Albania Financial System - Case Study Example

THE FINANCIAL/BANKING SYSTEM OF ALBANIA An Economic Assessment and documentation of the systems structures, Documentations, Operations Users and activities. 1.0 Introduction: The financial system exists to facilitate, a settlement and the flow of funds from one party to another. In such a system, financing is easily raised and allocated with the risk associated with such financing easily managed A developed financial system is one that has a secure and efficient payment system, security markets and financial intermediaries that arrange financing, and derivative markets and financial institutions that provide access to risk management instruments (www.wikipedia.org). 1.1Operations and Structure The Albania financial system is at its early stage of development and while the core legal and regulatory frameworks are in place, much is still to be done if the country must catch up with the pace of development in industrialized nations (Ingves and Dappler, 2005). However, these are highly based and are affected by the prudential regulations, licensing policies and capital standards being put in place. Other sectors of the country's financial system are not large enough to be systematically important. How ever, growth in the insurance sector is rapid and the fear is that problems within this sector may undermine confidence in the institutions (Ingves and Dappler, 2005). The Bank of Albania (BOA) is at the hem of the financial system, setting the rules, ensuring fair play. It is the keeper of the government accounts, carry out and negotiate government lending and borrowings. It also monitors the other institutions (Commercial banks and other forms of depository institution.) It issues and revokes licenses and do not compete with other institutions in ordinary business operations, but uses its lender of last resort policy, and open market operations to bail the economy and other banks out of recession (Article 16 of Law No.7491, dated April 29, 1991). Other institutions include, state banks, banks limited by shares, cooperative banks and private banks with Albanian capital exclusively. Private or state banks with Albanian and foreign capital, and private banks with foreign capital. Membership deposits and credit are open to both physical and legal persons. There are about sixteen commercial banks in Albania, and examples of such institutions include: Alpha Bank, Procredit Bank Italian Albania bank. The ownership and management structure runs from the general assembly, through the board of directors, the managing director to the front line employees. The internal and external audits are independent bodies to ensure, agents greed are mitigated. However, these institutions can only go operational once required conditions set by BAO are met, from capital to qualified board of directors. Other forms of non banking crediting institutions include The Mountain area Financing Fund (PSHM). Future Development Association (FDA). Besa Foundation. Albania savings and credit union However, Ingves and Dappler, 2005 argued that this non banking sector is not large enough to be systematically important their roles and contributions should not be under looked as most of them provide alternative banking services to deprived areas. What is the role of the central bank' A Central Bank (CB) is the central authority, the rule maker and the government representative in the financial system. It is an entity responsible for the monetary policy of its country or of a group of member states (http://en.wikipedia.org/wiki/Central_bank). "It is a bank that provides financial and banking services for the government of a country and its commercial banking system as well as implementing the government monetary policies" (Butler B. etal 1997:58). In Albania, the central bank is known as The Bank of Albania or in other words, the banker's bank. Other examples of central banking institutions include The Bank of England for the United Kingdom, the Deutsche Bundesbank in Germany, and France's Banque de France (Butler B. etal 1997:58). The functions of the central bank include Government Account Management:-The central bank act as banker to the national government. It is the keeper of government accounts, manages government reserves, borrowings and deposits by doing this the bank is acting as the government monetary policy adviser, executor as necessary steps are being taking to either cool or boost the economy. Bankers Bank:- The central bank act as banker to other banks. By law, the central bank is the central referee in the banking system as such; it is being authorized with the issuer of licenses, statutory rights, reserves accounts to other banks. Excess liquidity in other commercial banks is deposited in their respective account with the central bank. Using its open market operations, the central bank regulates the amount of money supply in the economy. Using its lender of last resort policy, it bails other banks when they are hard up. But however, do not compete with these institutions in ordinary business transactions. To ensure fair play, the central bank control and manages the issuer of bank notes, carry out effective interest rate management, manages the price level to curb down inflation and it is the sole keeper of the country reserves of gold and foreign currency. Financing Government deficit and acting as a buffer for surpluses. Being a watch dog in the financial system, the central bank act as a main source for financing government deficits. However, some scholars argued that by acting this way, this has been a major source of inflation in many transition economies (Sheets and Loungani 1997). Using Poland as an example, Sheets and Loungani, 1997 went further to argue that where the central bank exercises political and Economy freedom opposition to providing financing to the government in such situation will increases(Sheets and Loungani 1997, Butler B. etal 1997:58). