Bankieri No. 14 - January 2015

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Bankieri

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Bankieri

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Content

Bankieri No.14, January 2015 Publication of the Albanian Association of Banks

Editorial Team:

Editorial Electric energy From Carpe Diem philosophy to the reform’s mentality! 5 Elvin MEKA Frontline The Energy Sector Challenges from a banking perspective and possible ways out Klaida ÇEKREZI (EMINAJ) The energy sector recovery has taken off Damian GJIKNURI Journalist corner The electricity price hike and solutions for bridging the energy gap in Albania Mirilda TILI

energy

Costs, benefits, opportunities.

Bankieri is the official publication of Albanian Association of Banks which mainly focus the Albanian banking industry. Bankieri provide readers with valuable information on the financial industry’s developments in general, and of commercial banks in particular.

Albanian Association of Banks Street ‘Ibrahim Rugova’, SKY TOWER, 9/3, Tirana Tel: ‘+355 4 2280371/2 Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

Banker's stage From a different angle Creative thinking - The lost Atlantis!

Savvas THALASSINOS

Printed by:

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Banking System The Comprehensive Assessment towards the European Banking Union 14 Roberto RUOZI Necessity and momentum for internal audit standards 17 Stavri PASHKO Experts’ Forum The challenges of transfer pricing Olindo SHEHU Corporate bonds A reality and potential for the future Enkeleda SHEHI, Flora MUSTA Primary Dealers A (known) idea for the development of the securities market Niko KOTONIKA, Erjon TAÇE Economist Corner Currency war A myth or just a troubling reality?

Adrian CIVICI Social capital Banks' activities Information security zone Information Security Governance in Bank’s organizational structures Maks LEKSANI Financial Auditorium (Bad) Loans' Sale, a mechanism which creates added value for banks Evis ÇELIKU AAB AAB Trainings 2014 AAB Trainings 2015 AAB Activities

Elvin Meka Editor–in-Chief Eftali Peçi Coordinator Junida Tafaj (Katroshi) Collaborator Andis Rado Photographer Design & Layout: PIK Creativ

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Editorial Board: Seyhan PENCABLIGIL AAB Chairman & CEO of Banka Kombëtare Tregtare Gazmend KADRIU AAB Vice Chairman & CEO of Union Bank Christian CANACARIS AAB Executive Committee Member & CEO of Raiffeisen Bank Albania Periklis DROUGKAS AAB Executive Committee Member & CEO of Alpha Bank Albania Frédéric BLANC AAB Executive Committee Member & CEO of Societe Generale Albania Bozhidar TODOROV AAB Executive Committee Member & CEO of First Investment Bank Endrita XHAFERAJ Secretary General, Albanian Association of Banks Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IEKA) Adrian CIVICI President & Head of Doctoral School European University of Tirana Spiro BRUMBULLI Chief of Cabinet, Ministry of Finance Enkeleda SHEHI Chairwoman of Albanian Financial Supervision Authority

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Për më shumë informacion na vizitoni në një nga degët tona ose në faqen tonë të internetit http://www.nbgbank.al

Editorial

Electric energy

From Carpe Diem philosophy to the reform’s mentality!

During the last two decades, the sector has never experienced a true reform; instead it has suffered much from creative policies and a Carpe Diem philosophy. So, an all-embracing reform for the energy sector is therefore indispensable, urgent and mandatory, not to mention that it is one of top priorities of actual government and it has just kick started.

by Prof. Asoc. Dr. Elvin MEKA1 Editor–in-Chief

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or industry to settle in a country you first need electricity; for electricity, you need some trained workers; for trained workers, you need some schools; for schools you need some money; for money, you need some industry”. These chain-like wording by Mr. Evan Davis, the famed English economist, journalist, and presenter for the BBC, explain in a laconic way, the role and importance of electric energy. Needless to say, the energy is one of key basic needs of the everyday life, and in a broader view, the base for the entire economic development of any country.

When it comes to Albania anyone admits that the country is blessed with one the most important natural resources: WATER, which means electricity, which is energy and power, in its broadest sense of the word. Unfortunately, all such natural blessing is not converted into power and prosperity. The Albanian energetic system and its all stakeholders are, unbelievably, in a worrying financial shape, simultaneously and in concert. If there is a black hole in

the Albanian economy for sure everybody will point the finger towards the (electric) energy sector. Just like a black hole, the sector has amazingly sucked, through times, all the bad things and inefficiencies possible, like: mismanagement, strategic errors, wrong market models, political intrusion, theft, lack of investments, technology upgrade and necessary reforms, various losses, corruption and abuse, human capital waste, and surely bad debts. All these things have created a surreal landscape, full of free riders, but unfortunately many losers, like government, regular citizens, and cost-bearing entities, such as: energy producers and banks.

During the last two decades, the sector has never experienced a true reform; instead it has suffered much from creative policies and a Carpe Diem philosophy, which has dragged it and the economy into a dangerous path of existence and structural collapse. The previous short-sighted and unrealistic pricing policies, either in terms of final price for consumers or the purchase price from small hydropower plants, have challenged almost all rules of finance, accounting, risk management, governance and strategic planning, thus displacing the energy sector’s development out of market principles. An all-embracing reform for the energy sector is therefore indispensable, urgent and mandatory, not

to mention that it is one of top priorities of actual government, and it has just kick started. It is mega-surgical and normally painful intervention, as everything within the sector needs fixing, although it has created confusion, perplexity and concern, on the table of all energy-linked stakeholders, especially energy producers and banks. They both see now that their projects and investment plans must and will be reviewed and restructured, in the light of the new course of reforms within the sector. The government has a role to play, if not the key role, not for etatism, but for the sake of market economy, market player, like banks and energy producers, and above all for citizen’s well-being.

In fact, the greater the per capita consumption of energy in a country, the higher is the standard of living of its people. So far, this axiom does not hold in Albania, but the government has taken first steps in this regard, by collecting the unpaid electricity bills, as well as paying back the obligations due. This attempt goes in line with the wellknown saying of Mr. Steve King, the US Republican Congressman: “That's the key: get the constitution in place. Get rule of law in place, capital will come, electricity will follow”!

Deputy Dean & Head of Department of Finance, UET-EUT

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Frontline

The Energy Sector

Challenges from a banking perspective and possible ways out The sector can be reshaped and thrive without being a burden to public finances, rather by being a benefit to the community at large, by employing relevant prudence and careful analysis.

by Ms Klaida ÇEKREZI (EMINAJ), Manager of Project & Structured Finance Department BANKA KOMBËTARE TREGTARE

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nergy is, undoubtedly, one of the sectors which used to be continuously in the spotlight, during the past couple of years in Albania. This is so, not only for its unquestionable importance, as a driver of economy, but also due to the increased emphasis given to this sector, as regards the incentives and schemes developed, and the unfortunate serious difficulties it has encountered, during this path.

Banks have kept pace and have acted in line with market expectations and positive governmental signals on the energy sector, as a priority sector. So far, the Albanian banking system has granted a total loan portfolio of approximately US$ 500 million (October 2014) to the energy sector, thus impacting directly to a boost in investments in the energy sector,

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with a special focus on Hydro Power Plant (HPP) financings. BKT is no exception in this regard. Investing in such sector has not been and is not an easy task, considering the lack of proper knowledge of such investments, with no inherited know-how on the engineering prospective and the lending perspective as well, given the sector’s specifics. From the banking point of view, the process is fairly complicated and the difficulty is mainly inherent on the valuation of the project’s technical aspect, which is an important, if not determining aspect that goes beyond any banker’s scope and ability.

Nonetheless, if considering the banking sector, with specific emphasis to BKT’s experience, we have had a proactive role and the bank is firm in its belief that the key success factor for implementing and putting into life such projects, apart from the fact that a project must have good technical features, is the investor’s integrity, in terms of know-how and financial ability to accomplish its share of investment. This is an indispensable

condition that must be met, if projects of such specific nature are to come to light and be successful.

The immediate question which springs to mind is: “Why have banks seen this sector, at least so far, as a good potential to enter into?” Because there has always been, and ex-

The incentives should not be scrapped altogether, otherwise investing in this sector will cease. From a financial point of view, a price incentive should be in place to cover the financial cost of debt and cost of capital employed, at least for a certain period. In this way, a fair treatment is ensured for all investors in established HPPs, and they do not find themselves far away from their plans and expectations.

pectations are that there will always be, a need for energy in terms of consumption, especially green energy, as is case when using water resources.

Therefore, the demand is available; even an ever-increasing demand, considering improvements in our lifestyle. The two most important factors that have determined the influx of private and foreign investments in hydro projects in Albania relates to the two major incentives in place: a preferential treatment in tariffs and a guaranteed purchase of generated electricity for the first 15 years from the state company (KESH). This model allows feasibility and, by having a guaranteed purchase, also the stability. We shouldn’t forget that this sector has its own inherent operational volatility, caused by weather conditions, and this is especially important, given that most HPPs do not have dams or lakes, that could allow a smooth and managed water regime and performance.

There has been a debate that these undertakings are creating a burden for the public sector, however, but I prefer to see the big picture and emphasize the added values, as a final result of such investments, regulated through concessions. The final product is a production of green energy, there is a decreased dependency on imports, it means more employment, access to main roads and improved infrastructure, as another implicit benefit that often reshape communities, more taxes generated for the government, and additional power generating assets for the state to own and administer, following the 35-year concessionary period. As for the latter, the role of the state consists in conducting a continuous and strict monitoring, ensuring that the inherited asset, at the end of its concessionary life, will be productive and that investments during the asset life are completed properly, as foreseen by concessionary contracts.

The challenges encountered from the investors’ and banks’ perspective

relate to payments’ backlog in arrears, KESH owes to small HPPs. This has created liquidity problems, especially when considering the need to meet loan repayments and other operating expenses. Liquidity is crucial for a proper day-to-day operational activity, as in any other business or sector. Moreover, investors in HPPs often put additional strain to the liquidity of their investing companies that provide HPP’s working capital, to meet liabilities due.

The imminent question one will ask, especially considering the current obstacles, is: “What’s next?” I would

The final product is a production of green energy, there is a decreased dependency on imports, it means more employment, access to main roads and improved infrastructure, as another implicit benefit that often reshape communities, more taxes generated for the government, and additional power generating assets for the state to own and administer, following the 35year concessionary period.

consider two important milestones, as a way to try to better understand the process, attempting to give answers, as well: 1. Solve the current crunch by clearing the backlog of payments due to power producers, 2. Have a final standpoint/approach for the way the sector will continue to function, considering the pricing formula and the structure as a whole.

As for the first point, the new government “tightening actions” on unpaid electricity bill collections and energy debtors is a promising approach that helps in this respect, especially when a rational budgeting is done with regards to administering these “extra funds” collected and channeling part of these proceeds as payments for the energy generated by small hydro power plants.

Once this is settled, there is a need for a long-term and sustainable solution. From my personal point of view, I strongly believe that incentives should not be scrapped altogether, otherwise investing in this sector will cease, as I also believe that, if the reform is a necessity, a differentiated treatment should be applied between operative plants and new concessions.

From a financial point of view, a price incentive should be in place to cover the financial cost of debt and cost of capital employed, at least for a certain period (it is advisable, for example, to be linked with the loan maturity, which is comparable with the investment repayment period). Such treatment can be conceded exclusively to HPPs, where the investment is completed and plants are functional, or in cases when the invested quota is over a certain threshold. Should the tariff’s change be indispensable, at least it should be conducted and implemented gradually, to avoid shocks to the sector and aftermaths to the banking sector, which is directly linked to such investments. As for the newcomers, the conditions can be reviewed and incentives may be wiped out, as regards the sector’s final layout, and if investors see a business case, let them pursue it. Transparent treatment and clear arrangements are instrumental to a fair decision-making process.

