Bankieri No.16 - July 2015

1 www.aab.al Bankieri


Editorial tEam:

Elvin MekaEditor–in-Chief

Eftali PeçiCoordinator

Junida Tafaj (Katroshi)Collaborator

Andis RadoPhotographer

design & layout: PIK Creativ

Printed by:

Editorial Board:

Christian CANACARISAAB Chairman& CEO of Raiffeisen Bank Albania

Gazmend KADRIUAAB Vice Chairman& CEO of Union Bank

Periklis DROUGKASAAB Executive CommitteeMember& CEO of Alpha Bank Albania

Seyhan PENCABLIGILAAB Executive CommitteeMember& CEO of Banka KombëtareTregtare

Frédéric BLANCAAB Executive CommitteeMember& & CEO of Societe Generale Albania

Bozhidar TODOROVAAB Executive CommitteeMember& CEO of FIBank Albania

Endrita XHAFERAJSecretary General,Albanian Association ofBanks

Hysen ÇELAChairman of AlbanianInstitute of AuthorizedChartered Auditors (IEKA)

Adrian CIVICIPresident ofEuropean University of Tirana

Spiro BRUMBULLIChief of Cabinet, Ministryof Finance

Enkeleda SHEHIChairwoman of AlbanianFinancial SupervisionAuthority

Content BankieriNo.16, July 2015Publication of the Albanian Association of Banks

SHadoWBaNKiNGIN ALBANIA

EditorialShadow banking in Albania The Past, the Present and the Future! 5

Elvin MEKA

FrontlineShadow Banking and Opportunities in Banking Sector in Albania 6

Athanasios PALoUdIs A glimpse light on shadow banking 8

Teuta BALETA, Rinald GURI

Banking SystemThe shift in the credit risk control is a move in the right direction 11

Arjan KAdAREJAInternal Ratings-Based models, an opportunity to be considered 13

Altin KAdAREJA

Experts’ ForumPerspectives on the valuation of real estate properties in the current market 16

Anton LEZHJAInternal Audit.Its role in mitigating the bank fraud 18

stavri PAsHKo

Economist CornerBanks and the financial system in front of money laundering 23

Adrian CIVICI

Social CapitalBanks' activities 27

information Security ZoneInformation System for Reporting and Compensation (ISRC) in Deposit Insurance Agency 32

Blerta KoÇIThe importance of cyber securityand ALCIRT’s role 35

Rovena BAHITI

Financial auditoriumPracticing the art and science of project management in today’s business 37

Bianca dURo

iCC academy 39aaB activities 42

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

ALBANIAN ASSOCIATION OF BANKSStreet ‘Ibrahim Rugova’, SKY TOWER, 9/3, TiranaTel: ‘+355 4 2280371/2 Fax: +355 4 2280 359E-mail: [email protected]; www.aab.al


Editorial

Shadow banking in albaniaThe Past, the Present and the Future!

Shadow banking has been one of the most quoted phrase within global financial sys-tem, among financial market practitioners

and academia, especially after the outbreak of the last financial crisis of 2007-2008, given the particular role, the “shadow banking” system played in originating such crisis. The term “shadow banking”, as iconized by Mr Paul McCulley, an US economist and former managing director of PIMCO, the well-known global investment management firm, includes financial services and credit to clients, be they businesses or individuals, by way of nontra-ditional and nonbank distribution channels, which are provided by entities which are not subject to regulatory oversight, as well as the financial activity of regulated intermediaries, which is not subject to oversight. However, its definition is not exhaustive, as according to GLOBAL FINANCE: “Financial Stability Board (FSB) has a very wide definition of shad-ow banking, including all nonbank financial intermediation in aggregate”, and it “defines it as the Monitoring Universe of Non-Bank

Financial Intermediation (MUNFI)”. When it comes to Albania, shadow bank-ing is not a new phenomenon, although the Albanian “shadow banking”, used to be quite rudimentary and had almost nothing to be compared with the standard definition of it. Nevertheless, we know quite well the repercus-sions and effects of such activity, during the last decade of the last century. Now it belongs to the past and fortunately it had no interconnect-edness with the formal commercial banking system. As for the present, the situation is far more different and positive, in every aspect of discussion, be it regulatory, operational, the public and institutional approach towards risk and its respective management, etc. On the other hand, what we can see being devel-oped now is a rise of the informal lending and borrowing and a quiet substitution of bank deposits with other alternatives, coming from collective investments schemes, which seems to be a pragmatic choice for individuals, who are naturally looking for higher yields, in an envi-ronment with continuously low and ultralow interest rates. What is country-specific for Al-bania is that the modern and standard shadow banking is being developed in total absence of any organized form of the securities mar-ket, which would enable regulators to collect more information about it, let alone the fact of enabling them to monitor, supervise, regulate and enforce it, thus mitigating and contain-ing the systemic nature of risks, triggered and

produced by such activity. So, the future could bring numerous challenges, not only for reg-ulators of the Albanian financial system, but also for commercial banks, given the challeng-ing nature and the steady growth of shadow banking, in a time when commercial banks will be much less interested in long-term loans for regulatory reasons, the EU integration process for Albania, and the digital revolution and new technologies, especially big data and business intelligence, which are reshaping totally the financial landscape, globally. Indisputably, the shadow banking is not the “black cat” for the financial system, in-stead it could support the country’s economic growth, but it is unavoidably associated with its own risks, too. That’s why the Albanian reg-ulators of financial system and markets, must consider the famous quote of Desiderius Eras-mus, the well-known Dutch humanist, that: “Prevention is better than cure!!!”

The shadow banking is not the “black cat” for the financial system, instead it could support the country’s economic growth, but it is unavoidably associated with its own risks, too.

by Prof. asoc. dr. Elvin mEKa1 Editor–in-Chief

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


Therefore, appropriate monitoring of shadow banking helps to mitigate the build-up of such systemic risks. The common denominator is that these activities flourish outside the

Frontline

Shadow Banking and opportunities in Banking Sector in albania

With the right approach and attitude all banks operating in Albania can work more in order to gain leverage and also institutionalize the money market in Albania, because in the long run that will make it easier to control the country’s economy, adjusting interest rates and also controlling the money supply.

by mr athanasios PaloUdiS, Head of Branch Network & sME divisionTIRANA BANK

In the developing world, the shadow-banking sector provides grease to keep economies functioning smoothly. small businesses get the loans they need; savers get investments yielding more than inflation and in economies with underdeveloped financial systems, shadow banking fills a vacuum. Thus is case with Albania, too.

Because of indefinite number of reasons, most people borrow from time to time. They may

want to buy a home or land, seek to invest in an education or a business, or even invest on their children education, or need to cover the costs of a health emergency or perhaps starting up a business. When they lack the money to do so, they turn to someone who will lend it to them - a bank, a friend or family member, an informal lender. In some parts of the world many people may sometimes rely on credit cards in the place of loans. Whenever they do not turn to a bank, there is where we see the shadow banking taking place. The term "shadow banking" has been attributed to 2007 remarks by

economist and money manager Mr Paul McCulley to describe a large segment of financial intermediation that is routed outside the balance sheets of regulated commercial banks and other depository institutions. Shadow banks are defined as financial intermediaries that conduct functions of banking without access to central bank liquidity or public sector credit guarantees. The shadow banking system can broadly be described as credit intermediation involving entities and activities outside of the regular banking system. Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy; but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions (e.g. maturity and liquidity transformation, and leverage) and when their interconnectedness with the regular banking system is strong.


increasing the use of accounts among those who already have one. The challenge in each case is for the private sector to design appropriate financial products that meet the needs of the unbanked and make using an account at least as easy, convenient, and affordable as the alternatives. By providing a regulatory framework conducive to expanding account ownership-through such actions as licensing bank agents, introducing tiered documentation requirements, requiring banks to offer basic or low-fee accounts, and allowing the evolution of new technologies such as mobile money-governments can both help lower the cost of financial

services and help reduce the distance to financial institutions by making it cost-effective for them to locate outlets in more remote areas. One promising opportunity to expand financial inclusion among the unbanked is to digitize payments by moving cash payments into accounts. Shifting to digital payments has many potential benefits, for both senders and receivers. It can improve the efficiency of making payments by increasing the speed of payments and by lowering the cost of disbursing and receiving them. It can enhance the

security of payments and thus lower the incidence of associated crime and it can increase the transparency of payments and thus reduce the likelihood of leakage between the sender and receiver. Shifting to digital payments can also provide an important first entry point into the formal financial system, which can lead to significant increases in saving and the substitution of formal for informal saving. In short, the benefits of digital payments go well beyond convenience. If provided efficiently and effectively, digital payments can transform the financial lives of those who use them. Payments for the sale of agricultural products offer another opportunity for increasing account ownership among the unbanked. In developing economies overall, 23% of unbanked adults-440 million people-receive payments in cash for the sale of agricultural products. Many people who receive payments for the sale of agricultural products are part of an agricultural value chain. This means that one actor—such as an agricultural commodity buyer-can have an outsize influence on how such payments are received. Just as with wages and government transfers, digitizing agricultural payments could therefore contribute to rapid expansion in account ownership. As it can be seen the opportunities which lay ahead of us in order to tackle and solve this problem are plenty. With the right approach and attitude all banks operating in Albania and Tirana Bank in particular can work more in order to gain leverage and also institutionalize the money market in Albania, because in the long run that will make it easier to control the country’s economy, adjusting interest rates and also controlling the money supply.

