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An Analysis of the Nonperforming Loans in the Albanian Banking System

An Analysis of the Nonperforming Loans in the Albanian Banking System

“It is clear that Albania is affected by a high level of nonperforming loansi ”, said Michael Edwards responsible for operations in the financial sector of the World Bank. The aim of this study is to contribute to the treatment of a current and interesting topic like the nonperforming loans in the Albanian Economy which have been increasing in the recent years. 

The weight of nonperforming loans to the total number of loans in the Albanian banking system is worrying because it shows that individuals and businesses have difficulties of payments, thus increasing the risk of the whole economic system of our country. 

Speaking of nonperforming loans means treating a very current and rumored problem for the Albanian economy. This is why briefly is presented the meaning of the nonperforming loans and mostly concentrate on analyzing the factors that led to the increasing number of these loans. 

Nonperforming loans were one of the most serious obstacles that banks in the transition countries faced. They are still present in many transitional places. If in the first period of transition the causes of nonperforming loans were mainly in the inefficiency of state owned banks and enterprises, now the attention is more focused on the micro and macroeconomic environmental factors where banks operate. 

1. Non-performing loans in Albania from 2009 – 2012 

A simple definition of nonperforming loans: A loan which does not provide incomes anymore and: (1) full payment of the principal and interest is not provided, (2) their payment is 90 or more days late, (3) the maturity date has passed and the payment has not been completed. 

According to experts a loan is considered non-performing when the person or the entity that has obtained it at the bank becomes a problem for its repayment. At the beginning they are the daily delays, then they become weekly and monthly ones. 

In such cases banks are obliged to inform customers many times, they are even forced to impose “fines” which are added to the monthly amount they have to pay based on the set percentage for the loan. The nonperforming loans have been increasing in the recent years. 

However the accelerated level growth of nonperforming loans in the banking system remains a major problem for the economy as well as a main threat for the banking system in the years to come. According to the Supervisory report of the Bank of Albania during 2009 the nonperforming loans arose. 

The nonperforming loans have had a rapid increase and the loan portfolio quality deteriorated significantly. According to the report the nonperforming loans by the end of December 2009 resulted in 86.7 million ALLii. 

Where, according to experts this sum is really concerning. The numbers for the 2010 are still problematic. The loan’s portfolio should be monitored nearly all the time. 

The loan’s portfolio quality will deteriorate as a result of internal factors, as well as a result of problems that could be imported by the Greek economy developments, where many workers in agricultural and tourism field are Albanian immigrants who bring a considerable contribute in the remittances level in Albania. 

These developments will naturally affect even the income base. The nonperforming loans for the 2011 have nearly reached 18.8%. This figure shows a continuous increase in these loans number. However the Governor of the Bank of Albania said that a significant part of nonperforming loans is covered by collateral which reaches about 85%. 

Nonperforming loans for the first quarter of the 2012 reached the amount of 20.1 %. Comparing it to the first quarter of 2011 where the level of these loans reached 14.4% so we see that from year to year we have an increase of about 6%. 

However in order to cope this situation the bank should increase its reserve funds, so assure more hardened money, less given loans and higher interest rates. 

The increasing number of nonperforming loans is a real evidence of the difficult economical conditions that businesses and the customer are going through. Even though banks after the crises appearance have been trying to tighten the loans giving through increasing the interest rates for the loans, they have still been having an increasing trend. 

2. The factors that have influenced the nonperforming loans in Albania 

The situation of the nonperforming loan is concrete in Albania. It is known that these loans have been growing year after year. And the question rises spontaneously. Which are the main factors that made this situation happen? 

The banks have identified the main factors that brought the rapid increase of these loans, starting from the problems caused by the economic crisis, the decline of the incomes coming from emigration up to the reduction of incomes as a result of individuals being fired from their work. 

Noticing that the deposits and exports are growing and that the country is having a positive development, the only indicator that is not recovering is that of the nonperforming loan. Its increase has been continuous, starting from the end of 2008 when the country started to suffer the consequences of the economic crisis. 