The sector can be reshaped and thrive without being a burden to public finances, rather by being a benefit to the community at large, by employing relevant prudence and careful analysis.

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Frontline

The energy sector recovery has taken off The year 2015 could be considered as the year of reforms and large investments in the energy sector. As we stopped the system’s wreckage and hemorrhage, we face numerous challenges ahead, on the long road towards the improvement and full recovery of the energy system.

by Mr Damian GJIKNURI Minister MINISTRY OF ENERGY AND INDUSTRY

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he energy system of a country could be easily compared with blood vessels in the body. Energy is at the heart of social and economic activity of industrialized and developing economies, affecting every citizen in his/her daily life. A "wounded" energy system is certainly an open grave for the economy. If bleeding from blood capillaries endangers human life, the energy system’s hemorrhage is destined to take all the country's economy into the abyss. Therefore, the reform in the energy system is enlisted with painful, unpopular and very difficult reforms, but it is a must. The more irresponsible government policies toward the sector, the more difficult the reform becomes.

In about one year and a half, since the new government took office, we faced with an almost bankrupt sector, but managed to heal the most urgent wounds and kindly note now that the energy sector recovery has taken off.

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Where did we start...

The sector was found plunged into a full-blown operational and financial crisis, with mutual debts and bank loan payments in arrears. The debt chain between all operators, like: OSHEE, KESH and OST were figuring over USD 1.1 billion. The seal of unsuccessful privatization of the distribution system left its mark on the whole sector.

The Albanian state was subpoenaed in the Arbitration Court by CEZ, and therefore, the entire sector was taken hostage.

The former government did nothing for the legal defense of the Albanian interests, by losing valuable time, which almost cemented Czechs’ chances to succeed at trial. Notwithstanding "honeymoons" and acrimony between previous government and Czechs, the energy distribution system remained at an average annual losses (in 2013) level of at 45%, with only 77% payment ratio for issued invoices, whereas bill payment was at 67%. Even in an ideal situation, 100% payments and 0% non-technical loss, the system was producing an ALL 8 billion deficit. Also, the sale of five hydropower plants by the former government just deepened

the negative economic balance of the sector. The failed applied model, as well as the ill-studied concessionary agreements, with no real reflection in the cost of small private producers, made a constant contribution to the deepening of the financial crisis. The deterioration of power supply to consumers was the most obvious consequence, due to lack of investment, in a time when over 80% of the distribution network is approximately 35-40 years old, about 25% of medium voltage lines were fully obsolete and 20% of distribution trans-

The government has started to repay arrears to small power producers, and is in a dialogue process with these investors, for finding a longterm formula of price-setting that takes into account the interests of small producers, but also those of the state.

former cabins were in urgent need for intervention.

What we managed to do ...

We managed to resolve the conflict and reach an agreement with CEZ, by having also a full support from the World Bank, IMF and the Energy Community. The conflict resolution, through a transparent process, paved the way for so-much needed investments and bringing serious foreign investors.

Also, the government managed to finalize successful negotiations with the World Bank for financing a USD 150 million project for the energy sector recovery. Such funds will be used for investments in the power distribution network, aiming at reducing losses and improving power supply, across the country. Investments will be focused on those regions and areas that have greater power consumption, such as: Tirana, DurrĂŤs, Fier and Vlora. The government is committed to reduce losses within the distribution sector by 5% annually, with the target of 15% by end-2019. The management approach of electricity sector companies was transformed, with the aim of bringing them to market parameters, by turning them both more accountable and effective. For the first time in 24 years, and with the strong support of the Prime Minister, Mr. Edi Rama, we have given life to a vital operation of restoring lawfulness in the electricity consumption, which will not be seasonal, instead, it will be the daily and continuous work of OSHEE itself.

Budgetary institutions have commenced to give clear signs of a drastic transformation in their approach, regarding the obligations towards OSHEE. Recent changes to the Penal Code have toughened penalties for crimes against power grid, i.e. zero tolerance, without any distinction, for anyone who steals and abuses with electricity. The government has refused the amnesty, by being fully convinced that such practice has eroded rather than improving the system. Instead, it is offering an easing and affordable scheme for repayment of arrears. Over 60 meter reading staff and electricians

are punished for misconduct, along with punishing customers, who have dared a criminal approach toward the energy system. Naturally, an essential element is the tariff structure reform, which includes the waiver of the protected range of 300 kW, for residential consumers, and by establishing a unified fee. Such reform is intended to end the abuse of "stealing range" by protecting, simultaneously, through a secure mechanism, over 210 thousand families in need.

Meanwhile, there are currently some 164 concessionary contracts for the construction or rehabilitation of 435 HPPs. Their total installed power reaches at 1,930 MW, their annual pro-

duction is projected to total 345.087 GWH and total investments in the sector marks the figure of EUR 2 billion and 654 million. Until now some 70 contracts, ore over 100 hydropower plants, have started to be effective, whose energy is purchased by KESH. The government has also intervened at the fee level, by which KESH buys electricity generated by private HPPs. The new formula, set by the government, is based on the average price, quoted and set on the Hungarian Stock Exchange, plus the 10% incentive. This formula brings the price of energy, purchased from these plants, closer to the market, and thus avoids thee distorted import tariff and gives breath to KESH.

The reform in the energy system is enlisted with painful, unpopular and very difficult reforms, but it is a must. In about one year and a half, since the new government took office, we faced with an almost bankrupt sector, but managed to heal the most urgent wounds and kindly note now that the energy sector recovery has taken off.

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The recovery has just taken off ....

The operation to restoring lawfulness in electricity consumption has scored significant results. The average annual loss for 2014 was locked at 37.81%, while a year ago this figure was 45.04%, i.e. a decrease of 7.2%, which is the largest one, for at least 10 years. Revenues from collections, for 2014, are USD 100 million more than a year ago, total revenues grossed at ALL 49.1 billion, as compared to the previous year with ALL 38.4 billion, only.

This operation is meant to be intensified even further, with the beginning of this year, by aiming the consolidation of lawfulness. The project of OSHEE’s management transformation is projected to kick start this year, to ensure quality delivery service to citizens. The company will utilize the World Bank loan and its own funds, to undertake necessary investments in the network, to ensure energy security. An intensive work is underway, to establish and build the 400 kV interconnection line, between Albania and Kosovo, along with ever-improving domestic lines, which includes the important project of the 110 kV South Ring line.

The government has started to repay arrears to small power producers, and plans to liquidate, within April, all last year’s unpaid obligations, as well as paying current ones. In the meantime, we are in a dialogue process with

these investors, for finding a long-term formula of price-setting that takes into account the interests of small producers, but also those of the state. The new legal framework, adopted by the government, will be in place, until reaching a formula that will guarantee the price, close to the market and private investments’ interests. In order to neutralize the negative effect, such situation may cause, as claimed by small producers, the government has expressed its willingness to extend the term these concessionary contracts 5 years. Also, the government is ready to act as a broker, between producers and banks, with the aim of restructuring producers’ loans, by way of extending the payback time.

The government supports and encourages investments for increasing energy sources, but it will be transparent, by making clear for the citizens that there are two ways, could be taken. The first is to add up new energy sources, which bear a cost which must be reflected somewhere, and that means citizens will have to pay more for energy, for the sake of adding up these new resources. The second is that of a continued dependence on imports and the use of current energy sources.

Personally, I think that the right way is to add up new energy sources, but being transparent with citizens, and by not charging the cost, secretly, to the State Budget and KESH, as it happened

Roundtable with the Ministry of Energy AND INDUSTRY, 11 December 2014.

A A B , i n collaboration w it h the National Economic Council organized a Roundtable between Member banks’ Directors, the Minister of Energy, as well as high representatives from KESH and OSSHE, where participants discussed on the latest changes and measures undertaken by the Ministry of Energy with regards to the private

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producers of energy, and the concerns of banks as lenders to the latter regarding the unpaid arrears that KESH and OSSHE owe them, which has in turn created unpaid loans to the banks. Main focus of the meeting was on the potential sources to be exploited for providing the necessary liquidity to KESH and the possible involvement of banks in this regards.

previously. Recent measures, taken by the government, aim at increasing liquidity in the sector and pulling it out of the financial crisis. The Government has approved, and will soon propose to the Parliament, a new law for the electric energy sector, which will sanction the change of the market model and start the deregulation process of the energy sector, initially with clients connected to the Medium Voltage network. This group of clients will depart form from the regulated scheme and nearly 30% of the energy market will be liberalized, by end-2018. This process and parallel development of the transmission network with Kosovo, followed by Macedonia, will increase the opportunities for energy trade from small private producers. In the longer term, the government is working to exploit TAP gas pipeline, aiming at diversifying the country's energy sources.

It is a known fact that, the master plan for the gasification of Albania will be funded by the European Union, with the support of the government of Azerbaijan and SOCAR state company.

The year 2015 could be considered as the year of reforms and large investments in the energy sector. As we stopped the system’s wreckage and hemorrhage, we face numerous challenges ahead, on the long road towards the improvement and full recovery of the energy system.

Journalist corner

The electricity price hike

Solutions for bridging the energy gap in Albania During the year-end discussions on electricity prices, the government decided to level the electricity price, purchased by KESH with that from domestic producers, at the price level quoted on the Hungarian Stock Exchange.

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he electricity prices went north. Now a family consumer will pay a final price at ALL 11.4 per kWh, including taxes. But could this increase just close the "gap", deepened through many years, where the official figures estimate a loss of over USD 150 million? Could it be possible that such price hike for consumers to solve the issues of small (electricity) producers in Albania, which can in turn, pay back their bank loans? At the last meeting of the Managing Board of Regulatory Authority of Energy, an interesting fact emerged: "For the first time, the Electric Energy Distribution Operator (OSHEE) has a detailed plan of investments and management of tasks in the energy distribution sector". It is somewhat surprising that after so many years, in a time when the state owes over EUR 500.000 to commercial banks annually, as a guarantee for energy purchase, no investment or bill collection plan has ever existed.

During the year-end discussions on electricity prices, the government decided to level the electricity price, purchased by the Albanian Power Corporation (KESH) with that from domestic producers, at the price level quoted on the Hungarian Stock Exchange. Such decision brought immediate reaction by producers, who claimed that it will bring a lot of liquidity crunch, or even bankruptcy, because their bank obligations are too large. The fact is that banks have been their sole supporters and continue to be seen as their chance for survival. The increasing contribution by small Hydro

Power Plants (HPP) to the total electricity national production by 11% is now at risk, because of the government's decision to decrease the purchase price by 30%.

Currently the total value of investments for small HPPs reaches up to EUR 250 million and their revenues have been increased by 200%, during the past three years. Over 80 small HPPs are active generators this year and dozens more are expected to join by next year. KESH has failed to buy electricity from these HPPS with the price of ALL 9 per kWh, thus accumulating about EUR 51 million of debt obligations, which is one of the shackles, in the chain of obligations created within the Albanian power system that led the government to the decision of setting the KESH’s purchase price of energy from these HPPs, about 30% lower, starting from for the year that has just begun. In such conditions, some 60 small HPPs are risking seriously to go bankrupt, as most of them are built with bank loans and business plans based on the price of ALL 9 per kWh, at least for the next 10 years. A simple question arises naturally: Does Albania have the luxury to risk the bankruptcy of one of the few productive sectors in the country, in the context of actual complex economic situation?

