TIRANA, May 5 – Lending to the economy slowed down to 2.2 percent last March as interest rates on loans denominated in the national currency underwent a surprise increase unveiling the poor transmission of the central bank’s monetary policy which since late January 2015 has kept the key interest rate at a historic low of 2 percent.
Latest Bank of Albania data shows interest rates on lek-denominated loans rose to 8.25 percent last March, up from 8.02 percent last February and 7.96 percent in March 2014 when the key interest rate stood at 2.75 percent.
Non-performing loans at around a quarter and poor demand for new loans as the economy struggles with growth rates of around 1 to 2 percent as well as sluggish consumption and private investments are considered the key barriers to a recovery in credit, experts say.
Bank of Albania governor Gent Sejko says lending continues remaining sluggish as a result of tight lending standards applied by commercial banks despite the banking system remaining solid, liquid and well-capitalized.
“Lending is expected to undergo only a slight improvement in 2015 but the Bank of Albania expects the banking system to play a more active role in lending and will take the necessary measures for its promotion,” Sejko has recently said in a joint press conference with the IMF and the finance ministry.
Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.
After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 and shrank by 1.25 percent in 2013 as bad loans hit a record of 24 percent.
Interest rates on euro-denominated loans, which account for around 60 percent of the total lending, have also registered a slight decline as the European Central Bank has kept its key rate at a historic low of 0.05 percent since September 2014. Average interest rates on Euro-denominated loans slightly dropped to 6.28 percent last March, down from 6.34 percent last February and 6.93 percent in March 2014 and a record low of 6.12 percent last December, says the Bank of Albania.
Meanwhile, interest rates on US dollar-denominated loans, which account for around 10 percent of the total loans to businesses, dropped to a historic low of 4.16 percent, down from 5.21 percent last February and 6.93 percent a year ago as the Albanian lek continued losing ground to the USD.
With interest rates standing at historic lows and considerably below inflation rate, deposits also slowed down to 2.55 percent last March amid competition from the newly established investment funds which are emerging as a more competitive alternative in investing savings due to higher interest rates compared to traditional bank deposits.
Interest rates on 12-month lek-denominated deposits dropped to 1.46 percent last March, down from 1.57 percent last February and 2.16 percent a year ago, standing below inflation rate which hit 2.2 percent last March, making bank deposits one of the least attractive investment opportunities.
Interest rates on 12-month Euro-denominated deposits dropped to a historic low of 0.41 percent and slightly rose to 0.52 percent for USD-denominated deposits.
The easier monetary policy the central bank has been following by cutting the key interest rate to a historic low of 2 percent has considerably promoted lending in the national currency, but interest rates remain at around five times higher compared to deposit.
The situation is rather strange as the banking system continues remaining liquid, well-capitalized and profitable and the bank credit is largely funded by local deposits with the loan-to-deposit ratio estimated at around 55 percent.
