Five Steps to Continue the Improvement in the Albanian Financial Sector
By By Mark Crawford
Albanian Daily News
Published July 13, 2015

Last year, during a challenging period for the domestic financial sector, I outlined five areas as important for stakeholders to review: the development of the credit bureau, the review of bank shareholder suitability, increased licensing of non-bank financial institutions, increasing access to capital markets and increasing access to risk capital funds. 

Today, in most of these five areas, we have seen some positive steps in comparison with a year ago; however, the region is again dealing with threats of economic crisis with the Greek credit default.  It is worth reviewing all five areas to determine what needs to be done to protect the Albanian market and continue progress.

First, the review the suitability of all 2nd tier banks according to their current financial and ethical capacity to meet 'fit and proper' standards remains a priority.  Given the tenuous state of the banks in neighboring Greece it is important for the Central Bank to actively protect this market both in terms of paid in capital required and public perception.  Albanian banks must not to be reliant on weak shareholders, especially those who have a poor commercial track record and now have little to no additional funding to support a bank in times of such crisis, such as the Balkan Financial Sector Equity Fund. 

It is important that the Central Bank require such shareholders to reduce their ownership positions below five percent or even ask such shareholders to exit the market.  At the same time, even when shareholders are strong, there are a number of mid-level and smaller banks that could use the injection of new ideas, management and direction in order to have an impact on the market.  One positive step in this area has been the Central Bank's approval of the acquisition of Credit Agricole's Albanian operations by the American investment fund, NCH Capital (via their affiliate Tranzit Finance).  While Credit Agricole is a fantastic group, the entrance of an American owner backed by a multi-billion dollar fund will help diversify the sector and bring new product ideas to the market.

Second, the Central Bank has had some positive developments increasing non-bank financial institution activity.  The Central Bank has successfully licensed new lending firms and licensed Vodafone's M-Pesa mobile wallet.  Steps taken by the Albanian Post Office in order to offer a complimentary service or become a payment aggregator for already licensed entities, like EasyPay, M-Pay and M-Pesa would also be welcomed.  More activity in this sector is welcome in so far as these institutions are non-leveraged and only aid in increasing the velocity of money within the country and/or allocating credit efficiently in niche areas often neglected by the banking sector. 

Third, assisting the Central Bank to develop the Albanian Credit Bureau would be a major step forward.  Non-Performing Loans in Albania continue to remain high.  The IMF and Ministry of Finance continue to make the reduction of NPL a clear priority.  Developing the credit bureau would allow the entire sector to move forward with modern risk analytics, such as provided by California's FICO (formerly FAIR ISAAC), the oldest credit risk management company in the world.

Fourth, the next untapped field of development remains the capital markets sector.  Though the FSA is very active with the insurance market and has seen a local bank develop a domestic debt fund, almost nothing significant has developed within the capital markets sphere.  Quite simply the market is too small to get the economies of scale needed for stand-alone initiatives and the dormancy of the Tirana Stock Market reinforces this point.  Additionally, we see that domestic pension funds have approximately 5 million EURO of combined assets and even those funds are generally restricted to investment in domestic treasury bills, also reinforcing the difficulty of emerging, smaller markets to develop stand-alone investment initiatives. 

Unfortunately, the most active 'capital markets actors' are companies that operate in Albania as call centers, soliciting investors into high risk investments (perhaps following a Wolf of Wall Street model) - though many of these companies actually target non-resident, foreign clients and fall outside of the FSA's authority.  What Albania needs is access to diversified global investment options that give diversified options not only to the rich but also to younger investors that want to take advantage of the time value of money concept by investing small amounts over time. 

It may be time for the Financial Services Authority to begin to 'passport' license major international capital markets firms to work in Albania.  Additionally, the concept of tied-brokers is not the norm in developed countries.  The FSA should abandon the misguided idea that brokers work as tied agents and allow brokers to work with EU regulated firms across the board.  By giving Albania greater access to standard capital markets products this sector might get the kick-start it needs.

Fifth, Albania should revisit the idea of partnering with Israel to create a 'Yozma' like investment environment, coupling some public funds with Israeli private equity management.  The University of Navarra's IESE Business School's publishes 'The Venture Capital and Private Equity Attractiveness Index'.  The 2015 Index ranked Albania at number 105 out of the 120 countries, below Zimbabwe and Rwanda.  With such a ranking it is clear that attracting risk capital is a challenge, so it would make sense to use a public-private partnership to spur cooperation with the Israelis to leverage off of their know-how in attracting and deploying risk capital.

The current environment continues to beg for change, so it should be used to its fullest potential.  The impact continuing to focus on these five areas would ensure the suitability of traditional bank shareholders, enable more non-leveraged financial institutions, improve the credit bureau, expand investment options and enable venture capital.  Albania needs good news in the financial sector and these steps help deal with current challenges as well as look toward the future. 

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