Bankieri No. 20 - July 2016

Publication of the Albanian Association of Banks

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Content Nr. 20, July 2016

Bankieri

Bankieri No.20, July 2016 Publication of the Albanian Association of Banks

Publication of the Albanian Association of Banks

Editorial Zero base interest rate, or the moment of truth for the Albanian economy, entrepreneurship and policy makers!

Prof.Asoc.Dr. Elvin MEKA Frontline Why economic expansion is not in place, despite the low interest rates Kaan PEKIN Bank of Albania’s monetary policy its effectiveness and challenges Erald THEMELI, MSc Monetary policy in Albania under a big question mark Aurora SULÇE

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Bankieri is the official publication of the Albanian Association of Banks which mainly focuses on the Albanian banking industry. Bankieri provides 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

Interview Dr. Spiro BRUMBULLI The new Secretary General of the Albanian Association of Banks, AAB Dr. Spiro BRUMBULLI Banking System Unified/Standardized Payment Order The road towards increasing productivity and process easing Najada XHAXHA New products in the Albanian banking system1 Fatih KARLI Security in Digital Banking Anila TOLLKUÇI Experts' Forum AFSA role and challenges for managing risks and confronting monetary easing Enkeleda SHEHI A business perspective on the benefits of the WTO trade facilitation agreement ICC Albania

EDITORIAL TEAM:

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Elvin Meka Editor-in-Chief Eftali Peçi Coordinator Junida Tafaj (Katroshi) Collaborator Andis Rado Photographer Design & Layout: FCB Afirma Printed by:

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Economist Corner “Quantitative easing” and deflation Central Banks’ question marks Prof.Dr. Adrian CIVICI

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Social Capital Banks' activities

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Financial Auditorium Helicopter drops Prof. Asoc. Dr. Arbi AGALLIU

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AAB Activities Digital Banking In Albania

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AAB Trainings

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Christian CANACARIS AAB Chairman & CEO of Raiffeisen Bank Albania Gazmend KADRIU AAB Vice Chairman & CEO of Union Bank Periklis DROUGKAS AAB Executive Committee Member & CEO of Alpha Bank Albania Seyhan PENCABLIGIL AAB Executive Committee Member & CEO of Banka Kombëtare Tregtare Frédéric BLANC AAB Executive Committee Member & CEO of Societe Generale Albania Bozhidar TODOROV AAB Executive Committee Member & CEO of FIBank Albania Spiro BRUMBULLI Secretary General, Albanian Association of Banks Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IKEA) Adrian CIVICI President of European University of Tirana Enkeleda SHEHI Chairwoman of Albanian Financial Supervision Authority

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Editorial

Zero base interest rate,

or the moment of truth for the Albanian economy, entrepreneurship and policy makers!

This level will be the moment of truth, where stakeholders, so far as spectators, will finally understand that the interest rates mechanism has fully accomplished its function, the Bank of Albania’s legal and technical mandate cannot help in stimulating lending, consumption, investment and entrepreneurship any more, and that the challenge of stimulating economic growth eventually walks out from Bank of Albania’s gates and moves into the “spectators”’ territory.

Prof. Asoc. Dr. Elvin MEKA1 Editor in Chief

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he base interest rate at very low levels is no breaking news in Albania any more, at least from the moment when it dropped, for the first time below 2%. The last 2 – 3 years have witnessed consecutive interest rate cuts, all at "historic" levels, by the Bank of Albania, with the clear objective: boosting consumption and reducing public’s propensity to save and stimulating lending. Currently, the national economy is experiencing a continuous lending process, especially credit in national currency (ALL), regardless of the fact that such positive effect is almost neutralized by early or timely loan repayments, thus making the outstanding loan portfolio to remain almost at same levels, without considering the thorny issue of nonperforming loans. Never before bank loan cost have never been so low, and this essentially due to frequent key interest rate cuts by Bank of Albania, but this is not the real issue; the problem remains with the borrowing structure, which unfortunately is heading swiftly towards the short-term one, while long-term loan portfolio for investments is shrinking incessantly. Also, subsequent historical

interest rate cuts have not succeeded in stimulating consumption and productive investments in the economy, both essential elements of GDP, and this is so for numerous reasons, primarily related to the country's existing economic structure and model, business climate and the initial or problematic stage of structural reforms in Albania. The Albanian entrepreneurship is facing increasing difficulties to create more and more added value in the economy, and is undertaking less and less risk, whereas Albanian households are using more and more a uniform consuming pattern through years, with the idea of being “prepared”, year after year, for future’s "rainy days".

In this context, it seems that entrepreneurship, is not living up to its name; so it is not doing entrepreneurship, which means that it is not generating additional employment, additional cash flow and liquidity circulation and additional consumption. On the other hand, households and institutions are competing to buy as much as they can long – term government securities, which reduce even more the real interest rate in the economy, thus rapidly "consuming" the quasi-final investment alternative that provides a reasonable return on investment, without undertaking any

substantial risk. If such picture of economic behavior, will keep repeating itself, then all stakeholders will continue to wait as spectators, until Bank of Albania uses all its "ammunition" with the remaining 4 – 5 other "historic" rate cuts, thus walking steadily and faster towards zero base interest rate.

This level will be the moment of truth, where stakeholders, so far as spectators, will finally understand that the interest rates mechanism has fully accomplished its function, the Bank of Albania’s legal and technical mandate cannot help in stimulating lending, consumption, investment and entrepreneurship any more, and that the challenge of stimulating economic growth eventually walks out from Bank of Albania’s gates and moves into the “spectators’” territory.

Until the arrival of such moment of truth for the economy, entrepreneurship and Albanian policymakers, i.e. until the base interest rate reaches 0%, everyone should clearly understand and implement the philosophy of the iconic sentence of US President, Mr. F.D. Roosevelt, in his Inauguration Address in 1933: "... the only thing we have to fear is ... fear itself ..."

Vice Rector for Academic Process, UET.

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Frontline

Why economic expansion is not in place, despite the low interest rates “Monetary Transferring Mechanism”, which BoA controls through pumping money or decreasing interest rates, works only for LEK denominated loans. Obviously, BoA is not and cannot be the monetary authority for foreign currencies, like Euro, and it has no power to fully control monetary transmission mechanism unless majority of loans in Albania are denominated in ALL.

Kaan PEKIN

Treasury & Financial Institutions Group Head BANKA KOMBËTARE TREGTARE

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ank of Albania (BoA) cut its key one-week repo interest rate twice this year by 25 bps each time, in mid-April and in the beginning of May, aiming to enhance the monetary stimulus to economy. The key rate was 1.75% since November ‘15, but it came down to 1.25% after these two rate cuts.

BoA’s monetary policy clearly intends to support further lending growth, private investments and consumption in the economy. However, do low interest rates stimulate of lending growth and economic expansion? Do rate cuts affect commercial banks’ decision making process and loan pricing and does this transform to expansion in loan portfolios? In order to answer the above questions, we need to figure out why interest rates are so persistently low, not only in Albania, but globally. For a better analysis, I

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will try to simplify things and refer to two actualities, which are beyond the control of BoA. First, most people taking a loan or a mortgage believe that they are getting it from the bank, or credit union. Simplistically, getting a bank loan is, in reality, getting a loan from some other member of society, through the services of the bank. The individual or business who acquired the savings/ time deposit account with the bank is the real provider of the loan or the mortgage and the bank is the link between. The bank may not only rely on its own resources made available by its own deposit customers, but it can also pool its funding resources by selling these loans to another financial intermediary, which provides funding for itself again through individuals or businesses.

The roots of economics theory depend on simple supply and demand analysis, and prices are determined at the point where supply and demand colludes with one another. In that context, any central bank interest rate cut normally aims to stimulate consumption and loan demand by

affecting decision of savers and borrowers through cheap money.

However, in nowadays world, where majority of savers are worried about their future ability to maintain their consumption at the level they already have today, attempt of central banks to reduce interest rates cause savers to decrease their consumption and

Sharply falling local currency interest rates forced inevitably the banking system to decrease its credit rates.

However, lower interest rates are not the sole determinants for the expansion of loans and consumption, since the actual determinant for increased consumption and loan demand is the future expectations of economic actors.

increase their savings, despite the decrease on the price of money (lower interest rates).

This causes a spiral where interest rates and economic expansion would stay low globally for an undetermined period of time. This process is caused by a change on risk tolerance of economic actors (both savers and borrowers), where savers would not like to consume and borrowers would not like to invest more, due to deterioration of their future expectations.

Coming back to our country, BoA was very successful in decreasing interest rates. Numerically, 1-year average T-Bill rates came down to 1.28% yield level at the end of July ‘16, compared to average yield of 3.22% by the end of July ‘15; which means 1-year interest rate decreased by 2.5 times during that time period. Moreover, 5-year T-Bond yields, considered as a better indicator for credit rates, fell down to 3.43% in May ‘16, compared to 6.45% yield observed in May’15.

This indicates a decrease by 1.9 times on 5-year T-bonds’ rate. The sharp fall on interest rates is also the result of a successful debt swap of Ministry of Finance, which renewed significant part of domestic debt with foreign debt offered by IMF, WB and similar institutions. Sharply falling local currency interest rates forced inevitably the banking system to decrease its credit rates. However, lower interest rates are not the sole determinants for the expansion of loans and consumption, since the actual determinant for increased consumption and loan demand is the future expectations of economic actors.

Secondly, the actuality that I want to mention hereby is related with the currency composition of borrowers’ aggregated loan portfolio. I did not call it on purpose portfolio of banks, because borrowers’ decisions rather than banks’ lending strategy created such a composition. There are varieties

of factors which might be effecting borrowers’ decision to choose Euro denominated loan rather than ALL denominated loan, but my aim here is not to discuss these factors. If we go back 8 years ago, in December 2008, and check the composition of aggregate loan portfolio of borrowers in Albania, we see that 72.6% of loans are denominated in foreign currency (mostly euro) and only 27.4% of loans are denominated in ALL. Specifically, aggregate loan portfolio was ALL 396.768 billion and foreign currency denominated loans was equal to ALL 288,106 billion. Till the end of March 2016 (latest data available), the composition changed in favor of ALL denominated loans, but still foreign currency denominated loans override ALL denominated loans with 60.6% shares of total loans. Aggregate loan portfolio currently is ALL 589.062 billion, whereas foreign currency denominated loans are ALL 356.983 billion.

The actuality here is that “Monetary Transferring Mechanism”, which BoA controls through pumping money or decreasing interest rates, works only for LEK denominated loans. Obviously, BoA is not and cannot be the monetary authority for foreign currencies, like Euro, and it has no power to fully control monetary transmission mechanism unless majority of loans in Albania are denominated in ALL. Here, for Albania, I would even dare to say that European Central Bank (ECB), rather than BoA, has more power on monetary transmission mechanism, since the majority of loans are denominated in euro in our country.

Nevertheless, Euro rates are also historically at their lowest level and nominally they are lower than ALL interest rates. However, we have not yet witnessed a loan expansion or increase in consumption. I will refer again to the first actuality I explained above; the savers’ risk-averse behavior

and propensity to save more actually suppress loan demand both for investment and consumption. Last but not the least, ineffectiveness of low interest rates in Albania, can also be explained by the non-existence (relatively) of qualified borrowers.

The deteriorating future prospect on global level is a hindrance, which can be removed by neither BoA, nor Ministry of Finance/Government.