Import vs. domestic power generation?

Last year, the electricity import cost averaged at 6.8 (euro) cents, or ALL 8.4 per kWh, a level almost equal with the

purchase price of electricity from small HPPs. During the last decade Albania has spent over EUR 1.2 billion for energy imports, or 10% of GDP. During the last 10 years, the prolonged drought put the energy production in real difficulties; on the other hand, consumer needs were growing with a double-digit figure and the "energy" issue turned into a serious threat for the macroeconomic stability.

Notwithstanding this, the resources were exhausting and the unused capacities of water resources were seen as the best opportunity to give a boost to the economic development. Prospects appeared promising, as the electricity consumption is growing at colossal rates and hydro energy prices were increasing steadily. The former government fixed a price level of ALL9 per kWh for all concessionary producers, aiming at encouraging the domestic production of electricity. Seen from this perspective, such policy was successful, in the sense that small HPPs up to 15 MW, realized a level of income up to EUR 30 million in 2013 (excluding “Ashta” HPP, which is a foreign investment and has a high production capacity). Now, the government is reviewing the pricing policy, less than three years since the commencement of energy production form these HPPs, by putting a question mark on EUR 260 million domestic investments (totaling just EUR 400 million euros, by adding up FDIs, according to data from Renewable Energy Association).

by Ms Mirilda TILI www.aab.al

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Banker's Stage

From a different angle

Creative thinking - The lost Atlantis!

Innovation has been the foundation of the successful civilization. It has been the cornerstone of entrepreneurship. But innovation is basically the result…it’s the outcome of creative thinking.

by Mr Savvas THALASSINOS Managing Director & CEO1 TIRANA BANK

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ow more than ever, creative thinking should take over the functional organization. Yet, it appears it is still the other way around. “Do things right or do things different?” Undoubtedly, the Cosmos has moved on when the latter was stimulated, when all of a sudden things have turned around and were approached unusually, oddly, abnormally. And, this is the definition of the new, of the innovative, being the noble outcome of creative thinking: something that comes into existence or in use for the first time, or not seen or done before. This is what has been the so-called achievement and the triumph, the one once admired because it created substance and added value. This is the lost Atlantis!

The socioeconomic happenings of the last half a decade or so have evolved in such a way forcing us to abstain from creative thinking. I would dare to say that in some instances organizational creative thinking becomes even an anathema. It is “unwanted” or “dangerous”. Things now are focused on stringent rules and regulations.

And robotic interpretations of such rules and regulations have taken over the norm and are becoming the “right” discipline.

This is now the context! This highlights the boarder lines. It defines the box! But then doesn’t creative thinking start when thinking itself jumps out of the box – literally I say? Accordingly and if so, to claim creative thinking as still the norm becomes an oxymoron schema! What’s wrong with this picture? Is it a matter of choice between regulation and creative approach?

Is it a debate between the technocrats and the market creators? Rather I would say it is currently a matter of balance or better imbalance where the “what is right” has really outlawed the “what is different”.

So, first things first: Recognize and then Change! Change in order to retrieve the lost competitiveness. And Change requires one to look things on a daily basis from a fresh perspective. But this is a matter of organizational (and personal) culture. Seeking from another angle the unorthodox, or the different solution, has to do with the environment of the organization and the air that flows in it. If not there, embed the differing judgment as a bucket of creative thinking. It keeps on generating the different perspective and the alternative angle.

And it can be done only when elasticity in thought is allowed. That is why a lot of good ideas or the solutions to the difficult problems are generated in the shower, at a soccer game or even at the most relaxing stages of ones self – ultimately and not surprisingly when sleeping. When even the unconscious mind takes over and works on its own productive flexible way.

Banks, as any other organization with no exception, should review and adjust their style in order to regain their glamour, and adaptation calls for a change, which in turn should take place after a constant sniff of the environment as stated already.

And in order to reposition themselves in the

nucleus of the economic activity and drive growth, they should find a new-fresh-alternative way to do things apart from the strict technocratic methodology of the latest years. That is why creative thinking should be re-embedded in the organizational culture, and through empowerment of the structures to eventually: • Reestablish an effective contact with the society and its greater environment. A new communication process that will allow rebuilding trust and confidence. It is not only a must but a prerequisite for a fresh cyclical relationship of give and take to fuel development and growth • Suggest a new consultational partnership when it comes to lending/fundraising relationship on a constructive project basis. Banks posses those transferable skills that can supplement or support entrepreneurship and private business initiative in a fundamentally solid foundation. Such a relationship leads to a mutually benefited economic growth.

• Redefine the service offering to the society apart from the strict banking service.

A bank should recognize that, specialized knowledge and information should arm the factors of economic activity to act and decide in wisdom and full conscious. Likewise, banks should rethink their model and consider whether they can be the one-stop shop connecting the dots from A to Z. Banks are eligible to become the temples of knowledge and information, shouldn’t they?

Innovation has been the foundation of the successful civilization. It has been the cornerstone of entrepreneurship. But innovation is basically the result…it’s the outcome of creative thinking. Let’s make a call for Lateral Thinking and lead the organization to innovations, to the new, to different, to change, to the new frontier, to... growth.

Creative thinking pays off!

Until 31.12.2014

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Banking System

The Comprehensive Assessment towards the European Banking Union

CA has created important conditions for a serene start of the European Supervision, that as of 1 November 2014, for the largest banks in the Economic and Monetary Union countries, has replaced the national authority, and which we hope will be followed by further concrete steps, towards the achievement of the European Banking Union.

by Mr Roberto RUOZI Professor Emeritus UNIVERSITĂ€ BOCCONI DI MILANO

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he European Central Bank (ECB) published on 26 October 2014, the outcome of the Comprehensive Assessment (CA), which consisted of the Asset Quality Review (AQR) and stress tests of the banks and had as its main objective the examination of the level of capital adequacy of the 130 largest banks in the Economic and Monetary Union.

The AQR focused on the analysis of the real consistency of the major items of banks’ balance sheets (mainly loans and securities), assessed by taking into consideration the risks they contain.

The assessments were compared with the values with which these assets were recorded in the banks’ balance sheets and the final conclusions referred to the shortage of capital associated with possible accounting overvaluations of assets, as compared to the values calculated by the ECB. Instead, stress tests es-

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timated the impact that future economic situations (2014-2016), characterized by particular difficulties (including a deep recession), could generate in the balance sheets of banks. Furthermore, these tests assessed the capital adequacy of banks, necessary to allow them to overcome the economic and capital challenges, triggered by these scenarios.

Again, the results highlighted the potential shortfall of capital that each bank would have in such situations.

The Comprehensive Assessment was an important step towards the European Banking Union, and its results have been overall positive. In fact, only 13 banks did not pass the tests.

Four of them, which on a first analysis were in a critical situation, have already cleaned up their balance sheets and increased the capital, in the period between the date of calculation of the test (31.12.2013) and the date of publication of their result (26.10.2014) and, therefore, have no more capital shortfalls.

It is interesting to note, in the Albanian context, that none of the nine banks that will have to take the necessary measures to overcome the identified shortfall of capital is present in

Albania and, therefore, the Albanian banking system should not be affected by the results of the CA. The nine problematic banks mentioned above, should actually recuperate as soon as possible, both by planning adequate increases of capital and by looking for solid banks with which to merge. In this regard, the CA represents a useful tool to strengthen the banking concentration in the Economic and Monetary Union countries.

The Comprehensive Assessment did not bring something new. Its greatest contribution was in the period preceding the carrying out of the CA, during which banks have adapted spontaneously (with the above-mentioned cleaning of balance sheets and capital increases), in order to get in a good condition for the exam date.

The results of the CA were welcomed by the European banks. Those who did pass the test considered its results as a normal and expected fact; those who did not pass it were not particularly surprised by the results, either.

To a certain extent, it was almost obvious, who were the banks with very risky assets, or with inadequate capital. Nevertheless, there were various comments on the results of the CA and mostly they referred to the methodology used in the calculations, and the quality of the scenarios for the stress tests, judged over-penalizing and unrealistic. Another criticized fact was that the sovereign debt securities, included in the balance sheets of banks, were considered as carrying risk. In addition, it was reasonably accepted that it was necessary to use the same calculation model for all banks in all countries analyzed, but it was also noted that by doing so, banks and countries that are very different between them, and whose specific characteristics should have been instead taken into account, were treated in the same way. One of the facts that was strongly criticized was that of not taking into consideration in calculations neither pure financial activities, such as: derivatives, which weigh up very differently on the risks of individual banks, nor the government support that banks have received before the tests, and are indeed very different between them. In fact, they range from more than EUR 200 billion, for German banks, to only EUR 4 billion for Italian banks.

Nevertheless, the greatest weakness of the tests lies in the fact that they have considered only the capital requirements and assets quality, neglecting the problems of liquidity, and especially the efficiency and profitability aspects, which are not secondary in forming a judgment on the health of individual banks. Thus, they are related only to the capital, with effects mainly on a perspective point of view.

Looking to the future, the question arises whether this recovered capital equilibriums of the vast majority of the European banks may enable them to fully resume their crediting functions and therefore their support to the eco-

nomic growth that, in the EMU countries, seems hard to reboot. From this point of view, it is thought that these equilibriums are not sufficient. Ensuring the reviving of credit to the economy requires two other necessary elements.

The first is the increase in credit demand, especially by companies, which still seems far away, despite some timid signs that may indicate some positive movements, even in the short term.

The second is the willingness and the organizational capability of many banks, which for years had neglected the lending sector, in which, incidentally, have achieved very important losses, and do not seem to be ready yet to support crediting levels larger than the current ones. And then, it remains always the fact that loans absorb a significant share of capital, in order to comply with supervision requirements in force, and this continues to strongly discourage their credit expansion.

The positive thing is that we are not in the situation of some times ago, when European banks also indicated a lack of resources to invest in loans.

Now, the situation has changed and the abundant liquidity, made available to banks by ECB at rates close to zero,

could in fact be used not only to underwrite government bonds, as occurred in the past, but also to regenerate financing for the real economy.

As it can be seen, the remarks made previously, are of general nature. From this point of view, the Comprehensive Assessment did not bring something new. Its greatest contribution was in the period preceding the carrying out of the CA, during which banks have adapted spontaneously (with the above-mentioned cleaning of balance sheets and capital increases), in order to get in a good condition for the exam date. In this regard, it was much more useful than the CA conducted a few years ago, but its results should be taken for what they are, without exaggerating, neither positively nor negatively.

Nevertheless, there is no doubt that it has created important conditions for a serene start of the European Supervision, that as of 1 November 2014, for the largest banks in the Economic and Monetary Union countries, has replaced the national authority, and which we hope will be followed by further concrete steps, towards the achievement of the European Banking Union.

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Banking System

Necessity and momentum for internal audit standards The International Standards for the Professional Practice of Internal Auditing are a guide toward a successful accomplishment of internal audit professionals. They may serve as a compass to orientate the internal auditors, as they navigate through turbulent times and challenges, provided by the profession of internal auditing.

by Mr Stavri PASHKO Executive Director ALBANIAN INSTITUTE OF INTERNAL AUDITORS (AIIA)

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he banking sector in Albania is one of the few sectors where (at least) the concept of good corporate governance has started to show signs of growth and awareness. The presence of functions like: risk management, management board, internal and external audit - important pillars of corporate governance – are all positive and promising foretokens. Nevertheless, the presence does not mean enough. While in a global business environment, developing and improving the above-mentioned functions is in the agenda of all successful companies, in Albania we are still getting acquainted and implementing them randomly with vague applications. And as our country is trying to catch up with others and compete in a globalized world, the dynamic development of corporate governance and aforementioned mechanisms, is inevitable.

