF BANKS Street "Ibrahim Rugova" SKY TOWER, 9/3, Tirana Tel: ‘+355 4 2280371/2 Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

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Experts' Forum A reassessment of security strategies Akil NDRENIKA IFRS 9 - challenges and opportunities of financial instruments' recognition and assessment Prof. Dr. Adrian CIVICI

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Sustainable Goals Development

Sustainable Goals Development SDG 2016 - The New AAB Report Donard BRAHA

AAB Activities

AAB Trainings

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

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

Ervin KOÇI Chairman of Albanian Financial Supervision Authority

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

Adrian CIVICI President of European University of Tirana

Bozhidar TODOROV AAB Executive Committee Member & CEO of FIBank Albania

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

July 2017

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EDITORIAL

IFRS 9 The “scary” challenge not to be scared from Banks must ensure that their clients on the left side of the balance sheet are and will keep being REALLY performing, since Day 1 till the end of the loan life, and this is definitely a complex challenge, as banks will be required to tie up their business targets with a pro-active risk management approach and the shareholders’ capital. In this way, IFRS 9 will turn into a special mechanism, which will equal the “bank as a trust institution” feature (right side of the balance sheet) with “bank as an undisputable premier risk manager” one (left side of the balance sheet).

Prof. Asoc. Dr. Elvin MEKA1 Editor in Chief

y January 1st, 2018 we will see IAS 39 to go at full retirement, as it will be replaced with IFRS 9. Discussions about IFRS 9 have been accelerating, especially during recent months, as the clock is ticking and banks are noticing the silhouette of the Deadline. Why there is so much intense discussion about IFRS 9, and why banks and other financial institutions view it as a “scary” challenge? Surely, the scars of the last global economic & financial crises are still visible, everywhere in every corner of the global financial system. Regulatory measures and tightening, along with governments and supranational institutions’ hefty and urgent interventions did their job, by putting reins on the irreversible debacle of capitalism. But life goes

on and the vehicle of economy needs moment and impulse to run and prosper, and in this regard, all eyes are turned again on banks for the big finance, because, frankly speaking, the above measures did not change the fundamentals of how capitalism works. Given the role, banking industry played in the crisis, it goes without saying that, the revolutionary intervention is thought to be in the way banks manage credit risk and how the respective outcome in therefore reflected and displayed in their financial reporting statements. So, the real challenge IFRS 9 poses for banks is not of a technical nature, although there is a rugged mountain to be climbed, even in this regard. The real “pain” is that banks will have to revise and streamline the business model, which paradoxically brings into the spotlight the basic principles of banking: a quality management of 5Cs (Character, Capacity, Capital, Collateral, Conditions). Put in other words, banks must ensure that their clients on the left side of the balance sheet are and will keep being REALLY performing, since Day 1 till the end of the loan life. This is definitely a complex challenge, as banks will be required to tie up their business targets with a pro-active risk management approach and the shareholders’ capital. In this way, IFRS 9 will turn into a special mechanism, which will equal the “bank as a trust institution”

feature (right side of the balance sheet) with “bank as an undisputable premier risk manager” one (left side of the balance sheet). Having said that, IFRS 9 will not be “scary” challenge; instead it will be the challenge not to be scared from, as it will definitely reshape the banking industry according to the (credit) risk management pillar, which is already near its thirties and it is at full power. Banks need to understand that, in the long term, such pillar will unfurl them as the risk management champion in the financial system, thus giving them an edge in the fierce competition with other entities, within a globalized world!

Vice Rector for Academic Process, UET-EUT

July 2017

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FRONTLINE

Challenges for the transition towards IFRS 9 The new standard presents the increased need for better coordination between risk management structures, finance and business lines. It is accompanied by the need to reassess and improve processes, especially those related to credit risk management.

Brisilda BALA

Manager of Risk Management Department TIRANA BANK Chairwoman of Risk Management Committee ALBANIAN ASSOCIATION OF BANKS

his year started for many of us with intensified discussions, related to the required actions for transition from IAS 39 financial reporting standard to IFRS 9, and especially with the need to understand its meaning and the impact such new standard entering to force on 1 January 2018 will bring upon. Experts of financial reporting standards relate the development of the new standard with the need to address the issues IAS 39, its predecessor, produced in practice. Especially, IAS 39 showed deficiencies in addressing problems with the assets quality in a timely manner, therefore leading to their poor and late provisioning. 6

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So, what does it mean for banks? The key driver, which ensures continuity of banks’ operations under normal conditions, is their capital whereas the main investment activity is lending. For every ALL invested in lending, banks must set aside in a “reserve bag” funds, which cover possible losses of their investments. These reserves are a small part of the undertaken investment, when the latter has a good quality, and increase considerably as its credit quality erodes, until it reaches

IAS 39 works based on the logic of creating reserves based on the Incurred Loss Model, which showed that banks were faced with the loss and not prepared for it. IFRS 9 transforms therefore the perception for credit risk management deriving from these assets, increasing the ability of banks to face potential loss events through a more visionary model of provisioning, based on Expected Losses.

the extreme of its 100%, when it is considered as lost. They decrease the capital available for investment in other new loans, and when increased considerably,

corrodes it to the point when the continuity of banking business is endangered. However, the logic behind creating credit loss reserves lies with the readiness to face possible investment loss events, therefore such process should be proactive, rather than reactive. IAS 39 works based on the logic of creating reserves based on the Incurred Loss Model, which showed that banks were faced with the loss and not prepared for it. IFRS 9 transforms therefore the perception for credit risk management deriving from these assets, increasing the ability of banks to face potential loss events through a more visionary model of provisioning, based on Expected Losses. What is the key news the new standard introduces? Classification and measuring of financial assets – designed with higher logic consistency. Financial assets will be classified under three categories (FVPL, FVTOCI, Amortized Cost), a classification which is based on the typology of the contractual cash flows and the business model. Expected Credit Loss Model – represents the most important change of the standard, related with creating of credit loss reserves for possible losses, moving away from the Incurred Loss Model. It

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is for this change that is expected to change the banks’ approach of credit risk management from financial instruments, leading them towards being more proactive. Hedge Accounting – is now better related with risk management practices and is more flexible. As a tool to reduce volatility in the company’s result, the standard emphasizes the economic relation between the hedging instrument and the exposure being hedged, and eliminates the band of 80-125% of hedging effectiveness ratio. The logic introduced by the standards seems to better address problems, so why there is so much anxiety in the process of transition towards it? Certainly, it is related to limited knowledge on the standard, as well as the short remaining time to its final adoption, with the increased requirements for complete and consistent data and especially, related to its financial impact. The latter is expected to be, in any case, associated with increase of credit loss reserves at considerable levels (researches on its impact show for a possible increase of credit loss reserves up to 30%) and as a consequence, a reduction of the financial result and capital, the efficient usage of which will have an important focus. However, it is worth mentioning that despite the expected increase of credit loss reserves, they are not generally expected to increase to their level as per the local standards (as regards the regulatory framework of Bank of Albania) and neither to affect the capital, calculated as per these standards. The new standard presents the increased need for better coordination between risk

management structures, finance and business lines. It is accompanied by the need to reassess and improve processes, especially those related to credit risk management. The material requirements it presents for historical data create an inevitable need for important investments in IT applications for the administration of these data. • Regarding the loan portfolio, as the main item on banks’ balance sheet, so that to estimate the need for credit loss provisions, as per IFRS 9, banks should be able to classify loans into three categories, strongly related with credit quality. While changes for loans classified as in default are minimal, changes are significant for the performing loans, but which show significant deterioration of

Another important item on the balance sheet of banks is actual investment in securities portfolio of the Albanian government. The results of the standard towards a possible increase of provisions for this category of investments, means for sure a re-consideration of the investment strategy and the required return for these investments.

their credit quality, since initial recognition. Certainly, the first challenge is the establishment of what the significant credit deterioration criteria will be. Loans classified under this category should be provisioned based on a lifetime probability of default (PD) and this is a big challenge, as well. PDs estimated based

on past default events should be simulated to produce lifetime PDs. To achieve that, it is necessary to correlate them to the economic developments and for the latest, accessible information is limited. Therefore, banks are faced today with the big challenge to overcome problems related to lack of macroeconomic data, deficiencies which should be overcome through workaround solutions with direct financial impact. • The increase of loan loss reserves means that cost of credit risk will increase, as a result of the increase of credit risk cost (Risk Adjusted Pricing). Furthermore, the transfer of loans from category 1 (1 year PD) to category 2 (lifetime PD), which means higher PD, will increase sensitivity of banks towards credit risk management and its respective addressing at the early stages, avoiding downgrading of loans classification. Surely, this is one of the positive aspects of transition to IFRS 9; however, it can be associated with further tightening of lending criteria and reduced risk appetite. • Another important item on the balance sheet of banks is actual investment in securities portfolio of the Albanian government. The results of the standard towards a possible increase of provisions for this category of investments, means for sure a re-consideration of the investment strategy and the required return for these investments. As a conclusion, the implementation of improved concepts of the standard is a big challenge, but its real value towards transformation of processes and increasing of banking system stability is what should remain in our focus. July 2017

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IFRS 9

versus banks and business model in Albania In Albania, given that more than half of banks of the banking system are European banks, they have undertaken all measures to move towards IFRS 9, but this transition could not be complete and effective if it will not be accompanied by a change in the mentality of conducting credit risk analysis. So far, banks in their financial analysis have used not only formal business data, but they have also used informal or "confidential" information, provided by the customer.

Deniz DERALLA

Head of Supervision Department BANK OF ALBANIA

y the end of 2008, the global financial system was caught in the midst of chaos caused by Lehman Brothers bankruptcy and the onset of an unprecedented financial crisis. The sharp increase of non-performing loans ratio, until then not a significant indicator for European or American banks, the unavoidably increasing level of reserves (provisions) to cover potential losses and, consequently, additional capital requirements, were some of the unexpected impacts of the non-performing loans’ crisis. During a 4 - 5 years period, non-performing loans ratio in Eurozone jumped from an

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average level of 2% at 8% level, but at scary levels of 47% in Greece, 45% in Cyprus, or approximately 20% in countries such as: Italy, Ireland, Hungary or Bulgaria, by causing billions of Euros in losses for European banks. In Albania, the financial crisis, and then the economic situation of European countries, would spread its effects a bit later. During the time span of 2009 – 2011, lending process continued with doubledigit growth and banks did not suffer the effects of the crisis, but the first signs were noticed. In 2010, for the first time, the nonperforming loans ratio exceeded 10% and was perceived as a direct threat to banks’ profits. Within a 2 – 3 years time, the indicator continued to grow, up to a maximum of 25% in the first quarter of 2015. As elsewhere in Europe, the growth of non-performing loans ratio reflected the economic downturn and the lack of liquidity in businesses activity. However, in case of Albania the increase in such indicator was reflecting not only the failure of the main sector for which the loans were granted, the construction sector, but at the same time, the structural weaknesses of banks in Albania. The lending decision-making structures within Albanian banks were mainly oriented towards

business development, rather than credit (creditworthiness) risk assessment. Often, the loan was granted based on the collateral’s value, pledged as a guarantee on behalf of the bank, rather than on a pure analysis on the possibility of loan payback. Financial analysis were simply based on data provided by business itself, rather than on formal financial statements, given the Albanian practice of holding two balance sheets versions. This misled the bank often, because "the confidential" data, in most cases, were not supported by justifying documents.