Although, both ALL and Euro interest rates are historically low, we have not yet seen the desired increase on loan expansion, consumption and economic activity. The recovery of banks’ lending (funding mechanism between savers and borrowers through banks’ services) remains a precondition for a stable and long-term growth, and it is one of the medium-term objectives for BoA, but prolonged period of low interest rates environment and the deteriorating future expectations of economic actors is the biggest risk against the primary objective of BoA.

Euro rates are also historically at their lowest level and nominally they are lower than ALL interest rates. However, we have not yet witnessed a loan expansion or increase in consumption. The savers’ risk-averse behavior and propensity to save more actually suppress loan demand both for investment and consumption. Also, the ineffectiveness of low interest rates in Albania, can also be explained by the (relatively) non-existence of qualified borrowers.

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Frontline

Bank of Albania’s monetary policy

Its effectiveness and challenges As long as inflation and inflationary expectations are not sustainably anchored to the target, the major challenge of monetary policy remains open. Although the economy is still faced with low inflationary pressure, both in domestic and foreign environment, the Bank of Albania is capable to win this challenge.

Erald THEMELI, MSc

Head of Monetary Policy Department BANK OF ALBANIA

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ank of Albania undertook two consecutive policy rate cuts in April and May 2016, respectively. Such monetary policy easing brought the interest rate to a new historical minimum of 1.25%. This move was accompanied by numerous comments, both in mass media and among professionals, regarding its expected utility or effectiveness. Surely, it is deemed as necessary that such moves be explained professionally, form Bank of Albania’s perspective, regarding monetary policy’s objectives, achievements and challenges.

1. Monetary policy in the economic and financial context of Albania Although being affected a bit later, the Albanian economy did not remained unscathed form the impact of global crisis. This development is naturally understandable for a small and open economy, with a high degree of financial integration with Eurozone.

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The effects of crisis were transmitted primarily through reduction of commercial and financial relations to be further complemented by increased insecurity and a heightening of risk premiums, in domestic financial markets. Consequently, the economic growth rate was halved, from an average of 6% during five pre-crisis years, to an average of 3% for the

The major objective of monetary policy has been, and still remains, ensuring price stability. As long as inflation and inflationary expectations are not sustainably anchored to the target, the major challenge of monetary policy remains open. Although the economy is still faced with low inflationary pressure, both in domestic and foreign environment, the Bank of Albania is capable to win this challenge.

subsequent period. The economic slowdown was reflected in the rising unemployment and falling inflation. It created financial difficulties for private sector, which had an impact in the increase of non-performing loans in the banking system. These developments have dictated an astute reaction by country’s monetary policy. Our monetary policy was oriented towards an easing cycle, whereas its respective intensity has been progressively strengthening. Beyond the initial shock, such easing was also dictated by the shift of fiscal policy towards the consolidation approach, and finally, the weakening of inflationary pressures in the international markets.

Bank of Albania had good reasons for pursuing such a policy, because: - Our legal mandate is to achieve and maintain price stability, set out as an inflation rate of 3%. The decline in inflation rate below the target was, inter alia, a symptom of inadequate aggregate demand. Modern economic theory sees monetary policy as an instrument for managing aggregate demand, so as an instrument specifically designed to respond to the demand shocks.

- Low levels of inflation, if prolonged

through time, may cause a decline in inflationary expectations. This may cause the emergence of vicious circles, where low inflationary expectations cause a shrink of aggregate demand, reduce inflation and generate further decline in inflationary expectations, thus re-launching the cycle.

- Extension of uncertainty enhances risk premiums and demand for liquidity in financial markets. Satisfying such increased demand can only be achieved by pursuing a stimulating monetary policy.

To conclude this discussion, I would like to further detail the transmission mechanism of monetary policy, by illustrating how the above issues may be addressed.

Easing monetary policy means a growth of money supply and lowering the cost of money in the economy. In the view of neo-Keynesian economic models, which are the basic models used for business cycles’ analysis, the monetary policy stimulus aims to reduce real interest rates below shortterm market equilibrium, affected by current economic developments. The drop in real interest rate encourages investments, as it reduces the cost of financing. It also encourages consumption, reduces incentives and the propensity for saving.

Furthermore, easing monetary policy

Chart 1 Financial markets interest rate (in percent)

Source: Bank of Albania

helps determine the most appropriate exchange rate equilibrium, by creating the premises for improving the trade balance. All these three channels help expanding the aggregate demand, increasing employment, real wages, and business profit margins, by bringing these indicators in line with the inflation target. Along with them, the consequent reaction of monetary policy signals the willingness of Bank of Albania to respect its inflation target, whereas the relaxation of liquidity pressures in financial markets helps increase the volume and reduce the costs of financial intermediation.

2. The instruments used and their respective effectiveness Bank of Albania, aiming to address the aforementioned problems, has cut base interest rate, increased liquidity injection into the system and guided general public towards the future direction of monetary policy (forward guidance). All these three instruments have sought - and achieved - lower funding costs for the economy (Chart 1).

Also, the liquidity injection has calmed the financial markets’ functioning (Chart 2), while the use of forward guidance has helped in flattening the interest rates’ curve (Chart 3). In the presence of an aggressive reduction of interest rates by ECB and FED, our monetary policy stimulus has curbed

the imminent trends of exchange rate appreciation. These factors have created more appropriate financial conditions to support the aggregate demand. Although the economic and financial environment is characterized

The low level of interest rate suggests that the room for further use of this instrument is narrowed. Although our analysis suggests that the current monetary stimulus is at appropriate levels, risks’ balance remains on a downward trend and other shocks may require an increased monetary stimulus.

If this happens, Bank of Albania believes that there is still room for a reduction of base interest rate. Beyond that point, monetary policy would need to address nonconventional instruments of monetary policy.

Chart 2 BoA liquidity injections and interbank market transactions (in ALL bln)

Source: Bank of Albania

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by high risk premiums, further fueled by policies of European regulators, they have helped to increase loans in ALL (Chart 4). Also, the phenomenon of loan indexation with short-term interest rates implies that our monetary policy stimulus has eased debt service cost for businesses and Albanian households.

Easing monetary policy means a growth of money supply and lowering the cost of money in the economy. In the view of neo-Keynesian economic models, which are the basic models used for business cycles’ analysis, the monetary policy stimulus aims to reduce real interest rates below shortterm market equilibrium, affected by current economic developments.

All these developments illustrate the fact that monetary stimulus has produced a positive effect. In the absence of such stimulus: (i) interest rates and the exchange rate would be irrationally at higher levels; (ii) lending, aggregate demand, economic growth and inflation would be obviously lower; and (iii) the costs of debt service and economy’s financial balance would be clearly deteriorated.

3. Challenges of monetary policy The major objective of monetary policy has been, and still remains, ensuring price stability. As long as inflation and inflationary expectations are not sustainably anchored to the target, the major challenge of monetary policy remains open.

Although the economy is still faced with low inflationary pressure, both in domestic and foreign environment, the Bank of Albania is capable to win this challenge. In the long term, inflation remains a monetary phenomenon and, as such, it is subject to the monetary policy’s action.

In short term, monetary policy also faces other challenges, as follows: - Low risk appetite weakens the effectiveness of the transmission mechanism of monetary policy.

Chart 3 The slope of the government paper yield curve (12m yield – 3m yield, in p.p.)

Source: Bank of Albania

Reduction of risk premiums and enhancement of willingness for loans and investments require the undertaking of structural reforms, some of which are already under way. However, it should be noted that, for such mechanism to continue being functional: (i) the traditional monetary policy remains effective, but (ii) the “dose” of monetary stimulus must be stronger than it would be, under ideal conditions.

- The low level of interest rate suggests that the room for further use of this instrument is narrowed. Although our analysis suggests that the current monetary stimulus is at appropriate levels, risks’ balance remains on a downward trend and other shocks may require an increased monetary stimulus. If this happens, Bank of Albania believes that there is still room for a reduction of base interest rate. Beyond that point, monetary policy would need to address nonconventional instruments of monetary policy. The use of these tools requires caution, since their specific nature often creates unwanted side effects.

However, achieving the inflation target will remain the primary objective of Bank of Albania, regardless of the instruments used.

Chart 4 ALL to Total Credit Ratio (in percent)

Source: Bank of Albania

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Frontline

Monetary policy in Albania under a big question mark Structural reforms are critically needed to ensure a sustainable economic growth, but they are being absent so far, thus leaving the Bank of Albania alone in its efforts to stimulate lending and consequently, to restart the engines of economy.

Aurora SULÇE Journalist

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ank of Albania has, since September 2011, reduced the base interest rate 16 times, in an effort to stimulate lending and, as in a chain reaction, the economy, too. In the summer of six years ago, the cost of domestic currency was 5.25%, whereas today it stands at its historical minimum of 1.25%. But did the easing monetary policy approach by Bank of Albania achieve its goal? The reduction of base interest rate was followed by commercial banks, which initially was more obvious in the deposits’ side and slightly slower on the loans one.

In the coming period, the transmission of monetary policy was clearer and would affect Treasury Bills and Bonds, as well as other investment alternatives of private funds.

Bank of Albania’s data show that interest rates have fallen considerably and loans in ALL have never been cheaper than now. The average interest rate for loans in ALL, for all maturities, has fallen in May of this year to 7.2%, a historical minimum record, from the level of 11.4% in September

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2011. Nevertheless, the fact that loans are cheaper is not accompanied with an increase in lending, as it might have been expected. In March of this year, for the second consecutive month, a slight recovery of ALL 2.7 billion in loans granted by the banking system was evidenced. However, credit to economy declined by 2%, on a yearly basis, and April data were not very encouraging; instead they proved a still meager lending activity. According to Bank of Albania, loans to private sector recorded an annual growth of only 2.5% in April, when considering the write-off effect of non-performing loans from banks’ balance sheets. Such figures clearly indicate that the credit crunch is not caused by the loan price, which has declined as a result of the Bank of Albania’s monetary policy, but from other factors.

Firstly, the business climate, perceived and defined as worsened by domestic and foreign investors, but recently by the International Monetary Fund, too. Recent surveys by the Foreign Investors Association of Albania, the American Chamber of Commerce, German Chamber of Industry & Commerce, as well as other business associations, pose an urgent need for eliminating bureaucracy, es-

tablishing the rule of law, easing fiscal burden and improving relationship with state institutions, primarily the fiscal authorities. The last survey of Economic Sentiment, conducted and published by Bank of Albania, shows very low results in the first quarter of this year, practically the lowest level since the same period of 2014, evidencing a strong pessimism perceived by economic agents, consumers and businesses in industry, trade and services. This indicator has improved in the second quarter of the year, marking an increase of 6.2 points. Nevertheless, Bank of Albania assesses that business and consumer confidence remains volatile, illustrating the wobbly private domestic demand, as the engine of economic growth. In parallel, lending activity data for the first quarter of the year, published by Bank of Albania, showed a decline in demand for loans from households and large businesses, which are the main borrowing segment. Lending data for the second quarter showed that businesses loan demand has remained almost unchanged. Corporate Albania is currently working at approximately 70-80% of capacity, as pointed out by Bank of Albania, thus bringing out the difficulties that business goes though,

by being the main employment generator and the main contributor to the country’s economic growth.

The second factor, which for the long time has become a determinant in banks’ decisions to lend, is the non-performing loan portfolio. According to the Albanian Association of Banks’ data for April of this year the level of non-performing loans has been increasing, amounting to 20%.