The early presence of internal audit function in banks is empowered primarily by the regulatory framework of Bank of Albania, specifically by the Regulation: “On Internal Audit System of Banks and Foreign Banks’ Branches”. Despite the name, the regulation covers less than it seems on internal audit function, but in the same time, it provides some basic principles on establishing and managing the internal audit function. By being aware of its own limitations, the regulation indicates that for unaddressed areas and issues, banks should follow their internal regulations and procedures.

In such context, it is quite obvious that the development of internal audit function in different organizational environments is taking different paths.

Such approach leads to an increased opacity and/or confusion about the internal audit function. This confusion can create unrealistic claims and expectations from users of internal audit function, such as senior management.

These claims and expectations can intentionally or not, prevent internal audit from playing the appropriate role in their organization.

Along with internal usual users, such as: Management Board and se-

nior management, the internal audit services are being increasingly used and utilized by external parties, such as: courts (in economic crime cases), external auditors, or other supervisory institutions. Such users require assurance that the internal audit activity has been conducted in compliance with high professional and quality standards. Moreover, internal audit

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.

It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. www.aab.al

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professionals themselves need clearer guidelines on how to perform and how to better conduct their activities.

Their professional growth cannot be complete if it is nurtured only by their organizational knowledge and the risk of stagnation is excessively high.

The need for a standardization of the profession is inevitable and somehow should not come out as a surprise.

Similar professions, such as: external audit or accounting, are performed and conducted in accordance with their own standards.

The International Standards for the Professional Practice of Internal Auditing are compiled and published by the Global Institute of Internal Auditors, the internal audit profession's global voice. The Standards are part of a conceptual framework that provides principles and guidance for steering and promoting the internal auditing profession. These Standards have been used for many years in different industries and organizations, in the private and public sector, as the only ones recognized in an international scale.

Some well-known institutions that are already using these Standards are: European Commission, Basel Committee, as well as hundreds of other organizations. Even in our country, many banks refer to such Standards to regulate their internal audit functions in their organization’s environments.

The Standards are important for all internal audit stakeholders: users and executives.

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When conducted in accordance with the Standards, the internal audit activity gives proper assurance on the performance and quality of the internal audit work, even to the external users.

Consequently, the work of the internal auditors can be used as a credible and quality reference by several stakeholders.

Quis custodiet ipsos custodes?

Among others, the internal audit activity performs controls in the bank’s perimeter to give assurance to its stakeholders, on processes’ continuation and risk management. But who gives objective assurance on the adequate management of the internal audit activity? Senior management and audit committees, as key users, require more insight on the performance of their internal audit activity.

They demand assurance that internal audit focus goes in tandem with the objectives of respective organization.

The same stakeholders need to know

more about the effectiveness and even more about the efficiency of the internal audit function and activity.

The Standards provide senior management and audit committees with an assessment system, which measures the effectiveness and efficiency of the internal audit activity. They give a clear picture of what must be done by an effective internal audit function.

Moreover, the Standards promote the risk-based internal audit, as an instrument to add value and to address issues, related to the efficiency of the function.

When conducted in accordance with the Standards, the internal audit activity gives proper assurance on the performance and quality of the internal audit work, even to the external users. Consequently, the work of the internal auditors can be used as a credible and quality reference by several stakeholders.

The Standards for the internal auditors

A professional framework and standards are characteristics that distinguish a profession from an unstructured group of individuals, who happen to be employed in similar roles.

A definition of what it means to be professional states “conforming to the technical and ethical standards of a profession”.

Internal auditors shall make use of Standards, to avoid and disrupt false expectations and deviations from their work. Among others, they shed light on areas of responsibility of internal auditors, promote independence and objectivity, as key elements of an efficient and effective function, and regulate the relationship between internal auditors and stakeholders. The International Standards for the Professional Practice of Internal Auditing are important for the internal audit professionals, as insightful guide toward a successful accomplishment of their work. The Standards have been created by internal auditors for internal auditors. They may serve as a compass to orientate the internal auditors, as they navigate through turbulent times and challenges, provided by the profession of internal auditing.

Experts’ Forum

The challenges of transfer pricing Transfer pricing remains one of the most sophisticated elements of the tax legislation, at the international level. Transfer pricing methods are complex and include the commitment of more qualified fiscal, legal and economic expertise.

by Mr Olindo SHEHU Partner, Tax & Legal DELOITTE ALBANIA AND KOSOVO

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he rapid developments of technology, transport and communication, affect growth in the number of multinational companies that have the flexibility to organize the entrepreneurship and activity, throughout the world. Nowdays, a significant level of global trade is related to the international transfer of goods and services, capital and intangible assets, e.g. intellectual property, within the same group. There is a lot of evidence which demonstrate that transactions within the group are growing steadily and now reach roughly 30 percent of all international transactions. This means that a large number of international transactions are not governed entirely by the market forces, but also by forces that urge the common interests of entities within the same group.

This international trend has shown

its influence even in Albania. Over the past few years, a considerable increase in payments has been noted, from Albanian companies to foreign companies, within the framework of managerial, technical, and other services. Such a situation is emphasized especially in terms of the global crisis. Given the existence of legal loopholes, the Albanian tax administration, as well as local companies, has failed to "challenge" the invoices and charges received from the group, in cases when those may have been fatty, or beyond the market prices.

Determining the right price, called the "transferable price" for the transfer of products or services between related parties within the group, is a legal obligation that has been missing in Albania and that addresses this issue.

It is important to emphasize that the transfer price itself does not necessarily involve tax avoidance. The international transactions, which affect different countries with different economies and different market rates, make the concept of transfer pricing based upon "market value", much more difficult than in case when these transfers occur within the same country. In other words, although tax avoidance may be not the goal of prices set for certain products or services offered by residential companies in developed countries (e.g. Germany, Austria, etc.), when taking into con-

sideration the market in Albania, such prices may seem exaggerated and give the impression of an artificial overload.

Meanwhile, in reality these prices are based on a market that is different from the market of Albania.

As it can be noticed, the transfer price remains one of the most sophisticated elements of the tax legislation, at the international level. Transfer pricing methods are complex and include the commitment of more qualified fiscal, legal and economic expertise.

In addition to expertise, which

The accurate implementation of this legislation during its first steps will be very important, to lay down sound foundations for the future.

Transfer pricing provisions, if implemented correctly, provide local branches and subsidiaries with instruments through which they can better negotiate with the group, and may even strive to avoid surcharges, and to preserve their profit rates. www.aab.al

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should be of the highest level, both from the tax administration and by taxpayers or their consultants, one of the most challenging issues in this regard will be the identification of the market price, for transactions that will be effected with the group by respective branches and affiliates in Albania.

The taxpayers should be able to identify and provide evidences to the tax administration, which confirm that these prices are at the market level and vice versa. This may be easy, in case of quoted prices, but in cases when there is a lack of publicly available information, accessible by taxpayers and tax institutions, e.g., in case of specialized products or services, or in case of consultancy services, it is far more difficult to identify whether these prices are at the market value.

In the United States, the first legislation relating to transfer pricing was focused on the pharmaceutical and hydrocarbons industries. Today, in terms of a global level, some of the largest transactions between countries are performed between different branches of international banks and insurance companies. Although the financial industry has its particularities, for purposes of transfer pricing provisions, there are not so much differences. Charges for managerial services, from a parent to a subsidiary in the manufacturing sector, in principle, follow the same concept,

as in the financial sector. Consequently, the pursued methodology, according to OECD regulation, is already applicable in case of banks, or insurance companies.

However, there are some transactions in the financial industry with unique characteristics, which require a more specialized application of transfer pricing legislation. The financial instruments, which are formed beyond the traditional ones e.g. derivatives, reinsurance and other transactions, which are based on the risk taken by each party in the transaction, become

The transfer price itself does not necessarily involve tax avoidance. The international transactions, which affect different countries with different economies and different market rates, make the concept of transfer pricing based upon "market value", much more difficult than in case when these transfers occur within the same country.

more difficult to be assessed on the basis of traditional methods of transfer pricing. This is so because the cost of each risk undertaken by each party is difficult to be assessed. Consequently, cost-based transfer pricing methods become too difficult to be implemented, in transactions for which the risk transfer forms its contractual basis. There do exist some alternative methods that are even more complex and based on profit sharing between parties involved in a transaction (the "profit split" or the "transactional net margin" method), but these methods require specialized guides and instructions, to achieve relatively acceptable results for taxpayers, but also for tax administration.

In the actual Albanian market, and particularly in the financial sector, the transactions with the related parties consist mostly in management services, software development, distribution costs and consultancy services. In cases when transactions are more complex, a more intensive commitment will be required from all "stakeholders", such as: financial institutions, tax administration and/or external consultants in transfer pricing experts, in order to reach implementing methods that will be needed in the future.

The accurate implementation of this legislation during its first steps will be very important, to lay down sound foundations for the future. Transfer pricing provisions, if implemented correctly, provide local branches and subsidiaries with instruments through which they can better negotiate with the group, and may even strive to avoid surcharges, and to preserve their profit rates. In this context, the branches can strengthen their position in the group, compared to the period before the implementation of this law. At the same time, the tax administration can protect the progress of the country, fighting potential surcharges from non-resident companies.

Beyond challenges, the successful implementation of this legislation will bring multiple benefits for branches and subsidiaries of foreign companies, as well as for tax administration, the state budget and the economy in general.

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Experts’ Forum

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he development of bond market is currently the key issue in the agenda of regulators and securities industry. So, the International Organization of Securities Commissions (IOSCO) and the European Regional Organization (CERS/ESMA) are working actively for a more complete regulation of such market, by paying a special attention to the increasing of transparency. The G20 Cannes summit in 2011, stressed the importance of developing bond markets, with the document: "The Action Plan for the development of corporate bond markets", especially for bonds issues in local currency of each country, as a way to to absorb capital.

For developing countries, the development of bond markets in local currency is one of the substantial advantages, to diversify their funding sources, beyond the banking sector and the stock market. The financial crisis caused banks to be more conservative in lending, along with tight regulatory measures, such as the Basel III requirements. In this regard, countries with a more active domestic bond market showed that they were in a better shape to weather the reduced financing flow by the banking sector and therefore, reduced the impact of the crisis on their own financial system and economic performance.

The development of bond markets in local currency offers companies an opportunity to raise capital in the debt form, as a funding source, and also helps them to reduce the cost of ensuring such valuable resource. This is so, because the company may borrow from investors directly, thus avoiding fees associated with administrative costs of lending, and furthermore, the interest rates of this type of financing resource may become more competitive, compared with the interest rates imposed by banks. Bonds, as transferable securities (titles), are often more attractive instruments to borrowers, rather than bank lending, as bonds can

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Ms Enkeleda SHEHI

Ms Flora MUSTA

General Executive Director FINANCIAL SUPERVISORY AUTHORITY

Head of Licencing & Monitoring Department FINANCIAL SUPERVISORY AUTHORITY

Corporate bonds

A reality and potential for the future In the framework of the Albanian financial system, the development of bond market could boost business development. The development of such market could also generate certain interest rates, which will reflect the opportunity cost of funds, for each maturity. be traded on the capital markets before their maturity date. On the other hand, an active and effective bond market provides savers and investors with the opportunity to invest in a broader range of assets. Bond markets improve the transparency and companies’ management, by encouraging greater transparency and inciting them to be more open to the public, as well as forcing them to better understand themselves and consequently, improving their management.

