Lending to the economy and the long-term health of the banking system

On March 4, 2013, the forum on “Lending to the economy and the long-term health of the banking system” took place. Representatives of the Bank of Albania, the Albanian Association of Banks, and “Business Albania” discussed the measures to be taken to stimulate lending and long-term macroeconomic stability.

Governor Ardian Fullani presented the package of measures to encourage lending by banks and explained the three pillars on which this package will be based: legal changes for the execution of collateral, monetary policy, and macroprudential measures.

Speech of Mr. Seyhan Pencabligil, chairman of the Albanian Association of Banks, at the forum “Lending to the economy and the long-term health of the banking system”, March 4, 2013.

Dear Governor Fullani,

Dear Mr. Bregasi,

Dear representatives of the banking system, business, and media,

Ladies and gentlemen:

Hello and thank you for your interest. My special thanks go to Governor Fullani, who took the initiative to organize this round table, with the ultimate goal of stimulating the economy and enabling increased credit from banks.

Six years ago, we had a similar roundtable with the Bank of Albania and the IMF, but then the problem was why the banks were giving so much credit! And then, the matter was very simple. Each bank had its reasons for lending. The Savings Bank, for example, at the time it was privatized and had no loans in its accounts, so it wanted to lend aggressively.

Please allow me to look into things a little deeper.

First, banks in Albania are lending – as much as banks are lending in Serbia, Montenegro, Macedonia, Slovenia, Hungary, and so on. Therefore, the case of Albania is not unique in the region, but typical.

Secondly, Albanian businesses are not returning the debts they have to the banks, at a higher level than other borrowers in the region, and as a result, the banks are not making enough profits to justify the risk they take on. In other words, our shareholders would be better off selling the assets and investing elsewhere.

Third, I agree with Governor Fullan that some measures should be specific, according to the banks. You cannot solve an issue that originates at the European Banking Authority in Frankfurt by changing some regulations in Tirana.

Given the above elements, let’s return to the main issue: How can we stimulate the economy in the context of financial intermediation?

Many of the measures mentioned by Governor Fullani are welcomed by the banks, but more must be done and not only by the Bank of Albania.

Almost half of the deposits are in foreign currency, mainly in euros, and this is understandable. About one-third of the population lives and works in the eurozone countries. Most of the trade takes place with the eurozone countries. Geographically, Albania is surrounded by countries that either use the euro or have an exchange rate regime dependent on the euro. The country itself aspires to join the Eurozone one day.

Albania is not yet in a position to use deposits in euros. If we give those loans to businesses that do not generate income in euros – and the majority of business in Albania does not generate income in euros – then the Bank of Albania asks us to put more capital aside. In case we lend to the state, again the Bank of Albania limits such lending, as if the state were an ordinary company. As a result, the banks are forced to invest most of the deposits of Albanians in euros outside of Albania, with very low-interest rates that I would say are punishing for the banks. We should be allowed to lend more to the state in euros so that it can meet its obligations to businesses, which in turn can pay their debts to the banks: This is one way to break the vicious circle. However, if the banks are forced to bring the euro into the country, without giving them new platforms to invest, then the inevitable result will be a drastic drop in the interest rates we pay for euro deposits.

Secondly, as Governor Fullani mentioned, the Ministry of Justice, in cooperation with the Bank of Albania, the Albanian Association of Banks, and other actors, has prepared proposals to amend the Civil Code and the Code of Civil Procedures. These amendments are necessary to speed up the collateral execution and stimulate the economy. Similar changes have been made in other countries in the region. But such changes require a qualified majority in parliament and I appeal to all political parties in parliament to treat this issue as an economic necessity rather than a political debate.

A third issue is that we believe that the Bank of Albania is being very cautious in its requirements for provisions for bad loans. The provisions that we have to make according to the requirements of the Bank of Albania are not recognized either by the tax authorities or by the financial reporting standards. Excessive provisioning is depleting our capital base and reducing our lending capacity. We are finalizing a study by an independent firm to present the case to the Bank of Albania, according to which provisioning should consider physical collateral.

Finally, some banks have recently been the victim of a wrong interpretation of the tax law for provisioning expenses, a law which is itself arbitrary and our Association is taking it to the Constitutional Court. So far, the result of such an interpretation has been that banks have had to pay large taxes in proportion to their already very low profits.

Banks in Albania did not cause the economic slowdown – we simply reflect it. We have no toxic assets, nor exotic derivatives; we have not lent excessively about GDP or deposits; we did not lend in Swiss or Japanese currency. In retrospect, judging by the high level of non-performing loans, we should have lent less: surely some of the businesses do not deserve our trust. But we have always been on the side of businesses and we want to be part of the solution.

Today, there are many banks in the system, which are not limited either by the rules of the Bank of Albania or by those of the European Banking Authority but are simply waiting and looking for good projects and reliable businesses.

In conclusion, I would like to emphasize the following:

  • The measures proposed by the Bank of Albania are welcome, but more needs to be done;
  • There are other authorities, including parliament, that must take up their responsibilities to act on this point;
  • Even if no measures are taken, there are still banks in the system looking for good projects and reliable customers to lend to.

Thank you for your attention!