Lending slightly accelerated to 3 percent in February 2015, up from 2.4 percent last January, registering only a slight recovery and poorly reflecting the payment of accumulated unpaid government bills to the business community which seems hesitant to reinvest the money
TIRANA, March 31 – Tight lending standards applied by the 16 overwhelmingly foreign-owned commercial banks operating in Albania and poor demand by both businesses and households continue keeping lending at moderate growth rates in early 2015. 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.
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.
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.
Latest Bank of Albania data shows lending slightly accelerated to 3 percent in February 2015, up from 2.4 percent last January, registering only a slight recovery and poorly reflecting the payment of accumulated unpaid government bills to the business community which seems hesitant to reinvest the money.
“For 2015, government plans to pay off 20 billion lek (Euro 141 mln) to clear government arrears, compared to 35 billion lek (Euro 247 mln) in 2014,” says 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.
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.
Meanwhile, deposits also accelerated to 3 percent in February 2014 despite interest rate standing at record low levels of 1.5 percent.
With average deposit interest rates hitting a historic low and standing below inflation rate, deposits are struggling at positive growth rates and the newly established investment funds are emerging as a more competitive alternative in investing savings due to due to higher interest rates compared to traditional bank deposits.
“While these funds have helped diversify the ownership of government securities, they are inadequately supervised and regulated, invest mostly in longer-dated securities and their clients appear to consider these funds as substitutes for bank accounts,” warns the IMF in its latest report.
Central bank data show the deposit growth slightly accelerated to 2.9 percent in 2014, up from 2.1 percent in 2013, but down from 6.3 percent in 2012, and 11.7 percent in 2011, unveiling consumers’ downward trend.