The challenge in each case is for the private sector to design appropriate financial products that meet the needs of the unbanked and make using an account at least as easy, convenient, and affordable as the alternatives.

regular banking system and often beyond the control of regulators and monetary policy. Together they show how hard it is to restrict risky lending without causing harm. For instance, in the developing world, the shadow-banking sector provides grease to keep economies funct ioning smoothly. Smal l businesses get the loans they need; savers get investments yielding more than inflation, and in economies with underdeveloped financial systems, shadow banking fills a vacuum. Thus is case with Albania too, it is not an exception to these practices and financial behavior. Recently from the survey held from Gallup International and World Bank says that 56% of Albanian adults used outside bank channels to borrow during 2013-2014, a very high percentage even when compared to the regional one which was around 36%. The poll shows that 43% of the Albanians borrowed their emergency loans from their relatives, 10% from their employer and 25% of them used their savings. The survey also shows that 25% of the Albanian used their borrowed money to cover health emergencies, 12% for education, 9% to buy a new house and 4% to invest in starting up a business. The survey shows that, in Albania, funding during the past two years is not provided by banks and financial sector, unlike other developed or OECD countries. However we can say that the shadow banking system can be viewed as a parallel system-one that is a complement to and not a substitute for traditional banking. In such economies lies the opportunity for expanding the financial inclusion of these people. These falls into two broad categories: expanding account ownership among the unbanked and


ms teuta BalEtaAdvisor

mr rinald GUriHead of department of Research, IT and statistics

alBaNiaN FiNaNCial SUPErviSioN aUtHority, aFSa1

Frontline

within such context (Green Paper, March 2012), but rather it defines even the activ-ities, in which they are engaged, such as: accepting funding with deposit-like char-acteristics, performing maturity and/or li-quidity transformation, undergoing credit risk transfer, and using direct or indirect financial leverage, as well as involvement in activities with a nature that could serve as important sources of funding of non-bank institutions, including securitization, securities lending and repurchase transac-tions. However, the essence of different definitions is clearly the same: lending ac-tivity, which is a traditional banking activ-ity that takes place in different forms and from such institutions, beyond the scope of banking regulation. The definition of "shadow bank/ing" concept is closely linked to at least three aspects: (i) the definition of institutions, activities or risks, classified within this cat-egory; (Ii) measuring its extent and scope; and (iii) defining the counter - measures by regulators. It is worth noting that the shadow banking activity is not necessarily dangerous for the financial system stabil-ity as a whole. Like any other financial activity, it has its advantages and helps the smooth functioning of the financial system, especially by adding liquidity, available in the market. It may constitute a useful part of the financial system, be-cause it performs several functions, such as: providing saving/investment alterna-tives, along with bank deposits; efficient channeling of resources towards specific

fining mode. The concepts are based on broad and narrow meanings of the phe-nomenon; they are shaped according to institutions, activities or risks, thus giving us a full range of definitions. Various au-thors equalize the term with securitiza-tion, the non-traditional banking activity, or crediting process by non-bank finan-cial intermediaries. Other authors give a comprehensive definition, by including all financial activities, in addition to tra-ditional banking activities, which require a last rank guarantee, be it private or public, in order to be carried out. Broader defi-nitions of such concept include activities similar to banking, but carried out by fi-nancial companies, that are not regulated as banks. Bernanke (April 2012) used this definition: “Shadow banking, as usually defined, comprises a diverse set of institu-tions and markets that, collectively, carry out traditional banking functions - but do so outside, or in ways only loosely linked to, the traditional system of regulated de-pository institutions." At the November 2010 Seoul Summit, the G20 decided to strengthen the shad-ow banking regulation and oversight. The Council for Financial Sustainability (Financial Stability Board, FSB), assumed the task of addressing such issue. This body defined the shadow banking activ-ity as "a credit intermediation system, formed by institutions and activities that operate outside the regular banking sys-tem" (2011a). The European Commis-sion’s respective definition is also formed

Since its onset in 2007-2008, the global financial crisis is not considered as a purely banking crisis. A part of risks,

which were materialized later in factors that caused or aggravated the crisis, were "created" and "grew up" in activities or non-bank financial institutions, which have been labeled with the term "shadow banks" or "shadow banking activity". The term itself is dressed with ambiguity, despite it’s increasingly use in literature and discussions about the financial system. Its translation in Albanian, gives another hand to the term’s uncertainty. Typically, the term "shadow bank/activity" would naturally mean an irregular or illegal institution or activity, carried out in underground. Practically, the term "shadow bank/banking activity" is the literal translation of the word in English "shadow bank/banking". In our opinion, the Albanian word "shadow" remains the most accurate translation possible, compared with efforts to use other alternative terms, such as: parallel or unregulated banking system/activities (e) or parallel banks. The term "shadow" implies that we are dealing with an organization (unit/activity) that is not a bank or banking activity, but is established or stands in the shade of banking activity. The term "shadow" becomes more meaningful when considering efforts to define the "shadow bank/banking activ-ity", and this turns to be a difficult task. The term, used for the first time in 2007 by Mr Paul McCaulley, is still in the de-

a glimpse light on shadow banking

The shadow banking activity is not necessarily dangerous for the financial system stability as a whole. Like any other financial activity, it has its advantages and helps the smooth functioning of the financial system, especially by adding liquidity, available in the market.

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


the behavior of shadow banking activity The display of behavior of shadow banking activity in Albania

Use of financial leverage This form of behavior, in the current stage of development of the financial system, is not present, because the trading of debt financial instruments is underdeveloped.

Credit risk transfer

This form of behavior, in the current stage of development of the financial system, is an isolated phenomenon, because the securitization process is absent, but there are forms of credit guarantee products, issued by insurance companies. The development of the insurance market beyond traditional mandatory insurance products may cause a rapid development of the phenomenon. It is easily understood that, the revival of bank credit creates conditions for the strengthening of such behavior.

maturity transformation This form of behavior, in the current stage of development of the financial system, has begun to be visible, due to the rapid development of the investment funds’ market.

liquidity transformation This form of behavior, in the current stage of development of the financial system, has commenced to be visible, but not in its traditional form. This behavior appears mostly due to lack of development of secondary markets in the country.

deposit acceptance

This form of behavior, in the current stage of development of the financial system, is not present, because such behavior is typical for money market funds (MMF), or bond market funds, which act as MMFs. Albania has neither developed money market instruments, nor funds that invest exclusively, or at least 50% of their portfolio in such instruments, in domestic or foreign markets. But there is a likelihood that the environment could change quickly and such behavior may become present.

legal structures, but fully interacting with each other. This was the typical case that played a significant role in molding the global financial crisis, which began in 2007-2008. In this case, the activities that bypassed the accounting rules and capital requirements just transferred risks outside the scope of banking supervision. In the end, when these institutions were faced with difficulties or bankruptcies, the effects were easily conveyed into the banking system. Contagion or the spill-over of harmful effects on the banking system came through several channels, like: borrowing from the banking system or contingent liabilities, linked with the occurrence of event for providing liquid-ity from the banking system, such as: credit or liquidity lines, or in cases of a massive assets’ sale, which have conse-quences on the prices of financial or real assets. So, as Mr Mark Carney, Governor of Bank of England (2014), said: "Shadow banking ...is huge, fast-growing in certain forms and little understood-a powerful tool for good but, if carelessly managed, potentially explosive." Today, shadow banking activity is considered the greatest threat to the world economy. Therefore, the challenge for the authorities is that the inherent risks of shadow banks must be addressed sufficiently and appropriately. If we refer to the case of Albania, we may argue that the unsophisticated fi-nancial system creates less ground for the development of shadow banking activity, but such behaviors are becoming visible (see table below) and could display rapid

needs, by taking advantage of narrow specialization they feature; providing al-ternative funding for real economy, when banks and other traditional channels of the market are in difficulties, as well as risk diversification, outside banking sys-tem. But shadow banking is accompanied by a number of risks. Some of them may have a systemic nature, given the fact that they are developed outside the perimeter of regulators, and because of their com-plexity, interconnectivity with the bank-ing system; their extension and spread toward the scope of various regulatory systems, or exceeding the confines of se-curities markets and investment funds, to seek for higher returns. Some of these risks are: the panic, the extensive and hidden use of financial leverage, avoid-ing regulation and regulatory arbitration, or consequences and contagion caused by failures of these institutions, toward the banking system. Shadow banks are exposed to the same financial risks as banks, but are not supported with the same level of regulation and supervision, as (commercial) banks. Some shadow banks rely on short-term financing, thus being exposed to the risk of massive and immediate fund withdrawals by custom-ers. Since they do not fall within the pe-rimeter of bank regulation, they use an extensively high financial leverage, by offering secured financing, thus turning into a systemic risk. The circumvention of traditional bank regulation or super-vision, transforms the traditional process of credit intermediation into independent

growth dynamics. What can authorities do in this case is to study of phenomena, which may be essentially shadow banking activities. The first step is to gather more informa-tion on the phenomena, taking place in the financial markets of the country and identify those units/activities that resem-ble to such activity. Secondly, there is a need for improving the database and ex-changing them between regulators of the financial system, to understand the scope and interaction of shadow banking phe-nomena, as well as the exposure certain different segments of the financial market have, against them. The authorities have the option, based upon the findings of the study phase, to decide whether there is any need to expand the scope of report-ing and regulation of shadow banking activity and to what extent, or otherwise going a step further with tougher action, to restrict the spread of shadow banking. Thirdly, given the degree of complexity of shadow banking activity, it is import-ant that legal/regulatory requirements for interaction between customers and finan-cial institutions be strengthened, in terms of the transparency regime. Finally, the task clearly does not belong to a single regulator, instead it will require pursuing a coordinated supervisory approach be-tween regulators, to supervise the dynam-ics of (shadow) banking activity develop-ment, in a way that such phenomenon to serve the financial system diversification, and not the accumulation of excessive risks, and their transformation into sys-temic ones.


the shift in the credit risk control is a move in the right direction

Banking System

by mr arjan KadarEJa, Phd,Professor of Banking and FinanceCANAdIAN INsTITUTE oF TECHNoLoGy (CIT)

The strategy of applying less interest rate discrimination and more credit rationing should have been used from the beginning, but to be successful in long term, the strategy should be implemented with due consideration given to the situation of banks’ important stakeholders such as depositors and corporations.