Currently, in the framework of the Albanian financial system, the development of bond market could boost busi-

ness development. The development of such market could also generate certain interest rates, which will reflect the opportunity cost of funds, for each maturity. Financial Supervision Authority, as the regulatory and supervisory authority of the securities market, is willing to support and encourage any initiative, relating to bond issuance, be they corporates, or local governments.

The process of bond issuance through private placements in Albania dates back to end-2011. The total amount of bonds offered in the Albanian market has been approximately EUR 35 million, where

The bond market serves as a funding source also for small and medium sized companies, and given the advantages the bond provides for them, such market should be promoted and encouraged. The primary and secondary market for government bonds as well as the promotion of bond private offerings by corporations is the basis for the development of corporate bond market.

investors have underwritten about EUR 25 million. Meanwhile, the number of issuing companies remains extremely limited. Currently, all legal and institutional infrastructure as well as relevant experience, do exist for the Albanian market.

T`Law No. 9879, dated 21.02.2008, "On Securities" and the Law No.1015, dated 15.10.2009, "On Corporate and Local Government bonds", establish the legal basis for regulating bond issuance and trading. This legal base supports the creation of an active and efficient bond market in Albania.

The bond loan program (Prospectus) is the most important feature of the bond. It constitutes a contract that binds various parties into a loan (agreement) and includes details, regarding parties’ rights and obligations. The arrangement of such rights and obligations is the main reason why the issuance of Bond Loan Program is a mandatory requirement.

Moreover, the Bond Loan Program provides legal assuarances, in the relationship between parties involved in the contract. The more detailed, clear and precise a Bond Loan Program is, the less likely it is for disputes to be raised, between the issuer and bondholder. In this way, the law sets forth a standard for the protection of bondholders and market efficiency. The issuer must provide investor with an objective documentation of

the investment. The Bond Loan Program is offered to potential bondholders before bond purchase, thus constituting an offer to enter into an agreement with the issuer. The bond issuance (distribution) can be carried out through a private, or public offering of transferable securities.

It is worth mentioning that the provisions of the Law "On Corporate and Local Government Bonds" are closely linked to the provisions of the Law "On Securities", with regard issues of public offering and private placements.

The legal framework in force protects the interests of bondholders, by putting emphasis on their rights, through their participation in the meeting of bondholders. The law stipulates that, in any case of bond issuance, it is mandatory for bondholders to be organized into a group. This arrangement aims at protecting the common interests of bondholders and facilitating communication between bondholders and issuers. Also, such arrangement allows for regulating the issues between issuers and bondholders, by providing a solution by the majority vote of bondholders, attending the meeting. Every bond grants a right of one vote in the meeting of group of the Bondholders.

Moreover, the law recognizes the role of the competent agent, who may represent the interests of bondholders, which guarantees the protection of the bondholders’ rights. The bondholders may find more easy to exercise their rights through a group’s agent, rather than individually. Through the competent agent, the bondholders have a

The development of bond markets in local currency offers companies an opportunity to raise capital in the debt form, as a funding source, and also helps them to reduce the cost of ensuring such valuable resource.

better opportunity to monitor their investments and to exercise their rights, in cases when the issuer does not accomplishes the obligations, in accordance with the law and with the bond loan program. Protecting the bondholders’rights, as well as the ability to ensure the relations’ continuity between issuers and investors depends vastly from the prudential and complete exercise of duties, by the Account Provider (Custodian). The Law "On Securities” prescribes banks as the only subjects which have the right to provide custodian services, following the authorization granted by the Authority. Custodians play a central role in the whole process of bond safekeeping and redemption, on behalf of investors. The efficient transfer of securities between custodians or between investors’ accounts within the same custodian is a prerequisite for normal functioning of the entire capital market. Custodians provide a wide rage of services and their complete and efficient functioning os of a systemic importance to the whole financial system. One of the main principles of the custodian’s work is the separation of assets of investors from those of the custodian, as a mechanism that serves to distinguish between the assets of both parties.

With regard to bond trading, the Law "On corporate and local government bonds" refers to the Law "On Securities". So, bonds are traded primarily on a regulated market, under the conditions prescribed by the Authority.

The bond market serves as a funding source also for small and medium sized companies, and given the advantages the bond provides for them, such market should be promoted and encouraged.

The primary and secondary market for government bonds as well as the promotion of bond private offerings by corporations is the basis for the development of corporate bond market. The existence of a yield curve for government bonds is a prerequisite for the development of corporate bond market. Issuers and investors in corporate bonds need to refer to the yield curve of government bonds as a benchmark in assessing corporate bonds.

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Experts’ Forum

D

espite important institutional and regulatory changes that have been enacted during last years, securities market in Albania remains still in its early stages and fairly underdeveloped. This is due to the fact that the secondary market, be it between commercial banks, as well as the retail market for individuals, leaves a lot to be desired. The total value of transactions for the secondary retail market, for the period January – September 2014 has been only ALL 7.6 billion2 (taking into consideration sales from the financial intermediary portfolio and purchases from individuals, prior to the maturity date), a quite small value, as compared to the total investment portfolio of banks and financial institutions. The same situation is also witnessed in the interbank secondary market, with respect to securities’ trading before the maturity date, where except for a few banks that have chosen to quote few of their securities from their trading portfolios, the others are not willing to quote or are even not allowed to have any trading portfolio.

This shows that, the ability that the Albanian securities have to be liquidated quickly in the secondary market is very limited. A security is considered as liquid if it is sold quickly, without causing a significant change in price and up to a significant amount.

The lack of numerous trading portfolios and of their quotations in the market, combined with strict rules on avoidance of risks related to these portfolios, has caused a situation where most of securities are not traded in the market, and no prices are available for most them.

The latter has led to a cost increase for finding liquidity in the market, or even the inability for accomplishing efficient investments in the securities within the local market. Another old obstacle for the development of an interbank market

Mr Niko KOTONIKA, CFA

Erjon TAÇE

Head of Treasury NBG Bank Albania

Head of Treasury Societe Generale Albania

Primary Dealers

A (known) idea for the development of the securities market1 One of the most well-known structures today in the international markets is the one of Primary Dealers. Primary Dealers can be banks and/or financial institutions that purchase securities directly from the Government, with purpose of reselling them to other investors in the secondary market.

for securities has been the absence of a payment system, which guarantees the delivery of the security simultaneously with the paid funds (Delivery Versus Payment – full DVP). This is due to the fact that, there is a risk that the security might be delivered, while funds might not be paid, and vice versa. Bank of Albania has recently started to implement an automatic delivery versus payment

system that enables the movement of funds simultaneously with the delivery of the security, by eliminating in this way the above - mentioned risk.

Despite all these efforts, even more should be made to create an interbank securities market. If we want to take the international experience, especially from countries that experienced an extraordinary development of the secondary

1 The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy, opinions or position of the respective banks.

2 Financial Supervision Authority, September 2014, Securities Market, Quarterly Report.

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market, we can notice that the securities market has a very different structure from the one that is actually prevailing in Albania. It is because there is a market maker that quotes securities on a daily basis for all maturity dates. But how such a market structure can be created, where some banks could take the role as continuous market makers? We will answer this question below.

One of the most well-known structures today in the international markets is the one of Primary Dealers. Primary Dealers can be banks and/or financial institutions that purchase securities directly from the Government, with purpose of reselling them to other investors in the secondary market. Apart from their role as direct intermediaries, Primary Dealers have also the role of market makers. Along with privileges that might favor some banks that will have the function of a Primary Dealer, such a structure produces also obligations for participants such as: continuous quotations in both ways (Bid/Ask) buying and selling, reporting and advisory functions to the Government with respect to debt structure, continuous promotion of government securities to the public, etc.

Notwithstanding this, the system of Primary Dealers is not the optimal system in every situation. According to a IMF3 working paper the necessary conditions to promote a Primary Dealer system in a country are the following: 1. A practical Government strategy for promoting the country’s debt securities, and a Government forecast about the potential demand, in order to plan its own need for financing, in compliance with market demand.

2. Interest Rates should be set freely from the market, in order to reflect supply and demand.

3. Auctions should be performed in such a way that the price could be set efficiently and competitively.

4. A clear plan for secondary market development and an adequate demand from the secondary market to justify a Primary Dealer System.

According to the same working paper, in order for a Primary Dealer System

The lack of numerous trading portfolios and of their quotations in the market, combined with strict rules on avoidance of risks related to these portfolios, has caused a situation where most of securities are not traded in the market, and no prices are available for most them. The latter has led to a cost increase for finding liquidity in the market, or even the inability for accomplishing efficient investments in the securities within the local market.

to work as it should, there should be a considerable number of participants in the securities’ primary market. Despite the difficulties that the Albanian securities market shows, with respect to the above conditions, especially due to the fact that banks might not be willing to participate in the Primary Dealer structure because of the imminent competition any further promotion of government securities could pose for customer deposits, we think that such a structure would improve significantly the liquidity of government securities, apart from the limited number of Primary Dealers. Also, it would foster the secondary market and furthermore, it would improve the filling the pot at government auctions at any time, by evaluating the demand for securities, beforehand.

In order for the securities to be tradable and that their exchange for cash to be done freely in the market between market agents that possess them, that or want to possess them, there should be an intermediation, so that the demand and supply for money meet each other.

Should the existing financial intermediaries be satisfied with the existing level of intermediation, or they have no other opportunity for increasing such intermediation, another set of financial intermediaries should enter the market, and those will be the Primary Dealers. The system of primary dealers is one that should be launched in full compliance with current market conditions, and of course the implementation of such a

system would require further improvements of the regulatory framework. All economic agents get benefits from the implementation of this new system, like: • The Primary Dealers, which benefit from having the exclusive right of purchasing securities in the primary market and later reselling them in the secondary market, given a market demand. A sizeable number of them (primary dealers), as we mentioned above, is crucial to an efficient market and competition.

• Other financial intermediaries, that currently have no trading portfolio of securities and that are not willing to trade securities, will have the opportunity to buy from or sell to the primary dealers all the securities they want and, in this way, there will exist a real market where they could close positions generated from their clients. Consequently, they could be capable of offering additional products to the customers, whereas there are opportunities to support such product in a liquid market, created by those primary dealers.

• Buying or selling of a security from the side of individuals or even companies will be a decision to be made, as easy as choosing where to deposit their own money or where to get a loan.

• The presence of a liquid market of securities increases the opportunity in the market for more non-bank financial intermediaries, such as investment funds, asset managers, etc.

3 Primary Dealers In Government Securities: Policy Issues and Selected Countries Experience, Marco Arnone and George Iden - March 2003.

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Economist Corner

Currency war

A myth or just a troubling reality?

This is a bloodless war, however, it is considered "war", in the broadest meaning of the word. The "competitive devaluation" weapon is an easy to use one, a priori quite efficient for the country that uses it, but constitutes a direct attack on other countries’ economy.

by Prof. Dr. Adrian CIVICI President & Head of Doctoral School EUROPEAN UNIVERSITY OF TIRANA, EUT-UET

C

urrency war", also known as "competitive depreciation of currencies", is a more than one century-old international conflict. But what is the "currency war", which are its associated social, economic and financial risks, how to use this monetary policy instrument, to create an economic supremacy, or other highly competitive abilities; is it the "weapon" used by the Great Powers only, or its consequences can be felt, even dangerously, either by small countries or developing ones? In a famous quote, M. A. Rothschild said: "Let me issue and control a nation’s money and I care not who writes the laws."