Although this indicator decreased slightly by 0.5 % in May, it remained at an unease level of 19.5%. When compared with its level at the end of 2015, its increase is at almost 1.3%. In December, the level of non-performing loans decreased to 18.2%, after banks wrote - off lost loans from their balance sheets. Banks cleared balance sheets form loans which were not collected during the last three years. Regardless the write - off loan process in the banking system accounted for ALL 23 billion lost loans in 2015, other loans have entered into such category. In the current business’ state of affairs and in the overall economy, it is clear that the monetary policy alone is not sufficient.

However, the continuing drop in base interest rate has also had its negative impact, mainly on all depositors. Deposit interest rates fell sharply during the last 6 years, thus turning the bank savings’ investment into a less profitable investment alternative. According to Bank of Albania’s data the annual average interest rate of new deposits for May 2016 was 0.84%, compared to 0.93% in previous month. This is the lowest historic level for ALL deposits.

Only one year ago, the 12-month deposits were producing a 1.6% return.

The sizeable spread between loan and deposit interest rates which was 6.3% in May 2016, witness a high level of risk perceived by banks during lending activity, which undoubtedly stems out from the country’s difficult economic situation.

The decline of deposit interest rates is not associated with any increase in consumption, which could have been good news for the economy. INSTAT

reported that, in February, inflation declined to 0.2%, in March 0.3% and April 0.3%, by clearly indicating the contraction in consumption, which, according to Bank of Albania, is a result of uncertainty felt by households and businesses, in terms of spending and investments. It was for May and June that inflation began to leave the danger zone, reaching at 0.7% and 1.2% respectively, but it still remains away from Bank of Albania’s 3 % target. On the other hand, T-Bills and T-Bonds, regarded as the best investment alternative, suffered a substantial decline in their respective yields, as a result of decrease of key interest rate for ALL. At the auction of 7 June, 12-month T-Bills’ yield went down to 1.24%, while 6-month T-Bills’ yield reached 0.95%, by staying for the second consecutive month below the 1% mark. The Government was a clear winner form the decrease in interest rates, as it sells its debt cheaper to the public, whereas the latter, after losing the profit advantage from deposits, are now losing the chance to make profit from Treasury Bills. The 2015 State Budget data show that the government paid ALL 1.4 billion less, for the last year’s debt service, due to the sharp decline of Treasury Bills and Bonds’ yields. The monetary policy, over the past 6 years, has imposed low interest rates to the economy. The low interest rate environment for stimulating the economy delivers, but at the same time, policy makers should undertake structural reforms. Such stance is also supported by Mr. Wim Mijs, Chief Executive of the European Banking Federation, EBF, who emphasizes that if low rates are not combined with reforms, the environment can become dangerous. In this case, structural reforms become a necessity, especially when fiscal stimulus to economy is already exhausted. Put it differently, the government cannot reduce the tax levels, due to the agreement with IMF. Recommendations by the World Bank, EBRD and IMF point out that Albania, over the time and up to the

year 2025, should focus more on developing the energy sector, removing bureaucratic and administrative obstacles in the construction sector, by putting it back on the right track of higher growth rates, increasing investments and expanding the agricultural sector, modernizing and making efficient the mining sector, improving business environment and undertaking efficient policies, for consolidating and modernizing domestic business, tourism development through substantial improvement of tourism supply, and the service and tourism infrastructure quality, improving human capital and enhancing investments in education, scientific research and innovation, etc.

The above mentioned reforms are critically needed to ensure a sustainable economic growth, but they are being absent so far, thus leaving the Bank of Albania alone in its efforts to stimulate lending and consequently, to restart the engines of economy. Finally, the effectiveness of monetary policy and its primary objective to stimulate lending, is therefore under a big QUESTION MARK!

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Interview

Dr. Spiro BRUMBULLI

The new Secretary General of the Albanian Association of Banks, AAB AAB has an important role in protecting banks’ interests, and acting on their behalf gives you strength and prestige, but it means responsibility, too. Often, the interests of the industry do not move in the same direction as those of policymakers and this fact puts you in front of them. Arguments are of economic nature, well-founded and based on modern best practices.

Dr. Spiro BRUMBULLI Secretary General ALBANIAN ASSOCIATION OF BANKS, AAB

BANKER:

Firstly, we wish you success in your position as the new Secretary General of the Albanian Association of Banks, AAB. Following such "comeback" in the banking system, how do you find now AAB and the banking system, itself?

We live today in a dynamic world, where things change and evolve very quickly. Technology has provided indefinite opportunities and the reality has witnessed developments that go beyond expectations. Banks are part of such process. Actually, the discussion is not just about a new development model for the banking business, but for accomplishing many of its features.

On the other hand, the 2008 crisis has been a historical lecture, translated and managed, in an excellent way, by all policy-making institutions, by avoiding serious consequences of 1929-1932 crash and crisis.

In this context, many things have already changed in the banking system,

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since the time I left the managerial position. Unfortunately, the banking system is not at its flourishing moment (thousands of banks have gone bankrupt in the world), in terms of business development and financial intermediation, but instead it is living the most important moment, from the view of consolidating the activity to

Following the 2008 crisis, the banking system has not ceased, even for a moment, crediting the economy. Banks continued lending, despite the tightening of procedures and restrictive measures, often bound to be implemented.

If 2008 was the best year in credit growth, where the new credit reached at ALL 280 billion, since 2009 until today the banking system has granted ALL 250 billion of new loans, on an average annual basis. This means that credit to economy is always present. However, loan portfolio growth is not as it used to be.

adapt to a new world: globalization and technology development. Specifically, many rules are changed; more stringent measures, in favor of protecting public interest, are already in place; a muchbetter defined bank failure is enforced, which halts public funds to be used in such cases, thus minimizing the systemic risk. Also, significant changes are applied, regarding the calculation of regulatory capital and capital adequacy. Non-performing loans are a burden and a challenge for accurate legal and operational addressing of the issue. Currently, a vivid discussion is developing, about the need for implementing global standards of professionalism in the banking industry, as a lesson from the global crisis, with regard to human capital.

In short, we are in a phase of banking business consolidation, for the sake of a safer perspective. AAB should be at the frontline of protecting the interests of industry it represents and the changes that taking place.

BANKER:

As a former experienced banker, how challenging this new role may be, given that now you have to represent and protect the interests of the entire banking sector in Albania?

When you are a CEO and manager,

you have interests that join together with other colleagues, because they belong to the whole industry or environment, in which the bank carries out business, but also have diverging interests, because anyone strives to accomplish his/her own objectives.

Put differently, you are focused on both fronts, but the emphasis is placed on the performance of the bank you run. As a director you have executive responsibilities and the final product is easily measured by business plans indicators.

The task of AAB Secretary General, as it is today, in a coordinating role, aligning the concerns and issues of the banking industry, representing banks, at certain level, at other institutions, providing some services that are of common interest to the industry, etc.

So, strictly speaking, there are no basic executive duties, the final product is more difficult to measure, but public sensitivity is more direct.

AAB has an important role in protecting banks’ interests, and acting on their behalf gives you strength and prestige, but it means responsibility, too. Often, the interests of the industry do not move in the same direction as those of policymakers and this fact puts you in front of them. Arguments are of economic nature, well-founded and based on modern best practices.

The fact that most banks are of EU origin, makes it easier to present the best modern practices, as a reason and direction where we should go. Their accomplishment is a challenge, as well as for many other sectors of the economy.

BANKER:

Following situation the country's economy and banking system goes through, what do you think will be the main focus of AAB and the entire Albanian banking system, in terms of credit growth?

There a comprehensive and interesting discussion, regarding the intermediation function, the banking system currently plays, in terms of

credit to economy. We often hear ungrounded and perception-based comments, which once disseminated in public, may create a far more wider perception, which is completely wrong.

Specifically, I want to emphasize that, following the 2008 crisis, the banking system has not ceased, even for a moment, crediting the economy.

Banks continued lending, despite the tightening of procedures and restrictive measures, often bound to be implemented. If 2008 was the best year in credit growth, where the new credit reached at ALL 280 billion, since 2009 until today the banking system has granted ALL 250 billion of new loans, on an average annual

We are in a phase of banking business consolidation, for the sake of a safer perspective. AAB should be at the frontline of protecting the interests of industry it represents and the changes that taking place.

basis. This means that credit to economy is always present. However, loan portfolio growth is not as it used to be. For example, in 2008 the loan portfolio grew by ALL 110 billion, and the following years it grew quite modestly, by showing a saturation level, at ALL 600 billion. There are two reasons causing such situation: first, repayments are too high, compared with the period before 2010 (in 2008 the loan portfolio was ALL 396 billion, and it is at approx. ALL 600 billion); secondly, the economic growth is low (in 2008 it was at 7.5%; last year it stood at 2.6%). Meanwhile, there are also changes in the loan structure, which affects these indicators.

So, given the above periods and figures, lending just carries on and therefore, we have not any obstacle to overcome. The challenge is with

economic growth, improving the climate for business development, especially in terms of justice and property. AAB should protect and promote the implementation of necessary legal amendments and other structural reforms, aiming to improve the business climate. In this respect, the efforts to reduce non-performing loans and clarify and strengthen the foreclosure process of mortgaged assets, fall within such endeavors.

BANKER:

How do you see the future role of AAB? Do you think there may be room for a new dimension for AAB? At a time when the banking industry has changed, the way the banking business is conducted has changed, under the impact of regulatory changes and technology there is and will be always place for changes and improvements, even in the organizational forms, which serve these industries. Although I must stress that the form is not quite important, rather than the content that it produces, there is room for improvements within AAB. So far, the staff has done a remarkable operational job, built very efficient cooperation and banks’ involvement infrastructures in every issue, has consolidated the organizational part and relationships with many institutions, including the international ones, and has given AAB a respectful name. However, AAB must be more visible to the general public, should find ways to communicate with him, because the interests of the industry are in the same time public interests. Much remains to be done in this regard. I don’t think it should experience a redimensioning, as AAB lay on sound foundations, but we will be attentive to changes in other countries, to benefit from their experience. Trends and developments in developed countries (such as: digital banking, financial education, etc.) are in our focus, through established relationships with many other organizations.

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Banking System

Unified/Standardized Payment Order

The road towards increasing productivity and process easing The payment order unification and standardization brings the building of a common, safe infrastructure, based on the state-of-the art technology, at a higher level, and it will lead the process towards the automated processing, thus contributing in reduced processing (direct and indirect) costs, data processing time and in a reduction of operational errors.

Najada XHAXHA

Head of AAB Payments Committee AAB

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he impact of developments in technology and processes’ computerization lead the financial system and the banking sector towards supporting and being involved in the theatre of fundamental changes, to ensure security in the market, efficiency and cost reduction, including all participants in the process. Proper coordination to set out some common standards, that will enable facilitation and inter-operability in the exchange of information, constitutes one of the key challenges of the banking system, in view of mass usage of payment instruments, as well as a correct perception by their respective users.

Furthermore, it is very important to consider the variety in payments market, where new players have already entered in with their services, and where interests and requirements by individuals, businesses, or even various institutions, have been increasing,

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alongside their respective suitability and functioning.