It is well known that, other things equal, the higher the contractually promised interest rates the higher the

expected returns on bank loans. But, this is only one side of the story because the other things do not have to be equal. One of other things is the probability of returning the loan, which decreases with the increase in the contractually promised loan rates. This implies that beyond a certain level the increase in loan interest rates is associated with lower expected returns. In what follows, I argue that there has been a shift in banks’ credit risk management strategy and, more importantly, the new strategy is paying off.

a rECENt HiStory Following the creation of the Albanian private banking sector, the credit risk

management strategy of relaxed credit standards and relatively high loan interest rates produced, till the end of 2008, a credit boom and high bank profits. However, as shown in Graph 3, the initial boom was followed by exploding Non Performing Loans (NPL-s) with profits (RoE) close to zero in 2011. In addition to well-known factors of lack of experience in credit risk management, the aggressive behavior by some banks to increase their market share and the lack of quality in supervision by the central bank, I think there is another factor which made things worse. That is the apparent credit risk strategy based mainly on interest rate discrimination rather than a combination of quantity restrictions and interest rate discrimination. However, some recent facts suggest that banks might have shifted to the second strategy.

a PiECE oF tHEory At retail level a bank controls its credit risks mainly by credit rationing rather than by using a range of interest rates or prices. Retail customers are more likely to be sorted or rationed by loan quantity restrictions than by price or interest rate differences.

The optimal credit risk control is somewhat different for wholesale loans, however. It is well known that, beyond some interest rate level, there is an inverse relationship between the expected returns on loans and the contractually promised interest rates. This in turn suggests that, beyond some interest rate level, it is best for banks to do credit rationing rather than seeking to continue price sorting, i.e. by charging higher premiums to higher risk borrowers.

tHrEE rECENt FaCtS I have documented three important facts which suggest a shift in the bank credit risk management, at least regarding the wholesale loans.

Fact 1 - As shown in Graph 1, for the first time ever, there has been a fall in the quantity of bank credit outstanding during 2013 and only a slight marginal increase during 2014. If we take into account the sizable depreciation of ALL Vis a Vis USD, during the last months, the slight increase in credit during 2014 is even smaller. This development suggests that banks have been doing a lot more of credit rationing than before.


Data Source: Albanian Association of Banks Source: Bank of Albania and author’s calculations

Fact 2 - Since January 2009, the Bank of Albania has been delivering numerous policy rate cuts. This was followed by a gradually falling bank loan average interest rate, as shown in Graph 2. However, there is a visible accelerated fall in bank loan interest rates since the middle of 2013. The bank loan average interest rates have dropped by about 3 percentage points during the last 18 months period (July 2013 - December 2014). That is roughly equal to the fall in the loan interest rates during the entire preceding 6 year period. This suggests less use of the interest rate discrimination by banks during the recent 18 months period. Moreover, this appears to be a strategy shared by most of the banks since the standard deviation of the loan interest rates across banks in 2013 was three times less than its value of 20101. This indicates that there is a kind of “convergence” towards an interest rate level, beyond which the credit rationing is heavily applied by most banks. Fact 3 - The last development, but certainly not the least, is the stabilizing and even a slight fall in NPL-s as well as a steady increase in the banking system profits with the RoE reaching a

respectable level of 10.9% at the end of 2014 (Graph 3). This clearly shows that the new “feet on the ground” strategy is working well for the banking system. The strategy is working but other stakeholder’s situation is poor Profits at 10.9% and a first ever fall in NPL-s! This is very good news for banks, but seems to be somewhat in contrast to the fortune of two of the banks’ primary stakeholders, namely depositors and corporations. Let’s consider the depositors first. Since the spread between the credit and deposit rates is close to the long-term average, the accelerated fall in the loan interest rate implies a symmetric fall in bank deposit rates. Indeed, the one year average bank deposit rate reached a historical minimum in December 2014. Under these circumstances, the banks should be aware of the side effects of interest rates falling towards less than inflation territory. The risk is that their main and stable source of financing - namely bank deposits - start to break down as their relationship with depositors becomes difficult. As a first warning sign is the first ever annual fall by 3.34%, in 2014, of ALL denominated bank deposits. How about corporations? First, the

January 2015 government revenue from corporate income taxes has been in free fall (-15.7%), as compared with the corresponding month one year before. This indicates a difficult situation with the profits of the corporate sector. There is another thing. It is true that Consumer Price Index (CPI) inflation has been positive, though mildly so, but Producer Price Inflation (PPI), according to INSTAT data, has been in negative territory for two years in a row (-0.41% in 2013 and -0.45% in 2014). This implies that the corporate sector is facing the so called “debt deflation”, i.e. falling sales revenue associated with constant debt service payments.

CoNClUSioNIn conclusion, I think there are some clear facts implying that banks have been using a new “feet on the ground” strategy for credit risk control. This implies less interest rate discrimination and more credit rationing. The strategy, which being optimal should have been used from the beginning, has started to pay off. To be successful in long term, I think the strategy should be implemented with due consideration given to the situation of banks’ important stakeholders such as depositors and corporations.

1 I thank Mimoza Agolli, PhD(c), for the standard deviation data and calculations.


internal ratings-Based modelsan opportunity to be considered

Banking System

by mr altin KadarEJa, mSc, senior ConsultantPRoMETEIA s.P.A., MILANo, ITALI

Commercial banks and their top-level management should consider optimizing the use of bank’s capital, and on the other hand, the central bank should consider and prepare the banking sector towards the natural evolution of rating models.

On 31 March 2015, Bank of Alba-nia approved the regulation "On the Bank's Regulatory Capital",

which lays down the structure, compo-nents and method of calculating regula-tory capital of the bank and sets forth its minimum level, a capital amount that banks are required to provide, in order to cover credit, market and operational risks, respectively. This regulation is part of regulatory framework which addresses capital adequacy, in order to maintain the financial system’s stability, naturally de-rived from Basel regulatory framework. Particularly, Basel II framework seeks to address the problem of systematic insta-bility due to banks’ bankruptcy, by mak-ing capital requirements more sensitive against risk. Although published back in 2001, several risk practitioners (manag-ers, regulators, bankers and professors) are not yet convinced about the achieved results. One of the major issues is procyclical-ity. Risks in the banking business are highly correlated with the business cycle, as well as risk-weighted assets. In case of

any economic downturn the amount of these assets will rise, thus reducing bank’s capital ratio. This will "force" banks to raise capital, or otherwise, reduce the amount of risk-weighted assets. Given that capital increase is difficult in the short-term, banks will chose between re-ducing lending, and replacing, or swap-ping existing exposures with lower risk ones. Therefore, if some banks will act accordingly, then credit to economy will decrease and such tightening of regulato-ry capital will stimulate the recession, even further. The opposite effect will oc-cur in case of any economic boom, where the amount of risk-weighted assets will decrease, by increasing the capital ratio, and as a result, the bank credit to econo-my. In both cases, the minimum capital requirements and pro-cyclicality will am-plify the business cycle, by deepening the decline, during the recession, and boost-ing growth during economic expansion, respectively. In this way, it has produced exactly the opposite effect that the regu-latory framework of Basel II was aiming to achieve. However, this is a macroeco-nomic perspective, still to be confirmed. The effective advantages of these regula-tions are experienced on a microeconom-ic level. The formula of calculating the regulatory capital includes Tier I and Tier II Capital, with their respective risk-weighted assets. It is exactly the de-

nominator of such formula that reflects the profile of bank’s loan portfolio, in terms of loan risk, and offers the oppor-tunity to change and reduce the level of the required regulatory capital. Risk weighted assets are a function of internal parameters of bank’s credit risk. The calculation of these parameters, in different banks, is based on specific mod-els, which take into account the borrow-er’s and transaction’s characteristics. However, the generally dominating mod-els consider the borrower’s probability of default, by incorporating the percentage of bank’s loss given amount, along with the bank’s exposure at default, in case of default. All three elements, Probability of Default (PD), Loss Given Default (LGD) and Exposure-At-Default (EAD), com-pose the basis for the Economic Loss (EL). Basel committee has offered two methods (Standardized and the Internal Rating Based (IRB) for calculating these parameters, often considered by many banking players (regulators and commer-cial banks), as the Achilles Heel in order to reduce the regulatory capital. When using the Standardized method the risk parameters and weights are taken by external sources to the bank, credit rating institutions and central regulators. When using the Internal Rating Based models, the parameters for calcu-lating the risk-weighted exposures are calculated from internal resources/mod-


els of the bank. The method of Internal Rating Based models can be applied in two ways: foundation and advanced ap-proach. The difference between the two approaches lies in the way the risk pa-rameters (PD, LGD, EAD) are calculat-ed. According to the foundation ap-proach (FIRB), only the borrower’s probability of default (PD) is calculated with internal models. Other parameters are standardized. Whereas, according to the advanced approach of internal mod-els (AIRB), banks may calculate all three parameters (PD, LGD, EAD), through internal models and use them to calcu-late risk-weighted assets. In this way, banks can choose out of three methodologies (approaches) - Stan-dardized, Foundation and Advanced Internal Rating Based, considering the tradeoff between the disadvantage in complexity of calculation and the advan-tage in reducing the required capital. As it can be understood, the more one aims towards the advanced approach the more internal to the bank the meth-odologies become and the more indepen-dence in such calculations the bank needs to prove. Certainly, achieving such levels of independence requires relevant experience, both in time and technical terms. However, what could be of sector interest is the specific analysis of the ad-vantages and the added value that such methods could provide for clusters of different banks. Specifically, two main advantages could be mentioned:Firstly, a higher sensitivity against risk.