The change in the provisioning method in IFRS 9, from the “incurred loss” to “expected loss”, presents a substantial change from the previous IAS 39, a change that will have a considerable financial impact on banks’ balance sheet. In this way, the credit risk assessment should be more complete and comprehensive, as the potential loss from the approved loan would be recognized immediately, and not subsequently, as set out in IAS 39.

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In the following years, banks reflected on these newly emerging issues, by improving the quality of financial analysis, strengthening risk assessment capacity, separating tasks and distinguishing different levels of decision-making, etc. Risk management structures started to have full independence from those of business development, and in most banks they were having a decisive role in lending. These changes, coupled with improvement in the economic situation, brought initially a slowdown in the increase of non-performing loans ratio, and later on, the commencement of a downward trend of them. In Europe, during the crisis, the delayed recognition of loan losses was identified as a weakness point, which consequently asked for a new system for recognizing and assessing potential losses for loans, as well as all for other financial instruments. The International Financial Reporting Standard 9 (IFRS 9), drafted in 2014 will enter into force next year, and in this context, the credit risk assessment methodology will no longer be part of bank's capital requirements assessment, but it will also have a direct impact on the accounting practices of banks, as well as on their financial statements. The change in the provisioning method in IFRS 9, from the “incurred loss” to “expected loss”, presents a substantial change from the previous IAS 39, a change that will have a considerable financial impact on banks’ balance sheet. In this way, the credit risk assessment should be more complete and comprehensive, as the potential loss from the approved loan would be recognized immediately, and

not subsequently, as set out in IAS 39. In Albania, given that more than half of banks of the banking system are European banks, they have undertaken all measures to move towards IFRS 9, but this transition could not be complete and effective if it will not be accompanied by a change in the mentality of conducting credit risk analysis. So far, banks in their financial analysis have used not only formal business data, but they have also used informal or "confidential" information, provided by the customer. In the framework of the "Interinstitutional Action Plan", a document prepared in August 2015 by a working group with members from Bank of Albania, Ministry of Finance, Ministry of Economy, Ministry of Justice and a number of other bodies and organizations, decided that, starting from January 2018, banks should only rely on certified or audited financial statements, while in the process of approving the loan. This will be an important step for both banks and businesses. Business companies will then found themselves in a crossroad: either they should formalize their business activity, or they will not be able to get access to bank lending. This is not a simple decision, but a decision which initially requires the change of the Albanian’s businessman mentality, which has to realize that by showing the true values of his/her business, more gains s/he is supposed to realize. Afterwards, the support from tax authorities and/or the Ministry of Finance is needed, in order that the formalization of businesses operating with double standards to be accompanied by a fiscal holiday for the “hidden” part of

business activity, so reducing the potential income for state coffers, but increasing the possibility of having formalized businesses, a formalized and stronger economy, thus creating an expanding tax base in the coming years. After a long transition period, it is the right time for Albanian businesses to show the maturity and experience gained during the last 27 years. Changing the organizational structures of businesses or economic groups, improving their governance, by involving them in risk assessment committees, in internal control systems and in internal auditing processes, appointing highly educated people with market economy principles, outside or within the country, will pave the way for further development, new investments and their expansion, will facilitate their relationship with banks or foreign investors, by becoming a powerful development engine of all the Albanian economy. Bank of Albania has consistently held a pro-active approach to this process of change. The ongoing change of regulatory framework in force or the drafting of new regulatory acts related to transparency, risk assessment and management, effective governance of banks and alike have the same purpose: Pushing towards formalizing the economy, strengthening the financial system, improving the relationship between the bank and business, and increasing bank transparency with clients. Bank of Albania will continue to be an important stakeholder in this regard, by guaranteeing a continuous realization of its mission for country’s sustainable and long-term economic growth, employment and well-being.

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IFRS 9

Financial Instruments: The most significant change in accounting regulations over the last 10 years PriceWaterhouseCoopers

ALBANIA

January 2018, the effective date for the implementation of IFRS 9, is fast approaching. With careful planning the changes that IFRS 9 introduces might provide for balance sheet optimization, enhanced efficiency of the reporting process and cost savings. Left too long, the complexity of this standard could lead to some unwanted surprises. IFRS9 becomes effective in 2018 and will have a significant impact on asset classification and measurement and loan loss provisioning. This will create a number of challenges for banks, mostly in Classification and Measurement, Loan Loss Provisioning and Hedge Accounting. Therefore, there’s enough at stake that if you haven’t begun assessing the implications of IFRS 9, now’s the time to start.

comprehensive income (‘FVOCI’), or (iii) at fair value through profit or loss (‘FVPL’). Financial institutions will need to carefully assess the overall business objective to determine whether their portfolios of financial assets are more aligned with the FVOCI business model (hold to collect and sell), or the amortized cost business model (hold to collect). Once the business model

Classification and measure-ment Under IAS 39, how assets are classified generally determines the basis for their measurement. Under IFRS 9, the reverse is true—the basis on which assets are measured is the way they are classified. Classification under IFRS 9 for investments in debt instruments is driven by an entity’s business model for managing financial assets and their contractual cash flow characteristics. Based on the model and cash flow characteristics, financial assets will be classified as: (i) financial assets at amortized cost, (ii) at fair value through other

assessment has been performed, management should assess whether the asset’s contractual cash flows represent solely payments of principal and interest (‘the SPPI condition’) as this condition is necessary for them to be classified at amortized cost, or FVOCI. Financial assets should be classified as FVPL if they do not meet the criteria of FVOCI, or amortized cost. Impairment IFRS 9 establishes a new model for recognition and measurement of impairments in loans and receivables that are measured at

Amortized Cost or FVOCI—the socalled “expected credit losses” (‘ECL’) model. The new standard outlines a ‘three-stage’ model (‘general model’) for impairment, based on changes in credit quality since initial recognition. A summary is presented in the table below: The Expected Credit Losses (ECL) model relies on a relative assessment of credit risk. This means that a loan with the same characteristics could be included in Stage 1 for one entity and in Stage 2 for another, as an entity could have different loans with the same counterparty that are included in different stages of the model. An entity should apply a definition of default that is consistent with the definition used for internal credit risk management purposes for the relevant financial instrument, and it should consider qualitative factors (for example, financial covenants), where appropriate. The new requirements involve modifying not only accounting policies, but also credit management systems. Implementation challenges The new classification and measurement requirements will represent a challenge, especially for banks, as management will need to assess their financial assets classification, in light of the new business model requirements. This new model is substantially different from the previous guidance in IAS 39. The business

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model assessment is a highly judgmental area that depends mostly on facts and circumstances, so entities are expected to document the reasons behind their assessment (including the SPPI condition) as well as monitor sales in order to determine whether they meet the requirements in the new standard. Since part of the business model assessment is also dependent on the history of how the entity has achieved the objective in the business model, entities should start tracking this information, as soon as possible, in order to have sufficient history to make the comparison. Impairment is going to be a challenging area, in particular for financial institutions. Currently, most entities including banks do not collect the amount of credit information required by the standard. Financial institutions will need to significantly modify their current credit and information systems in order to gather the required information. Management will need to build new models to determine both 12-month and lifetime ECL. This will require complex judgements (for example, definition of default, definition of low credit risk and behavioral life of revolving credit facilities). This process might take a significant amount of time, so it is advisable that entities should start planning their transition to IFRS 9 in order to make sure that they are ready for when the new standard becomes effective. What will happen at 1 January 2018? The standard is to be applied retrospectively. Restatement of comparatives is not required, but entities are permitted to restate 12

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comparatives if they can do so without the use of hindsight. If an entity does not restate comparatives, it should still adjust the opening balance of its retained earnings for the effect of applying the standard in the year of initial application. Implications on profitability In accordance with IFRS 9, absolute impairment provisions may increase and therefore profitability may reduce. Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books â&#x20AC;&#x201C; even if it is highly likely that the asset will be fully collectible. Furthermore, after transition, the new standard is going to bring about more income statement volatility since more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they arise. The new framework should allow for the alignment and integration of existing credit risk, liquidity management and cashflow forecasting, to make more informed risk-based decision making and deter the risk of non-identification of loans with significantly deteriorated credit risk which would impact the corresponding provisions and their performance metrics. Extent of Revamping IFRS 9 is arguably the first time that outputs from risk models will play a significant role in financial reporting. Therefore, controls and

governance around these models and the final IFRS 9 provision is crucial for which internal model review is paramount. The risk measurement framework needs to be flexible and scalable to apply to all business units with varied risk profiles. Independent validation must be introduced to validate these models and to monitor their performance. The improvement of data quality and a closer collaboration and consistency between finance, accounting and risk management department is a must for the successful implementation of IFRS 9. This may require revision of the roles and terms of reference for all these functions as well as revision of reports submitted to management and shareholders, including details about assumptions used. The question of how an entity is affected by IFRS 9 is that â&#x20AC;&#x153;it dependsâ&#x20AC;?. Some entities may find that classification and measurement of their financial assets will be substantially the same as they are currently under IAS 39, and that their impairment allowances may not be materially affected. Others will change substantially. Regardless, every entity will have to go through the process of re-evaluating their accounting policies, financial statement note disclosures and making appropriate changes to their accounting systems and internal controls to reflect the requirements of IFRS 9.

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Agreement of convenience When the BCBS published the proposals for the finalization of Basel III in the first quarter of 2016, numerous estimations were conducted about the impact it would have on banks. Market analysts, consultants and groups of experts from banks, all concluded that the impact would be significant for European banks.

