6. Financial Sector
Capital Markets and Portfolio Investment
The government has adopted policies to promote the free flow of financial resources and foreign investment in Albania. The Law on “Strategic Investments” is based on the principles of equal treatment, non-discrimination, and protection of foreign investments. Foreign investors have the right to expatriate all funds and contributions of their investment. In accordance with IMF Article VIII, the government and Central Bank do not impose any restrictions on payments and transfers for international transactions. Despite Albania’s shallow foreign exchange market, banks enjoy enough liquidity to support sizeable positions. Portfolio investments continue to be a challenge because they remain limited mostly to company shares, government bonds, and real estate.
In recent years, the high percentage of non-performing loans and the economic slowdown forced commercial banks to tighten lending standards. However, following a continuing decrease in non-performing loans (NPL) which at the end of 2020 reached 8.1 percent, lending increased by 6.5 percent year-over-year in 2020. The credit market is competitive, but interest rates in domestic currency can be high, ranging from 5 percent to 6.5 percent. Most mortgage and commercial loans are denominated in euros because rate differentials between local and foreign currency average 1.5 percent. Commercial banks operating in Albania have improved the quality and quantity of services they provide, including a large variety of credit instruments, traditional lines of credit, and bank drafts, etc.
Money and Banking System
In the absence of an effective stock market, the country’s banking sector is the main channel for business financing. The sector is sound, profitable, and well capitalized. The Bank of Albania, the country’s Central Bank, is responsible for the licensing and supervision of the banking sector in Albania. The banking sector is 100 percent privately owned and its total assets have steadily increased over the years reaching $15 billion mostly based on customers deposits. The banking sector has consolidated recently as the number of banks decreased from 16 in 2018 to 12 in 2020. As of December 2020, the Turkish owned National Commercial Bank (BKT) was the largest bank in the market with 26.4 percent market share, followed by Albanian Credins Bank with 15.5 percent, and Austrian Raiffeisen Bank third with 14.9 percent. The American Investment Bank is the only bank with U.S. shareholders and ranks sixth with 5.5% percent of the banking sector’s total assets.
The number of bank outlets has also decreased over the recent years also due to the consolidation. In December 2020, Albania had 416 bank outlets, down from 446 from 2019 and the peak of 552 in 2016. Capital adequacy, at 18.23 percent, remains above Basel requirements and indicates sufficient assets. At the end of 2020, the return on assets was just 1.2 percent. The share of NPLs continued to fall, reaching 8.1 percent at the end of the 2020, down from 11.1 percent in 2018, and significantly below the 2014 level when NPLs peaked at 25 percent. As part of its strategy to stimulate business activity, the Bank of Albania has adopted a plan to ease monetary policy by continuing to persistently keep low interest rates. The most recent reduction was in March 2020, when the interest rate was reduced to the historic low of 0.5 percent, down from a rate of 1 percent in place since June 2018.
Many of the banks operating in Albania are subsidiaries of foreign banks. Only three banks have an ownership structure whose majority shareholders are Albanian. However, the share of total assets of the banks with majority Albanian shareholders has increased because of the sector’s ongoing consolidation. There are no restrictions for foreigners who wish to establish a bank account. They are not required to prove residency status. However, U.S. citizens must complete a form allowing for the disclosure of their banking data to the IRS as required under the U.S. Foreign Account Tax Compliance Act.
Foreign Exchange and Remittances
Bank of Albania (BoA) formulates, adopts, and implements foreign exchange policies and maintains a supervisory role in foreign exchange activities in accordance with the Law on the Bank of Albania No. 8269 and the Banking Law No. 9662. Foreign exchange is regulated by the 2009 Regulation on Foreign Exchange Activities no. 70 (FX Regulation).
BoA maintains a free float exchange rate regime for the domestic currency, the Lek. Albanian authorities do not engage in currency arbitrage, nor do they view it as an efficient instrument to achieve competitive advantage. BoA does not intervene to manipulate the exchange rate unless required to control domestic inflation, in accordance with the Bank’s official mandate of inflation targeting.
Foreign exchange is readily available at banks and exchange bureaus. Preliminary notification is necessary if the currency exchange is several million dollars or more – the law does not specify an amount but provides factors for determining the threshold for large exchanges – as the exchange market in Albania is shallow. A 2018 campaign launched by the BoA to reduce the domestic use of the euro to improve the effectiveness of domestic economic policies has produced tangible results. The share of foreign currency loans in total loans fell from 60 percent in 2015 to 47 percent in 2020. Foreign currency deposits, which to some extent reflect relatively high remittances, reached to 53.4 percent of total deposits.
The Banking Law does not impose restrictions on the purchase, sale, holding, or transfer of monetary foreign exchange. However, local law authorizes the BoA to temporarily restrict the purchase, sale, holding, or transfer of foreign exchange to preserve the foreign exchange rate or official reserves. In practice, BoA rarely employs such measures. Faced with the unprecedented economic disruption following the COVID-19 pandemic, on July 1, 2020 Bank of Albania ordered banks to halt distribution of dividends and use dividends to cover potential losses and increase loans to the economy. The decision, initially in force till the end of 2020, was extended till the end of 2021.
The Law on Foreign Investment guarantees the right to transfer and repatriate funds associated with an investment in Albania into a freely usable currency at a market-clearing rate. Only licensed entities (banks) may conduct foreign exchange transfers and waiting periods depend on office procedures adopted by the banks. Both Albanian and foreign citizens entering or leaving the country must declare assets in excess of 1,000,000 lek (USD 9,000) in hard currency and/or precious items. Failure to declare such assets is considered a criminal act, punishable by confiscation of the assets and possible imprisonment.
Although the Foreign Exchange (FX) Regulation provides that residents and non-residents may transfer capital within and into Albania without restriction, capital transfers out of Albania are subject to certain documentation requirements. Persons must submit a request indicating the reasons for the capital transfer, a certificate of registration from the National Registration Center, and the address to which the capital will be transferred. Such persons must also submit a declaration on the source of the funds to be transferred. In January 2015, the FX Regulation was amended and the requirement to present the documentation showing the preliminary payment of taxes related to the transaction was removed.
Albania is a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a Financial Action Task Force-style regional body. In February 2020, Albania was included in the category of jurisdictions under increased monitoring, also referred to as the Grey List. Albania had previously been on this list and was taken off in 2015. The 2021 International Narcotics Control Strategy Report (INCSR) keeps Albania in the “Major Money Laundering Jurisdictions” category following its inclusion for the first time in 2017. The category implies that financial institutions of the country engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking. Albania and the United States do not have a bilateral MLAT, but cooperation is possible through multilateral conventions.
Sovereign Wealth Funds
Parliament approved a law in October 2019 to establish the Albanian Investment Corporation (AIC). The law entered in force in January 2020. The AIC would develop, manage, and administer state-owned property and assets, invest across all sectors by mobilizing state owned and private domestic and foreign capital, and promote economic and social development by investing in line with government-approved development policies.
The GoA plans to transfer state-owned assets, including state-owned land, to the AIC and provide initial capital to launch the corporation. The IMF Staff Concluding Statement of November 26, 2019, warned that the law would allow the government to direct individual investment decisions, which could make the AIC an off-budget spending tool that risks eroding fiscal discipline and circumventing public investment management processes. There were no activities by the AIC in 2020.