Bad Loans Essay In Albania

This echoes to the reflexion we had over a previous essay. are the increasing educational fees fair? #pol241 �

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October 2014

Non-performing loans (NPLs) in Albania have reached scary figures, up to 25%.  This means that one fourth of loans issued by private banks in the country are problematic and have entered in that category of loans which are hard to be paid back.

Officially Bank of Albania has confirmed that “in the second quarter of 2014, non- performing loans in banks’ portfolios in Albania is 23.9% or 69 billion ALL (670 million USD). According to these figures, from 2008, there’s been a progressive increase of 6.7%. This way, percentage of NPLs in Albania is one of the highest in the region.

But, experts of the Confederation of Industries in Albania say that “in absolute value, there are over 1 billion Euros worth of NPLs and half of them have been reported as lost in the first half of 2014”.

These loans are a serious obstacle for the development of the national economy in Albania. On the other hand, the growing percentage of NPLs has had a negative impact in banks’ earnings, capitalizations and their ability to offer other loans in Albania.

World Bank and IFC express their concern

World Bank says that the percentage of NPLs in Albania has seen a progressive rise. International Financial Corporation (IFC), part of the World Bank Groups, also shares the same concern. Therefore, it has decided to assist Albania by launching a program to improve the system of the payment ability in Albania. IFC program for the Solution of Debt is expected to reduce lending risks and increase the level of borrowing in the country.

“The expected result of the program is to make Albanian debt resolution system more efficient by improving the insolvency frameworks and practices, which will lead to a strengthened avenue for NPL prevention and resolution, increase returns to creditors and protect economically viable companies”, – said Mahesh Uttamchandani, IFC’s Lead Private Sector Development Specialist.

 Companies don’t pay their debts, creditors fight

Notwithstanding the high level of NPLs, the Albanian Bankruptcy Law from 2002 has scarcely been used. There is a consensus at the market that the insolvency proceedings envisaged by the law are too complex and burdensome; it takes 525 days to enforce a contract following 39 procedures or 2 years to resolve insolvency – according to the latest Doing Business report.

Also, there are few qualified professionals to implement the legislation in Albania, and the lack of awareness among the business community and some of the key players, such as lawyers and judges.

As a result, instead of seeking restructuring, companies simply stop repaying their debts and close operations, with no legal remedies being used. Consequentially, creditors struggle to recover their funds.

The only mechanism of recovery is via individual legal actions, which are hampered by a poor enforcement system in the courts and outdated civil procedure rules.

Dr. Civici: Trade and construction are at risk

Economy expert, Prof. Dr. Adrian Civici, former member of the Oversight Committee of the Bank of Albania, says that construction and trade are mostly affected by the risks of NPLs. The concern grows taking into account the fact that these are two of the most vital sectors of the economy in Albania.

Civici is against the reduction of lending. According to him, “if the pace of new loans is slow, then non performing loans will continue to increase in percentage”.

The economy professor advices the government to seriously evaluate this issue. He suggests negotiations with lending institutions in order to give way to restructuring of NOLs.

Konfindustria:Development of national economy is being slowed down

Confederation of Industries expresses its concern about the fact that NPLs occupy 25% of the general portfolio. Gjergj Buxhuku, general administrator of Konfindustria says that this figure marks an all time high. “The increase in the level of NPLs shows that the economy continues to face difficult conditions. On the other hand, it also shows the inability and the subjectivism of the banking system to support the economic development of the country”. Konfindustria advices the government and political class to cooperate with the World Bank and assess as soon as problem the problems concerning the banking system.

Mrs. Buxhuku raises one concern. He comments the fact that while lost loans have increased a lot, earnings from the banking sector continue to rise.

“It’s unacceptable to think that while NPLs reach an all time high and lending for several years in a row is almost zero, earnings of the banking sector for the same period of time have amounted to an all time high of 5,7 billion ALL”.

Mr. Buxhuku believes that the problem also relates to the monopoly situation in banks. “The monopoly position of the banking sector in the financial market of the country, along with the inability of government policies to achieve the necessary level of competition within the banking sector, are the main causes of the current unsatisfying situation”.

Prof. Malaj: NPLs stimulate the crisis

Former minister of Economy and Finance, Arben Malaj, one of the best experts of economy in Albania, says that the consequences of NPLs include all institutions and the public. He says that if this problem is neglected, the country may head toward a crisis.

“We find ourselves in the highest level of NPLs. In this situation, all chances should be seized to act and the government’s contribution must be included here”, suggests Mr. Malaj.

But, Mr. Malaj sees the situation and financial problems in the country from a wider perspective: “Albania has a high public debt. At the same time, NPLs have increased along with the NPLs that public companies owe or budgetary entities owe to private companies. Albanians can feel and do not conceal the fact that debt among them has increased too, when they do business or when they deal with each other”.

Dr. Malaj warns that if this phenomenon is not stopped, the costs for the economy will be high and there may be extreme scenarios.

“If you look at the countries that are in crisis today, a part of them have reached that point because they have underestimated the crisis of NPLs. Not only public debt, but also the debt that private subjects owe to each other or to the banking sector of their country. When economic growth has been based on the rise of the debt of citizens or companies, bankruptcy has been unavoidable”, says Mr. Malaj.

But, how can this situation be analyzed? For the former minister of Finance, the solution initially goes through the state budget. The expert suggests a full analysis of the banking system. “NPLs must stop starting with the state budget. Then, there must be a full analysis of the banking sector of the country. Ways must be found to relieve businesses from the overburden cost of loans and the lack of an option to restructure loans. Banks must collect NPLs, but not by blocking new loans. Thus, this is a professional possibility which may lead to a solution path”.

‘Take whatever you can’ is the principle of private banks

Bad loans exist not only among businesses, but among individuals too. Many people have borrowed, but have no money to pay back in time. Banks initially followed the legal way, because the number of debtors was low and the number of NPLs was minimal.

But in the recent month, a new phenomenon is taking shape. Some banks are practicing the so called offers. Erion, a 36 year old from Tirana, who up until a year ago used to work as a bar manager, says: “I borrowed 8 thousand Euros from the bank. I was on time with the installments in the first two months, but then I had no work. It was very hard to pay the third installment, two weeks late and as far as the fourth one is concerned, there was no way I could pay it. Three months had gone by when I received a phone call from the bank to offer me a settlement. They proposed me to pay half of the 7 thousand Euro loan that I had remaining and the loan would be considered paid. It looked like a good deal, but I was skeptic. When I learned from friends that they had received such offers too, I rushed to borrow the amount from a friend and paid what they asked me”.

Why are beings making deals with customers

Private banks are very cautious in providing information for the media. What’s  more, they don’t want to talk about the strategies that they follow to reduce NPLs. IBNA talked to a loan analyst of a German bank that operates in Albania and several other Balkan countries.

He explains the reasons why such agreements are made with debtors, while he refuses to conform if they are made with businesses.

“It’s been at least three years that the number of non paying debtors has increased. Not only businesses, but individuals too. It’s surprising to see how rules for loans in Albania are much more stringent than in the European Union. Nevertheless, problematic debtors have increased a lot. If we used to leave everything to the courts before, now we’re trying to come to an agreement with customers. It’s true that we offer a reduction of the amount that must be paid, but our calculations indicate that this is more than normal. If we continue with court and bailiff procedures, which often lead to social drama, our assets will be sold at auction at a low value. If we add all the costs and years of delays, then the return on the loan shrinks to the extreme”

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