Gonzalo GASĂ&#x201C;S

Head of Banking Supervision EUROPEAN BANKING FEDERATION

eaching an agreement is arguably the most civilized way of cooperation between various players, countries or groups of interest. However, every treaty enshrines checks and balances between its signatories. The consequences of the accord need to be carefully assessed. It is better to sleep on things beforehand than lie awake about them afterwards. The finalization of Basel III is approaching its final stage. Several rounds of meetings will surely lead to an agreement, sooner or later. But what sort of agreement? This article outlines the contours of some likely consequences from the perspective of the EU banking sector. Sense of stability and continuity Details are for specialists. The general public will only be aware

whether an agreement has been reached or not. The announcement of an international pact for the global banking system will projecst an immediate image of cooperation and safety. No matter what the terms of the agreement are, we should not underestimate the positive effect of the news that banks around the world will continue to operate under a harmonious prudential framework. The financial crisis of 2008 could finally be seen as overcome. The BCBS (Basel Committee on Banking Supervision) orchestra

In Europe, the European Banking Authority (EBA) and the Single Supervisory Mechanism (SSM) are currently engaged in serious and thorough technical reviews of banksâ&#x20AC;&#x2122; internal risk models to fix any residual problem. This is the right action to take.

has been performing the melody of the Basel Accord for three decades and the music should not stop. The tension peaked in the symphony during the meeting in Santiago de Chile, in November 2016, followed by a sudden rest. During the pause which has followed, the audience wonders whether the concert is over or if it goes on. It would be wise to play some music before the audience stands up and leaves the

auditorium as bringing them back may prove highly difficult. Asset reallocation The output floors distort the balance between risk and pricing. Placing a minimum cost of capital for assets with no regard to their riskiness will have consequences on the business decisions of banks that can be summarized in two categories. First, banks with a very low risk profile will be hit disproportionately by the output floors in their capital requirements. Therefore, during the phase-in period, one could expect a shift towards riskier assets in order to avoid the suboptimal use of capital. Second, despite portfolio restructuring many banks will still have a risk profile way below the minimum risk weights imposed by the BCBS standard. The only way to adjust this breach in the long term is by price increase. In short, the new floored regime will affect mostly European residential mortgages and trade finance because those are massive portfolios with a very low risk weight. Therefore, home-seeking citizens and international corporates may end up paying a significant part of the bill of overly conservative floors in the Basel standards. Too much complication The Basel Committee wisely set three objectives in its review July 2017

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of the prudential framework: simplicity, comparability and risk sensitiveness. It was understood that the right balance between them should be struck. It could be argued that placing high floors contributes to simplicity and comparability at the expense of lesser risk sensitiveness. But there are grounds for disagreeing with this view. The setup devised by the Basel Committee is indecipherable. If someone maintains it is simple, then we have a different definition of simplicity. When the BCBS published the proposals for the finalization of Basel III in the first quarter of 2016, numerous estimations were conducted about the impact it would have on banks. Market analysts, consultants and groups of experts from banks, all concluded that the impact would be significant for European banks. A careful review of all those analyses and conversations held with experts prove how difficult is to understand the effects of the newly proposed regime. Constrained risk sensitivity, a tangle of output floors, overlapping with input floors over risk parameters, as well as arbitrary risk weights for certain asset classes, all transpire to making the overall assessment a pure conundrum. The BCBS is known to be finetuning the proposal introducing longer phase-in periods but keeping the output floor in place. The problem is that market investors can hardly build up accurate scenarios due to the proposalâ&#x20AC;&#x2122;s sheer complexity. Raising the regulatory bar and constraining the supervisory judgment The EU banking system has significantly strengthened its resilience in the aftermath of the crisis. Banks have increased their core equity capital ratios, from 14

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barely 6% to the current 13.6%, mainly by raising fresh capital in the market and retained earnings. This improvement has resulted in a boost to the leverage ratio of banks from less than 3% to the current 5%. In addition, more than a hundred of the largest banks have prepared recovery plans, in the event that adverse situations befall them, and are currently in the process of presenting and reviewing those plans with their supervisors. In short, the world has changed and the lessons from the crisis have been learnt. In addition to the enhanced quantity and quality of the Pillar 1 capital requirement, European supervisors have made use of Pillar 2 buffers from the beginning of Basel II. Currently, the additional capital requested via Pillar 2 is on average around 4% of risk-weighted assets with some countries reaching levels of 6% and beyond. Against this background, the fundamental question is how to divide the prudential pressure that a solvent bank can bear between Pillar 1 minimum requirements and Pillar 2 buffers. A plausible example can illustrate the situation: a safe European bank has a healthy 15% capital ratio. To all appearances, it is a solvent bank that counts with the trust of investors and clients. Its minimum capital requirement is 10.5% therefore it operates well above the bar. It also has a Pillar 2 add-on of 3% making a total capital requirement of 13.5%. In accordance with a modest central scenario of market analysts, the floors and other changes proposed in the new BCBS standard

will mean a 33% increase in the minimum requirements of European banks. Taking this assumption, the bankâ&#x20AC;&#x2122;s minimum requirement of 10.5% will rise to 14%. As a result, its 15% capital ratio would look barely sufficient in front of investors as the slightest setback would overwhelm it. In fact, if we add the 3% Pillar 2 add-on, the total requirement would be up to 17% and the bank would be technically doomed to start an early intervention process. This news would inevitably scare depositors thus triggering a self-fulfilling liquidity crisis. All in all, a solvent bank could be pushed to problems as a result of an excessively conservative regulatory framework. Would this situation be beneficial for financial stability? Careful examination is wiser than ex-ante blunt prescription Requiring output floors in the Pillar 1 minimum capital requirement is like prescribing hard antibiotics to all patients with a headache before examining the source of the pain. In Europe, the European Banking Authority (EBA) and the Single Supervisory Mechanism (SSM) are currently engaged in serious and thorough technical reviews of banksâ&#x20AC;&#x2122; internal risk models to fix any residual problem. This is the right action to take.

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SPECIAL

Balkans & Black Sea Cooperation Forum in Serres, Greece On 25 – 26 May 2017, in a single forum in the city of Serres, Northren Greece, the Balkans & Black Sea Cooperation Forum unfolded 42 international actors, who shaped the entrepreneurial future of Balkans & Black Sea region, by bringing forward the geopolitical importance of the region, recognized the challenges and identified opportunities for untapped business and trading potential. In plenary sessions the Forum provided an outlook on European Union, Balkans & Black Sea Perspectives and Sustainable Development Goals towards 2030. Interactive panels discussions dealt with main topics concerning: “Roads of Energy, Electricity & Gas inter-connectivity”, “Digital Economy & Innovation”, “Women in Leadership”, “Agriculture, Environment & Use of sources”, “Maritime, Transportation, Infrastructures & Hubs” and “Cultural & Sustainable Tourism”. Albania was represented by Mr. Periklis Drougkas, CEO of Alpha Bank - Albania, Mrs. Eralda Cani, Deputy Minister of Integration and Mrs. Brunida Paskali, Deputy Mayor of Tirana Municipality.

Periklis DROUGKAS General Director ALPHA BANK ALBANIA

t was indeed great pleasure and honor for me to participate in the Balkans & Black Sea Cooperation Forum 2017, representing the Association of Albanian Banks and be part of a distinguished panel, which dealt with “Digital Economy & Innovation, Controlling the doubleedged sword” and contributed to a sustainable dialogue for closer cooperation in the region. This panel discussion was a magnificent experience. Eminent speakers presented their experiences,

thoughts and inspiration in their field of expertise, moderated in a masterful manner by Mr. Wim Mijs, a forward-looking President of European Banking Federation, EBF. Presenting in the Digital Economy & Innovation, I referred to the enormous progress that Albania has done towards digitalization. Main topics of the presentation were the transformation journey that banking system has undergone through the years, the evolution of legal and regulatory framework, the challenges for a digitized banking system and economy, the barriers towards digitalization, the cyber-crime threat, etc. The diversity of speakers, the audience engagement and participation provided a very constructive dialogue and substantive outcomes that have a profound impact on banking of today and must be considered thoroughly from banks, when designing their future strategic direction and plans. Typically, discussions were focused on: Technology: Standardization of processes by

using mathematical algorithms to provide quality service faster than employees and reaching more consumers worldwide is changing dramatically the way we transact today. ”Banking is necessary, banks are not” said once Bill Gates. Consumer Behavior: Expectations of consumers from the banks have changed. They want more and faster services for a lower cost and wide range of access. Regulation: Due to the huge amount of transactions that take place every day in the financial world and the financial crisis of the past, regulators are taking stricter measures to control and monitor the movement of money and each ultimate usage. Hence, key competitive advantage is the fast adaptation of banks towards these challenges. New commerce and compe-tition: FinTechs are becoming a synonym of massive transactions today. These new businesses bring agility, lean efficiency and high technology that enable offering value – added services. Access to July 2017

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easy banking is the key, not the assets. Concluding, I may say that Financial Technology can provide the Balkans and Black Sea Region with: • Stability, by raising financial inclusion through financial literacy and easier access to banking, • Growth, by embracing the “Digital Revolution” and creating a competitive, capable and secure banking system, by Establishing a cyber security center, • Cooperation, by sharing experiences. Considering that AAB is a key partner of the Forum, we will be more than happy to work towards the direction to strengthen our ties of friendship and collaboration among the countries of Balkans and Black Sea Region.

Prof. Dr. Eralda CANI

Deputy MINISTER OF INTEGRATION

n this forum I attended “Women in Leadership” panel and delivered the presentation: “Developing policies for better participation of women in public and political life, and strengthening economic power of women”. The presentation consisted in the following:

The world we live in is one where women, almost half of the world-wide population, are yet underrepresented in the public and political life. While increasing awareness on the need to have more active women in all aspects of public life, several policies have been adapted to boost their participation. Still, their leadership is generally accepted with the background that they need to reflect quality in every aspect. Such an attitude refers to both hidden and non-hidden prejudices and social barriers, trying to work as self-censuring mechanisms for women participation in a country’s public and political life. Leading by positive example is for sure highly supportive to the cause of women participation, and here one may refer to many distinguished women from the region. A recent example in Albania is that of Manushaqe Shehu, an Armed Forces General for the Doctrine and Drilling Command, appointed in 2016. She is the first woman in the country to hold such rank, since the creation of Armed Forces of the independent Albania, around 100 years before, appointed in this rank due to high professional and personal command. Another example from Greece is that of Konstantina Kuneva, current member of European Parliament, with a life that may speak volumes: a difficult life as migrant in Greece, with political and social achievements as a trade unionist activist, fighting for the right pay and proper working conditions for workers, an activity that even resulted to a physical attack to her of the kind that could devastate and shatter in pieces many of us. This example is not an inspiration only, instead it reflects on what should not be forgotten: values

that we hold dear, such as freedom, equality, justice cannot be taken for granted. These values should be materialized, defended and developed, on an everyday basis. Regarding women participation in public and political life, the political sphere really matters. Considered as socially transformative, building social trust and capital, providing valuable democratic apprenticeship, and building civil trust and augmenting personal welfare and status, such participation needs to be supported with proper policies and political measures. The Beijing Platform of 1995 recommended the well-known 30% rule for women’s representation in national parliaments, an affirmative policy reflected in the electoral legislations, thereafter. The Albanian electoral law was amended, by introducing the 30% quota of gender representation, a measure that increased the share of women MPs after the 2009 elections to 16.4%, from 12% in the country’s previous parliament, and to around 22%, after the 2013 general elections. The law was amended further in 2015, requiring a 50% gender quota representation for local government councils, which resulted to around 35% of women local councilors, in local elections of 2015. An increased number of women involved in politics and the increase of their political experience, will naturally boost the number of women in leading positions. While highly appraising the importance of political measures, the representation of women in leading positions should become “normalized” in the political mentality and be naturally considered as “functional and July 2017

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valuable”. Typically, while there are no gender quotas for the Albanian Council of Ministers’ representation, the number of women ministers is currently 10 out of 21 members of the government, or 48% of it. This high number of women ministers places the country in the top position of government ministerial level women representation in the region; it is valued as progressive and a token of “Europeanization” for Albania. This example indicates that women leadership, disregarding quotas, may be boosted through proper political will and mentality. All studies and analysis of gender equality and empowerment speak for the importance of women’s economic empowerment, as part of proper policies to be adopted in this regard. A special Action Plan 20142020 was adopted in Albania, with the assistance of the UN Women, to support women entrepreneurs, focusing on: • Designing incentive policies to support women entrepreneurs, including the improvement of regulatory and institutional framework; • Capacity enhancement for women entrepreneurs through trainings and education programs; • Improving access to finance for women’s entrepreneurs, including both dedicated financing schemes and increase of applications in general financing ones; • Setting up a network, supporting women entrepreneurs, including awareness activities; • Increasing the support for women in rural areas, by enhancing their potential for employment. Lack of financial means is deemed as the main impediment 18