What is meant by the term "currency war"?

Currency war, or war of the exchange rates, is a situation where different countries implement specific measures, eco-

nomic and monetary policy, to reduce the value of the national currency, in order to give an advantage to their productive sectors, exports and services. This is a bloodless war, however, it is considered "war", in the broadest meaning of the word. The "competitive devaluation" weapon is an easy to use one, a priori quite efficient for the country that uses it, but constitutes a direct attack on other countries’ economy. The risk and consequences arising from such war is the fact that "opponent" countries may respond by using the same gun, so the devaluation of their currencies, and in this context, it will be for the international trade which loses its balance, by ringing the alarm bell of the danger of inflation’s appearance.

It is a situation that fears all, including developed countries, developing or even emerging economies, such as the BRICS group.

"Currency clashes" have been historically part of the economic war, thus becoming an embedded reality of major crises of capitalism (crises of end-nineteenth century, Great Depression of 1929-33, the crisis of the ‘70s, the financial crisis of 2007-2014), and provoking displacements in the hierarchy of the Great Powers. Currencies play a paramount role

in such situations, because they are the key element in international economic relations, by appearing as an efficient instrument of economic policies, which affects and simultaneously allows active engagement on domestic macroeconomic balances, consumption, savings, investments, and trade balance. Currencies have always lured governments and various states, by way of manipulating them, in order to pull out from crisis.

In the decades to come, the world economy will headed for a monetary system based on three international currencies, which will "clash" to find a balance, that kind of balance that will reflect the rivalry between major economic poles of the world.

If monetary policies miss their coordination, the risk of a "tough currency war", could be become a reality, very quickly.

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For the first time, the "currency war" concept was used by Brazilian Finance Minister Mr. G. Mantega, on 27.09.2010, in the frame of concerns about an abnormal appreciation of Brazilian real, against US dollar and Japanese yen, by noting that "we are facing with monetary policies of wealthy countries, which lead to revaluation of currencies of emerging economies, which translates directly as a loss of competitiveness and deterioration of their trade balance." Even the IMF President of that period, Mr Dominique StraussKahn, used the same concept, expressing concern that "we should take very seriously the threat of a currency war, even if it still seems minimal. I think that attempts for unilateral national solutions will become more intense." This choc expression became the subject of the G20 summit in Moscow in February 2011, and the financial and monetary environments was rocked by a war that brought back the reminiscences of taking the trenches of Great Depression crisis of ‘30s, where protectionist barriers could be easily substituted by "competitive devaluation", finally producing the same negative effects. Many countries around the world were afraid of US monetary policy that provoked the shift of a large capital flow into emerging economies, causing a substantial increase in asset prices, high inflation and artificial appreciation of currencies of these countries, and consequently a deterioration of their competitiveness and trade balance. By attempting to do the same thing, these countries could fall into the trap of building a massive monetary base, which could automatically lead to an increase of domestic prices and high inflation, whose management would turn into a difficult task.

Which are the countries that tend to manipulate their currencies, and to use them as an effective weapon in this currency war?

Many countries tend to maintain artificially a low value of their currencies, despite the fact that their economic and financial situation is not considered as

All monetary adjustments of the world’s most avdanced economies cause tensions and problems in their economic partners and traders in other parts of the globe, especially in Asia and Latin America, which are expected to start a counteroffensive, logically within their monetary power. They are deeply concerned, at seeing their currencies strengthening, as an outcome of “Great Powers” monetary policies. problematic. China, with the state-controlled yuan, continues to maintain artificially an exchange rate that is estimated to be 30 - 40 percent lower, in relation to the US dollar; Hong-Kong and Singapore are enlisted as countries that "use" their currency in favor of protectionism and trade war; Saudi Arabia, Russia, etc., as oil-and-gas-producing countries manipulate their currency; Switzerland through its much required currency in the international markets, as one of the safe-heavens currencies, does not hesitate to "play" in the monetary area to protect the economy; Japan, an active actor in the currencies’ front, worried by a 20-year period of stagnation and deflation, has tried several times to weaken its yen, to bring the economy out "liquidity trap"; Great Britain has been often lured by pound’s depreciation, in the name of "support for its shaky economy".

The United States of America has a tradition of manipulating the dollar, each time it is in economic and financial difficulties, by keeping a relatively weak dollar to support economic growth, investments, employment and consumption’s promotion. All this allows the United States to keep an economic and consumption level beyond the real means, if we take into consideration public deficit and its colossal sovereign debt. However, the US dollar is currently facing a revaluation trend, and FED is behaving prudently that this appreciation does not penalize the US economy, by following carefully the evolution of its exchange rate with euro and yuan, respectively. It seems that in this "currency war", the Eurozone has employed a more modest strategy, in relation to the US. The Euro-

zone does not seem to have free hands to implement a radical solution, as the ECB has been focusing on public deficit, sovereign debt and inflation control, thus not setting the economic growth and employment as an objective, which may drive it to be far more active in the "game with the powerful euro".

Are we living now a worrisome return of currency war?

"Monetary maneuvers" are obviously noted throughout 2014, which make such fear more than real. The word of the day and the key theme of national monetary policy seem to be the "transfer of deflation to others". The ECB has signaled that, "by facing the risk of deflation and weaknesses of the Eurozone economy it will start to react against negative effects of the strong euro and act toward its depreciation", in the coming months. The first effects are giving signs; the Euro has commenced a depreciation trend against the US dollar, yuan, pound and yen. The Central Bank of Japan, under the "transfer-deflation-outside-Japan" policy and objective, has taken a non-conventional monetary policy of quantitative easing-type, during the last 2 - 3 months, to the weaken yen and increase the competitiveness of Japanese economy and its exports. The Bank of Japan’ counteroffensive is producing results for its economy and is neutralizing the Euro devaluation effects, whereas FED seems more interested in transferring the deflation in Europe and Japan.

In the article "The Return of Currency War" (December 2014), Mr Nouriel Roubini, the economist who rung first

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the alarm bell about the financial crisis of 2008, makes reference to the decision

by Bank of Japan to increase the scope of its quantitative easing, by weakening the yen and acting according to the "beggar-thy-neighbor" approach, which has induced policy chain reactions around the world, thus returning the black clouds of a "currency turmoil".

Who is responsible for this new currency war?

During recent decades, the globalization has caused several reversals of gravity in global capitalism, towards emerging economies, which today contribute with over 50 percent of global industrial production and exports, and own over 80% of global currency reserves. China, Brazil and India are already in the top 10 countries of the world, in terms of GDP classification. The Currency has been the substance of many imbalances that led to the global crisis of 2007. The US has pursued an ultra-dynamic monetary policy, which is thought to have directly favored the speculative bubble that

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caused the crisis, but on the other hand, it supported growth and funded the huge costs of the war in Iraq and Afghanistan.

Also China has played a role in the crisis’ scene, through its control over currency exchange rate, via yuan’s depreciation, its trade balance and currency reserve, which figured over US$ 3,800 billion, in 2014.

On the other side, the Japanese yen and Euro followed a strengthening course, which hindered their economic growth, reduced the competitiveness the employment growth. The devaluation of currencies in emerging economies, such as: China, Brazil, India, Argentina, Russia, Mexico, and the respective appreciation in the developed countries favored a problematic configuration, in which countries like: USA, France, Italy, UK, Spain, etc., should increase their debt, in order to consume imported products, whereas emerging economies, together with Germany should save, in order to invest and export. The global crisis brought again into the limelight, the ghost of currency war.

Faced with soaring public debt and feeble economic growth, the developed countries turned to dynamic, non-conventional, quantitative easing-type monetary policies, which consisted in buying public debt by central banks, as conventional monetary policies, based on "playing" with interest rates, resulted ineffective. Actually, such policy increases government debts, and also the monetary base, guarantees the liquidity of the banking system, supports economic activity and causes depreciation. Launched

by Federal Reserve, other central banks followed suit, like: Bank of England, Bank of Japan and also ECB, by way of refinancing banks, in the context of Long-Term Refinancing Operation, with more than EUR 1,000 billion, launched in September 2012.

Such monetary movements are restructuring and reshaping the world economy around several large regional centers that tend to go towards common monetary areas. The experts estimate that the future monetary panorama, its "boxing ring", will be shaped with the following contours: US dollar will remain the major international currency, but will lose its monopoly; the Euro, in the context of building a European financial and economic governance and a substantial regulatory role of ECB, will be promoted as a relatively less international currency, compared to US dollar; Japanese yen tends to be marginalized, in response to the decreasing weight of Japan in the world economy; the Chinese yuan, reflecting the fact that the Chinese economy is the world's second economy and the reorientation of its economic model towards domestic demand and departure from US dollar’s dependence, is expected to start becoming a more and more international currency for payments and foreign currency reserves.

In the decades to come, the world economy will headed for a monetary system based on three international currencies, which will "clash" to find a balance, that kind of balance that will reflect the rivalry between major economic poles of the world. If monetary policies miss their coordination, the risk of a "tough currency war", could be become a reality, very quickly.

Social capital Alpha Bank Albania Supporting the health care During the last months of 2014, the bank financed several projects in the health sector, such as: painting the building of health care center in Kamza, providing it with some most urgent, donating a coagulometer for Health Care Center no.6, in “Kombinat” and placing signaling devices at the premises of "Omer Nishani" Regional Hospital in Gjirokastër.

Supporting people in need Alpha Bank staff embraced the initiative of the Albanian Red Cross, by supporting financially and by donating food and clothes to the families in need.

End - Year donation Bank supported "Mother and Child" Hospital Foundation, through the initiative of purchasing a X-Ray equipment for newborns.

BKT “Let’s Clean Albania”, 21 November 2014, organized by Green Line Albania This initiative aims to mobilize Albanians to join a one-day voluntary action, aimed at cleaning our country from dirt and waste disposals, across the country.

“The Banker” awards BKT with "The Best Bank in Albania for 2014" prize, for the fifth time "The Banker", a Financial Times publication, which nominates annually the best banks in the world, has awarded Banka Kombëtare Tregtare with "The Best Bank in Albania for 2014" prize, for the fifth time. The Gala evening was held in London, on 27 November, 2014.

Credins Bank Credins Bank was awarded the Grand National Prize of Philanthropy, 2014.

This award is given by a jury composed of different personalities, by Albanian Partners. This prize encourages the bank to undertake in the future greater challenges, in the context of improving various aspects of social and community awareness.

Credit Agricole

World Savings Day On 31 October, the World Savings Day, Alpha Bank launched a one-day offer, under the slogan: "Your savings are the only thing that should not be ever in diet", in order to educate customers to save money.

Supporting the art In the eve of 70th Anniversary of the Liberation of Albania, he bank supported the revitalization of "The water supply system of Bogova" sculpture, placd in the central square of Berat.

Together in the fight against Breast Cancer For the second consecutive year, Crédit Agricole Bank collaborated with YWCA (Young Women's Christian Association of Albania) and other supporting institutions for this important cause. During October, free test and mammograms have been available to every woman, even in remote areas of Albania. This was made possible through professional health care staff and two mobile vans, holding all necessary equipment for mammograms. Credit Agricole Albania staff, as for last year, joined the symbolic walk to support this sensitive cause.

A better world – It all starts with our actions!

Under the motto “People help people”, Credit Agricole - Albania staff, in collaboration with Red Cross Albania, voluntarily contributed with clothes, food and toys for children of people who have fewer opportunities in life.