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. In all, for every economy to function smoothly the must be a central authority acting independently to institute fair play. In the case of the financial system, this central authority known as the government representative, the rule maker is the central bank (Sheets and Loungani 1997). Who owns banking institutions in Albania' According to Article 16 of Law No.7491, dated April 29, 1991, "On the main constitutional provisions" on the proposal of the Council of Ministers, to the General Assembly, (www.law.nyu.edu/centralbankcentre) In Albania, like in any other country, Banks are independent financial institutions that accept all kinds of money deposits from the general public, be it physical or legal persons, preserve their secrets, provide credit and execute other banking activities within the framework of law. The Albania banking system is divided into two levels. The first level comprises the Central Bank known as the bank of Albania and whose status is defined by special law. This bank commonly known as the government eye is owned by the national government in other words it is owned by the Albanian government. (See article 2, www.law.nyu.edu/centralbank) The second level comprises other banks, from commercial banks to depository institutions. Examples of such institutions in Albania include: the Alpha bank, the American Bank of Albania, Italian Albanian Bank, Commercial Bank of Greece, First Investment Bank, United Bank of Albania etc. Ownership of these institutions is open to both Albanian and foreign nationals of goodwill and faith (www.Albic.net/Eng/). However, nonphysical persons such as groups, companies, corporations can have access to ownership to any of these institutions. According to article 3, of Law No.7491 Banks shall be organized in one of the following forms: a) state banks, banks limited by shares, cooperative banks, private banks with Albanian capital exclusively; b) private or state banks with Albanian and foreign capital; c) private banks with foreign capital exclusively. The bank may be national or regional bank Are there special government lending institutions' In Albania, the central bank exercises the sole function of government lending institutions. However, in some situations, such a function might be executed through another depository institution like the Albanian deposit insurance agency or any other as deem necessary. Can banks own non-financial firms' As any non physical legal person, ownership of none financial and financial institution is open to both physical and non physical persons operating in goodwill and faith. What kind of banking risk or crisis do the banks and financial institutions face in Albania' Webster's dictionary defines risk as "the chance of injury, damage, or loss." Unlike, say, a portfolio of stocks, which has a potential for gain, risks present only a down side. A risk is a chance o something f bad occurring and, hence, to be avoided (Meyer and Upjohn 2003:10). Given that risks are endemic in our uncertain world, banking institutions in Albania shouldn't be looked at as an exception. According to International Monetary Fund country report no 05/274, the risk associated with the financial system of Albania runs from a combination of poor internal governance, weak financial accounting and reporting practices, inadequate land registration titling system, money laundering and corruption, so many financial sector regulatory entities some of whom have no market participants to regulate. Though, the banking institutions exhibit a modest degree of sensitivity to interest rate risk, the high percentage of their loans in foreign currency raises the concern (Ingves and Dappler, 2005). Other forms of risks include Currency transactions and translation exposure risk. These are the risk associated with foreign lending and borrowing. The value of the local currency might fall all appreciate, the effect shouldn't be neglected. Credit and Liquidity level risk. That is the risk associated with having enough cash to pay depositors at any given time, and the risk that borrowers will pay back within the given period. Political interest rate and Inflation risk. The political situation of Albania is a big risk for the banking institutions especially after the collapse of the Soviet Union. Rising prices and interest rate provide poor signals for banking activities. Other forms of risk experience by banks within the Albania financial system are, operational risk, competitive risk, commodity risk, communication risk, energy price risk, environmental risk, equity market risk, fraud risk etc. At the beginning of the 21st century, Albania was having a great difficulty to create a banking system. Though banks within the country's financial system were able to accept deposits, they were stymied on how to profitable lend out this cash to private businesses (Sowell 2003). The London Magazine, The Economist, reported that "the legal infrastructure is so weak" in Albania that the head of the bank the is "afraid to make any loans" Sowell, 2003:362). Situation was made worst, in the 90s with the collapse of the Soviet Union, the financing mechanism (the state) failed in the early 1990s because production rates plummeted and state enterprises generated far more losses than gains. http://www.country-studies.com/albania/finance-and-banking.html Today, the situation has change, as risk is being tackled formal conventional dimension. The entry of foreign banks into the economy, the stringent measures apply by BOA have calm down situation and the result of the two tire banking system introduced by specialist from the IMF. Conclusion In all, the Albania financial system is structured just like any financial system with the Central bank at the top, and other banking and non banking institutions doing the normal deposits and lending. The BOA should take as a major responsibility to restore confidence, provide financial support to the bank under conditions determined by it in order to make up any temporary liquidity deficiency. Use it lender of last resort policy in good faith and to carry out corrective actions deem necessary to benefit the state. References: Sheets N.and Loungani P. 1997 Central Bank Independence, Inflation and Growth in Transition Economies; Journal of Money, Credit & Banking, Vol. 29, 1997. Butler B. et al 1997. A Dictionary of Finance and Banking. http://www.questia.com/read/76802211 08/11/00708:21 http://en.wikipedia.org/wiki/Central_bank 08/11/007 08:43 http://www.albic.net/Eng/a3business/banks_in_albania.php Ingves S. and Deppler M. 2005. Albania, Financial system assessment including, reports on the observance of standards and codes on the following topic: Banking supervision and payment system. IMF country report number 05/274 August 2005. www.imf.org Meyer D. J; and. Upjohn W.E 2003 .The Economics of risk. Institute for employment. www.questia.com/read/109813331 of 09/11/007 Sowell Thomas, 2003. Basic Economics. A common sense guide to the economy. http://www.country-studies.com/albania/finance-and-banking.html Read More