TIRANA, July 4 – Fuelled by historic low interest rates of below 1 percent, deposits have turned to negative growth rates for the first time since late 2008 at the onset of the global financial crisis when savers made panic withdrawals also worried over the health of banks in neighboring Greece, whose Albania subsidiaries held about a quarter of assets in the country’s banking system at that time.
Central bank data shows deposits dropped by a slight annual 0.1 percent last May when average interest rates for lek-denominated savings dropped to an all-time low of 0.84 percent and remained at a historic low of 0.18 percent for euro-denominated deposits.
The sharp decline has been triggered by consecutive cuts to the key interest rate by the country’s central bank and the European Central Bank in an effort to boost sluggish consumption and prevent deflation following a slump in oil and food prices.
The key interest rate for the Albanian lek currently stands at a historic low of 1.25 percent and at zero for Europe’s single currency.
Since December 2015, Albanian savers have withdrawn about 12 billion lek (Euro 87 million) in deposits from the country’s commercial banks as deposit rates remain only slightly above the average inflation rate of 0.6 percent for the first five months of this year.
However, the deposit withdrawal has not been accompanied with the expected boost in investment and consumption, two of the key drivers of the Albanian economy, which remain at sluggish growth rates, due to ongoing perceived uncertainties by both households and businesses.
Arjan Kadare, a financial expert, says a slowdown in household income has also influenced on the deposit decline.
“It is a fact that wages, the main source of disposable income, have only slightly increased or stagnated. When interest rates are at this low levels, households seek other investment alternatives such as government securities or investment funds and can keep part of the savings in cash,” he says.
Deposits in the Albanian banking system grew by only 1 percent in 2015, the lowest growth rate since the outbreak of the global financial crisis in 2008.
With the economy struggling with poor growth rates of slightly above 2 percent and interest rates at a historic low, investment opportunities for Albanian savers have considerably reduced, turning them to risky investments such as informal lending and online stock trading.
The country’s highest financial authorities have warned Albanians to be careful with online trading in international stock exchanges, describing such investments as highly risky, especially if offered by unlicensed operators and used by investors lacking appropriate knowledge.
While traditional bank deposits struggle to remain at positive growth rates due to a sharp cut in interest rates, the emerging investment funds continue registering moderate growth rates fueled by more favorable interest rates although at slower pace compared the boom following their establishment in 2012.
However, a sharp decline in government securities yields has considerably waned interest in the emerging investment funds following their rapid growth in their first three years of operation as a more profitable alternative to investment in traditional bank deposits.
Starting this year, Albania’s deposit insurance scheme has been extended to also include deposits by the business community. The new legal changes have included some 130 billion lek (€917 mln) in the insurance scheme covering deposits of up to 2.5 million lek (€17,700). The amount accounts for 13 percent of total deposits and 6 percent of the total number of depositors in the Albanian banking system.
As elsewhere in the region, Albanian banks witnessed substantial panic deposit withdrawals in the face of spillovers from instability of global financial markets, which were compounded by concerns about the health of the Greek banking system in the fall of 2008. Ample liquidity buffers were utilized to meet deposit withdrawals. To boost confidence, deposit insurance limits were raised fivefold to 2.5 million lek (€17,800), and deposits started to recover from the second half of 2009.
Deposits denominated in the national currency slightly dropped to 48.7 percent at the end of 2015, says the country’s central bank. Bank credit in Albania is largely funded by deposits, but has been struggling to turn to positive growth rates in the past year due to high levels of non-performing loans and poor demand by both businesses and households despite a sharp decline in interest rates.
The minority 4 percent of Albanian savers continue dominating more than half of total bank deposits, the Deposit Insurance Agency says in its 2015 annual report. By contrast, the remaining 96 percent of savers hold only 42 percent of total deposits. These fully insured deposits of up to 2.5 million lek (€17,900) are held by about 2 million depositors with the average deposit at only 181,524 lek (€1,291).