These models enable banks to identify, in the most accurate way, the risk profile of their customer. When capital require-ments are based upon such methodolo-gy, they are more sensitive against cred-it risk and the economic losses of bank’s loan portfolio. Secondly, the improvement of inter-nal risk-rating systems. When banks get approval to use internal rating method-ologies for calculating risk parameters, they should include the use of such pa-rameters in most banking processes and procedures, such as loan administration, capital management, decision making and strategic positioning, etc. This inclu-sion of risk parameters in bank’s decision making processes not only improves the internal risk-rating systems, but also en-ables the spread of the risk culture at all levels of bank’s management. In this landscape, it is crystal clear that all banks would prefer the use of advanced methods of internal rating models, with the aim to reduce and opti-mize as much as possible the required capital requirements. However, this comes at a cost. In order for banks to reach these levels of independence in cal-culating the parameters, they must seek and obtain the central bank’s approval, and to do so, it requires maximum com-mitment and considerable investments in implementing such framework of inter-nal rating methods/models. On the other hand, the use of the standardized method is positive, as it limits the pro-cyclicality effect, as the external calculation of pa-rameters is less sensitive than internal

calculation, thus producing a more stable risk weighting. However, the standard-ized method provides incentives for bank’s clients to perform the so-called "rate shopping", in order to reduce the costs of debt, by forcing banks to provide estimates of artificial risk parameters (because they include external parame-ters’ calculation), without considering exactly the customer’s risk profile. In conclusion, the Albanian econom-ic situation and the low number of eco-nomic crisis have helped the banking sector to avoid strong fluctuations in the regulatory capital and the need for its adaptation. However, commercial banks and their top level management should consider optimizing the use of bank’s capital, and on the other hand, the cen-tral bank should consider and prepare the banking sector towards the natural evolution of rating models. Internal risk-rating models are an untapped “for-tune” for the Albanian banking market. Surely, the application of effective regu-latory framework and their implementa-tion requires proper timing, both in terms of market experience, and the re-quired time period for implementing this methodology. Nevertheless, the advan-tages of using these models are signifi-cant, as recent experiences have shown that the transition from standard meth-odology to foundation internal ratings approach reduces bank’s regulatory cap-ital by 10 - 20%, while the transition from standard methodology towards the advanced internal ratings approach, does reduce it by 20-30%.


Perspectives on the valuation of real estate properties in the current market

by mr anton lEZHJa1 director, Valuation and Modelling, Financial Advisory servicesdELoITTE ALBANIA & KosoVA

Ever since the real estate market started functioning after the '90s, the comparable sales and the rent capitalization methods have produced widely different results. The wide gap between the values derived under comparable sale and rent capitalization method could be explained, by the existence of additional income sources, that Albanian households have, apart from wages.

In the last-year-and-a-half, while being en-gaged in real estate appraisals through-out the country and in casual discussions

with valuation experts and bankers, a num-ber of questions have often came up, related to real estate values in the current market landscape. Like: “How is the market value determined in a dried up market?” or “Why isn’t the capitalization of rent method uti-lized as the primary valuation method for an apartment, store, or land?” This article, is an attempt to share a few perspectives and thoughts related to these questions, while simultaneously hoping to stimulate a broader discussion on the topic from all players in the real estate sector. The price of any good or service, by definition, manifests the precise intersec-tion between supply and demand. But, is the price-setting mechanism currently working for real estate properties in Albania? We’ve been witnessing a significant reduction in the number of property transactions in the ewhole country, even in the most popular and exclusive areas in major cities. When

no transactions take place at a time when the desire to buy or sell can clearly be ev-idenced, - for example, by the number of offers to sell or the number of requests to buy - suggests that a notable difference does exist between the buyers’ and sellers’ market positions, and, for all intents and purposes, neither is willing to move toward the others’ direction. The concept of market value is built on the premise of a willing and capable seller and a willing and capable buyer, who agree to enter into an agreement to exchange property, on a specific date. Be-cause a seller is not willing to sell a property, at the price currently offered by the buyers, or because a buyer postpones a transaction under the expectation that prices will de-cline and therefore it is better off waiting, the notion of market value is overwhelmed. In this way, how would an appraiser assess the market value of a property when the market is very thin or does not even exist? An approach is the appraiser to begin the valuation process by analyzing empirical, fundamental factors from both a micro- and macro-economic perspective, to arrive at a most probable estimate, that closely resembles the equilibrium “supply meets demand”.

1. From a micro-economic view, the market value is determined by using generally ac-cepted valuation methods, where the most commonly used is the comparable sales method. As per above mentioned, it means.

however, that the comparable sales meth-od is not sufficient to arrive at the market value. Another universally used method for real properties’ valuation is the rent capi-talization method, albeit it is not typically applied, or relied upon, for residential prop-erties in Albania. Ever since the real estate market started functioning after the '90s, the comparable sales and the rent capi-talization methods have produced widely different results. I will illustrate this with a simple example. A furnished apartment with an average area of 70-80 m2 located in Tirana’s very own city center is rented for around EUR 250-300/month, presumed that it would sell somewhere in the range of EUR 1,000 - 1,200/m2. Without taking into consid-eration any necessary adjustments to the actual rent price, such as: adjustments for vacancy rates, contribution of furniture to rent, or differences between used area to total area, the rent for m2 would be EUR 3.6-3.8/ month, or EUR 43-45, annually. The ratio between annual rent and the sale price results in what is known as the yield (rate of return on capital). In our exam-ple, this would equal 3.8% (45/1,200) to 4.3% (43/1,000). Since yield is also used as an indicator of investment risk, this places Tirana on the same footing as other major metropolitan cities, such as: London, Par-is, and Berlin. But that is simply not true, because based on a risk analysis of real es-tate investments in Tirana it appears that,

Experts’ Forum

1 Anton Lezhja is an Accredited Senior Appraiser of American Society of Appraisers (ASA) and member of Royal lnstitution of Chartered Surveyors (RICS), of Albanian Society of Real Property Valuers (SVP), and is a licensed valuator of real estate in Albania and Kosova


under the current market conditions, and also based on mid-term forecasts, the yield is 10%-12%. By capitalizing the prevailing market rent using this yield we’d get prop-erty values at the range of 375-430 EUR/m2, a figure that is fairly close to the aver-age construction costs in Tirana, and 3-4 times less than property sale prices. Such a phenomenon is also observed to persist in other countries of the region for a number of perfectly valid reasons, including people’s crave to own property as opposed to the less desirable psychological condition of living at someone else’s property; the per-ceived uncertainty related to long-term rent contracts (i.e. the risk that the landlord may suddenly discontinue the rental agreement, or puts the property on sale), or the appeal of securing another source of income, along with wages, etc.

2. In order to appropriately weight the sale comparison and rent capitalisation meth-ods, we should now turn on the macro-eco-nomic view, which analyzes the real estate market on the basis of several parameters, the most important of which are:i. the house price to income ratio2 is the

basic affrodability measure for housing in a given area. It is generally the ratio of median house prices to median house-hold disposable incomes, expressed as a percentage, or as years of income. This long-term, closely monitored ratio sug-gests that the home price, which can be afforded by a household, is equivalent to 3-4 times its annual income;

ii. the deposits to income ratio is the mini-mum required downpayment for a typ-ical mortgage, expressed in months or years of income;

iii. the affordability index measures the ra-tio of the actual monthly cost of mort-gage to nett household income. It is used more in the United Kingdom, and offers a much more realistic measure of the ability of households to afford housing than the house price to income ratio. However, it is more difficult to calculate, and hence the price to income ratio is still more commonly used by pundits.

The above charts show the historical trend of house price to income ratio, during the period 1976 - 2011 and its distribution across Europe in 2015. The long-run av-erage of this ratio equals 3.5 times annual earnings, while in the recent years is has trended toward the 5.0-5.5 times territory. In the chart to the right, the green symbols represent a lower figure and red symbols

represent a higher figure, as compared to the 3.5 average. The average earnings of an Albanian household are estimated to be at ALL 60,000-65,0000 per month (EUR 430-465/month), or EUR 5,143 to 5,571 per year. These earnings include almost en-tirely wages, as there are no reliable statis-tical data related to other income sources of a household. By applying the house price to long-term annual income rate, based on a 5-6 years ratio, the average price afford-ed by a family would range between EUR 25,700-33,400. If the average required space for a typical family would vary be-tween 70-80 m2, then the price per m2, a family would afford, is EUR 367-418. This price range is so close to results under rent capitalization method. The wide gap be-tween the values derived under comparable sale method and rent capitalization method

2 i) The average household income is defined as gross income from all sources, including wages, incomes from businesses and other activities, incomes from investments, and benefits in kind, such as: consumption of agricultural products

ii) Average (median) house price: an average–priced property is defined for purposes of this ratio as a property below which 50% of properties have a lower price and above which 50% of properties have a higher price. Value is defined as the price at which the property would sell after a reasonable marketing period and by a seller who is under no compulsion to sell.

could be explained, in part, by the existence of additional income sources, that Albanian households have, apart from wages. Conclusion: As long as actual trans-actions exist, market values of real estate properties will appropriately be determined on the basis of those transactions, regardless of household income sources. To the extent that household income diminish, then the value of real estate properties will begin to get closer to the affordable (intrinsic) values, implied by household wages, and there will be a reduction in the number of transactions. In these conditions, the rent capitalization method will be awarded a greater weight in estimating the market value. However, it is ultimately the job and responsibility of the appraiser to conclude on a reasonable market value of any real estate property.


The main purpose of internal audit function is NoT to investigate and detect fraud. Internal audit’s purpose is to provide reasonable assurance that the goals and objectives of the audited business process are achieved and that potential weaknesses in internal controls should be identified and highlighted.

internal auditIts role in mitigating the bank fraud

by mr Stavri PaSHKoExecutive directorALBANIAN INsTITUTE oF INTERNAL AUdIToRs (AIIA)

Internal auditors do have a role in the battle against fraud and theft in their organizations. They make assessments and provide recommendations on the improvement of internal control system.