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to empower women, especially in entrepreneurship, therefore functional schemes to support women entrepreneurs is considered as instrumental. In 2016, the Italian – Albanian Program for Small and Medium Enterprises supported 18 businesses, owned by women, for a total of EUR 4.53 million. In 2016, four support schemes provided around ALL 16 million (approximately EUR 120,000) to 36 women entrepreneurs. A study carried out in early 2017 by the Ministry of Economic Development, Tourism, Trade and Entrepreneurship recommended improving the functioning of support scheme for women entrepreneurs. Data shows that women are still lagging behind in the economic sphere. In the public sector, in 2016, only 4, out of 102 companies owned by municipalities, have a woman leader/manager. In December 2015, only 17, out of 120 stateowned companies, had a woman administrator. Meanwhile, the share of privately ownedcompanies, owned or administered by women was increased from 22.9% in 2005 to 28.5% in 2014 and to 31.3% in 2015. In 2015, 34% of new businesses were owned, or administrated, by a woman, which means that the share of these businesses is increasing. In this respect, further efforts are needed. There are several good examples to follow, such: as a program to foster women managers for companies owned by the state or municipalities. Also, a rule on the percentage of women in supervisory/management boards may be imposed, as well. It is implemented in other countries, such as: Norway and France, thus successfully increasing the number of women in managerial

positions. Another relevant issue is that of women of special subgroups, such as disabled women, or Roma and Egyptian women. Several measures have been taken, since 2013, addressing multiple discriminations. Amendments to the Law on Social Assistance and Social Services provide that disabled single mothers, or heads of households, may benefit from additional support services, offered by public community centers. Based on a special order of the Minister of Social Welfare and Youth, certain social groups, including disabled women and girls, are exempt from paying any fees for vocational trainings. For Roma and Egyptian women, the measures are more complex. Those start with support for Roma and Egyptian children to attend school, such as: fee exemption, free books and study materials, study places for them, etc. There are approximately 3,500 Roma children that receive free schoolbooks each year. Roma women may attend vocational courses, free of charge. Consequently, the number of Roma women that participate in education programs, or vocational courses has increased, but it is still too early to assess the long term impact of these measures. I would like to conclude with an old Chinese proverb that says: “Be no afraid of growing slowly, be afraid only of standing still”. We have achieved a lot. However, it is not the time to be content and stand still. We have to move forward, one step at a time. This is not a choice, but somehow a must, because, as Madeleine K. Albright puts it: “Development without democracy is improbable. Democracy without women is impossible”.

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2. Challenges of cooperation for a sustainable tourism in the Balkan region; 3. Cultural Tourism and its Promotion.

Brunilda PASKALI

Deputy Mayor TIRANA MUNICIPALITY

t was a great pleasure for me to get the invitation to attend the Forum of Balkans and Black Sea Countries, organized in Serres, Greece, on 25-27 May, 2017. Organizers have welcomed Albaniaâ&#x20AC;&#x2122;s participation in various panels of the Forum with the wish that in coming years this event could be organized in Albania, but also with the appreciation for presentations at this event. As a panelist in the panel on tourism: "Sustainable Tourism Development, Priorities and Challenges", together with representatives from Greece, Bulgaria and Turkey, the central topic of discussion were: How to develop tourism in our country? How to make it more sustainable? What are the common actions to promote cultural tourism in our region? My presentation focused on three main topics: 1. Our policies for sustainable tourism;

The first point of the presentation brought to the attention of participants government policies, undertaken during the last four years for tourism in Albania, such as the Law on Tourism, adopted on 27 July 2015 and the Tourism Strategy 2014-2020, emphasizing the fact that tourism is considered as a strategic and priority sector for our economy, with a growth contribution to countryâ&#x20AC;&#x2122;s GDP, 5.9% (2014), 6% (2015) and 6.1% (2016), respectively. Additionally, the supportive policies, provided by the Law on Tourism for local or foreign investors who want to invest in tourism, were presented, such as: the availability of state property with symbolic tariffs, or the most recent measures taken, such as: VAT reduction at 6% for hotel accommodation. Meanwhile, the second point discussed the challenges faced by Balkan region about the cooperation on sustainable tourism. Balkan countries undertake their individual state policies to promote sustainable tourism in their countries, but in an increasingly global world the regional cooperation and introducing the region as a whole for foreign visitors, is a challenge in itself. Some of key challenges the Balkan region is facing for a sustainable tourism range from the difficulty of delivering a quality all-year product, to a bit often difficult political situations, lack of a worldwide promotion of the region, etc. The good news

is that we are witnessing the first efforts to consolidate a joint tourism product of five Balkan states, for the Japanese market. In the meantime, the last part of the presentation presented Cultural Tourism as "a genre of special interest tourism based on the search for and participation in new and deep cultural experiences, whether aesthetic, intellectual, emotional, or psychological" (Stebbins, 1996). Albania is a rich country with cultural monuments, taking the second place in the Mediterranean by their density and presence with 2000 monuments, 4 out of them being a UNESCO heritage. However, cultural tourism is still not the first reason for tourism in our country, so we need to take continuous action to promote the country at various international fairs, coordinate with various local and foreign actors, to promote our cultural heritage, or to offer cultural products in common with countries of our region. Discussions and debates that followed the panel presentations concluded at one point: Our region needs a greater and continuous cooperation to promote our shared cultural and tourist values, in an increasingly global world. Participation in the First Forum of Balkans and the Black Sea Countries was a very valuable and interesting experience for the network created with participants from different countries, the shared experiences and the message of cooperation and continuity that we followed at the close of this Forum. July 2017

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INTERVIEW

Payment with "Contactless" cards An innovation in electronic payments

The next challenge in "Contactless" technology in Albania is the integration of "Contactless" card with a mobile device that replaces the plastic platform and carries out payments, by communicating with a POS terminal. This is expected to happen very soon, considering the penetration of mobile telephony in Albania.

Nevila KOVAÇI

Chairwoman of AAB Cards Committee ALBANIAN ASSOCIATION OF BANKS

"Contactless" cards are entering the second decade of their life in the world and are now the latest innovation in the Albanian market of payment instruments. What does this card represent for Intesa SanPaolo Bank - Albania and the Albanian payment system? Intesa SanPaolo Bank Albania launched its "Contactless" MasterCard Revolving credit card for its customers, in April 2017. This card comes as a highly advanced payment instrument, by following the latest developments in the field of payments’ innovation. The expression "Cash is king" is now challenged by “Tap and Go”, which means more priority to serve customers who have a "Contactless" card. Successful completion of "Contactless" card transactions me20

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ans less cash transactions, more speed, convenience and comfort, and as a result, higher service quality and better satisfaction for cardholders and merchants that accept these cards. The mandatory requirement, issued by MasterCard International Payments Organization for Europe, after January 2017, requiring that any new POS terminals installation and upgrades of existing POSs be made only with terminals containing "Contactless" additional functionality, contributed to a significant acceleration of the implementation of such technology in Albania. Since last quarter of 2015 to date, there were installed about 3,500 certified POS terminals in Albania, which are "Contactless enabled", and they accounts for over 47% of the total number of terminals, actually operating in the payments market. The market started preparations to accept "Contactless" cards, issued by any operator anywhere in the world, and it encouraged banks to issue their first "Contactless" cards. May 2016 marked the launch of the first "Contactless" card in Albania. From that moment, today there are about 6,400 "Contactless" cards, or 0.63% of total issued cards. What are the advantages of using this card from clients, and what are its features? "Contactless" card carries an antenna in its plastic platform, which enables the communication with POS terminal,

also equipped with the antenna, via waves, without the need to insert a card into the Chip/Magnetic reader, or entering a PIN code. "Contactless" technology provides, through NFC communication, a successful data reading from a distance of not more than 10 cm. A "Contactless" and PINfree transaction lasts 15 seconds on average, while cash transactions last 34 seconds and those with Chip and PIN, just 25 seconds. "Contactless" cards, issued by various countries, can be used naturally in POS terminals installed in Albania, as cards issued by banks in Albania are widely used anywhere, both domestically and internationally, wherever the signs of radio waves or WIFI symbol on terminals, as well as on cards, appear. The maximum amount, required by MasterCard for a "Contactless" and no PIN transaction for cards issued in Albania, is ALL 2.000, while the decision to apply higher amounts remains with the issuing bank. For security purposes there are also a maximum number of consecutive transactions without "PIN", usually it is recommended 2 – 3 transactions, while during the third or fourth transaction, PIN entry is required, to identify the user and the eligible client. For amounts higher than 2,000 ALL, inserting the card into the chip reader and using PIN code is again mandatory. The main advantages of using it are speed and convenience. For a merchant who accepts these cards as means of payment, this means fewer queues, less cash to

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administer, more productivity for sales staff, more sales in goods and services, and consequently, more revenues. What are the security settings for such cards and where do they differ from the existing ones? "Contactless" transactions are as safe as those with CHIP and PIN. They are processed within the same payment network, as well as chip transactions. "Contactless" technology platforms are based on secure CHIP technology, which provides both data protection and transaction security, through the use of latest keys and encryption standards 128-BIT and triple DESS encryption. This makes it simply impossible to steal data from the card. Although most of "Contactless" transactions do not have PIN, studies have shown that losses from misuse, or the loss and theft of these cards are almost at the same level as those with CHIP and PIN. Should the transaction amount is higher than the limit amount (ALL 2.000 for Albania), then the terminal will require the transaction to be executed, by inserting the card into the CHIP reader, along with PIN code. Until now, there are no cases of bad use of "Contactless" cards used by their owners. Although the card and terminal communicate wirelessly (NFC Communication), no transaction can be completed if the trader has not previously entered the amount. Any communication between the card and terminal at the same time creates only one

transaction and not a duplicate. If the client presents more than one â&#x20AC;&#x153;Contactless" card at the same time, in front of the antenna at the POS terminal, then the action will not be executed until the terminal identifies the presence of one card, only. How challenging is the current card payment infrastructure to quickly and largely accept the use of these cards? The widespread execution of "Contactless" transactions is the challenge for replacing CASH transactions. Today, over 90% of daily consumer transactions in the market, coffee bars and fast-food shops are made in cash, in amounts less than ALL 2,000, which is the limit amount of "Contactless" transaction, as well as the largest space where these transactions are realized. In Albania, as a small and new market, investments always come with the latest technology. This has happened to the card payment system, where investments in newer technologies, such as: in POS terminals, as well as in the type of plastic cards and chip modules of cards, have taken place. Certification remains a mandatory requirement of MasterCard, Visa and American Express payment organizations for all banks which want to apply this technology. According to the mandatory requirement of MasterCard, year 2020 is the year that any terminal installed in Europe and accepting MasterCard and Maestro cards should be "Contactless". The next challenge in "Contactless" technology in Albania is the integration of "Contactless" card with a mobile device that replaces the plastic platform and carries out payments, by communicating with a POS terminal. This is expected to happen very soon, considering the penetration of mobile telephony in

Albania. Also, "Contactless" transactions at ATM terminals network are expected to be the future innovation of such technology. What are the obstacles banks face when launching these instruments and what are the ways for a quick launch of these instruments in the market? Every obstacle comes turns into a challenge for banks, or other active operators in the card payments market in Albania, given the growing card payment trend. The year 2016 marked a 28.9% increase with regard to the total number of card payments, compared to 2015. On the other hand, the infrastructure in where "Contactless" card finds the widest use anywhere in the world, such as: public transport, public or private parking, taxes, or payment of various local and non-local services, is lacking. Arrangements with relevant authorities and the revision of applicable laws and guidelines, where necessary, are the ways to overcome them. The lack of information or insufficient education, are also identified as challenges, which banks need to overcome. How do you see the education and information of general public, regarding the existence and massive use of these cards by the public? Providing customers with information on the speed, convenience, and security offered by "Contactless" payments, as well as the periodic training of merchant sales staff, has still some room for improvement. Distributing promotional materials, or social media communication via educational video demo remains potentially effective ways to promote day-to-day use of "Contactless" cards.