The standardization of information exchange is a requirement dictated even by developed markets, with which Albania interacts, or aspire to integrate with. The most practical

The payment order unification and standardization is also closely related to the impact it will have on the economy, in the view of business activity. The “journey� towards an automated process starts with its unification and standardization, which provides increased productivity, by reducing payment processing time, reduces errors in filling out forms, by way of being familiarized with the same format, and transparency with the client. example is drafting an unique invoice/ payment order for payments, at European level, which is based on

"ISO 20022" as the latest standards; whereas, the development of payment system infrastructure is completely focused on the European standards & TARGET SEPA systems. Timely preparation for proper implementation of such standards is in the focus of developments undertaken in our banking system, and beyond.

In this context, the banking system in Albania, including all commercial banks, comes with some practical proposals, such as Interbank Direct Debiting, as an additional service in the market, through which "business" and "individuals" will be able to effect various payments for utilities, mobile services, by having real opportunities to choose their bank to cooperate with.

This would create necessary room to assess the features, each bank offers, or meet, individually. Also, a project in focus is the possibility of Euro "clearing" in Albania, by building a parallel system of this currency, similar to that of national currency, as an added value in domestic payment industry and the unification of Payment Order form, at the system level. The latter is the next, but not only, project for the

banking system.

The information details, clearly and easily specified in the unified form, will facilitate the massive use of such payment instrument by all market participants, both from individuals and businesses, thus contributing also in reducing cash movements and usage, as well as transforming, through time, the behavior toward the bank, as an institution. The simplicity of presenting such instrument affects, to a certain extent, the client's financial education which understands clearly the elements of the process, directly or indirectly, and furthermore contributes to the transfer’s accuracy and performance, thus becoming a valuable part of it.

The payment order unification and standardization is also closely related to the impact it will have on the economy, in the view of business activity. The “journey” towards an automated process starts with its unification and standardization, which provides increased productivity, by reducing payment processing time, reduces errors in filling out forms, by way of being familiarized with the same format, and transparency with the client. Moreover, expanding the use of this document into big business and corporations’ market would ensure a fast and unique professional & interaction approach, between these businesses and the whole banking system.

Regarding technical perspective, the payment order unification and standardization brings the building of a common, safe infrastructure, based on the state-of-the art technology, at a higher level, and it will lead the process towards the automated processing, thus contributing in reduced processing (direct and indirect) costs, data processing time and in a reduction of operational errors. On the other hand, banks that are periodically in the process of developing and improving their systems, in line with European standards, will be timely prepared and will not bear additional costs in implementing this unified document,

which will be based upon directives and rules specified therein.

The unified/standardized payment order form, as agreed in advance by commercial banks, was approved in the regular meeting of National Committee for Payment Systems, held at Bank of Albania, on 24 May 2016. Now it is up to the AAB Payments Committee, to pursue its implementation within the banking system. For this reason, the implementation of such document in the market will be accomplished through several stages. Banks will initially use it in paper form at their branch network, where clients will have the first touch of it. Then, depending on the diversity and relevance of each bank, its implementation will be carried out through operational systems, a process that requires lengthy time and which bears some costs. Also, it is important extending the use of this form towards institutions, companies and businesses, aiming at implementation it through their internal systems. The last two phases may take place simultaneously and the focal issue there is achieving a joint execution and proper operation.

Improving and further processing of such form shall remain a need, or

process, depending on the requirements of the market and payment systems, operating in the country, which are transformed and are dictated by further developments, or are affected by internal and external factors in compliance with required standards.

Continuity and further perfection of this document, up to future codification of respective fields and their automatic reading by the system, are the challenges to come for the banking system. The inclusion of banking, institutional and business markets, in the cooperation and extensive use of this form, will close the standardization cycle and open opportunities to initiate the E-Invoicing project, currently considered in the European market as an electronic transfer of payment information between business participants (sellers and buyers). This will be a highly automated process, which will enable better cooperation among payment systems with corporate internal transactions. Such initiative will lay down the foundations of relevant environment for a standardization of electronic invoice, in a cross-border level.

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Banking System

New products in the Albanian banking system1 We are trying to find appropriate solutions to fit demands of our customers, but we have to be selective to take initiative for investments, because we as a banking industry in Albania have scarce resources, due to small scales.

Fatih KARLI Retail Banking Group Head BANKA KOMBËTARE TREGTARE

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owadays, one of the most popular topics in banking industry is innovation. Similar to rest of the world, banks in Albania are also trying to adapt themselves to this trend. Indeed, innovation is not a seasonal fashion; it has becoming the only way of surviving in this changing and demanding world.

The Albanian government and Bank of Albania are advising banks to transform themselves and bring latest technology to the country to give better service quality to the customers. Most of banks have been taking actions for improving their service quality. We as BKT have taken some steps towards digitalization. We are trying to find appropriate solutions to fit demands of our customers, but we have to be selective to take initiative for investments, because we as a banking industry in Albania have scarce resources, due to small scales. Limited customer/user numbers for products is affecting the feasibilities of investments. If we mention about (USD) 50 – 100 billion in asset – size banks, they have more flexibility 1

to make some trial for innovation regardless of costs, even only for the sake of innovative image. For example, lots of e-wallet investments were failed in some countries, despite their robust technologies and huge marketing costs; lots of Mobile Payment companies have ended their operation due to low transaction volumes in some countries.

Nevertheless, at the same time there are lots of brilliant examples from all over the world that give hope and courage to investors.

In other words, we should select proper

We as the Albanian banking system are in the early stages of this transformation, but I believe that we will close the gap faster than the other countries.

solutions for Albanian ecosystem instead of copying latest trend regardless of customer’s existing or future demand.

In order to give better customer service, we have chosen a strategy to be present where our customers are being present in the

right moment. In the beginning of the year, we have launched a new mobile banking application for Android and IOS devices, since our customers have intention of being more mobile. This application has widest range of transaction set in the Albanian market. The application provides client with many facilities including: account opening and closing, time deposit transactions, all types of card transactions like payment, cash advance and even including changing online limits, money exchanges, all types of bill payments and direct debits, top up for all mobile operators, pay TV, traffic fines, all types of money transfers, etc. However, it does not mean we have finished our investments in mobile banking instead, it is an ongoing process. After the app launch we have reached our year – end target within a short period of time.

Besides that, we have continued to invest in internet banking and we have added new functionality, like “Divide to Installments”, where anyone can make e-commerce transactions with BKT credit cards from any merchant in the world and you can make installment with 0% through internet banking. Additionally, you can use installment option for card transactions abroad.

We believe that installment option is an important convenience for our customers.

This article is part of presentations, delivered at the international conference: “Digital Banking in Albania”, organized by the Albanian Association of Banks, AAB, on 25 May 2016.

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ATMs. It will enable us and also all the other Albanian banks to provide cash in (money deposit) option through ATMs. Due to difficulties during the development phase, deriving from some unique circumstances for Albanian currency and regulation changes, the project has been prolonged but at the end the licensing process has been successfully completed. In addition to cash in functionality, we have also added some new features to our ATMs, like top-up, card payments (for you or for other person).

Our customers can communicate with us by using social media. We have some applications in Facebook, one of them is for complaints and advises. We have also launched Whatsapp service to give a popular chat option to our customers. Furthermore, we have also launched dedicated call center service for Mortgage. Our agents are giving advisory service to customers having interest to buy a house.

We are also using complex event processing tools to manage communications

Therefore, we expanded installment option of our credit cards to all BKT merchants. All BKT POSs, including virtual POS, provide bonus and installment option. As it may be known, we have also launched contactless credit cards and POS, to speed up transaction time and to give future possibilities to our cardholders.

Besides innovations in credit card product, we have also added some functions to our debit card product. Debit card customers have an option to withdraw cash from our partner shops. For example, if you need cash you can go to a fuel station, you can make a transaction more than ALL 500 and you can withdraw cash, up to ALL 5000. Thus, we want to incentivize the usage of debit cards in shopping and also giving more possibility to withdraw cash.

Moreover, BKT’s debit cards have already been giving online shopping alternative to customers even in 3D secure environment.

Due to lack of infrastructure, banks’ customers could use their debit cards for limited transactions. We as BKT have made an investment several years ago to develop the ALL currency template for

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and we are also working on integration of all channels to give omni-channel customer relations experience.

We need some regulation changes to make some innovations possible, most of the regulations are assuming that transactions should be finalized within a branch environment. It is restricting to develop some products and services. For example, banks in Albania should be able to give retail loans within some seconds. I am not mentioning about time to “Yes”, even time to “Cash”. The main obstacle is not technical infrastructure, but regulations. We need some improvement in infrastructure, like better credit bureau information including scoring, healthy address system and online data sharing etc. It may help us to decrease NPL rates in banking system.

To sum up, digitalization is a journey, and we as the Albanian banking system are in the early stages of this transformation, but I believe that we will close the gap faster than the other countries.

Banking System

Security in Digital Banking Banks need to develop a layered ecosystem, combining preventive and detective controls on all layers, fully integrated into the whole digital and online banking.

Such system of course comprises of technology, processes and people, skillful and qualified security staff, who understand the customer, proactively creating thus a safe environment for the customer to do banking.

Anila TOLLKUÇI Security Head

RAIFFEISEN BANK ALBANIA

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igital is the biggest disruptor in banking nowadays. In his publication “Trends in Banking: Where the Experts See the Industry Today, and Tomorrow”, 2015, Cooper states that…digital banking will continue to take an ever-increasing percentage of business away from the brick-andmortar branches, rendering some of them superfluous while the remainder become more technology-centered and self-service. Banking is based on trust, when it comes to digital banking and more specifically online banking, security is among the highest evaluated factors that affects customers’ perception and customer’s trust in a bank. In their survey of e-loyalty of e-banking customers Raitani & Vyas (2014) note that, a majority of respondents show a lack of trust in e-banking. They suggest that bankers should educate the customers regarding the uses of online banking, as well as security and privacy of their (online) accounts.

Different studies suggest that investing in security will help to not only re-enforce customers trust, but also increase customer adoption and usage towards digital.

Referring to a global commercial banking survey performed by Ernst & Young (2015), nearly 50 percent of respondents say their worries about digital security as the primary reason they

The Albanian banking market has a long way to go on adopting these principles, along the digital road. The last but the most important part of the puzzle, is making the customer an integral part of such ecosystem.

succeed, from the banks perspective; it is the internal security ecosystem. Banks need to develop a layered ecosystem, combining preventive and detective controls on all layers, fully integrated into the whole digital and online banking.

Such system of course comprises of technology, processes and people, skillful and qualified security staff, who understand the customer, proactively creating thus a safe environment for the customer to do banking.

In their publication “Technology Prods Retail Banks to Evolve, Empowers Consumers”, 2010, from Teller Vision,

don’t use online and mobile channels more often.

What is meant by security in the overall digital world?

There are several aspects of security that need to be considered during the digital transformation, in order to really

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WWW.SOCIETEGENERALE.AL /societegeneralealbania

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… mass adoption of mobile banking, mobile payments, and person-to-person payments will shape financial institutions’ approach to customers, and social media will continue to shape customers’ relationships with their financial institutions. The way banks will interact with customers in the digital age will be highly influenced by the digital trend; on the security side this requires a new approach on how to proactively mitigate the risks. Banks will have to device and design the security ecosystem in such a way that it: - Prevents most of the threats from materializing by using innovative technology.

- Predicts e-Fraud attempts through a combination of technology, processes and skills, or at the very least be able to immediately detect it, limiting thus the financial impact.

Going through the digital revolution and especially in online banking becomes even more imperative for banks to maintain customers trust in banking by providing them a safe environment. A sound strategy, taking into consideration all factors that affect the most the customers’ perception and usage of banks services, will have to make security one of the cornerstones of such developments.