The Albanian banking sector is no stranger to the occurrence of the fraud. Fraud is a permanent and

inherent threat (and not only for the banks) that grows in its complexity and extent, due to several factors, such as: or-ganizational structure, company culture and geographic expansion of the business. In its eminent Report to the Nations on Occupational Fraud & Abuse, the Associa-tion of Certified Fraud Examiners (ACFE) states that organizations around the world lose an estimated 5 percent of their annual revenues, to occupational fraud. While in our country is difficult to find such sta-tistics, it can clearly be stated that many organizations, mainly banks, have been victims of fraud cases that cause millions of euros in losses. In addition to the lasting impact on profitability, fraud can cause sig-nificant reputational damage, sometimes even more severe than the monetary one. Due to the sensitive nature of business, when a fraud case happens, it is not un-

usual that customers will often run to the nearest branch, to withdraw their depos-ited money. When a fraud case has occurred, in-ternal auditors are often called upon to respond to many stakeholders, inside and outside the organization. Straight ques-tions such as: “Where were the internal auditors?”, or “How it comes that the internal audit didn’t see this coming?” are part of the post-fraud routine. Inter-nal auditors themselves may run back to their files and working papers to gain some self-assurance that they have exercised due professional care. Often, senior manage-ment and board require information and ask explicitly whether the internal audit function has performed recent work in the business perimeter, in the time when the fraud happened. This scenario doesn’t belong to the Albanian business environ-ment, only. Similar reactions and question marks are raised worldwide in organiza-tional environments, when the internal auditor is pictured as Argos, the Greek mythological guardian with thousand eyes that never sleeps. While internal audit in-volvement in preventing and investigating should not be questioned, consideration should be given to the extent of internal audit’s responsibility. The occurrence of fraud and theft is often facilitated by the weakness found in

the internal control system. Governance models, recognized and used worldwide, emphasize that management is responsi-ble for establishing and looking after the internal control system, which plays a de-cisive role in preventing and timely iden-tifying potential fraud and theft. Accord-ing to BoA’s regulation No.63: "On the core management principles of banks and branches of foreign banks and the criteria on the approval of their administrators",

Experts’ Forum


senior management is responsible for un-dertaking necessary measures and actions to monitor and manage potential risks to the bank’s activities. Due to the extensive presence of liquid assets in the banking sec-tor, fraud is known to be one of the most common operational risks. Undeniably, internal auditors do have a role in the battle against fraud and theft in their organizations. Internal auditors make assessments and provide recom-mendations on the improvement of inter-nal control system. As mentioned before, a sound internal control system is a great shield, and at the same time, an effective offensive against fraud. The internation-al standards for the professional practice of internal auditing require to internal auditors to consider (among others!) the fraud risk when they plan their internal audit engagements. In cases, when fraud risk is prevalent, internal auditors should perform analytical tests that may be useful in detecting the existence of fraud. In order to carry out such task successfully, internal auditors should have adequate knowledge on fraud dynamics, possible scenarios and recognize red flags that indicate the pres-ence of fraud. Mr Norman Marks, an international expert in governance, internal audit and risk, states that the responsibility of inter-nal auditors may be questioned, after the responsibility of the business line manag-ers have been scrutinized. For example, if the fraud has occurred within the human resources department, it is the head of hu-man resources that is primarily account-able for maintaining the internal controls that will help in deterring and identifying potential fraud. Most common fraud case in this business area is payroll fraud. Fic-titious employees are inserted in the pay-roll database by the fraudsters, usually an employee within the HR function, to issue paychecks or overtime hours for work not performed. If the head of human resourc-es does not establish or does not perform controls to prevent and identify such risk, then he might be considered responsible, as well. The governance model of “Three Lines of Defense” supports the “second-ary” role that the internal audit function should take while the senior management has the primary role in preventing and de-tecting fraud. The internal audit function can be ex-tremely useful and more effective for the organization, if allowed to play the rele-vant role. Often, senior management and

board ask internal auditors to spend ex-tensive time for auditing and investigation on fraud, while such responsibility should be distributed through all the lines of de-fense. Moreover, it is important to empha-size that, while internal auditors should be able to assess the fraud risk as a standard procedure of their work, not all internal auditors have the expertise and knowl-edge of a professional person whose pri-mary role is fraud investigation, i.e. a fraud examiner. The international standards for the professional practice of internal audit-ing were not created to prevent or detect fraud. Some banks and other institutions in Albania have understood this and have created specialized units that deal with fraud analytics and investigation. only. Positioned in the third line of defense, in-ternal audit can perform better its activi-ties by using instruments to identify fraud cases that have overpassed the internal controls, established in the business pro-cesses. Subsequently, where weaknesses are identified, internal auditors should work closely with management, by providing

recommendations on how to strengthen their lines of defense. The main purpose of internal audit function is NOT to in-vestigate and detect fraud. Internal audit’s purpose is to provide reasonable assurance that the goals and objectives of the audit-ed business process are achieved and that potential weaknesses in internal controls should be identified and highlighted. The fight against fraud and any other ir-regularity is a fight belonging to everyone inside the organization and not only to internal auditors. COSO framework en-forces that everyone in the organization has a certain degree of responsibility over internal controls. Top management should create and promote an ethical climate, within the related organization. This ethical climate may be an efficient and effective weapon against fraud and other unethical business practices. Inter-nal auditors should support top manage-ment by providing their knowledge and expertise on internal controls to create effective defenses against fraud and other potential risks.

The occurrence of fraud and theft is often facilitated by the weakness found in the internal control system. Governance models, recognized and used worldwide, emphasize that management is responsible for establishing and looking after the internal control system, which plays a decisive role in preventing and timely identifying potential fraud and theft.

LEK - 4% PËR VITIN E PARË, NË VAZHDIM BONO THESARI + 1.75%; MIN 4.5%.

EUR - 4% PËR VITIN E PARË. NË VAZHDIM EURIBOR + 4%; MIN 4.5%

BLERJE DHE RIKONSTRUKSION


Credit scoring is the set of decision models and their underlying techniques that aid lenders in the granting of consumer credit. These techniques determine who will get credit, how much credit they should get, and what operational strategies will enhance the profitability of the borrowers to the lenders. Further, they help to assess the risk in lending. Credit scoring is a dependable assessment of a person’s credit worthiness, since it is based on actual data. A lender commonly makes two types of decisions: first, whether to grant credit to a new applicant, and second, how to deal with existing applicants, including whether to increase their credit limits. In both cases, whatever the techniques used, it is critical that there is a large sample of previous customers with their application details, behavioral patterns, and subsequent credit history available. Most of the techniques use this sample to identify the connection between the characteristics of the consumers (annual income, age, number of years in employment with their current employer, etc.) and their subsequent history. Typical application areas in the consumer market include: credit cards, auto loans, home mortgages, home equity loans, mail catalog orders, and a wide variety of personal loan products.

Using Scoring While managing risk

by mr ayhan aKayRisk Management ConsultantsBPsT sH.P.K

Credit scoring is perhaps one of the most "classic" applications for predictive modeling, to predict whether or not credit extended to an applicant will likely result in profit or losses for the lending institution.

Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet

its obligations, in accordance with agreed terms. The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return, by maintaining credit risk expo-sure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio, as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

tHE CrEdit riSK StratEGy oF aNy BaNK SHoUld ProvidE CoNtiNUity iN aPProaCHTherefore, the strategy will need to take into account the cyclical aspects of any

economy and the resulting shifts in the composition and quality of the overall credit portfolio. Although the strategy should be periodically assessed and amended, it should be viable in the long-run and through various economic cycles. The credit risk strategy and policies should be effectively communicated throughout the banking organization. All relevant personnel should clearly understand the bank’s approach to granting and managing credit and should be held accountable for complying with established policies and procedures. Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios. Credit scoring is perhaps one of the most "classic" applications for predictive modeling, to predict whether or not credit extended to an applicant will likely result in profit or losses for the lending institution. There are many variations and complexities regarding how exactly credit is extended to individuals, businesses, and other organizations for various purposes (purchasing equipment, real estate, consumer items, and so on), and using various methods of credit (credit card, loan, delayed payment plan). However, in all cases, a lender provides money to an individual or institution, and expects to be paid back in time with interest commensurate with the risk of default.

Experts’ Forum


The application of scoring models in today’s business environment covers a wide range of objectives. The original task of estimating the risk of default has been augmented by credit scoring models to include other aspects of credit risk management: at the pre-application stage (identification of potential applicants), at the application stage (identification of acceptable applicants), and at the performance stage (identification of possible behavior of current customers). Scoring models with different objectives have been developed. They can be generalized into four categories, as listed below.

marKEtiNG PUrPoSESIdentify credit-worthy customers most likely to respond to promotional activity in order to reduce the cost of customer acquisition and minimize customer dissatisfaction. Predict the likelihood of losing valuable customers and enable organizations to formulate effective customer retention strategy. Response scoring: The scoring models that estimate how likely a consumer would respond to a direct mailing of a new product. Retention/attrition scoring: The scoring models that predict how likely a consumer would keep using the product or change to another lender after the introductory offer period is over.

aPPliCatioN PUrPoSESMany credit problems reveal basic weaknesses in the credit granting and monitoring processes. While shortcomings in underwriting and management of market-related credit exposures represent important sources of losses at banks, many credit problems would have been avoided or mitigated by a strong internal credit process. Decide whether to extend credit, and how much credit to extend. Forecast the future behavior of a new credit applicant by predicting loan-default chances or poor repayment behaviors at the time the credit is granted. Applicant scoring: The scoring models that estimate how likely a new applicant of credit will become default.

PErFormaNCE aSPECtPredict the future payment behavior of existing debtors in order to identify/isolate bad customers to direct more attention and assistance to them, thereby reducing the likelihood that these debtors will later become a problem. Behavioral scoring: Scoring models that evaluate the risk levels of existing debtors.

The overall objective of credit scoring is not only to determine whether the applicant is credit worthy, but also to attract quality credit applicants who can subsequently be retained and controlled while maintaining an overall profitable portfolio.