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BANKING SYSTEM

The Analytical Management Of Customer Relationship At Raiffeisen Bank, we have placed the customer in the center of our focus and the bank has undertaken a number of initiatives, aiming at becoming a customerâ&#x20AC;&#x201C;centered bank. This activity is deemed as very important and the bank has invested in such a way, to make the best use of tools and skills built for this purpose. from our customers that they want a comprehensive and a unique relationship with the bank. They want a bank which understands and provides the products and services they need. Our customers are increasingly requiring faster and more qualitative service, relevant service channels, as well as tailored solutions, according to their requests.

Edi MALA

Head of Client Development Unit RAIFFEISEN BANK

he most precious asset of a business is its customers; they are buyers of products and services that generate revenues, every business needs. Any business is successful whether such relationship develops and strengthens in furtherance. Often, the most effective marketing strategy is to satisfy existing customers, who naturally become its ambassadors in the market. Even banks, as a credit businesses, put individual and the relationship they build with him/ her, at their activity basis. They present an important part of each individual's life, as well as the most important part of decisions s/he makes over his/her lifetime. We, at Raiffeisen Bank, often hear

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Customer Relationship Management (CRM) is one of the most important banking activities, which is defined as an approach that manages customer relationship with the bank, based on an in-depth analysis of their interactions. It aims at increasing the profitability of this relationship, by increasing both customer retention and related sales.

In Albania, nowadays, banking products and services are increasingly becoming more uniform, by reducing barriers to customers to switch from one bank to another. This may be an advantage for customers, who can choose easily their bank, but

for banks this situation increases business instability and jeopardize the realization of their incomes. The continuous digitalization and technology advancement has brought in the spotlight other nonbank competitors, which provide unique and superior solutions for certain services, which have historically been part of banking activity. This trend is increasingly developed and strengthened on a daily basis. We all know such companies like: M-Pay, M-Pesa, Easy Pay, Pay & Go, FinAl and IuteCredit, which are a tangible reality of the financial industry. Also, many banks operating in the country do provide one, or more electronic solutions, for their services, as well. This means that the customers encounter a set of electronic solutions, which are already offered and which s/he needs to learn and adapt with. Actually, it is an imperative for banks to use bank-costumer trust relationship, which is built over time. Based on this relationship, client â&#x20AC;&#x201C; tailored and high quality products and services would be provided. The bank may provide these products and services by utilizing, in a proactive way, all data available. Customer Relationship Management (CRM) is one of the most important banking activities, which is defined as an approach that manages customer relationship with the bank, based

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on an in-depth analysis of their interactions. It aims at increasing the profitability of this relationship, by increasing both customer retention and the respective sales. During their lifetime relationship with the bank, customers generate a large number of data, which are quite valuable to them. Here we do refer not only to individual identification (demographic) data, but also the amounts and numbers of transactions, purchases, used channels, etc. Historically, banking is among the industries that has the most complete information about its customers. Usually, this information sleeps on separate electronic systems, which rarely interlinks to each other, thus making it difficult to fully recognize the customer. At Raiffeisen Bank, we have placed the customer in the center of our focus and the bank has undertaken a number of initiatives, aiming at becoming a customer– centered bank. This activity is deemed as very important and the bank has invested in such a way, to make the best use of tools and skills built for this purpose. Data collection and analysis are seen as a continuous process and it is thought that business decisions would be based on it. Experience and history build-up will enhance the quality of these decisions. It can be said that this approach has proved to be successful and has had a positive impact on bank's activity. Since 2 years ago, the following have been noticed: • Increased customer satisfaction. The bank's NPS has increased by 10 points . • Personalized customer contacting, by resulting in sales’ increase. At Raiffeisen Bank, about one third of individual consumer loan sales are realized through direct marketing programs, which 1 2 3

Some of the advantages of CRM are as follows: Customer’s effective segmentation. In addition to traditional segmentation, we manage to set out and target smaller segments and group of clients, based on their activity and their demographic features. In this way, we can provide tailored solutions, according to their needs. Customization of product and services. The ability to provide a banking service or product at the right time is a powerful tool that enhances customer loyalty. Profitability Analysis. Usually, a small percentage of customers generate the largest share of income. Once these valuable customers are identified the information is included in any business decision-making. Analysis of different scenarios. Constant further analysis, including various elements and their impact on bank’s profitability, are easily feasible. These analysis serve as a basis for product and services management, enabling the provision and marketing of new product and services. are direct products of this approach. of bank's • Reduction operational expenses. The cost of CRM is 1/10 of the traditional marketing budget, but instead offering a better accuracy in targeting and personalization of customer activities. This does not mean that traditional marketing is completely replaced by this new approach, but if these activities are optimally interlinked, then considerable savings would be realized.

These achievements have been accomplished thanks to the focus the bank has put on this approach. Given its strategic importance, it is necessary that such approach be supported at the board level and embraced by any department within the bank. In order to be successful, we rely on a: 1. Motivated team, on which the bank constantly invests for their professional advancement. 2. A well designed and complete infrastructure, which provides a clear view of customer and summarizes all his/her activity with the bank. The investment for developing this platform, just over a year ago, has been entirely carried out by the bank, internally. This platform constantly supports any other bank initiative. 3. Predictive Analytics are statistical models intended for client’s analysis and which facilitate decision making. These methodologies speed up processes and increase the accuracy and transparency of results. Digitalization is a radical transformation on how banks will operate in the future. According to McKinsey's estimates, this digitalization provides an opportunity to increase bank’s revenues over 30% and reduce the expenses by 20% to 25%, for a typical European bank. This potential can only be achieved by fully embracing CRM analytical approach, which provides multiple opportunities to enhance and strengthen bankcustomer relationship, at any point in their interaction. This is a trend spread out all over the world, where it is being invested heavily, in order to increase customer satisfaction, which is an incomparable competitive advantage.

Net Promoter Score is a widely used methodology which measures the loyalty and satisfaction of customer vis a vis a company. Bank measurements 2016 vs 2014. Bank measurements for 2016.

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BANKING SYSTEM

Internal Audit, is it necessary or indispensable? Internal audit practitioners are increasingly being challenged to apply their expertise in much broader ways than ever before — such as evaluating emerging technologies, detecting and deterring fraud, analyzing the effectiveness of policies and procedures, and identifying opportunities to save management costs and shareholders’ money. and each one also points to the necessity for competent internal auditing. Even though a fairly new function, the internal audit is already well - known and established in public sector, established and regulated by law, as well as in the most developed private sectors in the Albanian market economy. With regard to the Banking Sector, internal audit is a function

Astrit ALIJAJ

Head of Internal Audit Department UNION BANK

he dynamic environment like today’s world, where the daily and high-speed development of technology, and not only, brings new risks, news outlets regularly report on corporate scandals and frauds, privacy invasions, compromised ethics, and governance lapses. These events and the resulting laws and regulations, coupled with electronic commerce and other information technology breakthroughs; mergers, acquisitions, and other organizational restructuring; and issues related to the global marketplace, all suggest that things are likely to get even more chaotic. Each of these phenomena suggests new demands, challenges, and opportunities for management and the board,

As partners to management, internal auditors are positioned to help protect the organization against both traditional and emerging risks; provide consultation about how opportunities and vulnerabilities can be balanced; and make valuable recommendations for assessing and strengthening corporate governance.

regulated by well - defined and detailed regulation, set by Bank of Albania (even though the function is still called the Controlling Unit, rather than Internal Audit). In another important private sector, such as Telecommunication, the internal audit function is a well-incorporated role within the organizational structure, despite the fact that there is not any specific requirement, with

regard to internal audit, from their regulatory framework. Following the trend, it can be easily noticed that other local private companies, that does not belong to banking and telecommunication sector, are recognizing the increasing value of internal audit function every day, although not yet comparable to other countries, by including the Internal Audit Department within their organizational structure. The presence of internal audit, on most of the above - mentioned cases, is taken for granted, because it is “required by law”. However, beyond the general thought of required by regulations and laws, do we really need Internal Audit function, or such function is really indispensable? Without going far back in time, in ancient Egypt, where the first signs of internal audit can be spotted, the appearance of internal audit function, as it is known and recognized nowadays, is noticed in the 19th and 20th centuries, at the same time with the development of the corporate businesses. In this context, the existence of companies, having a large number of employees and at the same time operating in different locations and countries, naturally called for monitoring systems and verification of operational activities. At first, the verification and monitoring actions were focused primarily at financial statements, and soon, both, July 2017

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financial and operational activities were seen as linked with each other and affecting each other. Including the supervision of the operational activities hand in hand with the financial activities was a crucial factor of giving internal audit its own specific identity, by setting a clear separation from the existing controlling systems, financial control an external audit. Many professionals do link the beginning of the modern internal auditing with the establishment of the Institute of Internal Auditors (IIA), in 1941. Initiated by a group of proffesionals, growing rapidly from 104 to about 200.000 members, nowdays the Institute of Internal Auditors is the dynamic leader of the internal audit profession, in 190 states around the world, including Albania. The Global Institute of Internal Auditors, as the leader of the internal audit professionals, has defined Internal Auditing with the following statement: “Internal Auditing is an independent, objective, assurance and consulting activity that adds value to and improves an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”. As we read its own long definition, we believe that internal audit is a very dynamic profession, which includes many areas of interest and action. Internal audit activity helps the organization by identifying and analyzing the potential and existing risks that may affect the achievement of the organization objectives. Under this light, the internal auditor can be a consultant to anybody within the organization, and not limited to management. In fact, if we look at developed 26

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markets, where the internal audit function has existed from a long period of time, internal auditors are often engaged to improve the processes of the organization, in order to help the company and people that work in it to perform effectively and efficiently their activities. When internal auditing is accepted and acknowledged by an organization’s leaders as a management activity, internal auditors can fulfill their most fundamental role — supporting management and the board in achieving organizational

