By Altin Fuga
Tirana, June 10. The economy, like elsewhere in life, is proving that extraordinary pleasures must, sometimes, be paid back through extraordinary sufferings. That’s exactly what is now happening with Albanian banks. After a period of careless lending, as banks fought with each other to increase market share, it is now time to pay up the books.
Only during the first quarter of 2008 did Albanian banks report that bad loans increased by 35 percent or US $100 million. In total, Albanian banks have reported that they have outstanding bad loans amounting to US $400 million. These loans constitute 10.12 percent of the total outstanding loans of Albanian banks.
Additionally, the banks have revealed that US $120 million out of a total of US $400 million has already been lost and cannot be recovered and the banks consider the remaining to be suspicious or substandard. Nevertheless, observers believe the banks should be worried about the sharp rise in bad loans. The majority of the loans were granted after 2005 and the ability of borrowers to pay back these loans remains untested.
The Bank of Albania has continuously warned banks to be very careful. The Bank of Albania is deeply worried that the entrance of large European banks in the Albanian market was accompanied by an increase of loan activities. Further, the Bank of Albania fears that banks, in their eagerness to increase their market share, forgot to pay attention to the quality of loans granted to Albanian companies. Second, the Bank of Albania warns that a number of companies routinely report flawed or directly fraudulent financial figures as they apply for new loans. Third, the Bank of Albania fears a possible fall in the prices of real property. Real properties constitute almost 80 percent of loan collaterals. A price fall would render the collaterals held by the Albanian banks worthless.
Borrowing in Albanian currency still expensive
The Albanian Leku remains the most expensive currency to be borrowed compared to the foreign currencies, including the Euro and US dollar. The interest rates for three-months loans in Albanian Leku are at an all time high. Interest rates for six months loans are also very high, varying between 14 and 16 percent. However, interest rates for loans in foreign currency remain comparatively low with the Euro being the most preferred currency to loan from Albania banks.
However, borrowing in foreign currency carries the risk of instability in the currency exchange rates. The Bank of Albania continuously warns Albanians about borrowing in foreign currency if their main income is in Albanian Leku. Until now, the exchange rates have favoured the loans in foreign currency. However, no one can predict the exchange rates for the next five or ten years.
The high cost of borrowing in Albanian Leku is caused by two unrelated factors. First, the Bank of Albania has increased, several times during the past year, the repurchase rate (repo) in order to control inflation. Second, the International Monetary Fund has concluded that the cost of the intermediation in the region, including Albania, is extremely high. The cost of intermediation is used by the banks to cover their own expenses for turning deposits into loans. The cost of intermediation is represented by the difference between the interest rates on deposits and the interest rates on loans offered by the banks. The cost of intermediation for loans in Albanian Leku is nearly nine percent of the value of a loan. The cost of intermediation for loans in Euros in Albania is higher than the cost of the intermediation requested by European banks. Nevertheless, the cost of intermediation for loans in Euro is lower than the cost of intermediation for loans in Albanian Leku, in average only 5.25 percent of the value of the loan. The International Monetary Fund claims that the high intermediary costs reflect the relatively low level of competition in the Albanian banking system.