ReferencesCrook, J. & Banasik, J. Does Reject Inference Really Improve the Performance of Application Scoring Models? Journal of Banking & Finance, Risk Management Group of the Basel Committee on Banking SupervisionBasel Committee on Banking Supervision Basel September 2000Thomas, L. C., Edelman, D. B., Crook, J. N. Credit scoring and its applications. Siddiqi, N. Credit risk scorecards: Developing and implementing intelligent credit scoring.

Bad dEBt maNaGEmENtSelect optimal collections policies in order to minimize the cost of administering collections or maximizing the amount recovered from a delinquent’s account. Scoring models for collection decisions: Scoring models that determine when actions should be taken on the accounts of delinquents and which of several alternative collection techniques might be more appropriate and successful. Thus, the overall objective of credit scoring is not only to determine whether the applicant is credit worthy, but also to attract quality credit applicants who can subsequently be retained and controlled while maintaining an overall profitable portfolio. The absence of testing and validation of new lending scoring techniques is another important problem. Adoption of untested lending techniques in new or innovative areas of the market, especially techniques that dispense with sound principles of due diligence or traditional benchmarks for leverage, have led to serious problems at many banks.


In its formal meaning, the term "money laundering" comes from the fact that the illegally earned money, whatever the meth-ods pursued, is called "black finance", which includes mafia and criminal activity, etc. "Cleaning" serves such money to gain the equal status as the legal money, so not having compromising “stains”. The term "money laundering" commenced to be-come part of everyday vocabulary during 70s, at the time of the "Watergate" scandal in US, whereas it took the real legal mean-ing and content in the early 80s. From a historical perspective, there are several explanations for this term. They connect its origin with a Mafia family in Chica-go of '20s, which possessed a wide chain of "Sanitary Cleaning Shops" laundries, which was used as a legal facade for re-cycling money, i.e. to "clean" the money earned from illegal activities of all kinds. The phenomenon was openly discussed during the trial of Al Capone, who was sentenced for tax fraud and money laun-dering, despite having numerous crimes in his CV, as well as during trial process-es against mobsters, like: Luciano and Lansky, during the years 1930-40 in US. Also, in the medieval Europe of XIII-XVI there existed two currencies: the shining gold and silver coins, which were the main means of payment and metal coins, which

Economist Corner

by Prof. dr. adrian CiviCiPresidentEURoPEAN UNIVERsITy oF TIRANA, UET

Banks and the financial system in front of money laundering

Money laundering is the process that consists in concealing or legal deviation of earnings, or

money coming from illegal activities, with illegal, criminal or mafia nature, such as: drugs, prostitution, arm trade, money earned from corruption, financial specula-tion and fraud, informality, fiscal evasion, etc. The ultimate aim of money laundering is transforming such money into "honest and clean” money, legitimate profits, and consequently, their normal use in legal financial and economic activity. Money laundering is currently a widespread phe-nomenon, but in the same time, so much at the spotlight of national and international authorities. It is worth mentioning that ac-tually, according to the IMF, approximate-ly 2 - 5% of global GDP is circulating as dirty money. When put into figures, this means that, US 2.5 to 3.5 trillion (World GDP in 2014 was US 75 trillion) are pro-duced by illegal and criminal sources.

The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a standard way, regardless of specific features of different cases.

had a low value and blackened, which were used by ordinary people, which in most cases, were unregistered and without clear statistics about them.

International experiences and specific studies have proven that, if tolerated, money laundering is a negative phenomenon with serious long-term consequences, because: it prevents the development of formal and legal private sector, which is faced with unfair competition; it causes confusion and uncertainty in monetary flows and exchange rates in the money markets; it creates instability in the financial markets and reduces the reputation of banks and financial institutions in general, going up to the point of provoking bankruptcy or serious structural crisis to them.


The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a stan-dard way, regardless of specific features of different cases. Firstly, by "investing" or putting money into circulation, in the form of investments, bank depos-its, financial transfers, casino or games of chance cheques, etc., which means "introducing them into the legal finan-cial and monetary system". Secondly, separating or detaching those money from their origin and initial source and distributing or circulating them through various transactions, commonly called as "financial fabrications” or “Waltz of transfers", aiming at concealing and losing the tracks of origin. Such types of operations are made with support from banks, through tax havens, financial companies, insurance companies, invest-ment funds, speculative share transfers, earnings, expenses, casinos and other games of chance, etc. Thirdly, by joining up several “pieces” of such money, now as "clean money" and legitimating them as pure investments, in business areas, such as: real estate, construction, charity funds, investment funds, sports, fashion and media, stock exchange investments, purchasing luxury objects, etc. If we talk about improvisation, we may say that modern methods of money launder-ing keeps being more sophisticated and complex, thus making their illegal and criminal nature even more complicated. International specialized institutions, such as: the IMF, or other intergovern-mental organizations, publish regular studies which explain techniques and methods used in the field of money laun-dering. Nothing is unknown. The money laundering issue is part of the economic, financial and monetary globalization, operating through well-organized net-works. "Fiscal heavens" are, also, a quite specific phenomenon. The international criteria that identify them are three: very low taxes or total absence of taxes; the lack of any transparency of the fiscal sys-

tem; and a full banking and fiscal secre-cy, by not cooperating with any country, in this regard. There are also distinctions between tax havens and financial havens, banking havens, investment havens, etc.

These include typical "money launder-ing" countries, which include even some developed countries, which tolerate spe-cific aspects of money laundering. This is so fluid, as each country publishes a list of suspected countries or territories for carrying out such activity. The “hunt” for dirty money is being transformed from capturing dirty money of mafia’s criminal origin and blocking their le-gal recycling, into finding and reveal-ing hidden profits, profits which come from political clientelism, corruption, tax evasion, transferring public funds to personal activities, etc. In the battle at international scale against the process of money laundering, fiscal heavens and financial sophistications still provide op-portunities and playing field to develop such activity. Banks have an important role in the prevention of money laundering. The positive experiences and specific laws that exist in this regard clearly require banks to report to law enforcement agencies or specialized structures the

The monetary and financial institutions and stakeholders are establishing the institutional culture and order to identify and report cases, according to legal criteria, related to money laundering activities. Albania has a special law "on prevention of financing of terrorism". It is a positive fact that in 2015, Albania is no longer part of the group of countries that are under constant monitoring for money laundering and financing of terrorism.


operations and the identity of respective authors who are doubtful; to declare op-erations and transfers in which the ben-eficiary is dubious; to identify non-typ-ical financial and monetary operations, carried out by individuals, organizations or businesses which consist in frequent and unjustified changes of company’s charter, organizational setup, and prop-erties, or financial operations that are not related to their legal activity, as it is known until recently; to discover unjusti-fied operations, in the form of real estate transactions, executed at "strange" pric-es, fund deposits without any known or justifiable source; to run special control software for "best practices" in their dai-ly activities, etc. There is a widely-discussed theory, in public opinion, and in some cases within institutional or academic environments, that "many countries have benefited from the money laundering process, es-pecially when they are not the country of origin." It is true that "host" or "circulat-ing" countries for dirty money may have

financial benefits, especially the "inter-mediary operators", i.e. those who carry out the laundering process. About 20 - 25% of the amount of laundered money is the "reward" for such intermediaries. Certainly, a chunk of dirty money is in-vested as clean money in these countries and it is assumed that they develop the economy or stimulate consumption in these countries. International experienc-es and specific studies have proven that, if tolerated, money laundering is a nega-tive phenomenon with serious long-term consequences, because: it prevents the development of formal and legal private sector, which is faced with unfair com-petition; it causes confusion and uncer-tainty in monetary flows and exchange rates in the money markets; it creates instability in the financial markets and reduces the reputation of banks and fi-nancial institutions in general, going up to the point of provoking bankruptcy or serious structural crisis to them; it reduc-es fiscal revenues in the country where it takes place, as incomes produced by actions related to money laundering are mostly carried out underground; dirty money converted into legitimate one, is increasingly used in criminal, informal activities or to corrupt the political class-es or senior managers; laundered money is used to create clientelist or criminal parallel powers, out of the market, gov-ernment, law and citizens, thus making a corruption quite powerful; the more easily money is laundered in a country, the greater the incentive for informal ac-tion, abuse of power, cronyism, law in-fringement, etc.; many of major financial scandals that have occurred in the world, like: "Enron" in US, "Parmalat" in Italy, "Prestige oil tanker" with Swiss capital, "Elf issue" in Africa, "Glencore issue" of the steel multinational, etc., have clear cases of money laundering operations. For this reason, the issue of prevention of money laundering is considered the "Achilles Heel" for a healthy and sus-tainable capitalism. Is Albania immune from the money laundering phenomenon? Albania has some "specifics", when talking about the money laundering phenomenon. Firstly, like many other ex-communist Eastern

Europe countries, it has a bit of more than two-decade timeframe facing such completely new phenomenon, for its ex-perience and tradition. As such, it is, in many cases, "an easy prey" for "old mas-ters" in this field. Secondly, the process of prevention of money laundering is not just a goodwill or political determination, but is closely related to the establishment and strengthening of specific institutions for this purpose, with drafting a series of laws, regulations and specific measures, accompanied with proper qualifications of specialized human resources. Finally, the will for preventing or detecting and punishing money laundering should not be amateurish, selective, temporary, po-liticized, or ill-funded, which means that specialized institutions in this regard must have maximum legal, political and financial support. The important prob-lem, which has to do with the quality of detecting and preventing money launder-ing, is going from reasonable doubts to defining the direct connection with the originating job of dirty money. Albania has a good law against mon-ey laundering and terrorist financing; it has a special unit of financial intelli-gence: the General Directorate for Pre-vention of Money Laundering, which is well-coordinated with its international counterparts and regulators, and cooper-ates effectively with supervisory author-ities, especially he Bank of Albania and Financial Supervision Authority. The monetary and financial institutions and stakeholders are establishing the institu-tional culture and order to identify and report cases, according to legal criteria, related to money laundering activities. Albania has a special law "On preven-tion of financing of terrorism". It is a positive fact that in 2015, Albania is no longer part of the group of countries that are under constant monitoring for mon-ey laundering and financing of terrorism. This is one of the conclusions of the re-port of Onsite Team group of ICRG. Al-bania is considered that it has fulfilled all shortcomings, reported during past years by FATF (Financial Action Task Force), which monitors the implementation of measures against money laundering and financing of terrorism in the world.