Being at the core of the digital strategy, on one hand security per se needs to be at the forefront of adopting innovative technologies going as far as predictive analytics, but on the other hand security needs to be considered and tied into every stage and step of the digital strategy. A major factor that shapes the security ecosystem is of course the external environment and threat landscape. It is a major challenge to any organization in general, and to banks in particular, to stay on top and ahead of external developments of the (digital and online) threat landscape, in order to be proactive in this field.

Threat landscape has evolved even more in the past years, with online fraud becoming even more sophisticated, with dark markets evolving up to the point of creating toolsets available for few hundred dollars that offer a huge return on investment. Referring to their quarterly analysis Group - IB (a company specialized in preventing and investigating

high-tech crimes and online fraud) reports that, starting in 2016 a sharp increase in the number of targeted attacks on banks all over the world along with attacks on their clients was noticed. Of the best tools banks will need to adopt in the digital era is e-Intelligence, insight on attacks, attack evolution, methods and any detail that a bank can obtain and analyze will help it to better shape its defenses. In this regard, banks need to cooperate among each other in exchanging data in real time, as

Going through the digital revolution and especially in online banking becomes even more imperative for banks to maintain customers trust in banking by providing them a safe environment. A sound strategy, taking into consideration all factors that affect the most the customers’ perception and usage of banks services, will have to make security one of the cornerstones of such developments. Being at the core of the digital strategy, on one hand security per se needs to be at the forefront of adopting innovative technologies going as far as predictive analytics, but on the other hand security needs to be considered and tied into every stage and step of the digital strategy. well as with specialized third parties, such as Group - IB, FS-ISAC. In today’s digital evolution, banks have to device strategies how to: - Obtain such data - Operationalize on this information.

The latter of course should be built within the security ecosystem of banks, whereas the first is something banks have to come together and agree upon. While there are several communities, some of them highly effective (but also expensive), it is time for banks to consider creating their own (free of charge) communities,

where insightful information is shared and absorbed in real time.

The Albanian banking market has a long way to go on adopting these principles, along the digital road. The last but the most important part of the puzzle, is making the customer an integral part of such ecosystem. As banks embrace more and more the digitalization and increase online exposure, the customer is of course a very important link, but with a huge impact on the overall chain of digital banking. Nearly all attacks to online banking so far happen, or are initiated at customer level, the low hanging fruit.

In a very unique research, analyzing the perception of security towards online banking in the Croatian and Serbian market, Makarević et.al (2014), concluded that clients of Croatia and Serbia do not have same perceptions towards online banking. While Croatian clients, with no fear and misconceptions, aware of tangible features' importance, think that banks are able to protect their privacy completely and that bank are doing their best to improve confidentiality of online transactions, the clients of Serbia do not think that banks are able to protect their privacy completely. Even though they perceive that banks are doing their best to improve confidentiality of online transactions, their perceptions reflect fear, misconceptions and anxiety.

Results also indicated that Serbian clients are not completely aware of tangible features' importance for security while doing online transactions.

It will be very interesting to see results of such research for the Albanian market, and even running this over a period of consecutive years in order to see the trends over time. Despite the missing research it is clear that a lot of education is to be done with the customers. They need to be brought in the security ecosystem, they need to know it, understand it and live with it. Only in this way customers’ perception, and most importantly, the behavior towards digital and online banking, may be positively influenced.

Considering the overall impact on customer experience and perception, security becomes a crucial point that banks need to address during digital developments in a holistic way. Digital, a new era....let’s make it safe!

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Experts' Forum

AFSA role and challenges for managing risks and confronting monetary easing Establishing a sustainable environment with low interest rates brings some disadvantages, in terms of increased risks in financial markets, because investors would be encouraged to take greater risks, as a result of a shift of savings towards alternatives, outside banking sector, or even outside the overall financial system.

Enkeleda SHEHI Eecutive Director ALBANIAN FINANCIAL SUPERVISION AUTHORITY, AFSA

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inancial markets, under the supervision of the Albanian Financial Supervision Authority (AFSA), typically the insurance, capital and investment funds markets, as well as voluntary private pension funds, have pursued their positive trend towards expansion. In 2015, total assets in these markets reached ALL 96.1 billion, an 8% increase, compared to 2014. Total assets to GDP ratio reached, in 2015, the highest level so far, respectively 6.7%. Therefore, we can see a significantly increased contribution of such markets in the financial intermediation. The markets’ structure in 2015 just confirmed the structural change observed during the last three years.

Typically, the biggest supervised market, in terms of assets, remains the investment funds market. Such market is already listed as the second largest in the country, after the banking market, accounting for about 70% of supervised markets by the FSA, or 4.7% of GDP, although investment funds began their operations just four years ago. This expansion shows the interest of domestic

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investors for new savings or investment products, but it is also favored by the low interest rates environment, which is a multiyear reality for bank savings products.

Despite the fact that low interest rates were one of the factors that favored the development of investment funds, it is the dynamic monetary policy which represents a challenge for the AFSA's work. Establishing a sustainable environment with low interest rates brings some disadvantages, in terms of increased risks in financial markets, because investors would be encouraged to take greater risks, as a result of a shift of savings towards alternatives, outside banking sector, or even outside the overall financial system.

The investment funds and private pension markets, out of three markets supervised by AFSA, are the most exposed to market risk, as part of the systemic risk. The rationale is found at the fact that investments by insurance companies are mainly concentrated in deposits and Treasury Bills, whereas the other two markets have built investment portfolios, and in this regard, may be exposed to interest rate risk.

AFSA pays a special attention to establishing rules and preparing the legal basis to address risks within the financial system in Albania, in a better and coherent way. Practically, with regard to investment funds market, AFSA has improved the regulatory basis, mainly in the frame of strengthening the client transparency

regime and improving requirements for a proper market risk management. Also, in 2015, AFSA approved the Regulation “On liquidity management for investment fund" and changes in rules for fund assets’ valuation. The adoption of these two regulations was part of accomplished recommendations, given to AFSA through World Bank and IMF’s technical assistance.

The most important legal change for this year was the set of amendments to the law "On Collective Investment Undertakings", aimed at a strengthening and further development of the market for collective investment undertakings (CIU). This law emphasizes the strengthening of market risk management of investment funds and operators in this market, with the aim to control and mitigate risks against which such funds are exposed, as well as reinforcing the protection of investors’ interests. Also, the future project: "Strengthening AFSA’s supervisory capacities: focus on developing the capital market", implemented with the support form World Bank and SECO, aims to support AFSA, particularly on strengthening the capacities to monitor the investment funds market.

Regarding the voluntary pension market, AFSA is currently working to approve the manual of risk-based supervision, which includes the steps of identifying, defining, classifying and responding to risks in this market. This manual is a product

of the already completed project on the supervision and development of voluntary private pensions.

Regarding the insurance market, the most identifiable risks which affect it is the liquidity, interest rate and credit risk.

Specifically, there is no law in force on insurance against natural disasters’ risk, which would enable AFSA to identify even such risk, but this could become a factor in the future to kick start the endorsement of the law on compulsory insurance against natural disasters, which is still under discussion. Out of these risks the liquidity risk is undoubtedly the most significant one.

AFSA must ensure that insurance companies have adequate capital/solvency, technical / mathematical reserves and adequate liquidity to cover clients’ claims. In this regard, the Regulation: "On liquidity management by the insurance and reinsurance companies", has been recently approved, to fulfil the objective of liquidity risk monitoring. Such regulation requires insurance companies to monitor, on a daily basis, and maintain a sufficient liquidity level, which is reported to AFSA, on a monthly basis. In cases of violations of the required liquidity level, the company must notify within 24 hours, together with respective measures to fix the situation.

Another risk that could be mentioned is credit risk, but given that the Albanian market is very limited in this respect, such risk is seen as not-so-significant. The assets of insurance companies consist mainly in

investments in bank deposits (approx. 34% in 2015) and government securities (approx.

13% for 2015), which are classified as low risk. Also, the interest rate risk produces lower revenues from such investment and therefore leads to an increase of technical reserves. In the Albanian insurance market, where the damage/net premiums ratio in the non-life insurance market stands at 39%, the decline in interest rates does not represent an immediate threat to the insurance companies’solvency.

The Law No. 52/2014: "On the insurance and reinsurance activity" enabled the commencement of implementing AFSA risk-based supervision methodology in the insurance market. The application of this methodology is based on the Supervision Manual of insurance companies, which entered into force on 31.10.2014. The basic concept of risk-based methodology is to identify areas with the highest risk in the insurance companies’ activity and in furtherance, where it is necessary, to work jointly with heads of companies to reduce risks up to acceptable levels. The objective is the early prevention of financial troubles an insurance company may face, in the course of its activity. AFSA's focus is put on prudential provisioning and fee practices in the compulsory motor insurance market, which makes a considerable share of the insurance market, as the stability of such portfolio constitutes the financial health of the overall market. The above – mentioned measures, along with the goal of mitigating

the liquidity crunch and including risk assessment in the supervision practice, make a milestone towards the approximation with EU standards, where the risk assessment element plays an important role in all analyses, which has been increasingly important, since the outbreak of 2008 crisis. Also, the adoption of legal and regulatory framework accomplishes the recommendations, in the framework of technical assistance by World Bank and IMF. AFSA’s biggest challenge remains full compliance of insurance companies with the existing legal basis and regulatory framework, the increase of reporting quality, standards improvements and alignment of the insurance market with EU standards, as well as the development and widening of the range of insurance products. In the view of risk management in the market, AFSA has conducted joint inspections with Bank of Albania, and it is working to establish a practical protocol to carry out the consolidated supervision on the activities of financial institutions, which fall under the oversight of both authorities.

AFSA intends that, by accomplishing such objective, it to reduce the risk transfer opportunity, from one segment of financial system to another, or that certain risks remain out of supervision’s eye. The market risk profile, supervised by AFSA, is also analyzed in the frame of systemic risks of the financial system as a whole, and is part of the discussions made within the Financial Stability Advisory Group (FSAG-GKSF).

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Experts' Forum

A business perspective on the benefits of the WTO trade facilitation agreement

In cooperation with the Global Alliance for Trade Facilitation1

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rade facilitation is the general term for a package of measures to help cut red-tape at borders.

Burdensome customs requirements present real challenges to companies of all sizes — and make it particularly onerous for smaller and medium sized companies (SMEs) to trade internationally. Customs procedures might sound esoteric, but in the real world they are hugely important.

Recent studies suggest that improvements in border administration throughout the world could boost global GDP and create new jobs. Border procedures affect the investment decisions of companies and play a role in attracting foreign direct investment into a country. Companies look more favorably at new local investments or added business activities in countries when substantial improvements are made in trade facilitation.

What is the Trade Facilitation Agreement?

In a landmark global agreement, members of the World Trade Organization (WTO) agreed a comprehensive deal to cut red tape at borders in 2013, known as the Trade Facilitation Agreement (TFA). The TFA aims to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency;

The TFA aims to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency; reduce bureaucracy and corruption, and use technological advances.

reduce bureaucracy and corruption, and use technological advances. If implemented, the TFA would, amongst other things, increase cooperation between government agencies; simplify customs requirements; and promote the use of electronic documents.

Why is a global deal on border measures important?

