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Albania’s banking sector: Facts & Figures

Updated December 2020 – For earlier editions of Facts & Figures click here

Economic growth for the year 2019 in Albania has slowed down to 2.9%. The lower growth relative to the trend growth of the previous years is due to lower growth in exports of goods and electricity production as well as due to slower pace of major energy projects with foreign financing. Economic growth this year has been supported by robust private consumption and faster growth of service exports. The positive contribution of service exports as a share of GDP has been increasing for several years, offsetting the shortfalls in some other sectors of the economy. Inflationary pressures have remained low following weak price growth of tradable goods and commodity prices at global levels.
The lower pace of economic growth has slowed down the process of fiscal consolidation while the current account balance and labour markets have further improved. A positive primary fiscal balance of 0.2% of GDP was about 0.4 percentage points lower than the previous year. On the upside, the lower primary surplus has allowed a greater contribution of fiscal policy on aggregate income. The improvement of current account is attributed to the positive trend in service exports while a further decline of the unemployment rate to an historic minimum of 11.4% follows the positive trend observed in labour markets since 2016.

The Albanian banking system underwent further consolidation during 2019, a process initiated in the earlier years of the decade. Of the 14 banks operating in Albania in 2018, a small foreign bank was absorbed by a domestically owned bank while another one had voluntarily liquidated. The number of banks operating in Albania at the end of 2019 fell to 12. Similarly, the number of bank branches is 429 or slightly fewer than the 447 branches present in 2018. Following these changes, the origin of bank capital has shifted towards domestic ownership. As of end 2019, four banks making up for around 29% of the banking system are domestically owned. Yet the banking activity has slightly expanded. At the end of 2019, total assets of the banking system were 1,475.6 billion Lek or about 1.5% higher than at the end of 2018. Partial euroization of the banking system’s balance sheet and slight appreciation of the local currency in 2019, have had a negative effect on the growth rate of bank intermediation measured by assets. After accounting for the impact of the exchange rate, the total assets of the banking system expanded by around 2.2%. In terms of GDP and after taking into account the effect of appreciating local currency and the partial euroization, the banking system assets of 96.1% at the end of 2019 have not changed relative to 2018.

The consolidation of the banking system has not slowed down the financial activity of banks in 2019. While the statistical figures show a decline in credit to the private sector by the banking system, two main developments overshadow the extension of credit by the banking sector, write-offs and a slight exchange rate appreciation in 2019. Total credit extended to private sector has declined by around 0.6% on an annual basis, or around 3.3 billion Lek. As the local currency showed an appreciation of 1.3% at the end of 2019, the impact on the stock of credit to the private sector, around half of which is in foreign currency, wiped out an amount of outstanding credit approximate to that observed in the decline in absolute value. In the absence of exchange rate appreciation, the outstanding stock of credit would be flat. Furthermore, write-offs account for around 3% of the outstanding stock of credit. In the absence of this second development, credit extended by the banking system to the private sector would account for around 3% annual growth of outstanding stock.

The financial soundness indicators of the Albanian banking system have improved all across the board. The capital adequacy ratio of 18.3% as of end 2019 is 0.4 percentage points higher than in 2018 and way above the minimum requirement of 12%. The ratio of liquid assets to short-term liabilities of 49.4% at the end of 2019 is 3.2 percentage points higher than in the previous year and more than twice as high as the regulatory minimum of 20%. Two profitability indicators, RoA at 1.4% and RoE at 13.4% as of 2019, are slightly higher than in 2018. The non-performing loans’ ratio (to outstanding credit) declined by 2.7% compared to the year before reaching, 8.4% end 2019. The persistently strong capital adequacy and bank soundness indicators emit strong signals about the financial soundness of the banking system in terms of capitalization, liquidity and asset quality.

The non-bank financial institutions (NBFI) and savings institutions (SI) have expanded their activity in year 2019 in terms of the number of licensed subjects and their assets. With the licensing of two more NBFI and one more SI there are 32 NBFIs and 14 SIs operating in Albania as of end 2019. They have expanded their assets to 4.5% of GDP, a steady increase compared to 3.8% of GDP in 2018 and 3.2% of GDP in 2017. These non-bank financial institutions are becoming positive contributors of financial intermediation although currently at a small scale.

Contributor: Altin Tanku atanku@bankofalbania.org