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Social capital FIBank In support to the people in need During the year-end 2014 period, a considerable amount of funds have gone for “Daily Development Center” for disabled children/teenagers, in the city of Korca. This daily center helps 25 disabled children/teenagers and their families, through therapy, support and encouragement, and is a stable and well-known institution in Korça. By purchasing 100 paintings and various items made by children themselves with such devotion and love, Fibank used them as holiday gifts for bank’s staff and associates.

For the second consecutive year the bank wished its colleagues and associates for holidays with a special postcard, produced by the Foundation "Down Syndrome Albania".

ICB Cooperation with the Albanian Red Cross - In October 2014 the bank's staff donated blood to help children with thalassemia.

- The Bank participated in the public awareness campaign for the World Day Against Hunger (17 October 2014), where bank employees voluntarily contributed, both in monetary value as well as food or clothing, to help poor people.

Supporting people in need Bank gave its contribution, for the third consecutive year, and donated to SOS Village. Also, it collaborated with the Center for Protection of Child Rights (CRCA) and the House of Human Rights.

Intesa SanPaolo Bank Albania Sponsorship for the National Registration Center Intesa Sanpaolo Bank Albania, following its initiatives in helping businesses, supported a key institution such as NRC (National Registration Center), by refurbishing its waiting area for individuals and businesses. as well the digitalization of NRC core services, through an electronic device, the “Touch Screen Kiosk”.

Sponsoring the reconstruction of Ministry of Agriculture Since 2014, Intesa Sanpaolo Bank Albania has been focusing the development of agribusiness and through its initiatives it has also supported the Ministry of Agriculture in its biggest project to date for building reconstruction, the “Agro Business Meeting Hall”. This area was transformed into a space of motivation and productiveness, being also a supporter through tailor-made products and services for the small and medium enterprises of this sector.

Donation for the Charity Concert organized

by Caritas Intesa Sanpaolo Bank Albania supported through its donation, the organization of the Charity Concert: “It is not important how much we give, but how much Love we share while giving”, organized by Caritas Albania for vulnerable children and groups. The revenues from tickets of the concert went for supporting the Daily Care Center of People with Mental Disabilities in Fushë-Krujë.

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Procredit Bank Supporting of the domestic production "Made in Albania" ProCredit Bank, in cooperation with Chamber of Commerce and Industry in DurrĂŤs, organized a meeting with representatives of contract manufacturing businesses, in DurrĂŤs area. This meeting aimed to increase the opportunities these businesses may have on certain legal aspects of contracts and issues that should

be taken into consideration, regarding business relations with international partners. Products labelled "Made in Albania" influence the development of the sector where they belong and local production indicators, as well as increase visibility of Albanian products in international markets.

Raiffeisen Bank Playground for "Luigj Gurakuqi" Special School On the occasion of the holiday season, Raiffeisen Bank provided a playground for children of "Luigj Gurakuqi" Special School in Tirana, which will entertain pupils of this special and unique institution in the country.

The Bank is honored with "Golden Bee" award for corporate social responsibility The Ministry of Economic Development, Trade and Entrepreneurship, hosted the gala evening: "Golden Bee" in 2014, which was awarded to 15 best businesses of the year. Raiffeisen Bank was awarded "Golden Bee" in social responsibility, for its contribution to the improvement of community life, through support of social projects and those in education, health, and environment, across the country.

Societe Generale Albania Supporting people in need in Korca On the occasion of the holiday season, Societe Generale Albania, even this year, undertook an initiative to help children of "The newborn House" and "Persons with disabilities", in Korca. On 27 December, 2014, bank representatives traveled to the city and organized an evening to donate gifts.

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Banka e Bashkuar e Shqipërisë United Bank of Albania

Financime Depozita Transferta Pagesa

Banka juaj unike! www.uba.com.al

Tel: 00 355 4 2404575

Social capital Tirana Bank Supporting the Albanian Red Cross In cooperation with the Albanian Red Cross, the bank celebrated the holiday season with orphans and children who suffer from thalassemia. About 150 children of 6 to 11 years old, celebrated and received toys, which bring so much joy to them. Also, the bank organized a voluntary blood donation with all its employees across the country. The bank clients joined the initiatve, as well as volunteers, who responded positively to the call in media.

UBA United Bank of Albania donates!

For UBA Bank, this year-end festivity greetings were accompanied with donation and party organizing sponsorship, to those who range within groups who need most support, the children with Down Syndrome. In this regard, UBA bank chose to buy this year greeting cards of Down Syndrome Albania Foundation (DSA). The collected funds went in favor of the foundation and will contribute to offer additional free therapies, for children with Down Syndrome. Also, UBA Bank sponsored and organized the end-year party for DSA Foundation children.

Tirana Bank, joined the Albanian Red Cross initiative: “Think for people who are not like you”. In the framework of the International Day Against Hunger, the bank supported the distribution of 100 boxes of food to lonely elderly people.

- Në kuadër të ditës ndërkombëtare kundër urisë, banka mundësoi shpërndarjen e 100 kutive me ushqime, të cilat ju dhuruan të moshuarve të vetmuar.

Tirana Bank thinks pink!

In October, the bank supported the Albanian Women's Christian Association (YWCA) public awareness campaign against breast cancer. Also, its staff participated in public awareness meetings, as well as in the special marathon, organized

by YWCA. Supporting the initiative: "Scoot first marathon (42km)" Tirana Bank, with the aim of collecting funds to help children with HIV/AIDS, supported the initiative of Mr. Albi Greva: "Scoot first marathon (42km)", which also was joined by the bank's employees, who helped in fundraising for this human initiative.

Veneto Banka A Financial partner of the National Tourism Agency Veneto Bank supported financially the promotional information campaign, conceived and designed by the National Tourism Agency.

Sponsor of Super Cup of Albania Veneto Bank sponsored the final matches of the two most important competitions of the Albanian football, “The Super Cup of Albania”.

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Information Security Zone

Information Security Governance in Bank’s organizational structures Until recently, the focus of security had been on protecting the IT systems that process and store the vast majority of information, rather than on the information itself. However, this approach is too narrow… In order to achieve effectiveness and sustainability in today’s complex, interconnected world, the information security requires to be addressed at the highest levels of an organization.

by Mr Maks LEKSANI Head of IT Security and Business Continuity Management INTESA SANPAOLO BANK ALBANIA Vice Chairman of IT Security Committee, Albanian Association of Banks

I

nformation security in the financial sector is a strategic aspect that is incising always more in the banking business and that may become a determinant factor, in the competitive scenario of the business world. Information security management, considering it also in an integrated view, signify to respond to a precise and pressing demand of the market that imposes to the banks to have an overall integrated vision, comprising the criticalities of the business services, the requirements of the external governmental institutions, new threats deriving from the diversification and expansion of existing and new channels of payment systems, the protection of banks information assets and business continuity management; these are only some of the aspects of this vision. In this context, banks are found always more in front of the necessity for an optimized balance between the demand for security requirements and the need for efficient and flexible customer-oriented services.

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Nowadays, there has been noticed an increasing trend of information-related criminal activities which are being considered by the criminals with low risk and high profit. The evolutionary process of financial product offers, also strongly based on information technology, requires information security and business continuity solutions always more efficient. It is due to this noticeable participation of information technology, in the interaction process with the customer, being that retail or corporate, that makes the guaranteeing of an adequate level of information security an essential component of the financial institutions offer.

Integrated information security governance At a strategic level, a major concern of executive management is the need to be assured against information security risks, in an integrated view this would mean responding to the pressing and specific demand imposed by the acquisition of a complex and all-embracing vision. It is therefore evident that nowadays this topic is always more a matter of competence of top management, as it necessarily requires the reconciliation between effectiveness of information security prevention activities and specific countermeasures with the optimization of resources to be implemented at each organizational and operational layer of the banks.

The integrated approach of information

security governance in the bank aims precisely the intermediation between different, and sometimes conflicting, requirements of business and security by avoiding mutual blocking situations and lack of coherence and consistency. The realization and adoption of a model of integrated security consents to concentrate the responsibilities of various bank organizational structures in a single interconnecting structure at high management level and as a consequence, also to pursue the optimization of related security processes. Until recently, the focus of security had been on protecting the IT systems that process and store the vast majority of information, rather than on the information itself. However, this approach is too narrow to accomplish the level of integration, process assurance and overall protection that is now required. In order to achieve effectiveness and sustainability in today’s complex, interconnected world, the information security requires to be addressed at the highest levels of an organization.

The necessary approach for information security management requires the enlarged vision according to which an organization’s information and the knowledge based on it must be adequately protected, regardless of how it is handled, processed, transported or stored. It addresses the universe of risks, benefits and processes, involved with all information resources.

The security of information, as with other critical organizational resources, has to be addressed at a global organizational level.

Information security is not only a technical issue, but a business and governance challenge that involves adequate information risk management, reporting and accountability. In this context, effective information security requires the active involvement of executives to assess emerging threats and to establish the organization’s response to them. This integrated approach would also mean redefining the processes and activities, in order to coordinate methodologically cross-organizational activities, such as: information-related risk management in all its components (strategic, financial, operative and legal), business continuity management, logical and technical information security, anti-fraud, privacy management and other important activities. For example, an increasingly important aspect for the banks nowadays is the "forensic analysis" which is required to properly investigate and document criminal and fraudulent events and malicious attacks.

Each of these activities requires strong relationships and well-defined roles and responsibilities between Information Security, as a central governance structure, and other respective actors/business owners in the bank, such as: IT, Risk, HR, Audit, Le-

Stakeholders

Information Security Strategy

necessary tasks and avoiding over-control and waste of valuable resources, (iv) compliance with the organization’s philosophy and culture and lastly to remember that (v) information security is an everlasting process.

The increasing demand in the financial sector for well-structured and integrated information security governance and assurance in the organizational structures is a mandatory response, in order to prevent the criminal phenomena on banking information, that is in constant increase, due to expansion of electronic communication, new payment systems and the opening of Albania towards the European Union, an action that besides a series of positive effects necessarily carries some consequences, like a greater exposure to information-related crimes.

It is the duty of the banking sector to establish, position and enhance appropriate information security structures, capable to counteract and prevent such negative effects, not only as a bare compliance with regulatory and legal provisions, but primarily to preserve the confidentiality, availability and integrity of their customers information and data, as well as their reputation as institutions where serious guarantees are provided for the protection of banking information.

gal, Compliance, project management and external parties. This approach would bring to clear organization’s significant benefits, such as: • Increased predictability and reduced uncertainty of business operations, by lowering information security-related risks to definable and acceptable levels, • Protection from the increasing potential for civil or legal liability, as a result of information inaccuracy or the absence of proper care, • Assurance of effective information security policy and respective compliance, • A firm foundation for efficient and effective information risk management, • Rapid incident response related to securing information, • A level of assurance that critical decisions are not based on faulty information, during critical business activities.

