ALBANIA Economy and Banking System by Seyhan PENCAPLIGIL AAB Chairman Budapest, 15 November 2006 ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

ALBANIAN ECONOMY ALBANIA - Located in Southeastern Europe (Western Balkans) Economic Policy Framework Open Market Economy, No restrictions on profit and capital repatriation, No exchange rate restriction, floating exchange rate regime, Albania signed its Stabilization & Association Agreement with the European Union, the first formal step to eventual EU membership (12 June 2006). ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIA Main Economic Features & Indicators Macroeconomic performance of the Albanian economy has been good overall, with sustained growth and low inflation. Annual economic growth has been around 6% during the last 5 years. Domestic demand mainly driven by migrant remittances (EUR 939 million for 2005, or 14% of GDP) which have significant impact on fiscal revenues and expenditures, as well as by other external current transfers, and rapidly expanding financial intermediation & credit. Services, agriculture and industry share were 45%, 22.8% and 13.8%. Investments to GDP ratio reached 24.2 per cent for ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIA Main Economic Features & Indicators (2) EU is the main trading partner: 88% of exports and 60% of imports. SEE is the second trading partner: 9.2% of exports and 14.8% of imports. Exports and imports reached EUR 530 million and EUR 2 billion – Net importer …but more than 60% of the current account financed by FDI. FDI for 2005 reached EUR 213 million. Foreign reserves were at EUR 1.2 billion, covering 4.6 months of imports of goods and services. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIA Main Economic Features & Indicators (3) ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIA Macroeconomic Environment POLICIES Moderate rise of consumer prices during 2005 was favored by the fruitful coordination of monetary and fiscal policies. Fiscal Policy Prudential implementation of fiscal policies, by observing the planned parameters of fiscal indicators, has not transmitted excessive inflationary pressures and has contributed to maintaining price stability. Monetary Policy Monetary policy of the Bank of Albania has generally had a neutral stance. Lending to the economy has been the main source of monetary expansion during 2005, unlike in the preceding years, when this function had been realized by government borrowing or foreign currency inflows. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

Albanian economy experienced significantly higher growth than other transition. With the exception of 1997 (following the collapse of the pyramid schemes), however, Albania has consistently outperformed the CEE countries. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIA Macroeconomic Environment Source: IMF

Economic Growth Continuous and sustainable economic growth (~6% annually). Price Stability Price stability is one the lowest within SEE countries (ranging between 2-4%). ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIA Macroeconomic Environment

Income & employment GDP growth has enabled rise of income per capita beyond USD 2,500 per year, which, however, remains among the lowest figures of the region. Notwithstanding the ongoing GDP growth in years, employment performance reflects a moderate behavior. Unemployment rate reduction continues to be insignificant, either in absolute value or in relative terms. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIA Macroeconomic Environment

Remittances Albania’s receipts from workers’ remittances are, relative to GDP, among the highest in the world. Remittances are considerably larger than exports (1.8 times), foreign aid (7.3 times), and FDI (4.7 times). Remittances have significantly lowered the current account deficit and helped Albania build a comfortable level of external reserves. Although the bulk of remittances is still sent through informal channels, the importance of the formal channel has increased significantly in recent years. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIA Macroeconomic Environment

ALBANIAN BANKING SYSTEM ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIAN BANKING SYSTEM Brief History Genesis The establishment of Imperial Ottoman Bank (1863) in Albanian territories. Central banking Establishment of the National Bank of Albania, jointly with Italian and Austrian banking groups, 4 October Mixed Central & Commercial Banking Establishment of National Bank of Albania (NBoA), 02 September Communist era NBoA was nationalized in 13 January 1945 and the Albanian State Bank (ASB) was established, with both functions as central & commercial bank. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

Market Economy Two-tier banking system introduced and Bank of Albania established as the central bank of the Republic of Albania (1992). To date Albanian banking system has 17 commercial banks. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Brief History

Universal banking system, The dominant sector within Albanian financial system, managing more than 95.5% of total financial assets, Mainly foreign-owned (14 out of 17 banks are foreign-owned), Almost privately-owned (some minor state shareholdings), A highly concentrated banking system, where top four banks have a share of ~ 73% of total assets. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Features