Internal audit activity helps the organization by identifying and analyzing the potential and existing risks that may affect the achievement of the organization objectives. Under this light, the internal auditor can be a consultant to anybody within the organization, and not limited to management.

objectives. Competent internal audit professionals bring to the table objectivity, integrity, expertise in communication, the ability to identify enterprise wide risks, and the skill to assess the effectiveness of controls put in place by management to mitigate those risks. As partners to management, internal auditors are positioned to help protect the organization against both traditional and emerging risks; provide consultation about how opportunities and vulnerabilities can be balanced; and make valuable recommendations for assessing and strengthening

corporate governance. Today, a growing concern for management is risk associated with information technology and the control and audit ability specifications of new systems. Internal auditors’ independent review of information systems and other high-tech projects can help ensure a controlled and reliable IT environment. Their consulting services add value to the decision-making process, when management must consider the cost and benefit trade-off of IT control implementation. Competitive pressures demand that today’s organizations squeeze the most they can from all their resources — and as above mentioned, the internal audit process is clearly among the most critical. In addition to their responsibility for assessing and recommending internal controls, internal auditors’ skills in risk management and their broad-based perspective of the organization uniquely position them as a valuable resource for solid corporate governance. As a result, informed senior managers and boards are relying on internal auditors for advice and counsel on everything, from analysis of operations and risk assessments, to recommendations for improved corporate governance. Moreover, internal audit practitioners are increasingly being challenged to apply their expertise in much broader ways than ever before — such as evaluating emerging technologies, detecting and deterring fraud, analyzing the effectiveness of policies and procedures, and identifying opportunities to save management costs and shareholders’ money. When it comes to adding value across the board, there’s no better resource than internal auditing.

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EXPERTS' FORUM

A reassessment of security strategies The security is becoming increasingly critical for business, especially when talking about digital transformation of banks and the information society as a whole. What is needed is a review of security strategies, to adapt to business trends and to have a secured digital banking.

ware is the most successful and profitable way of attacks by cybercriminals. According to recent estimates, ransomware attacks cost around US$ 1 billion, worldwide. There is nothing surprising in this regard, about why they are so successful; it is just like any other wrongdoing activity, organized and used by

Akil NDRENIKA

Security Manager/ IT Security Officer Information Security Department BANKA KOMBËTARE TREGTARE

ccasionally, a new, unheard threat emerges and becomes a fashionable way of hacking different institutions. Lastly, APT (Advanced Persistent Threats) makes headlines in any portal and media, and is at the head of any security news and more. Every institution, including banks, as one of the main targets of hackers, react quickly to stop hacker attacks, which will usually hide traces and penetrate more deeply, inside the compromised institution. Initially, they hack it successfully, and then expand inside the institution. This recently updated threat is called ransomware. Following phishing, ransom-

Education is a key element for the protection of our institutions. Hackers always exploit human vulnerabilities in personalized attacks against us, with the ultimate goal of penetrating the institutions we work for. Monitoring each user activity on IT banking systems and linking these activities to different IT systems, monitoring realtime critical events by the Security Operation Center is a compulsory condition for the security of banks’ customers.

criminal organizations, such as: mafia for years, but adapted to a digital format, in the information society. Digital transformation is just as valuable and lucrative not only for society, banks or business, but also for cybercrminals. Recent ransomware attacks

are a major and serious threat, unlike cashing the ransom and leaving quiet the hacked company; now the new ransomware variants will destroy critical company data, despite the encryption of these data, without any recovery. At this point, the question that arises is: What will be the next step for cybercriminals? A variant would be a permanent payment under the threat of keeping the data in use, otherwise called "protectionware", or as adapted by mafia: getting il riscatto. So, permanent payment under the threat that critical bank records will no longer be usable, if payment is not made. The impact of such attacks is unlimited, where besides losing money by paying criminals, there are other inevitable effects, such as the case of a police station, which following the attack with ransomaware, has lost 8 years of criminals’ evidence and other scientific proofs, which can release criminals under trial, or for retrial. The effect of ransomware in the banking sector, similar to the above, may be irreversible and devastating for banks. Pointing to the significance of a ransomware attack, I would like to elaborate on some interesting facts. An April 2017 questionnaire (prior to "wannacry" ransomware), focusing on ransomware, included the biggest concerns about how far such threats could go, especially July 2017

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in small and medium companies, including the size of the Albanian banking sector. The questionnaire was conducted in 1,000 different companies, ranging from 1 to 10 thousand employees. About 18% of them were companies with 100 to 250 employees, mainly in Western Europe and EMEA. The results of the questionnaire are interesting and impressive. The vast majority of respondents were concerned about a ransomware attack at the company they work for (92%). A considerable part of them had previous experience with ransomware. Almost all failed to identify the hacker and the source of the attack. The main way of infecting with ransomware was e-mail. These findings highlight the importance of better protection of e-mail infrastructure, by using a layered protection and undoubtedly the importance of educating and raising awareness of bank staff about risks posed by ransomware. Also the results showed that e-mail cloud solutions were not sufficiently secure and respondents pointed out that cloud solutions provide built-in security and that the need for an additional security solution, such as third party, was evident, for example: using an additional security solution over the cloud service provider (e.g. Office 365 plus Malwarebytes). How can we protect the bank from such threats? First, we should not think we are a small and invisible target for internet criminals. Usually, there is prevailing thinking that we are a small banking market, or small banks compared to the region and neighbors, and therefore we will not be attractive to such attacks, and as a result, we are protected, by being invisible. Experience shows that companies/institutions 28

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that base their protection on such facts or strategies, i.e. small staff, few IT systems, few resources to protect, are easier targets for a successful hacking. Second, secure everything! Digital transformation may open doors to hackers. Being 24/7 online, what makes the surface attack bigger and wider. At the same time, attacks become more sophisticated and personalized. Typically modern attacks utilize some vectors and infected emails remain a constant threat to us, as well as a constant source of ransomware attacks by cybercriminals. By approaching the principle of securing everything, the potential

Experience shows that companies/ institutions that base their protection on such facts or strategies, i.e. small staff, few IT systems, few resources to protect, are easier targets for a successful hacking.

for modern attacks, including ransomware, decreases. Also, ATP solutions are an added value and necessary, as updated and trained technical and human resources are. Standard devices, such as: Firewall, NG-IPS, Antivirus, Secure Mail/Web are not enough, nowadays. Security Intelligence and threat intelligence are security elements that need to be put in place, in order to be protected. In today's trend, cloud services and virtualism are inevitable, but notwithstanding the trend, the same security and control elements need to be implemented and effective, both for actual physical IT systems in banks, and for those cloud or virtual IT

systems in the future. Third, implementation, monitoring and education. User behavior, so the behavior of each of us, is often the weakest point. It is inevitable that someone will click a link, or open an attachment. Therefore, education is a key element for the protection of our institutions. Hackers always exploit human vulnerabilities in personalized attacks against us, with the ultimate goal of penetrating the institutions we work for. Monitoring each user activity on IT banking systems and linking these activities to different IT systems (core banking, digital banking, IT infrastructure, vertical and horizontal, etc.), monitoring real-time critical events by the Security Operation Center is a compulsory condition for the security of banksâ&#x20AC;&#x2122; customers. Fourth, recovery with the lowest possible damages. When everything else, any protection or other measure fails, we need to recover, retrieve our records, our processes as soon as possible. Especially regarding recent attacks with ransowmware, it is critical to have backup and recovery plans, as part of business continuity plans (BCMs) for banks. Finally, it is inevitable that each of us could be attacked, as though we may have been attacked once this does not mean that we cannot be a target again, otherwise, the fact that you are compromised once means you are an easy target. It is important to protect and have effective security. The security is becoming increasingly critical for business, especially when talking about digital transformation of banks and the information society as a whole. What is needed is a review of security strategies, to adapt to business trends and to have a secured digital banking.

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EXPERTS' FORUM

IFRS 9

Challenges and opportunities of financial instruments' recognition and assessment The most obvious challenge relates to the new specifics of cooperation between risk management and finance departments. The accounting department will be much more involved than now in determining the expected losses, a process that so far has been merely in the form of prudential measures. An obvious change is also expected in the terms and conditions of financial communication between various departments of banks. implementation requires a more complete convergence of risk and accounting, a more modern vision for the banking business model, requires advancement towards new ways of calculating risk, adopting new accounting approach on financial instruments, improved operationsâ&#x20AC;&#x2122; accounting tracking,

Prof. Dr. Adrian CIVICI

President EUROPEAN UNIVERSITY OF TIRANA

anuary 1st, 2018 is set as the kick start moment for the mandatory implementation of IFRS 9, for the banking system. IFRS are international financial reporting standards intended for a standardized reporting of accounting data, on an international basis. Meanwhile, IFRS 9 is a new reporting standard for financial instruments that will replace IAS 39, starting from January 1st, 2018. Although this new standard for financial instruments has been approved three years ago, for many banks, it is a very challenging moment. Many of them are not fully prepared to implement this standard, yet. The reasons for such delay are lay behind the complexity of IFRS 9, whose

Late recognition of loan impairment or other nonperforming financial assets has been identified as one of the weaknesses of IAS 39. IFRS 9 corrects such weakness by outlining a new impairment model, by which an earlier recognition of expected losses is achieved.

and a deep review of the entire accounting information system. The long and difficult, but highly controversial, process of replacing IAS 39 â&#x20AC;&#x153;Financial Instruments: Recognition and Measurementâ&#x20AC;? has finally passed the Rubicon on 24 July 2014, the date on which the International Accounting Standards Board, adopted the final version of IFRS 9: "Financial Instruments", in response to the challenges of global financial crisis. But what is the rationale for such transition,

from IAS 39 to IFRS 9? Endeavors to revise IAS 39 should be seen in the context of the 2008 global financial crisis, and as an effort to react against the factors that caused the crisis and the measures needed to be taken to curb its adverse effects on the banking and financial markets, and in response to a specific demand form G20, too. This international accounting standard, applied since January 2001, dealt with the accounting and valuation of financial instruments (assets, liabilities and derivatives), hedging operations against market, FX and interest rates risks, as well as rules on presenting financial assets and liabilities in the balance sheet. The basic principle of IAS 39 was the recognition and measurement of financial assets, financial liabilities by their fair value, but many studies and analyses carried out on assessing this standard showed that the recognition and measurement of assets and liabilities by the fair value was one of the mechanic factors which accelerated the 2008 global financial crisis. The spread out and deepening of the financial crisis highlighted the urgency of reflections and new projects by IASB and FASB (Financial Accounting Standards Board). The new regulatory wave