Effective critical success factors for information security governance and management require continuous and visible commitment and support from the organization’s executive management, as the most critical one; other factors include: (i) security objectives and activities being based on business objectives and requirements, (ii) centralized management, based on a common strategy and policy across the entire organization, (iii) undertaking only Information Security Budget

Information Security Plan

Information Security Policies

Information Security Requirements

Information Security Awareness

Information Security Reviews

Information Security Service Catalogue

InformationRisk Profile

Information Security Dashboard

Internal: Enterprise Board

U

I

U

I

A

Chief Executive Officer (CEO)

U

A

U

I

U

Chief Financial Officer (CFO)

A

U

U

U

Chief Information Security Officer (CISO)

O

U

O

O

A

A

A

A

U

U

Information Security Steering Committee (ISSC)

A

O

A

U

U

I

U

I

U

U

Business Process Owners

U

O

U

U

U

Head of Human Resources (HR)

U

U

Chief Information Officer (CIO) / IT Manager

U

O

U

U

U

U

I

Information Security Structure

U

U

U

O

U

O

O

Investors

I

Insurers

I

I

I

I

Business Partners

I

I

Vendors/Suppliers

I

I

O

U

U

O

O

External

Regulators

External Auditors

I

I

I

I

I

I

An indication of the nature of the relationship of the stakeholders for each information type - Source: Isaca.org A - Approver; O - Originator; I - Informed of information type; U - User of information type

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Financial Auditorium

(Bad) Loans' Sale,

a mechanism which creates added value for banks The loan sale can be arranged as a single transaction or with several sequential tranches, but regulated as one legal contract. Actually, it is a flexible transaction, agreed between the two parties (seller and buyer).

by Ms Evis ÇELIKU Head of Retail Risk Division, RAIFFEISEN BANK ALBANIA

D

ebt (loan) sale is a commonly used strategy in the banking industry worldwide. It is focused, but not limited, to problem loans, only. Under a loan sale process, claims and obligations in a deal (loan) contract are transferred, in an outright form, from one creditor to a new one.

The latter substitutes the existing lending institution, and takes over claims and obligations until their fully repayment.

Although the collection activity is a crucial part in a bank’s credit cycle, it cannot be considered a primary and substantial activity for banks. It is already recognized/assumed in lending cycle that some borrowers will not pay back their debt obligations in due course, correctly and fully, for different reasons. In this way, they generate the potential pool for problem loan

(debt) sale. In principle, loan sale aims an immediate cash increase, releases the seller from costs and cuts down the bad loan rate in the balance sheet of the banks.

Whenever the bank concludes that repayment chances do not cover collection costs, it can decide to sell the bad loans; the price would be estimated with the time as a much better choice,

A crucial element in this process is the risk profile definition for the portfolio to be sold, since it serves as the key factor in setting the transaction fee/price.

The lack of reliable public information systems in the Albanian environment, such as: central address system, mobile telephony, employment and debt obligations’ databases, just emphasizes the risk profile’s weakness.

in the frame of total income and expenses, as compared to the when case the loan would remain under the bank management/portfolio, aspiring for the client’s payback.

Only during last years, the banking system in Albania has become more aggressive towards collection process, by launching new techniques in the market, in this regard. It was just during this time, that new agents such as: private collection companies, private bailiff agencies (replacing the state one), joined the market. And as a follow-up, the legal framework on collateral enforcement was improved.

This helped a grat deal in consolidating the image in the market – banks ask for loan repayment, they are not given for free – a lukewarm message ofr a long period of time, mainly triggered by a positive and upswing economic situation in Albania, until the wake of the global crisis.

In Albania and at Raiffeisen Bank - Albania, this process covered the unsecured loans extended to private individuals and microbusiness, which was a portfolio with payments in arrears, which had passed through all steps of the collection process. Surely,

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by being applied for the first time in our banking system, many doubts and questions were raised over the process, itself. When to sell? What are the risks involved? How is it legally regulated?

Where does the sale start? Is there any market in the country for such a transaction? What will be the market reaction?

Well, this was not the first experience for Raiffeisen Group and the accumulated know-how within the network, supported the whole process, substantially. It was for this group standard that targeted the implementation of this strategy in Albania, which marked the first portfolio loan sale in the country.

The loan sale can be arranged as a single transaction or with several sequential tranches, but regulated as one legal contract. Actually, it is a flexible transaction, agreed between the two parties (seller and buyer).

Most of the advantages of this transaction are as follows: • income/profit from bad loans, • time saving, administrative and management cost reduction when calling the loan, • concentrating internal resources on healthy loans, • an additional tool in collection, • improved cash inflow, and • improved risk portfolio rates.

A crucial element in this process is the risk profile definition for the portfolio to be sold, since it serves as the key factor in setting the transaction fee/price.

The lack of reliable public information systems in the Albanian environment, such as: central address system, mobile telephony, employment and debt obligations’ databases, just emphasizes the risk profile’s weakness. On the other hand, it is also the market development itself that reinforces this profile; it is just the competition which promotes an efficient and long-lasting process/activity. At the time when this transaction was carried out, such a market did not exist; we had to feed

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the appetite for such a process, and at the same time, set up co-operation with relevant institutions, in order to ensure the whole framework for the loan sale.

Currently, Bank of Albania does not provide any particular guidelines or regulations on this activity, and in this way, the existing framework was adopted to implement it, though under a conservative version, thus limiting the buyers’ list only to those who possessed a lending license, which is not the common practice, applied in developed markets. The upgrade of legal and regulatory framework on such specific transactions is more than necessary, with the aim of clarifying and making it easier for the existing or even new agents/operators, as it would bring higher competition and take us closer to other developed countries’ practice.

Raiffeisen Bank is currently using the most advanced and similar process and tools in collection that are being

used also in other European and international banks. It provides several solutions for financial pinch, caused by the quality of loan repayments, affected not only from borrower’s profile and bank policies, but also from the economic situation in the country and region, too. The market had a positive reaction, and the buyer’s professional profile was crucial how this portfolio was managed, once it was sold from the Raiffeisen Bank.

Today, one year since this transaction was performed we are proud to claim that it was managed and handled successfully, despite doubts and risks, accompanying it as a first-time transaction of that kind. Of course, experience offers chances to improve the process, which will be reflected in future similar transactions. We do believe that this collection tool will make its own way in Albania, because risk is where lending is, and where there is risk, there are also options to collect, even with loan sale.

AAB Trainings 2014

TRAININGS Moody`s analytics Workshop on Basel II, 22 - 23 October 2014 AAB, in collaboration with Moody's Analytics (UK)’ experts, organized three half-day workshops on Basel II, with the participation of commercial banks and BoA representatives. The workshop was focused on the best practice approach and practical tools in implementing Basel II / III. The workshop was attended by 45 participants, from member banks.

“Fraud detection: Challenges in a challenging business environment", 24 - 25 November 2014 AAB, jointly with the Albanian Institute of Internal Auditors (AIIA), organized a two-day training seminar on Fraud Detection. The Bulgarian trainer presented a general overview of current best practices supported with real-life case studies of the region, explaining how to identify areas most prone to fraud and red flags, as early as possible to minimize damage. A second trainer, an Albanian professional, was focused mainly on investigations, counterintelligence, collection, analysis, and exploitation of information and intelligence, in support of national security, defense and foreign policy objectives. The training was attended by 22 bank representatives.

“Branch sales optimization workshop for Albanian banks", 3 - 4 December 2014 AAB hosted for two days free workshops (one each day) offered by VISA for the VISA Cards issuer banks, whose objective was helping banks to build internal capabilities, for more efficient ways of selling VISA card products and make product development more focused on “internal” sales of credit card products (selling products to bank sales force). The workshops were attendes by 30 participants.

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AAB Trainings 2015

AAB

Facilitates participation of Albanian bankers in the high end trainings by ATTF, Luxemburg.

Since September 2014, AAB has become the only official Albanian partner of the Financial Technology Transfer Agency (ATTF http:// www.attf.lu/), in Luxembourg. The ATTF’s objective is to provide technical assistance in financial issues to partner countries/regions and to share the expertise of the Luxembourg Financial Centre with these partners. AAB will have the role of a coordinator for Albania in collaborating with ATTF in the frame of training programs, offered in the financial field. The available trainings programs are of a high quality at very affordable costs, since they are partially financed by the Ministry of Finance of Luxembourg. Applicants from Albania should submit their applications to AAB, directly. Candidates will be selected by ATTF on the basis of their profile, experience and job position in the respective financial institution.

As of end of December 2014, 8 specialists from commercial bank have attended the training programs provided by ATTF, and 10 specialists are selected to participate in the upcoming trainings, during the first months of 2015.

During 2014, the Albanian banks’ employees participated in the following training programs: 1. "SME Financing", organized in Luxemburg, 6 - 14 October 2014, 2. “Prevention of Money Laundering Level II & Preparation course to the CAMS® certification exam”, organized in Luxemburg, 20 - 27 October 2014, 3. The multinational seminar “CAMBOC Capital Markets Back-Office Certification Programme Level II: Mastering Securities Back-Office Operations“, organized in Luxemburg, 24 - 28 November 2014

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During 2015, ATTF will organize the following trainings: 1 Compliance Certified Programme

02 - 11 February 2015

Capital Markets Back-Office Certified Programme : 2 CAMBOC Level I: Fundamentals in Securities Settlement, Clearing and Custody

02 - 06 March 2015

3

Financing SME: From Business to Credit Assessment and Management

09 - 13 March 2015

4

Anti-Money Laundering Certified Programme: Anti-Money Laundering & Terrorist Financing Foundation

20- 24 April 2015

5 Certified Private Banker: Foundation Level

04 - 12 May 2015

6 Human Resources Management for Line Managers

17 - 22 May 2015

Capital Markets and Financial Instruments Certified 7 Programme: CAMFIN Certificate: Capital Markets and Financial Instruments,

01 - 08 June 2015

8 A Strategic Bank Management Review

08 - 12 June 2015

Risk Management Certification Programme: Preparing to the Financial Risk Manager FRM® Exam Part I of GARP

10 - 17 October 2015

Anti-Money Laundering Certified Programme: Anti-Money 10 Laundering Level II Preparation Course to the "Certified AML Specialists-CAMS® Certification"

12 - 19 October 2015

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11

Risk Management Excellence: Connecting Luxembourg to Leading MFIs

16 - 20 November 2015

12

Strategy, Performance and Risk Management in Microfinance – he SIMFI interactive Training Course

23 - 27 November 2015

13 ACI Diploma

30 November - 08 December 2015

For further information and to apply for the seminar, please contact: Junida Tafaj (Katroshi) HEAD OF TRAININGS ALBANIAN ASSOCIATION OF BANKS Rr. Ibrahim Rugova • Nr. 5 • SKY TOWER • A 9/3 • Tirana +355 4 2280 371 7 +355 4 2280 359 junida.katroshi@aab-al.org • www.aab.al

AAB Activities COMMUNICATION In the frame of developing a new Social Media Communications Strategy, AAB created its official page on the social network, Facebook, LinkedIn and Youtube. The FB official page can be visited by clicking the link below: https://www.facebook.com/www.aab.al

Financial education AAB, in collaboration with Neptun network exposed at the premises of commercial center TEG, the brochure on “Banking Card”, produced and promoted last year by AAB, at the third National Forum on Cards. This project aims to inform both banks’ cardholders and potential customers on cards’ usage, benefits and conditions.

AAB launched “My Bank”, video series project with the presentation of the first two videos: “Banking Cards” and “Payment Methods”, respectively. This project aims to provide details and simple information for a sound financial behavior to the new and existing banking customers. The project includes the realization of 10 more videos with different topics, mainly focusing on retail banking. The videos are displayed on the AAB web page, YouTube and AAB Facebook page. For further information please visit Shoqata Shqiptare e Bankave / AAB in Youtube.

In order to improve the transparency and level of information given to the customers, before entering in a contract with the bank, related to the consumer loans offered by banks in Albania, AAB in consultation with the Office for Consumer Protection, published the informative brochure entitled "Consumer Loan".

AAB believes that this brochure, along with the commercial banks’ guidelines, will provide the consumers with the necessary information to better handle their finances.

"An educated customer is the best customer”

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