Informal borrowing among households rises to 60%, survey shows

The Bank of Albania survey shows that three out of five households in need address friends and relatives as well as local groceries where they buy on credit usually in interest-free informal borrowing.
TIRANA, Oct. 8 – Tight lending standards and high interest rates in the banking sector are forcing more and more Albanian households in need to address informal borrowing, a survey conducted by the country’s central bank has found. The survey with around 2,000 Albanian households nationwide found that the number of Albanian debtor households who addressed informal borrowing rose to 60 percent in the first half of 2014, up from 55 percent in the second half of 2013. The survey shows that three out of five households in need address friends and relatives as well as local groceries where they buy on credit usually in interest-free informal borrowing.
Businesses have also been turning to informal channels after being classified by banks as unreliable borrowers as band loans stand at around 24 percent. Local media report construction companies, to which government still owes hundreds of millions of Euros for finished public works, are the most engaged in informal borrowing whose interest rates range up to 5 percent compared to an annual 10 to 12 percent in banks. In crisis since the onset of the global financial crisis and facing liquidity problems the construction sector has been widely using the bartering practice which involves the exchange of goods or services with other goods or services, rather than with money.
Some 29 percent of the surveyed households reported having at least one loan to pay during the first half of this year while 55 percent, a decrease by 3 percent compared to the final half of 2013, reported monthly income between 17,000 to 50,000 lek (Euro 120 to 351).
One out of three households (some 34 percent) said they borrowed to purchase and repair real estate and 32 percent to finance consumption.
Self-employment accounts for 27 percent of household income, followed by pensions with 26 percent, employment in the private sector 25 percent, public administration 10 percent and migrant remittances with 5 percent.
Debtor households reported a deterioration in their repayment ability in the first half of 2014, citing the drop in income and an increase in their cost of living as the key reasons.
As far as businesses are concerned, the Bank of Albania survey with around 700 enterprises nationwide showed a decrease in sales and profits for the first half of 2014.
The number of businesses reporting at least one loan to pay dropped to 53.6 percent, down 5.2 percent compared to the final half of 2013, with Euro-denominated loans accounting for the majority, showed the survey.
Facing financing difficulty and considering loan interest rates high, an overwhelming majority of 85 percent of surveyed businesses said they did not plan to borrow in the second half of 2014.
Despite non-performing loans at around a quarter, prospects for the second half of 2014 appear more optimistic after lending has returned to positive growth rates following a negative 2 percent for almost one year.
Lending further recovered to 2.2 percent year-on-year in August 2014 after overcoming a 12-month moderate decline only last July, positively reflecting the easier lending standards are applying. The recovery also reflects the moderate decline in interest rates, especially on loans denominated in the national currency as the key interest rate stands at a historic low of 2.5 percent.
Average interest rates on lek-denominated loans dropped to 8.43 percent in August 2014, down from 8.58 percent last July and 9.48 percent in August 2013, positively reflecting the consecutive cuts to the key interest rate by the country’s central bank. Meanwhile, average interest rates on Euro-denominated loans dropped to 6.51 percent in August 2014, down from 6.81 percent last July and 6.98 percent in August 2013.
Lending in the national currency continued gaining ground in 2013 when it increased its portfolio to a historic high of 37 despite total lending to the economy registering a slight decline.
Since September 2011, the country’s central bank has cut the key interest rate in eleven consecutive moves by 0.25 percent each time to a historic low of 2.5 percent, but the moves have mostly been reflected on lower interest rates for lek-denominated deposits and T-bill yields, which have almost halved during the past year, while interest rates on lek-denominated loans have registered only a slight decline.