SMEs are disproportionally affected by burdensome border processes, and research by the World Economic Forum suggests that TFA implementation could trigger a 60% to 80% increase in cross-border SME sales in some economies. The WTO’s 2015 World Trade Report also states that full implementation of the TFA will reduce global trade costs by an average of 14.3%. These gains would mostly accrue in developing and emerging economies, where businesses and consumers would reap the benefits of greater integration into global markets. Trade facilitation reforms would enable many companies to trade internationally for the first time — particularly as the internet opens up new opportunities for SMEs (small and medium-sized enterprises) and startups.

The greatest impact on trade costs for upper-middle income countries like Albania is expected to come from: streamlining border procedures (3.6%);

automating trade and customs processes (2.8%); ensuring the availability of traderelated information (2.4%); and providing advance rulings on customs matters (2.4%). Many border-related problems faced by governments, such as smuggling and fraud, could also be addressed by TFArelated reforms.

Why is the TFA important to Albania?

Albania ratified the TFA on 10 May 2016, becoming the 79th WTO member to do so. For the TFA to take effect and be fully implemented, a total of 109 ratifications are needed. Implementation of the TFA will have significant potential to enhance the competitiveness of Albanian industry in global markets.

A 2016 OECD report on competitiveness in South East Europe (SEE) showed that Albania is at a relative disadvantage among the SEE countries, particularly in terms of customs clearance times. In Albania, a recent UN Office on Drugs and Crime (UNODC) study also shows import efficiency may be additionally restrained by reported corruption at the border. The SEE region as a whole also suffers from export restraints caused by the demands of foreign technical standards and procedures. A World Bank study that measures perceptions of customs clearance efficiency identifies that the most

1 www.tradefacilitation.org

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problematic factor for importing foreign goods into SEE economies – aside from tariffs – are burdensome import procedures.

The Agreement provides the oppo-rtunity for Albania to bring together all relevant border agencies into a framework that would provide Albanian companies with better access to global markets and international value-chains. Furthermore, Albania would become more attractive for investors.

Trade Effects of Customs Reform: Evidence from Albania A 2015 World Bank report indicated that between 2007-2012 reduced rates of inspection led import shipments to spend less time under the control of Albanian customs. In turn, these time reductions generated a modest, but real, increase in import value. Furthermore, the research suggested that reduced inspection rates had an impact on import value equivalent to an acrossthe-board tariff reduction of approximately 0.36 percentage points. However, the implied cost savings were much larger than for a tariff cut of that size. It was estimated that the reforms saved the private sector approximately US $12 million in reduced trade costs in 2012, or US $4.33 per Albanian citizen. Lower inspection rates also reduced the variability of time spent in customs and this lower uncertainty led to significant import growth.

How does Albania perform on border crossing efficiency and cost?

The 2015 OECD Trade Facilitation Indicators demonstrate both strengths and opportunities for further customs reform in Albania. For example, when it comes to internal border agency cooperation, Albania’s performance was rated at 50%, compared to the world best practice. At the same time, Albania outperformed world best practice by almost 10% when it came

to advanced rulings. WTO research also suggests that implementing the TFA would have a positive and sustainable impact on government revenue collection due to increased trade volumes and reduced corruption at borders. Furthermore, TFA implementation would also help cut costs for Albanian consumers, given that customs costs can significantly increase the cost of essentials such as food and medicines.

Note: This info graphic reflects the list of countries having ratified TFA as of 31 July 2016.

2 Border Compliance: captures the time and cost associated with compliance regulations in order for the shipment to cross the economy’s border, as well as the time and cost for handling that takes place at its port or border.

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Economist Corner

“Quantitative easing” and deflation

Central Banks’ question marks The context of low interest rates and regulatory measures, aimed at financial stability in the context of Basel III, or European banking union, are exerting considerable influence in terms of financial intermediation and the weakening of monetary policies capabilities to achieve their traditional objectives.

Prof. Dr. Adrian CIVICI President EUROPEAN UNIVERSITY OF TIRANA, EUT-UET

T

he financial crisis of 2008, its consequences, and above all, the respective measures and monetary or financial policies undertaken, to overcome and eliminate it, just evidenced central banks and "quantitative easing" policies, in the forefront of such endeavors. Their content was nothing but a specific type of monetary policies, defined as "non-conventional", undertaken in difficult situations and economic and financial conditions, in the context of global economic and financial crises’ effects, experienced by specific countries, or group of countries, as in the case of the Eurozone. For example, in case of Eurozone "quantitative easing" means a massive purchase, by ECB, of government assets and bonds, amounting at EUR 1100 billion, during the the period March 2015 - September 2016, i.e. EUR 60 billion every month. In

this regard, Bank of England, during the period 2009-2010, stepped in and bought over GBP 200 billion of assets of financial institutions, bonds or public debt. In US, since 2008, FED has gone through several quantitative easing programs, which have already gone beyond the figure of more than USD 1 trillion.

The term "unconventional" stems from the fact that central banks do not use, or are unable to use, their traditional instrument of monetary policy: "the interest rate", which is zero or close to zero, but serves as the baseline for interest rates in the interbank money market, reserve requirements of commercial banks at the central bank, open market operations, etc. In contrast, "nonconventional operations", in the frame of quantitative easing, consist in an increase of monetary base and the central bank’s balance sheet through purchase of financial assets, such as: bonds, debt, problem loans, mortgage-backed securities, toxic derivative products, etc.

By "cleaning" commercial banks’ balance sheets from toxic products and providing money massively at an almost zero cost, the latter are provided with opportunities to grant more loans with lower interest

rates, thus stimulating investments, consumption, economic growth, discouraging savings and deposits, etc.

In the history of central banks and the banking system in general, such a policy, or measures, are not considered as something normal at all, instead, until the 90s it was considered simply as a theoretical possibility with almost zero chance for any practical implementation of monetary policy. During the last 60

Institutions and activities of non-banking nature, which are specialized in certain segments of traditional money and financial markets are becoming quite competitive and attractive for money and capital, but on the other hand, this structural change of financial markets is withering the impact of monetary policies and their "signals", as well as increasing the overall risk exposure, especially the sector’s exposure.

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– 70 years, central banks of developed countries have not kept policy rates for their currencies quite minimal, or close to zero. Nearly seven decades after the "Great Depression" of the 30s, nearzero interest rates had disappeared from memory, by thinking that they belonged to history already. Keynes, in the 1930s, formulated the first studies on the efficiency of traditional monetary policy during difficult economic and financial times, especially in deflationary situations. Following Keynes’ reflections and implementation, for the first time, of quantitative easing policy and processing the transmission mechanisms theory of these policies on the economy, the history and the dynamics of monetary policy thereafter, marks no new developments.

Furthermore, even in the very specific context of "lost decade" Japan underwent in 1990s, the idea that monetary policy may lose its traditional efficiency and role was simply unimaginable.

The first signals for this concern were given by Mr. Paul Krugman, who analyzed the impact of monetary policy in the context of very low base interest rates, simultaneously opening the debate over the existence of the "liquidity trap" phenomenon. This was followed by the first "unconventional" measures, implemented by the Bank of Japan in the years 2001-2006, which along with being the first case, has signaled the commencement of a "new era" of quantitative easing policy, on a large scale. The outbreak of the global financial crisis in 2008 marked the historic turn towards non-conventional monetary policies, designed and implemented in a various shapes and dimensions, from FED, ECB, Bank of England, Bank of Japan, etc. Mr. Benjamin M. Friedman of Harvard University notes that "in such specific situation, central banks are putting more and more emphasis on stabilizing financial markets, whereas the assets’ purchase is gradually replacing the use of base interest rate instrument. In the frame of non-conventional measures, the quantitative theory of money seems outdated, or at least not efficient."

Currently, about eight years from the

beginning of such "new era of monetary policy" which corresponds with the outbreak of the financial crisis, there is no sign of ending such non-conventional measures; it seems quite distant, yet. Steps and measures, taken by the Eurozone, FED, Bank of England, Bank of Japan, and many other central banks, seem still "shy and sensitive", which reflect the fact that the crisis is far from being over. In the Eurozone, ECB continues to be far from its average inflation rate target of 2%, whereas inflation moves within the range of 0.3 – 0.8%. Even FED, following a monetary policy with near-zero base interest rates since 2008, gave a timid signal change, at the end of 2015, by moving toward an interest rate of 0.25 – 0.50%, a decision perceived and analyzed under the optics of the beginning of "abandoning quantitative easing measures" and heading towards the opposite direction of monetary policy.

The debates and current analyses, regarding the impact and reasons of undertaking quantitative easing policies, are focused on several directions: What were the real causes of a drastic reduction, up to the 0% level, of base interest rates? Was it the best and most efficient answer form monetary authorities? What were the real causes of large financial and monetary imbalances, noticed in the context of the global financial crisis of 2008? What is the best method for financial assets’ managers, the capitalization or the redistribution system? When is the most optimal period to start withdrawing from quantitative easing policies and make a balance of their real or targeted effects? Is there any ground for developing unnecessary rivalry between monetary and macroprudential policies? And finally, in the context of a financial market and an increasingly globalized economy, do some countries’ quantitative easing policies lead to a "currency war"?

Some debates begin by identifying fundamental causes of imbalances in the real economy. Nearly 8 years after the outbreak of the financial crisis, and despite exceptional monetary efforts, most of different countries’

economies have not reached the precrisis levels yet, which demonstrates the existence of important structural causes that produce them, such as: restraining effects caused by real estate bubble, the swift development of information technologies that trigger unemployment, demographic changes, especially the population’s aging, etc. These reasons have negatively impacted global demand, which has become less sensitive to stimulating monetary and financial measures by central banks. Experts say that a new interpretation is emerging: especially developed countries and those with developing economies are facing low economic growth and long-term stagnation, due to "structurally weak economies in front of economic growth, as a result of weak global demand, the diminishing workforce and the inability of technical progress to compensate the reduction in the number and productivity of workforce. It seems that the "willingness for savings is structurally superior compared to the desire and capability for efficient investment – an equilibrium which tends to be regulated by the negative interest rate instrument, which could balance the liquidity demand and supply".

An outcome that is gaining wide support is that "the current situation reflects the end of an economic growth and financing model of production methods." “The systemic coherence", "new risks associated with the weakening of capital power" and "low interest rates that restrain capital investments and consequently employment, productivity and wage levels", are becoming key concerns. The weaknesses of monetary and financial sector are part of this scenario, requiring that these sectors must "implement a long-term perspective that adapts with such new industrial and technological revolution that is happening in the world, an adaptation that goes through a real restructuring of the whole banking sector, particularly the role and instruments of central banks."

In this regard, negative interest rates may impact in reining a deflationary spiral, but monetary policy is entering an uncharted

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territory with big question marks: How far can we go with non-conventional measures? Would we go for a direct support for consumers, through Milton Friedman’s idea of “helicopter drops”?

Can central banks directly finance major public projects?

An important element, in the view of discussions on the role of monetary policy, is the relation between "low interest rates and financial intermediation".

Non-conventional policies are causing a series of so-called "atypical side effects”, which are reflected in long-term capital markets, redistribution of assets from the private sector to central banks, creation of some long-term sustainable trends, quite difficult to be changed, private longterm savings are directed towards services related with housing, health, insurance, etc., instead of being directed towards productive investments. The context of low interest rates and regulatory measures, aimed at financial stability in the context of Basel III, or European banking union,

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are exerting considerable influence in terms of financial intermediation and the weakening of monetary policies capabilities to achieve their traditional objectives. Numerous data referred by researchers in the banking field highlight the fact that institutions and activities of non-banking nature, which carry out intermediation functions between savings and investments, are in a constant progress. These specialized institutions in certain segments of traditional money and financial markets are becoming quite competitive and attractive for money and capital, but on the other hand, this structural change of financial markets is withering the impact of monetary policies and their "signals", as well as increasing the overall risk exposure, especially the sector’s exposure.

