The Slowdown In Construction Sector May Affect The Banking Sector

Tirana, May 17 – The looming crisis in the housing market can create a chain reaction and affect the other branches of economy. The experts are warning about the impact of the construction problems on the financial sector because of the increase of the number of unpaid loans. They were supported last week by the conclusions of the latest IMF report about the Albanian economy. According to the report, the risks in the Albanian banking sector come mainly from the domestic economic and financial developments. The report establishes that the combination of the sharp increase of home loans and the slowdown of the construction sector constitute a threat to financial stability of the country.
The home loans are considered as relatively high risk loans. They expose the banks to two different risks. First, the risk that the borrower may fail to pay back the loans as agreed. Second, the banks finance the construction companies. Therefore, if the construction company fails to sale its apartments, it cannot pay back the bank.
According to the Bank of Albania, the borrowers are willing to cut any other expenses in order to pay the mortgage because otherwise they are going to lose their houses. However, according to specialists, under special circumstances, even the mortgagees can fail to meet their obligations. On of these circumstances is the increase of the food and raw materials prices. The Albanian consummators are facing such crisis at this moment. The increase of prices causes the raising of the cost of living. Further, the banks can raise their interest rates because of the intervention in the money market of the central bank. The Bank of Albania intervened 5 times during the period 2006-2007, rising each time the repo rate by 0.25 percent up to 6.25 percent.
Regarding the construction companies, the fall of the demand for new houses can diminish drastically the ability of the companies to pay back the loans they have taken from the banks. In Albania, the majority of new housing projects are financed by the banks. The construction companies pay back the banks after they sell the apartments. Already in Albania we are noticing a fall of the demand for new houses/flats.
According to the data from the Bank of Albania, around 19 percent of the total value of loans is used to finance the construction companies and home buyers. The commercial banks had loaned by the end of 2007, around ALL 45 billion to house buyers and construction companies. During that period, the commercial banks were especially aggressive in their efforts to take market shares from each other.(Tirana Times Staff)