Continuous institutional expansion and development… Other non-bank financial institutions ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS NoSubjects [1] [1] Banks and branches of foreign banks Non-bank financial institutions Foreign exchange bureaus Save & loan associations Unions of save & loan associations2222 [1] [1] Subjects licensed by Bank of Albania. 2/ Subjects licensed by Financial Supervision Authority, except for Leasing Companies. ALBANIAN BANKING SYSTEM Main Features

More coverage with banking services… ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Features

Performance of total assets ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Indicators Steady growth of banking assets…

Deposits’ growth Continuous deposit growth – among the highest in SEE countries. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Indicators

Credit performance Experiencing a credit boom recently, but credit ratios still low compared to EU and SEE standards. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Indicators

Private Sector Loan Structure Credit Quality Credit quality improving despite credit boom; retail loans in expansion ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Main Indicators

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

ALBANIAN BANKING SYSTEM Performance Indicators ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Performance Indicators

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Exchange Rates

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Electronic Cards

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Regulatory Framework Law no.8365, dt “On Banks in the Republic of Albania”. Main Licensing Requirements for Credit Institutions Banks shall be founded as joint stock companies. No discriminatory restrictions in terms of capital participation and formation. The minimum amount of initial capital required, paid in cash, in respect of a bank, is not less than ALL 700 million (to be raised up to ALL 1 billion); Administrators having a business or professional history for the past 7 years, General executive directors of the bank shall be more than two, Licensing Requirements for bank’s branch office Similar requirements as those required for Albanian banks.

Licensing Preliminary approval or deny, within 3 months from the date of its receipt of the application for a license at Bank of Albania. A bank or branch of foreign bank, which has been granted preliminary approval shall, within one year starting from the day of the preliminary approval, request in writing from the Bank of Albania granting of the final license. Scope of activity The range of allowed banking & financial activities a bank may offer differs in relation to the level of paid up capital. A bank with a paid-up capital of more than three times of minimum initial capital is eligible to offer the full range of banking services. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Regulatory Framework

Prudential Banking Supervision The supervision process is carrying out through the following instruments: Periodic data reporting regarding banking financial indicators, through unified reporting system (reporting various balance and off-balance sheet items, as well as other indicators, as the supervision regulatory framework requires); Ad hoc (special) reporting of various data; On-site (full scale or targeted) examinations; Off-site analysis. CAMELS system is employed during on-site examinations (CAMELS rankings range from “1” – top performance- to “5” – poor performance). ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Banking Supervision

Bank of Albania has already approved a set of all necessary and well- detailed rules and regulations, whose implementation help to ensure prudential banking supervision, as follows: Regulation “On Capital Adequacy”,, Regulation “On the amount and fulfillment of minimum initial capital of the allowed activities of banks and branches of foreign banks”, Guideline “On Bank’s Regulatory Capital”, Regulation “On Market Risks”, Guideline “On the Liquidity of the Bank”, Regulation “On Significant Risk Management”, Regulation “On Open Foreign Positions”, Regulation “On Bank Relations with persons related to bank”. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Banking Supervision (2)

The Albanian payment system is run and regulated by Bank of Albania. Postal service network, part of payment system also, mainly for money transfer ordered by individuals. Bank of Albania is the operator of two payment systems: AIPS (Albanian Interbank Payment System), a real-time gross settlement system (RTGS), which processes all interbank big value (equal to or exceeding ALL 1,000,000 (~USD 10,000)) payments (a SWIFT-based Y-copy service, “live” from January 2004). ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Payment System

AECH (Albanian Electronic Clearing House) System, an automated clearing system, for processing banks’ payments to their clients (small value payments; “live” from 2005). The system is fully integrated with AIPS and the net clearing position is settled daily in AIPS. Both systems are owned by Bank of Albania. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS ALBANIAN BANKING SYSTEM Payment System (2)

ALBANIAN BANKING SYSTEM Future Developments & Challenges Reduction of informal economy, Expansion of banking retail chains and products, more banking service coverage, Introduction of new technology: e-banking, New banking law – February 2006, Full implementation of IAS/IFRS, by January 2008, Increasing the beneficial effects of remittances, by channeling most of them through the financial system. ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS

Contacting AAB URL: ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE ALBANIAN ASSOCIATION OF BANKS