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undertaken by Basel Committee (Basel III), CRD IV (Capital Requirement Directive - European Legislative Package on Prudential Measures for Banks), and the Dodd-Frank Act in USA, adopted by President Obama in July 2010, aimed at strengthening the sustainability of the international financial system, with the emphasis on increasing the requirements for funds intended to cover credit risk losses. The proposed new accounting regulations aimed to increase the transparency of credit risk through the asset impairment instrument, which is deemed to be more countercyclical to the evolution of loan cycles. In this context, IASB published the final version of IFRS 9 on 24 July 2014, eventually replacing IAS 39. The basic elements of IFRS9 The new provisions of IFRS 9 affect some of most important and complex elements in the functioning of banks, particularly three essential aspects of accounting for financial instruments: Classification and measurement of financial assets: Financial assets affected by this standard include: business or household loans, real estate loans, shares, bonds, derivatives (share options, SWAPS, etc.), collateralized mortgage obligations (CMOs), etc. They should be reclassified in function of the potential value of bankâ&#x20AC;&#x2122;s business model/SPPI test (Solely Payments of Principal and Interest test). Financial assets will be assessed at their amortized cost, or at "fair value", in view of the nature and specifics of the cash flows and economic models of corporations, or businesses. Financial assetsâ&#x20AC;&#x2122; classification is based on the analysis of such

two cumulative criteria; on one hand, the unique internal financial instrument features (SPPI) and on the other hand, the real practical model of their administration. From an operational point of view, this phase requires a detailed work on the analysis and documentation of financial assets, to accurately identify their specific characteristics. The main purpose of this action stems from the fact that, by their very nature, financial instruments, part of financial assets, generate many cash flows that are not part of SPPIs. Contractual modalities of a debt financial asset, valued at its amortized cost, should be replaced by cash flows that reflect principal and interest payments, in relation to the remaining principal amount. In this sense, these flows are consistent with those of Interest Rate Swap (IRS) loan contract, or the so-called "plain vanilla" contract, whereby a borrower is committed to paying equal cash flows with fixed interest rates, over a long period of time, in relation to the principal. This new notion of SPPI creates the possibility that all contracts are recognized at their fair value, i.e., at their amortized cost. Loan Impairment: IFRS 9 substitutes the accounting model for recognition and measurement of loan impairment, prescribed by IAS 39, with a new model under which the expected credit loss or expected impairment should be made on the basis of analysis and projections of provisions for loan portfolios, based on a greater number of economic criteria and risk factors. The nature of these calculations or projections of expected credit losses depends on the rate of deterioration of the loan for each

financial asset, based on a threelevel of impairment, as clearly defined in IFRS 9. The accounting unit should record the evolution of the deterioration (or improvement) of loans. In the framework of IFRS 9, total loan portfolio becomes subject to systematic provisioning, including the type of loans for which risk assessment is made in a simplified and automatic manner. Late recognition of loan impairment or other nonperforming financial assets has been identified as one of the weaknesses of IAS 39. IFRS 9 corrects such weakness by outlining a new impairment model, by which an earlier recognition of expected losses is achieved. At the end of each financial and accounting period, banks and other financial institutions should proceed with an assessment of expected losses for each financial instrument, creating a respective amount equal to these expected losses, especially in cases where the credit risk of any financial instrument has been increasing, in relation to its initial recognition. Specifically, new requirements for credit risk provision are expected to have significant effects for banks. IAS 39 authorized the recognition of provisions only in case of problems in loan repayment, without requiring any pre-emptive provision. The global financial crisis highlighted the weaknesses of this model, especially in the occurrence of cases where provisions are recognized with a large time lag, in relation to losses that resulted greater than the initial forecast. IFRS 9 requires financial institutions to recognize provisions on a real-time basis, in relation to expected losses and, on the other hand, to make a step by step assessment of credit July 2017

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risk evolution, thus anticipating potential prospective risks. At the first stage, the implementation of this standard, or risk management and assessment model may be accompanied by a negative impact on banksâ&#x20AC;&#x2122; assets and balance sheets. "Hedge accounting": IFRS 9 proposes new improvements in this regard, especially by authorizing a larger number of "hedging" operations, by limiting the volatility of losses and gains, and by significantly simplifying the assessment and accounting methods, for the sake of "protection" efficiency from inadequate quality or ineffective risk management methods. The underlying objective of this type of recognition is to identify the best effects of different ways of risk management and assessment, especially those that are most noticeably reflected in banksâ&#x20AC;&#x2122; final financial results and other financial institutions. 32

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New Challenges for IFRS 9 implementation A full and effective implementation of IFRS 9 put banks and financial institutions not only in front of big challenges, but also with a series of unknown realities, like: the necessity of developing new instruments for long-term assessment of potential credit risk; the transfer of financial assets between different categories that depend exclusively on individual assessments of internal management structures; the interpretation of "significant increase of risk" or "default" terms becomes more and more subjective, in function of risk evaluator; accounting evidences of the performance or risks of different businesses, bank clients, is much more complex than the methods used so far. But even though the IFRS 9 requirements seem to be simple accounting rules, their impact on the functioning of banks and other financial institutions is expected to

be deeper and more sensitive. The most obvious challenge relates to the new specifics of cooperation between risk management and finance departments. The accounting department will be much more involved than now in determining the expected losses, a process that so far has been merely in the form of prudential measures. An obvious change is also expected in the terms and conditions of financial communication between various departments of banks. Many banks have already begun to strengthen and restructure their organizational structures, amending many rules and procedures, better defining credit risk assessment methodologies, completing data management methodology, information systems, their own business models and especially improving internal control standards, improving communication strategies and methods with customers and the banking and financial system in general.

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SUSTAINABLE GOALS DEVELOPMENT

OBJECTIVE 4 General sponsor of the event: "Peace begins with a smile”. OBJECTIVE 3 On June 12, the bank, in cooperation with the Albanian Red Cross, organized the Blood Donation Day. OBJECTIVE 11 During "Volunteer Day" on May 28th, the bank organized an event aimed at revitalizing the cultural and artistic heritage of Bashtova Fortress, Kavaja. Restoration of the Castle of Libohova, Gjirokastra, on 4 June.

OBJECTIVE 10 On May 19 th, a gala evening was organized at the premises of the Palace of Brigades: "Promote Change, Support Progress", organized by LGBTI community activists, with the support of ABI Bank. OBJECTIVE 11 On June 10 th, the bank supported the organization of the "International Carnival Festival" in Korça. ART, CULTURE, OTHERS • During April, attended at the famous "Animal Farm" play at the National Experimental Theater. • General Sponsor of Tirana Cultural Center ("Metropolitan Theater"). • Main Sponsor of all sports teams of "Studenti" Sports Club. • Supporter of "Motofest 2017", June 23 & 24 th. • Supporting the Biennial Activity "Mediterranea 18", organized by the Ministry of Culture for the first time in our country, during May 4-9 th.

OBJECTIVE 1 On June 1st, bank employees joined the voluntary initiative to purchase toys for children of families in need. OBJECTIVE 4 On May 25th, high school students at "Petro Nini Luarasi" school were welcomed at bank branch facilities. The bank supported UET Students’ Forum of Finance: "Financial Intermediaries in Albania Challenges and Problems".

OBJECTIVE 1 On the occasion of “Support and Assistance for Orphan Children in the Community” campaign, BKT, together with its staff, collected aid fo children

OBJECTIVE 8 ABI Bank supported the "EU Transit – Tirana Farm" event, on May 19-20 th, organized by Tirana Municipality.

OBJECTIVE 4 On the occasion of closing the 20162017 school year, BKT sponsored the sporting activity, organized by the Regional Directorate of Education, inTirana.

OBJECTIVE 9 On May 13th, it supported the 4th edition of the event: "Innovation Week".

OBJECTIVE 8 BKT considers employees as a partner for its success. By supporting July 2017

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this idea, BKT funded a tourist trip for employees of National Housing Authority. OBJECTIVE 11 BKT funded the organization of “Festival of Folk Song Interpreters for Children”, organized by Association of Alban’s City. OBJECTIVE 10 BKT supported “Ismail Qemali” University, Vlora, for organizing a marathon with the theme: "No to Discrimination and Racism". OBJECTIVE 4 / 8 BKT supported the "Painting Contest" activity, organized by the University Student Residence. OBJECTIVE 8 BKT financed “Aleksandër Moisiu” University in context of supporting the 13th International Conference of AESECU with the topic: Social and Economic Challenges in Europe 2016-2020.

OBJECTIVE 3 The bank supported financially "Shefqet Ndroqi" Regional Hospital, Shkodër, and "Tirana" Multi-Sports Club. OBJECTIVE 4 Supported the "Tomorrow's Entrepreneurs" kontest, organized by Tirana Business University and activities in favor of Junior Achievement. OBJECTIVE 8 Restoration of the premises of General Tax Directorate. OBJECTIVE 11 Supporter of

some

activities

organized by the Albanian Aeronautical Federation "Paragliding 2017"; organizing Snooker European Championships by Snooker's Albanian Federation; caryring out the national awareness campaign "My Albania" for the National Center for Children's Culture, at the "Puppet Theater".

OJEKTIVI 4 Mr. Bozhidar Todorov, CEO of Fibank, delivered a speech at European University of Tirana, on the occasion of the International Scientific Conference: "Albanian Studies Days". OBJECTIVE 3 Supported "You Are a Sunflower" awareness campaign, by offering the state-of-the-art technology equipment at the Pediatric Oncology Hospital, Tirana. OBJECTIVE 10 Fibank launched "Zero Stress for Life" campaign during summer, with a view to offer much convenience to new credit card users.

OBJECTIVE 1 Donation to SOS Children’s Village where the bank has continued for the sixth consecutive year, to meet the needs of the two children of the village. OBJECTIVE 3 Continuous blood Donation in collaboration with Red Cross Albania. July 2017

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OBJECTIVE 4 In collaboration with Junior Achievement Albania, the bank welcomed one of top achiever JA students, during “Leaders for a Day” activity. OBJECTIVE 7 Based on the collaboration with green recycling, ICB in the first quarter of 2017 received the annual report of 2016 showing positive impact on the environment as follows: by recycling 588 kg of waste paper, ICB avoided CO2 emission for about 0,8 ton and saved the following: - 11 trees - 21,5 cubic meters of water - 2.410 kilowatt of energy - 5,3 barrels of oil - 16 kg of air pollutants - 2 cubic meters of landfill space

OBJECTIVE 2 Organized the collection of various food packages, which were managed by the Albanian Food Bank (Member of the European Food Bank), to be distributed to families in extreme need. OBJECTIVE 3 Organized on May 29 – 30th, the blood donation initiative. OBJECTIVE 3 On June 1st, the bank’s staff contributed with clothes and toys for orphaned children, in cooperation with the Albanian Red Cross. OBJECTIVE 4 On June 13th, 2017, some New York University students in Tirana visited the bank training center, where a presentation was delivered 36

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by heads of that department. OBJECTIVE 4 Supported the initiative of the Italian Chamber of Commerce in Albania: "An Award for the Best Italian Language Students" for scholarships in Italy, which will be awarded to the best Italian language students. OBJECTIVE 8 On April 20th, the bank attended the Career Day: "Make your step ...", organized by the Faculty of Economics of Tirana University and at the Fourth Career Fair, organized by EPOKA University on April 26th and May 31st. OBJECTIVE 8 In cooperation with Tirana Municipality, the bank participated in the "Work & Study" fair. OBJECTIVE 9 Sponsored the National Information and Development Center, in the frame of "Innovation Week, May 1322nd, 2017". OBJECTIVE 10 Supported the UNHCR campaign for the World Refugee Day. This awareness campaign included: Postcard on ATM screens, specific footer on internal and external mail Exchange, over a week. IT IS NOW THAT WE NEED TO BE WITH REFUGEES! # WITHREFUGEES. OBJECTIVE 12 The bank supported school competition: "On differentiated collection and its sustainable journey", promoted by Tirana Municipality and ECO Tirana, with students from various gymnasiums. OBJECTIVE 13 5 June 2017 - World Environment

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Day - I'm With Nature! An e-mail footer postcard was used for about two weeks, when exchanging emails. OBJECTIVE 15 Following the awareness initiatives, the World Biodiversity Day was promoted. OBJECTIVE 17 The bank, as one of the largest Italian businesses in the country, supported the Italian Embassy in organizing the event of June 2nd, the Italian Republic Day.