Social Capital

alPHa BaNK alBaNia

volunteer dayOn the Volunteer Day, 17 May 2015, the bank organized a marathon at Tirana’s Artificial Lake and the respective sponsorship was made at “Autism speaks Albanian” foundation. In to-tal 60 employees of the Bank run, along with more than 40 other volunteers either from the foundation or celebrities. The slogan of the campaign was “Run for Autism”.

Blood donation For the fifth consecutive year Alpha Bank employees donated blood, in response to Red Cross Albania’s request. The slogan was: “To-gether we donate life” and the activity was ac-companied by a campaign in social media with the message: “I donate 5 minutes of my time. What about you?”

during the second quarter the bank spon-sored the following events and activities:•“DreamsandIdeas”Fair,organizedon10

June by the Ministry of Education, was re-lated to the ideas on how the students see the role of the School, as a Community Center.

•Thenext editionof theGeneralAssemblyMeeting on 27 April 2015, where Mr. Donald Lu, US Ambassador in Tirana, and Mr. Arben Ahmetaj, Minister of Economy presented the ABI-s and Year Book’s presentation.

•ReconstructionofLushnjamainsquare,byway of placing benches.

•SponsoringofGeneralDirectorateofStateReserves with office supplies.

•Sponsoring theElbasan folkloric groupatannual FOLK Fest on 10 May 2015, as re-quested by “Skampa” Cultural Organization and Council of Elbasan District.

CrEdiNS BaNK

tirana openCredins Bank supported, for the second consecutive year, the “Book and Art” Fair, organized in Tirana. During a whole week Ti-rana citizens had the opportunity to visit the Book Fair, organized at the premises of the Palace of Congresses, Tulla Center, for all lovers of music, the opera, "Katërt i Radës", at the University of Arts, the Tirana International Documentary Film Festival, etc.

the New music days The "New Music Days" International Festi-val arrived at its 18th edition, to promote, support and stimulate the composers of Al-banian contemporary music. The musical art is an inseparable part of long-supported

BKt

‘‘Folk Fest’’ Children Festival in Kruja BKT supported the Festival of Songs and Popu-lar Dances for children, which was held in Kru-ja on 29 May, with the participation of young artists. the event was attended by many well-known artists, Mrs. Tinka Kurti, actress, Mrs. Edit Mihali, soprano, and many prominent per-sonalities of different fields. This festival aims to promote the true values of Albanian folk song. Such activities during the last years have been held in Kruja, only.

tirana municipality - Green cityBBKT aims to become a green bank and in this regad, numerous sponsored projects on improving the environment have been implemented, recently. The recent project with Tirana Municipality is the improvement of the park area between "Kavaja Street" and "Durrësi Street", by planting trees, placing benches and bins, in order to increase the green space and improving city facilities.

BKt receives two other important awards by EmEa FinanceBKT has been awarded with “The Best Local Bank in Albania” Award and the “Corporate Social Re-sponsibility in Central and Eastern Europe and Commonwealth of Independent States” Award, from the prestigious British magazine: EMEA Fi-nance. BKT has been awarded by EMEA Finance as “The Best Local Bank in Albania” for the fifth consecutive year.

Credins Bank’s social responsibility, thus contributing to the enrichment of cultural life in Albania.

51st Festival of ChildrenCredins Bank, supported, for the second consecutive year, National Cultural Centre for Children, the Puppet Theatre. The 51st Festival for Children is a large-scale event for children of different age groups, organized under the auspices of National Centre of Culture for

Children.

moving Health CentersCredins Bank continued its support for the de-velopment and improvement of country’s med-ical services. Nine new health centers will be opened to provide medical service to all tourists who will visit our country, providing uninter-rupted service throughout the season.


Social Capital

CrEdit aGriColE

Caa-Ecovolis, a continuous cooperationThe bank continues, for the third consec-utive year, the cooperation with EcoVolis, the association of alternative system with bicycle movement, through the bicycle joint-station near "Skanderbeg" Square, under the motto: "Burns calories, not gas".

music Fest in tiranaCrédit Agricole Bank - Albania, in coopera-tion with the French Alliance of Tirana, For the second consecutive year, organized, for the second consecutive year, the Interna-tional Music Festival, through the sounds of "Pendentif”, a prominent French pop band, at an event organized at "Mother Teresa" Square.

iCB

International Commercial Bank held the first session of blood donation for 2015, in co-operation with Albanian Red Cross to help children with Thalassemia, which was held at the premises of the bank, in 2 April 2015.

Also, International Commercial Bank has made its contribution in donations, for the fourth consecutive year, in cooperation with SOS Village where it continues to sponsor the budget for two children form this village, a donation given at Donors’ Day, organized at SOS Village premises on 20 May 20 2015

Intesa sanPaolo Bank alBanIa

Seven Billion dreams. one Planet. Consume with Care. World Environment Day (WED), established by the UN General Assembly in 1972, gives a human perspective to environmental issues. The 2015 global WED celebrations were or-ganized at the world’s famous Universal Ex-hibition: “Expo Milano 2015” (01.05.2015-31.10.2015), where Intesa Sanpaolo Group is the Global Official Partner. The bank orga-nized a two-week internal & external commu-nication & awareness campaign to celebrate the WED 2015. The Bank also promoted a few internal initiatives, such as enticing colleagues to undertake ecologically responsible daily ac-tions, as well as an excursion in a BIO Farm.

donate blood to save a life! Intesa Sanpaolo Bank Albania Voluntary Blood Donors Group organized the recent initiative in 21-22 May 2015 in two of our biggest branches, at Head Office and at “Rr. Barrikadave” one, under the slogan: “The Blood can’t be created in a Lab, it can only be donated. Donate blood to save a life!”

aid for orphan Children Intesa Sanpaolo Bank Albania employees joined the call for help from the Red Cross Albania, to give aid by donating food and clothing for the orphans in occasion of the In-ternational Orphan’s Day, May 20th and the Children Day, June 1st. These packages were donated to 200 children living in communities. The motto of this initiative was Mother The-resa’s saying: “We can’t do great actions, but little things with great love!”

Energy saving initiative Intesa Sanpaolo Bank Albania employees joined the call for help from the Red Cross Albania, to give aid by donating food and clothing for the orphans in occasion of the In-ternational Orphan’s Day, May 20th and the Children Day, June 1st. These packages were donated to 200 children living in communities. The motto of this initiative was Mother The-resa’s saying: “We can’t do great actions, but little things with great love!”


NBG BaNK alBaNia

Support for SoS Children’s villagesAs part of the commitment towards the com-munity and people in need, NBG Bank Alba-nia purchased tickets for its staff, an event organized to raise funds for SOS Children's Villages in Albania. The event was organized by the Austrian Embassy and the National Theatre of Opera and Ballet, on 13 June, with the participation of Mr. Shkëlzen Doli, the well-known Albanian violinist.

ProCrEdit BaNK

ProCredit Bank-responsible for the future!An essential ingredient in the development mission of the whole group of ProCredit banks, environmental protection. All Pro-Credit banks have undertaken a similar and real initiative to reduce the use of plastics, by making available to the public some 600,000 Eco bags that will be distributed free of charge by all ProCredit banks. About 30,000 Eco bags were distributed in the largest su-permarkets, bookshops and other clients of ProCredit Bank. In the frame of ProCredit Bank’s initiative: "ProCredit Bank, respon-sible for the future", a series of events were organized by the bank, as follows:

•Aspecialentertainingeventforchildren,coming "Kristaq Rama", a 9-year private school, who received information on en-vironmental protection and various crea-tures. Later, they watched the theater for children, an outdoor play by the National Theatre Troupe. This joyful atmosphere lasted till the end of the event, when Eco bags were distributed to all teachers who attended the event.

•Investments in energy-efficient businessunits and central offices.

•UsingEcohybridcars,bybank’sbusinessconsultants in their daily operations, thus reducing the emission of harmful gases into the atmosphere.

raiFFEiSEN BaNK

training civil servants for customer service in the State Police Raiffeisen Bank has supported the initiative of the State Police to train young people, selected by competition for employment at citizens’ service offices and operators of 129. The initiative was introduced by Mr. Saimir Tahiri, Minister of Interiors. The ceremony was attended by Mr. Christian Canacaris, CEO of Raiffeisen Bank

Celebrating with orphan children in communityNBG Bank Albania was part of the activity organized by the Red Cross Albania, Tirana Branch, on the occasion of the Children’s Day, June 1st. The activity gathered 100 orphans who live in the community. NBG Bank Alba-nia supported this activity, by donating gifts to children.

Blood donation for thalassemic childrenRaiffeisen Bank, in cooperation with Alba-nian Red Cross organized, for the sixth con-secutive year, the blood donation campaign for Thalassemic children, with the slogan: "Donating blood, means giving hope, to save life!". Raiffeisen Bank’s employees joined voluntarily this campaign, now a tradition, by donating blood to help these children, whose number, nowdays, reach at 600.


Social Capital

SoCiEtE GENEralE

Societe Generale albania Bank and aleat collaborate together On 14 May 2015, during the “Innova-tion Week”, an activity organized in Ti-rana by Ministry of Innovation and the Public Administration, Societe Generale Bank - Albania made a presentation with topic: “Innovation in digital security and customer experience”. The presentation demonstrated innovative services, based on digital authentication and electronic signature of documents with a finger-print. These services were designed and prototyped using the eAleat, a well-known company which operates the concession for the production of electronic ID cards and passports for citizens of the Republic of Albania and in behalf of the Ministry of Interiors.

donors day in SoS Children's village albania At the event “Donors’ Day”, organized by SOS Children s Villages in Albania in 20 May 2015, Societe Generale Albania gave its contribution, not only in monetary val-ue by sponsoring a part of the event, but also was active at the auction organized by SOS with paintings made by children of SOS village. During the event, SOS Village renewed existing partnership agreements, not only with Societe Generale Albania, but also with other partners and signed new agreements, too.