Finally, due to an increasingly global integration of financial and monetary markets, monetary policies of FED, ECB, Bank of England, Bank of Japan, Bank of China, etc., have a direct impact on

money markets of many other countries in the world, leading to what is coined as "the real world interest rates." Now, central banks, especially those of most developed countries, react in accordance with structural forces of global economy and not merely with the conjuncture of their domestic economies, whereas their interest rates are transmitted as an “obligation” to other smaller, underdeveloped, or competitor countries.

Specific quantitative easing policies and the whole set of non-conventional policies, would inevitably lead to a “currency war” between US, China, Eurozone, Japan, Great Britain, etc. From this point of view, the interest rate policies of central banks shape the flows of capital and yields in various markets, as "help" in distributing negative effects of financial bubbles of specific countries throughout the network of global financial markets.

The question marks, over the role and policies of central banks in this new complex context, just stand bold!

Social Capital

Supported the National Competition & Fair of Student Associations, organized by Junior Achievement, on 4 May 2016, at the premises of "Mother Teresa" Airport, in Tirana.

More than 138 students of 12th form, from all over the country promoted their ideas, by presenting products or services conducted in the frame of such activity.

Organized Volunteerism Day, on 22 May 2016, where more than 100 bank employees, engaged in cleaning activities at various bays at Cape of Rodon.

On 4-5 June 2016, the bank, with the participation of more than its 100 bank employees, planted 3,100 black pines, aiming at a renewal of natural flora and fauna in Lura National Park.

Supported the "Green Cities Month", initiated by Green Line Albania, to promote the concept of green and sustainable cities, as well as raising the citizens’ awareness about maintaining clean cities and in harmony with nature.

Supported the event organized by the University Student Residence: "Painting Contest,"

by providing winners of the first three places with free residence for the next academic year 2016- 2017, a 10-month period for the first prize, 6-month for second prize 3-month period for third prize, respectively.

Joined the initiative: "The campaign to collect aid for orphans in the community" and in cooperation with the Albanian Red Cross, Tirana Branch, collected aid for 200 orphans in the community.

Supported the organization of the third edition of "Innovation Week”. The event was

Was awarded by Mr. Erion Veliaj, Mayor of Tirana Municipality, with special thanks for its contribution towards supporting the most important community, the children, by becoming part of "Adopt a kindergarten" initiative.

Supported the "Green Ideas 2016" national competition. This is the fifth year this competition is being organized, with the aim of supporting business initiatives that promote social inclusion, integration, employment and local economic development through friendly approach towards environment.

Supported "Economic Development Center and Education" Institution, by donating a cooler van, for food distribution to children in Tirana kindergartens.

Supported "Hope for Albania" activity, which is a form of raising awareness, to show love to all children or adults with Thalassemia and in need for blood.

Supported the National Competition of Tomorrow’s Entrepreneurs and Lawyers, organized by Tirana Business University.

Organized, on 21 June 2016, in cooperation with the Albanian Red Cross, a blood donation initiative with it’s by bank employees, dedicated for children with Thalassemia.

focused on presenting and assessing the innovation ecosystem in Albania, as well as introducing and presenting the work done by the best incubators in the country and in the region.

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Më pranë Kombëtares me kartën Kuq e Zi

Union Bank, sponsor krenar i kombëtares Kuq e Zi, në bashkëpunim me FSHF mundëson kartën e re të kreditit MasterCard, të personalizuar me notat e kombëtares dhe shoqëruar me plot supriza të tjera:

• Antarësim automatik në klubin “Tifozët e Kombëtares” pa asnjë pagesë shtesë • Bileta të garantuara për ndeshjet zyrtare dhe miqësore të kombëtares për ndeshjet kualifikuese të Botërorit 2018 • Zbritje deri në 10% për blerjet në dyqanin e FSHF dhe pikat e tjera të autorizuara prej saj • 0% komision për të gjitha blerjet brenda apo jashtë vendit 34

Bankieri www.aab.al Aplikoni online tek www.unionbank.al/karta apo ne www.fshf.org

0800 0800

Social Capital

Sponsored "TiRun" Marathon that took place on 2 April 2016, on the occasion of International Autism Day, organized by "Albanian Children" and "Autism speaks Albanian". The aim of such contribution was to provide physical and psychological assis-

The bank, in cooperation with education institutions in the country, and in order to exchange experiences, thus servicing to future professionals, organized: - a visit of 13 students of Bank & Finance profile form "Luarasi" University, at the Head office premises, during April.

- a study visit to bank’s Audit Department, which was attended by 25 undergraduate students of Audit subject, from University of New York - Tirana.

tance to children affected by various forms of autism and to raise awareness about this disease. Also, bank employees contributed for T-shirts purchase, while it ensured a broad participation in the marathon.

Attended the Career Fair, organized on 26 April at "Epoka" University, as well as the Work & Career Fair, organized on 17 May at "UET", where it had the opportunity of collecting best students’ CVs, as well as disseminating information about internship and job applications with it.

Conducted the first session of blood donation for 2016, in cooperation with the Albanian Red Cross, at the bank's premises, respectively on 6 April 2016.

In cooperation with the "World Academy of Tirana" international school, hosted on 9 June 2016 in its premises, about 22 children from the school. The program included a visit to Bank of Albania’s Museum.

Organized on 12 and 13 May 2016, at Head Office and "Rruga e Barrikadave" branch premises, the voluntary blood donation initiative, for the sixth consecutive year. The Voluntary Blood Donors Group of Intesa Sanpaolo Group celebrated on 28 May at Intesa Sanpaolo Building in Turin the 50th Anniversary of its creation, an event attended by donor group representatives of ISP bank in Albania.

employees for: - Fundraising in favor "Down Syndrome Albania" Foundation, for organizing summer camp for center’s mothers and children; - Fundraising and clothing to help orphans; - Food packages aids, prepared by employees themselves, for disabled and persons in economic difficulties, organized by Volunteer Association for Development and Solidarity.

As part of World Environment Day, the bank organized, on 5 June 2016, an awareness campaign to its employees of clients, through e-mail alerts, ATM images and cards, positioned at the e-mail footer.

Sponsored the winners’ prizes of "49th Children Song Festival", organized by Korça Municipality and "Michael Grameno" Children Cultural Center.

Donate office equipment for public hospitals in Gjirokastra and Pogradec, in order to improve health service quality.

Conducted an awareness campaign for avoiding tobacco use throughout the day, to raise awareness on negative life and health consequences for everyone.

On 1st June - the Children's Day, organized an internal help call directed to all bank

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Brought together some 500 SMEs to expand of regional cooperation, which attended the event organized in Thessaloniki, Greece. ProCredit Albania brought about 30 businesses operating in different sectors.

Supported Durrës Education Directorate’s initiative to install security cameras at all schools in the city. The project is currently implemented at 7 schools and will continue until all schools in the city are fully equipped with cameras.

moted Albania’s best potentials and values.

The business incubator was located in the center of the square, where 10 young people presented their ideas as entrepreneurs. Five out of these projects were the winners and they will be supported financially, as integration pioneers and pioneers in the business.

On 8 – 9 May 2016, in cooperation with "Culture Europe" Foundation, organized the Concert of Europe.

About 100 employees gathered voluntarily in a joint action to clean the environment from trash. This action, coincided with the opening of touristic season, was spread in some areas, such as: Lezha, Shengjin Beach and Korça touristic area.

The bank was the general sponsor of the 5th Edition of "Startup Live Tirana", from 20 – 22 May 2016, an event that gathers students engaged in teams, enabling and developing innovative ideas, with the aim of brining innovation in the Albanian market.

Supported, for the fourth consecutive year, the Eco-Fashion Show event, which took place on 4 June 2016. As every year, the message conveyed by this activity is: “Reduce Recycle - Reuse – Recreate”.

Supports for many years the Aerobic Artistic Gymnastics Association, which has successfully organized this year the event: "Together as one". The event was organized on the occasion of International Orphans Day, on 20 May 2016.

Supported the Tirana Municipality initiative, in cooperation with "Art, Culture, Integration" Association, in the "City of Readers" project. This project aims to provide books to functioning libraries at various neighborhoods in Tirana.

Supported the fourth edition of "Albanian ICT Awards", which announced nationwide contest winners in the information technology sector, during the gala dinner held on 29 April 2016.

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In cooperation with "Down Syndrome Albania" Foundation, it supported the celebrations of Children Day, as well as the second anniversary of "Performance and Development Center" of "Down Syndrome Albania" Foundation. Also, in this day, the bank supported the organization of 1st June Day, for the children of Korça Municipality.

Supported in children of families in need in Gjirokastra, by preparing food packages to help them.

Supported "Run for Autism" Marathon.

Bank’s staff attended the marathon organized in Tirana, in support of children and families of children with autism.

Collaborated with Junior Achievement for the activity: "Leader for One Day". One of the graduates selected by the organization spent a day at the premises of bank’s Head Office. At the end of practice, certificates were distributed to participating students.

Together with its partners, it organized on 9 May 2016, at "Mother Teresa" Square the activity: "EU-TRANSIT", on the occasion of Europe Day. The square, designed as an airport with 4 terminals, namely: Agro-Tourism, Art-Culture, Technology-Innovation, Communication and Perception, turned into a space where they shared ideas, and pro-

Supported #UnëMbrojFëmijët# awareness campaign. Bank’s staff set Friday as the day to wear T-shirts with the logo of the campaign and communicated with clients about the importance of reacting and denouncing any form of children threat or abuse in Report! Save! application, or call 116, 111, 129!

Donated office equipment (photocopiers and printers) to "Zyber Hallulli" Orphanage, as well as dedicated service to for the institution by the staff of the branch near Republican Guard.

Signed the sponsorship agreement, for the period 2016-2018, with the Albanian Football Federation, FSHF.

Financial Auditorium

Helicopter drops "Helicopter money" is proposed as an alternative to create stability when interest rates are near zero and the economy shows signs of significant weakness, or enters into recession.

Prof. Asoc. Dr. Arbi AGALLIU Head of Department of Finance & Economics EUROPEAN UNIVERSITY OF TIRANA, UET

“Helicopter drops”, also known as helicopter money, is a hypothetical, unconventional tool of monetary policy that involves printing large sums of money and distributing it to the public in order to stimulate the economy.

Helicopter drop is largely a metaphor for unconventional measures to jumpstart a country’s economy during difficult times, like an economic crisis, accompanied with deflationary periods1.

Although such similar ideas or concepts have been discussed earlier by different economists, "helicopter drop" is used for the first time by Nobel laureate Milton Friedman, in an essay written in 1969, assuming with imagination tones, as printing money and throwing them from the helicopter. Mr. Friedman used the term “helicopter” as a metaphor to argue that institutions, which have the 1

right to issue money, may create inflation by printing money, enough to spur consumption, thus producing a positive effect in the economic chain, with the economic growth as the ultimate goal.

"Helicopter money", he notes, could be a possible option for any country which is struggling with deflation and with sluggish economic growth.