OBJECTIVE 4 ProCredit Bank was one of the companies that participated in Job Fair 2017, March 29-31st, promoting ProCredit Bank as an employer and “ProCredit Entry Programme. OBJECTIVE 8 The Albania – Ukraine Business Forum: "One step forward", held by the Albanian Export Centre, on April 28th, had the support of ProCredit Bank as the general sponsor.

OBJECTIVE 4 Raiffeisen Invest and Saranda Municipality inaugurated "3 Squirrels" kindergarten on June 1st. Supported the UT Finance Department for the activity: 3rd National Conference on Finance. Supported the "Open Day" activity, at the premises of the Faculty of Philology. The "Act for Society" Center successfully completed the project: "Democracy In My eyes”, with the support of Raiffesen Invest. OBJECTIVE 9 Raiffeisen Bank Albania supported the ICTS Awards, for the fifth consecutive year. OSCAL came up with a two-day conference with young guests, sharing their knowledge and innovations in the IT field. OBJECTIVE 11 Cloud Festival - a one-week festival to promote the anniversary of "Cloud" installation in Tirana. Raiffesien Bank supported South Outdoor Festival -PILUR. OBJECTIVE 13 Eco living is the message that ECO Fashion SHOW brings for several consecutive years, with Raiffesien Bank as a partner.

OBJECTIVE 11 On June 17th, ProCredit Bank staff cleaned up the coast of Lalzit Bay.

OBJECTIVE 3 Tiss Center inaugurated the assessment and recreation hall, funded by Raiffeisen Invest Albania.

OBJECTIVE 9 In June 2nd, Societe Generale Albania, in cooperation with Faculty of Economy of Tirana University sponsored “Innovate your way out” competition, as a jury member and handed over the 2nd prize. July 2017

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OBJECTIVE 1 The bank continues its commitment, by "adoptin" three SOS village children. OBJECTIVE 3 The bank supported the play: "A small delay", played by children of Down Syndrome Albania Foundation. OBJECTIVE 3 Supported celebrations of "Lake Days", in Pogradec.

OBJECTIVE 1 Bank’s staff collected funds to renovate a family home in Elbasan in extreme poverty conditions. OBJECTIVE 4 The bank sponsored the publication of monograph on the occasion of 60th anniversary of City Gymnasium in Pogradec. OBJECTIVE 4, 5, 10 Attended the work fair. CULTURE, ART AND SPORT Union Bank’s employee football team is the champion of National Minifootball Championship.

OBJECTIVE 4 / 8 Evaluated the works on school competition, organized by Tirana Municipality and ECO Tirana, by awarding "Misto Mame" school with the project "Tirana in my eyes". OBJECTIVE 11 The bank attended

the

organized on the occasion of the 71st anniversary of the Italian Republic Day.

5th EFDI Balkan Region Meeting The 5th EFDI Balkan regional meeting, hosted by the Albanian Deposit Insurance Agency, ADIA, took place in Gjirokastër, Albania, from 11th to 13th June 2017. This meeting follows upon a well-established tradition, according to which deposit insurance authorities of Albania, represented by Mr. Genci Mamani, General Director; Bosnia and Herzegovina, represented by Mr. Josip Nevjestić, General Director; Croatia, represented by Ms. Marija Hrebac, General Director; Macedonia, represented by Mr. Goran Ancheski, General Director; Montenegro, represented by Mr. Predrag Markovic, General Director and Serbia, represented by Mr. Srdjan Mihajlovic and Mr. Vladimir Medan, respectively Chairman and Member of Board of Directors, gather with the aim to discuss and share experiences and knowledge. Upon the invitation of the Albanian Deposit Insurance Agency, the meeting was also attended by Mr. Patrick Loeb, EFDI Vice Chairman and CEO of Esissuise, who presented to all participants the recent amendments to EFDI Statutes and changes within EFDI organizational set, as well as future projects which aim at strengthening the organization and its members deposit guarantee schemes. In addition, Mrs. Georgia Karageorgi, Director General of Hellenic Deposit and Investment Guarantee Fund (TEKE), Mrs. Violeta Arifi Krasniqi, Managing Director of Deposit Insurance Fund of Kosovo (DIFK) and Mr. Bisser Manolov, Board Member of Bulgarian Deposit Insurance Fund (BDIF), also attended the meeting as guests of the Albanian Deposit Insurance Agency.

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SUSTAINABLE GOALS DEVELOPMENT

SDG 2016

The New AAB Report a result strengthen the economic incentives for companies to use resources more efficiently.

Donard Braha

Audit Manager ERNST & YOUNG ALBANIA

Setting the scene – Companies have long been involved in exercising their citizenship in society, including sustainability, corporate governance and corporate social responsibility. In today’s environment, business can no longer ignore the physical and regulatory impacts of climate change, Environment, Health and Safety on their operations. The Sustainable Development Goals (SDGs), launched by the UN, lay out an ambitious agenda for improving societies and economies by 2030. SDGs and materiality - Not all 17 SDGs are equally important to a company; businesses might have a large (positive or negative) impact on some goals and an insignificant impact on others. Materiality can be referred to as the threshold at which topics become sufficiently important and thus should be addressed within the overall strategic planning of a company. Addressing the SDGs through identified material topics, helps a company to integrate sustainability in their business strategy and as

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Linking the SDGs and GRI – Global Reporting Initiative (GRI) Framework is widely used in the private sector. It is the most recognized multistakeholder approach to disclose economic, environmental, social and governance information about a company’s performance and impacts. All SDGs can be linked to several GRI indicators, and as GRI focuses on materiality, it can also help by choosing the right SDGs to contribute to and communicate on. SDGcompass.org has developed an online inventory of business indicators. As the UN’s SDG Compass guide explains, the intent of the SDGs is to help companies identify future business opportunities for redirecting public and private investment flows, enhance the value of corporate sustainability, strengthen stakeholder relations and keep pace with policy developments, and stabilize societies and markets. Obtaining assurance – Obtaining external assurance is an important step to enhance credibility and reliability of information within a company’s annual report. As obtaining external assurance on non-financial information becomes more important, it is also of great importance for the progress on SDGs to be externally assured. The external auditor verifies the accuracy of the nonfinancial information in the report,

Since Albania is in the process of European Union (EU) integration, new EU regulation and legislation will be enforced to Albanian market as well. Alongside these challenges, new regulatory developments are becoming enforced by EU such as EU Directive on Non-Financial Reporting (2014/95/EU). This EU Directive will impact large public interest entities (listed companies, as well as banks and insurers) with more than 500 employees who will start reporting as of their financial year 2017. The scope will include companies and groups across the EU who should disclose in their integrated financial and non-financial reporting information on: policies, risks and outcomes regarding environmental matters; social and employment aspects; respect for human rights; anticorruption and bribery issues; and diversity in their board of directors. and thereby gives more value to the information reported to the stakeholders. Of all the ways in which business can make positive contributions towards the SDGs, perhaps one of the most influential is by increasing the role of the financial services industry. The industry is fundamental to achieving the potential of the SDGs, by providing capital, funding, and financing of projects. At the same time, sustainable development has the potential to be a crucial differentiator for Financial Services institutions — a differentiator with which companies will need to engage to stay competitive.

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ACTIVITIES Announcing the AAB New Website The updated site includes changes to navigation, with dropdown menus for both mobile and desktop versions and improves access to the information published. We’ve also improved the structure of our content. AAB collaborated with TOK Digital Agency.

Open lecture on the theme "Banking System in Albania" On April 05, Dr. Spiro Brumbulli, AAB Secretary General, organized an open lecture on the theme “Banking system in Albania”. Students of Business Administration Faculty and Economic Informatics of Metropolitan Tirana University (UMT) attended the lecture.

Launch of the program “Education of young jobseekers in banking sector” On April 05, was organised the program launching ceremony of the “Education of Young Jobseekers in Banking Sector” program.

3d Meeting of the National Payment Systems Committee On 9 May 2017, the National Payment Systems Committee (NPSC) held its third meeting. In the meeting, Mr Periklis Drougkas AAB Chairman, presented the most recent developments in the banking system related to electronic payments.

Roundtable on Risk Management On April 04, AAB in collaboration with IFC organised the Roundtable entitled “The Future of Risk Management”. The roundtable was attended by Bank of Albania representatives, CROs and risk staff of member banks, IFC experts, Deputy Head of Mission, Embassy of Switzerland in Albania.

EPOKA University students visit to AAB premises A group of students from the Finance and Economics Faculty at Epoka University, on May 30, visited the AAB premises.

The 44th Meeting of the Associate Members of the European Banking Federation On May 9, 2017 the Association of Serbian Banks hosted the 44th Meeting of the Associate Members of the European Banking Federation in Belgrade, which was attended by the representatives of the banking associations from Albania, Bosnia and Herzegovina, Bulgaria, Italia, Germany, Macedonia, Montenegro and Serbia.

SWIFT: Customer Security Programme (CSP) work session Albania & UGM annual meeting On June 1, was organized the “SWIFT: Customer Security Program (CSP) work session Albania”, which is a program launched by SWIFT Company after the cyber attacks happened in Philippines a year ago. On June 2, was organized the annual meeting of UGM. The meeting was attended by member banks and Bank of Albania’s representatives. Conference on “Infosec and Big Data Analytics” On June 8, was organized the conference entitled "Infopoint Meetup - Infosec and Big Data Analytics", in cooperation with INFIGO IS. Workshop on “Importance of AML Compliance Program” On June, 21, 2017, AK-Invest with the support of AAB organized a workshop on “The importance of AML compliance program”.

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TRAININGS

AAB organizes trainings Aprill - June 2017 Enhancing Corporate Governance Leadership 19 and 20 April

IFRS 9 27 April

Techniques and Instruments for Internal Auditors 24-26 May 2017

Team Work - Managing Effective Team 24- 25 May

Train the Trainer: Methodology and Didactics 5-7 June

Big Data driven CRM analytics 8 June

IncotermsÂŽ2010 8-9 June

Foundations of International Trade & Finance 21-22 June

Managing Credit Risk through Portfolio Management and Monitoring Performing and Nonperforming Loans 28 June

Anti-Bribery & Corruption in Practice 29 June

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HUMAN RESOURCES

COMMITEE FORUM OCTOBER 2017