Financial Sector in Albania

in Economy

The financial sector continues to face important risks, especially external ones, but it has remained stable and recently has shown improving trends. The outstanding credit contracted by ALL 3 billion in the first quarter of2014. Overall lending contracted by 1.7 percent in annual terms during the second quarter of 2014. Lending increased during the second half of 2014, reaching an annual growth of 2.2 percent as of the end of the year. The BoA further cut the key interest rate in January 2015 to a record low of 2 percent. As a consequence, during 2015, interest rates continued to fall. The exchange rate to the euro has remained stable. However, as monetary and financial conditions have improved, lending and demand for monetary assets have remained low. Widespread euroization, weak demand, and banks’ risk aversion (due to high nonperforming loan [NPL] levels) hamper the transmission of monetary policy. The Greek economic and debt crisis pose significant risks to Albania as well.
As of early 2015, the outstanding NPL portfolio was 22.8 percent, a slight improvement from the 23.5 percent at end-2013 and the 24.9 percent in September 2014. Several legal and administrative measures supported by the World Bank and the International Monetary Fund (IMF) have been taken up by the authorities to address the expedition of NPL resolution. The repayment of arrears so far has not significantly influenced NPL reduction, but a decline is expected in the future as the repayment of arrears advances. However, progress to date in cleaning up these troubled loans has been limited. Meanwhile, during 2015, banks are expected to write off considerable chunks of old, dated NPLs to comply with BoA rules that require mandatory write- offs of loans classified in the “lost” category for more than three years. An economic recovery, clearance of arrears, and reform of the bankruptcy law would help facilitate private balance sheet restructuring and revive loan demand.
Despite the large NPLs, banks remain sound, with an overall capital adequacy ratio of 16.8 percent at the end of 2014. The banking sector remained profitable, as the return on assets at the end of the same period recorded a positive result of 0.89 percent, while the return on equity reached 10.5 percent.

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