The Growth in the Albanian Banking Sector in the Global Financial Crisis Period and Its Reflection to the Local Economy

Abstract

The last global economic and financial crisis of 2007-2008 affected Albania considerably. However, it managed being one of the few countries with positive economic growth in Europe. But, the more remarkable event has happened in the country’s banking system: the amount of its assets has almost doubled in the period of 2008-2020, from 845 billion to 1.581billion Albanian LEK. This huge enlargement in the sector’s balance sheet has occurred by the increase in the deposits. Moreover, it has happened in the period where the deposit interest rates saw the historically low levels by the continual decreases from year to year. In addition to economic slowdown, some country-specific factors, such as lack of alternative financial instruments, difficulties in reaching some of them, and unawareness of many savings holders about the existing choices- except putting in bank account- have played role in this happening. Meanwhile, the banks have generally preferred buying bond/obligation to giving loan in the same period, which caused the loans’ share in the total assets to decrease from 48 percent to 39 percent and the securities’ share in it to increase from 32 percent to 35 percent. The decline in credit demand is one of the factors of this change, but the credit-less economic recovery, which started in 2013 and continued till the Pandemic period, implies that it is mostly due to the banks’ reluctance in making new loans. The huge rise in bad loans in the period of 2008-2013, and the limited effect of the following recovery on liquid assets as well as the increasing debt need of the government have led the banks to choose this way.The current structure of the banking sector’s assets should change in favor of the private sector. The banks should have more desire to give credit to the economy, but this requires some positive changes in the potential borrowers’ behaviors and management sense as well as improvement in non-performing loans issue. Meantime, the government should perform its functions more properly, and tend to meet its financial needs from outside, and thus a bigger part of the domestic resources will be presented to usage of the business enterprises and households. This change is crucial to launch a sustainable economic growth after the Pandemic period, and for the banking system’s soundness in the long-run, which requires having strong and diversified relations with the clients, including meeting their financial needs. Keywords: Albania, banking sector, financial crisis, asset allocation. DOI: 10.7176/RJFA/12-10-03 Publication date: May 31 st 2021