In his famed essay: "The Optimum Quantity Of Money" the Nobel prizewinner (Mr. Friedman) says: Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” The second assumption was made by Mr. Friedman to highlight the fact that such instrument cannot be used continuously, but rarely, or only once just when the economy is in recession and hopes for economic recovery are fading.

Although the above – mentioned term was first mentioned by Mr. Friedman, it was popularized by Mr. Ben Bernanke, Federal Reserve Governor, in his November 2002 speech. During that

speech to the "National Economists Club", Mr. Bernanke defined deflation “as a side effect of a collapse in aggregate demand, or such a severe curtailment in consumer spending that producers would have to cut prices on an ongoing basis to find buyers”.

"Helicopter money" is proposed as an alternative to create stability when interest rates are near zero and the economy shows signs of significant weakness, or enters into recession. When using the term "helicopter drops" economists refer to two policies that are basically different from each - other. The first group of policies emphasizes the permanent monetization of budget deficit, while the second group of policies includes the central bank. The second group of policies emphasizes direct transfers to the private sector by the central bank, without direct involvement of fiscal authorities. This type of instrument is also called citizen’s dividend.

There are numerous pros and cons views and theories about such monetary instrument. Some time ago, Mr. Mario Draghi, President of European Central Bank noted that "helicopter money" can be performed by all central banks

This is a situation similar to the actual one, Albania is currently going through. This definition is taken from www. investopedia.com.

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KONTRATE SHITJE MALLRA LETER KREDITE EKSPORTUES IMPORTUES

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of different countries, as a tool to help the economy get out of recession, or economic downturn. However, he raised the question: "If and when this monetary instrument is suitable for implementation?

On the other hand, Mr. Richard Clarida a noted economist at Columbia University predicts that modern economy will see throwing money from a helicopter after 5 or 10 years at maximum.

Another interesting perspective comes from the economist Simon Wren-Lewis.

He says it would be better money to be printed and distributed to consumers, who would spend it as they wish, instead of being used to buy government debt, which could reduce the interest rate in the long-run, and in turn, would have an impact on stimulating the economy.

According to him, then the second way, that is purchasing government debt by consumers, is already tested and has often shown than it has not been successful, so why not try the first way?

Regarding the "helicopter money" concept, its measure used is very controversial. Specifically, how large or small will be the amount of money printed, or how much it would last? A modest stimulus may shed or reduce inflation. It is believed that a good balance of the amount of money issued and its respective duration can also lead to stable domestic markets and macroeconomic

stability. On the other hand, skeptics come up with the theory of "not adequately" spending of such money. This means that, despite spending such money in a country’s domestic markets, the manner and the market where they are spent do affect mostly the economic growth.

Furthermore, customers can opt to save such money, thus making this stimulus less effective. Additionally, there is a risk that most of this money may be spent on imports, so outside domestic markets, thus impacting positively the economy of another country.

It has been recently articulated that even the Albanian economy may need "Helicopter drops", although this instrument should be considered as the final option, after all other efforts are exhausted to improve the (economic) situation. It is clear that in Albania there are many areas of action, which may fix the economic situation and therefore it is not necessary to take such a step, such as the increase of money supply under the principle of "helicopter money". Thus, we must necessarily use at first hand all the opportunities to ensure macroeconomic stability and to promote sustainable economic growth and then, if there is no other alternative, we may have a look on "helicopter money".

Albania may really meet the requirements for "helicopter money" and this

policy may positively influence the consumption growth by consumers and, consequently, the growth of aggregate demand, a rising inflation, thus avoiding deflation as a negative element impacting the economic growth, as well s a better income distribution, especially to that group that is "unfairly" affected by the fiscal package. Nevertheless, the use of this practice, on the other hand, is inconsistent with the principles of free market, as it puts the central bank in an unusual position in relation to the private banking system.

Also, the central bank, as a result of such policy, could lose its influence in maintaining macroeconomic stability through its monetary policy. Secondly, this move might produce adverse outcomes, i.e. an uncontrolled increase of inflation, and furthermore, such a step would encourage consumers to think that the solution will always come from the "state", by making them feel less and less connected with good governance of their finances.

In this context, Albania does not need, currently, any use of "helicopter money", but it may utilize the opportunity to improve macroeconomic stability with other elements of fiscal and monetary policy, where it first need a harmonization and coordination of both policies, to get optimal results.

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AAB ACTIVITIES

DIGITAL BANKING IN ALBANIA On 25 May 2016, the Albanian Association of Banks (AAB) organized, in cooperation with the Bank of Albania and the National Payment System Committee, a conference on " Digital Banking in Albania". This conference aimed at promoting new technologies used by the banking sector to provide services and products to Albanian citizens.

In the welcoming speech, Mr Christian Canacaris, AAB Chairman, highlighted the fact that technology and consumers have contributed to the banks' vision, and their renewed thinking on the way they operate. 12 out of 16 banks operating in Albania offer internet banking; 7 out of 16 banks offer mobile banking and 3 out of 16 banks offer e-commerce.

During the past five years (2011 2015), the banking industry invested EUR 65 million in infrastructure and information technology services. In addition, EUR 16 million are planned to be invested this year.

This conference was organized in three sessions: The first session was moderated

by Ms Elisabeta Gjoni, First Deputy Governor of the Bank of Albania and Chair of the National Payment System Committee. The panel participants were: Ms Milena Harito, Minister of Innovation and Public Administration, Mr Francisco Tur Hartmann Deputy Head of the Market Integration Division, European Central Bank (ECB), Ms Pascale-Marie Brien, Senior Policy Advisor, European Banking Federation (EBF), Mr FrĂŠdĂŠric Blanc, member of the Albanian Association of Banks and Chief Executive Officer EO of the Societe Generale Bank in Albania and Mr Periklis Drougkas, Chief Executive Officer of Alpha Bank Albania.

Ms Milena Harito, Minister of Innovation and Public Administration, in her speech, presented the latest developments regarding projects by

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the Government of Albania for the digitalization of government services.

The second session discussed the latest developments regarding the digital transformation and its role in the banking industry. The panel was moderated by Ms Maria Teresa Chiementi, representative of the Payment Systems Development Group at the World Bank.. Mr Wim Mijs, Chief Executive of the European Banking Federation (EBF), spoke on the regulatory framework in the European Union and its impact in Albania. His input added value to the session discussions. Representatives from Turkey ( Garanti Bank) and Poland brought the experience of their countries and the latest trend in the digital banking and the payment system model implemented by Poland.

The third session on "Digital Banking in Albania- Where we stand! What we should know!" was moderated

by Mr Christian Canacaris, AAB Chairman. The presentations by Mr Enkelejd Zotaj from Raiffeisen Bank, Mr Fatih Karli from BKT, Mr Gideon Van Der Broek and Mr Paul Wide from International Commercial Bank focused on the products and services their banks provide to the Albanian consumers.

The last two presentations by Mr Romano Stasi, Managing Director of the Italian Association of Banks and Mr Raja Said representative of ProgressSoft Corporation, discussed issues related to the information security in the framework of new developments in technology and possible solutions regarding the payment sector, which may be applied in the future in the banking sector.

Journalists, representatives of international organizations and telecommunication companies, providers of innovative products and services in the banking sector, as well by interest groups on technology attended the conference.

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AAB ACTIVITIES Amendments to the Labor Code The meeting was organized on 6 April, by AAB in collaboration with the Ministry of Social Welfare and Youth and the Labour Inspectorate.

Participants discussed on concerns raised by the banks on specific issues, with regard to Labor Code.

AAB organizes the 42th EBF Associates meeting

The 42th meeting of the EBF Associate members was held in Tirana on 29 April 2016. The meeting was attended by representatives of national banking associations from Albania, Italy, Hungary, Germany, Estonia, Czech Republic, Azerbaijan, Luxembourg, Montenegro, Poland, Serbia and Turkey and also representatives from Bank of Albania.

The meeting included speeches by high level guest speakers such as the Mr Erion LUCI, Deputy Minister of Finance ; Ms Natasha AHMETAJ, Deputy Governor of Bank of Albania and Christian CANACARIS, AAB Chairman, and CEO of Raiffeisen Bank Albania.

The meeting was an occasion to discuss the situation in the political and regulatory developments in the EU; to give an overview of the EBF and the Associate member experiences in terms of Cyber Security and to share the initiatives undertaken in frame of the Financial Education (European Money Week) in which regard Albania has been very active this year.

Following the meeting, on 30 April, under the auspices of AAB Secretariat was organised a special tour, where the participants visited the old city of Berat, which is under the protection of UNESCO and combines eastern and western cultures, costumes, traditions and and outlook.

The second meeting of the National Payment System Committee On 24 May 2016, the National Payment Systems Committee (NPSC) held its second meeting. AAB was represented at the meeting by Mr. Frederic Banc, member of AAB Board of Director & CEO of Societe Generale Albania, Mrs. Najada Xhaxha, Head of AAB Payment Systems Committee and member of NPSC, and Dr. Spiro Brumbulli, AAB Secretary General.

At the meeting, the progress of three projects, deriving from conclusions of the first meeting, were introduced and explained. In the frame standardized payment order, the agreed format was presented, which is fully based upon SEPA standards.

Conference: “Justice Reform A key pre-condition for boosting and attracting foreign investments in Albania”

The Conference was organized on 23 May 2016 by FIAA, in cooperation with Delegation of the European Union in Albania. During his speech, Mr. Christian Canacaris, AAB Chairman said that: “The Justice Reform should be seen as an obligation that each of us has for the development of the country.

This reform is a key challenge to accelerate the accession of Albania into the European Union”.

UET Students’ Forum of Finance: The best essay

The Department of Finance at the European University of Tirana (UET) organized on 26 May, the annual UET Students’ Forum of Finance.

The forum is organized in the form of a contest, where 3 best essay presentations are awarded by the Commission. This year, the secondplace winner of the Forum was rewarded by AAB.

Albania Financial Forum IV

On 23 June 2016, the Albania Financial Forum IV was organized

by Bank of Albania and International Monetary Fund. This year’s forum discussions were focused on the issue of reviving credit growth, to support a more stable economic growth. Among others, the forum was attended by the CEO of main banks operating in Albania.

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AAB TRAININGS

20 16 Train–the–Trainer: Didactics and Methodology This training was organized on 25 – 27 May 2016, in cooperation with the Austrian Institute of Excellence and the logistic support by Credins Bank. The workshop focused on latest trends and theories of competence-based and learner-centered methodology. The seminar was designed for anyone being a lecturer or trainer concentrating on in-house training and was attended by 10 participants from 7 member banks.

20 16 Sales & Negotiation Training

This training was organized on 27 – 28 May 2016, in cooperation with the Austrian Institute of Excellence. It covered challenging, insightful, and results oriented sales training theory, as well as practical exercises. The training was delivered by Mr. Eric Molin, communication training expert and was attended by 14 participants.

Risk Management for Risk and Internal Audit Professional

This training was organized in cooperation with the Albanian Institute of Internal Auditors (AIIA) on 20-21 April 2016. The training was delivered by two trainers, an international and a local one, and it was an opportunity for networking and understanding each other to better cooperate for improving their organizational risk culture. It was attended by participants from 6 member banks.

20 16 Operational Risk and Financial Crime Workshop

This workshop was organized with the financial support of IFC on 15 June 2016 in Tirana. It addressed key elements of managing operational risk and financial crime prevention with blended approach of lecturing and case studies debriefing. The workshop was attended by 19 participants from banking system.

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