Even though it seems that the economic situation is recovering, the number of the nonperforming loans is still high. First of all, this situation affects the financial performance of the banks. Secondly, it puts them aside regarding the delivery of loans. 

The falling number of loans are: standard loans, are counted as being 1 to 30 days late, but the quality loan too, the one that includes the standard and the proceeding loan (the latter being classified as such after a delay of 3 months) has decreased. 

Since the value of the good loans is falling, the nonperforming one is increasing. All the three categories of the nonperforming loan, substandard (180 days of delay), doubtful (365 days of delay) and lost (above 365 days of delay) have been continuously increasing. 

The rapid increase of lost loans is problematic, that of the ones about which the banks do not hope to recover and the fact that they will be endangered. 

In order to understand the increase of these loans we must examine the factors: Firstly, the consequences of the economic crisis, which have affected the business sales and the addition of liquidity problems, what affects the economy as a whole. 

This inconvenient situation in business, despite of conditioning the lack of returning the money to the banks, has been transferred to the individuals as well. The loss of the workplace and the reduction of working hours are the main factors identified as responsible for the increase of the nonperforming loan. 

Another cause is related to the decrease of income coming from emigrants. The change of the value of the country’s currency automatically increased the payment of those who paid loans in euro and worked with ALL. 

But except the consequences of the crisis, there have been other reasons that have affected the growing number of problematic loans, such as banks being aggressive, especially regarding the loans in mortgages with cheap interest rates. 

The providing of non-studied loans is having consequences now. On the other hand, a few years ago, there wasn’t a loan register. This causes the situation where individuals and businesses have taken more than one loan, without being able to pay it. 

Even the businesses that before the crisis intended to expand are suffering the results of their nonstudied decisions. The main reasons of the nonperforming loans growth are as follows:

General reasons : 
  • The economical crises consequences; 
  • The currency depreciation; 
  • The ownership problems; 
  • The high costs of re - financing. 
Businesses Reasons : 
  • The slowdown in the construction sector; 
  • The unstudied expansion of businesses; 
  • The general lack of liquidity in the market; 
  • The liquidity problems that go from one business to another as a chain; 
  • The exports’ contraction; 
  • The sales decline as a result of the purchasing power reduction; 
  • The loans overload. 
Individuals Reasons : 
  • The remittance decline; 
  • The interruption of the employment relationship, especially in the private sector; 
  • The reduction of personal and familiar incomes; 
  • The unreliable incomes certificates; 
  • The high rate of unemployment; 
  • The slow pace of wage growth. 
What measures should be taken in order to manage these nonperforming loans: 
  1. A reform in the banking system is needed. It should manage the structures responsible for the permition of loans. 
  2. The Bank of Albania should offer some training for the loans officers, who being busy with their files do not have the time to be trained individually. In the USA, banks offer 15- 30 days of training every year. 
  3. The Bank of Albania should organize classes for the loan officers by establishing a training centre. Years ago a similar centre existed and it gave classes for the banks’ employees. These courses were not just based on loan providing but in general aspects of banking. 
  4. We should be careful with the providing of new loans. If they are proper loans, the quality of the loans portfolio will improve gradually. So despite of the situation, the loan process in banks should not be stopped. 
  5. The loan officers should conduct controls in the companies at least once a year. This control should help for a better understanding of the situation in order for the banks to take measures for the payment of the loan. 
  6. The banks should compile and improve the manuals of loans to make these manuals a complete document that can be followed by the loan officers. They should provide the introduction of the new services that the bank offers, as well as concrete situations in our country. These procedures will prevent the allowance of nonperforming loans. 
  7. Regarding the individuals that buy houses, they should be very strict in relation to their work stability. They should be conservative in relation to seasonal workers and individuals that have unstable jobs. 
  8. These are the measures that should be taken but the most important aspect is, how serious will the banks be in dealing with this situation, because this ratio (nonperforming loans/total loans) is very serious.
Bona Pasogit
Bona Pasogit Content Creator, Video Creator and Writer

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