UBa

donation to the families in south flooded area United Bank of Albania, following the criti-cal situation of families affected by floods in the south Albania, decided to join the initia-tive of the Albanian Government, by helping the residents located in the suburb villages of Fieri city, by donating equally monetary amounts to 100 affected families, as a sign of humanitarian aid.

Support for albanian orphan children’s integrationThe bank supported the program submitted by the “National Institute of Integration of Orphan Children in Albania”, held in 20 May 2015, in Tirana. Many distinguished representatives from government, diplomatic corps, businesses and civic society attended the event, aiming to support the cause and once again remind us that: “Beyond pain, there is love”.

tiraNa BaNK

Support for the children of SoS villageTirana Bank supports SOS families that provide sustainable care, safe and loving family environment for children who have lost their parents, or that cannot live with their biological family. The bank is engaged in "adopting" three children from SOS Vil-lage. Sponsoring the life of these children is a long-term cooperation that enables everlast-ing support of our bank for an individualized care and promotion of development, educa-tion, health care, social activities, sports and entertainment for these children.


individual and/or aggregate basis. On the other hand, this system is helpful to DIA, in the sense that enables it to assess the accuracy deposit premium computation, reported by members of deposit insurance scheme.

2014, enabling banks to compute the in-surance premium, for the first time, in October 2014. The main objective of SIRK is to centralize the electronic infor-mation reported from banks to DIA, the calculation of premium for each individ-ual bank and quick and effective compen-sation, in any case of insurance event. This project is realized with the financial support of EBRD (European Bank for Re-construction and Development) and with the assistance from the FDIC (Federal Deposit Insurance Corporation), through the technical advice of high profile ex-perts, in defining terms of reference and evaluating its performance. The Information System for Report-ing and Compensation enables DIA to have immediate and any time access to relevant data, thus identifying, in a unique way, the depositors in the system by their personal data. This allows the verification of accuracy of depositors’ personal data in the electronic registers of members of the deposit insurance scheme and the in-sured amount, DIA has to compensate, in case of any insurance event. In this way, the ISRC provides the centralization of the available information to DIA, with regard to deposits and depositors, on an

Information Security Zone

information System for reporting and Compensation (iSrC) in deposit insurance agency

by ms Blerta KoÇiHead of IT sectorALBANIAN dEPosIT INsURANCE AGENCy, dIA

The Information system for Reporting and Compensation enables dIA to have immediate and any time access to relevant data, thus identifying, in a unique way, the depositors in the system by their personal data. This allows the verification of accuracy of depositors’ personal data in the electronic registers of members of the deposit insurance scheme and the insured amount, dIA has to compensate, in case of any insurance event.

The setting up and implementa-tion of the Information System for Reporting and Compensation

is one of the most important initiatives, the Albanian Deposit Insurance Agency (DIA) has accomplished during 2014. One of the lessons learned from the glob-al financial crisis of 2008 was the lack of information systems in deposit insurers. The information systems enable an effec-tive and seamless compensation process, which reimburses insured depositors, quickly and accurately. In this context, in order to meet the main objectives of deposit insurance scheme, the compen-sation of depositors, thus contributing at maintaining the financial stability in the country, DIA put in place the project of electronic reporting & compensation process. Pursuant to the project plan, the setup phase of the system started in July 2013 and was successfully completed in August

The reporting system specifies a monthly frequency for reporting data, linked to individual deposit accounts at banks, to ensure a continuous update of system files with data concerning the insurance amount and the premium to be paid by banks, as well depositors’ detailed data, which identify them properly.


ElECtroNiC rEPortiNG rUlESDIA’s Information System for Reporting and Compensation functioning is based upon data and information reported from parties involved in this process. For this reason, the definition of clear and accu-rate reporting rules was identified as a necessity, by DIA structures. Specifically, DIA Steering Committee adopted, in No-vember 2014, a special guideline for banks, in order to enable legal and tech-nical interaction with commercial banks, as the main users of the reporting and compensation information system. The guideline, which was put on a preliminary discussion and consultation table with all banks, prescribes the reporting rules, which consist in two levels:

(i) verification of the accuracy of premi-um amount, which banks report to DIA, and

(ii) availability of depositors’ data, in case of insurance event, or in case of any simulation.

The reporting system specifies a monthly frequency for reporting data, linked to individual deposit accounts at banks, to ensure a continuous update of system files with data concerning the insurance amount and the premium to be paid by banks, as well depositors’ detailed data, which identify them properly. Also, ISRC enables the reporting of premium calcu-lations for each individual insured depos-itor, in each bank of the banking system, on a quarterly basis.

WoRKsHoP: "aCtivatiNG tHE aUtomatEd SyStEm For data CollECtioN aNd rEPortiNG."

In the eve of online reporting by banks the Deposit Insurance Agency as one of the first institutions of deposit insurance in the region that implements a system for data reporting and compensation, organized, in September 2014, the work-shop: " Activating the Automated System for Data Collection and Reporting". The workshop aimed at presenting the main functionalities of the system, its impact on the work processes for the Agency and banks, the regulatory changes, following the adoption of the new Law: "On de-posit insurance", and to emphasize the obligation of banks to apply immedi-ately the Agency’s requirements for data reporting.

Taking into account the fact that some banks in the system had contributed in the testing phase of the system, the work-shop was an opportunity for presenting such experiences and challenges, which arise along with further development and improvement of ISRC, from the perspec-tive of the banking sector. The workshop was attended by general managers, heads of Technology Infrastructure depart-ments and Operations departments of commercial banks, as well as high-level delegations from the Deposit Insurance Fund of Kosovo and Montenegro.

In case of any insurance event, or a simu-lation exercise, the frequency of reporting for insured depositors and the respective amounts is going to be daily, given the particular importance, the depositor’s identification quickness and accuracy, in this regard. In these cases, some other data, regarding loans linked to relevant deposits, which are used as collateral for loans, as well as the net position for de-positors are collected, along with the above-mentioned data. Moreover, DIA has the mandate to ask special reporting from banks, requiring data for any partic-ular and unpredictable purpose, at any time, in order to accomplish the public objectives of its activity.

CooPEratioN WitH mEmBErS oF dEPoSit iNSUraNCE SCHEmEMeeting DIA’s established objectives for setting up and effective functioning of the system requires an effective cooperation and coordination between all stakehold-ers, which are part of the process. The coordination process, aiming at accepting all system’s features and components, is a guarantee for the success of the whole process. In this regard, DIA has collabo-rated consistently, throughout all the phases of the system implementation, with all banks. Typically, DIA has orga-nized seminars, training sessions and ISRC testing activities with banks, aiming at identifying the main functionalities of this system and the challenges which arise along with further development and im-provement of ISRC, from the perspective of the banking sector.


Information Security Zone

the importance of cyber security and alCirt’s role

by Prof. asoc. dr. rovena BaHitidirectorNATIoNAL AGENCy FoR CyBER sECURITy (ALCIRT)

Albania is among the countries where the development of telecommunication, internet and computerization of the society is progressing very quickly. The increased use of electronic communication constitutes an added value to country’s economic and social development, but at the same time, it exposes it against the risks of cyber nature, along with state and non-state actors.

We all live in a digital life, which means that we work, learn and play online. The in-

ternet is a common source and its secu-rity must also be a shared responsibility. For this reason, the cyber security starts from any of us, from every individual employee in the private sector, or in the public administration, from a teacher or a student, from a banker or a policeman, because we all are affected, or might af-fect the cyberspace security. Not any in-dividual, business or government entity is responsible for the internet security by itself alone. Everyone has a role in securing his/her cyberspace, comprising equipment and networks used in the pro-cess. Individual actions have a collective impact, which means that if the internet is used safely, it is going to be safer for everyone. Albania is among the countries

where the development of telecommuni-cation, internet and computerization of the society is progressing very quickly. The increased use of electronic commu-nication constitutes an added value to country’s economic and social develop-ment, but at the same time, it exposes it against the risks of cyber nature, along with state and non-state actors. The cas-es of network and information security breaches are growing rapidly. The cyber-attacks can potentially damage severely the exchange of information in public institutions, in telecommunication enti-ties and in financial and banking system, causing financial loss and disruption of vital services. These attacks create new risks and threats to the development of the information society. In this context, it was deemed as nec-essary to take some steps, at ensure the development of information society. Typ-ically, the setting up of National Agency for Computer Security (ALCIRT), was one of steps taken in response to today’s requirements with regard to security stan-dards. ALCIRT was established by the Council of Ministers Decision No.766, date. 14.09.2011 and with the support of USAID, under a two-year program (New

Cyber-Security Program), which aims to strengthen the capacity of the Albanian Government to prevent and respond to computer incidents, in an adequate way. The project used the expertise of Car-negie Mellon University Software Engi-neering Institute (SEI), which conducted several workshops and training activities to help key governmental institutions to

The attacks on critical information infrastructure all around the country may have serious consequences on their functionality, causing huge financial losses. Therefore, it is necessary to early identify them and then take strong security measures to keep the security of these infrastructures as vital as possible to enable the well-functioning of the society.


understand the models for cyber security, to build capabilities and skills to with-stand operational threats and to develop processes for management of computer incidents. The main activity of the agency (AL-CIRT) is to identify, forecast and take measures to protect against threats and cyberattacks, in compliance with rules and legislation in force. ALCIRT rep-resents the authority which coordinates the actions and measures to respond to threats and cyberattacks and serves as a central contact point with NATO and similar institutions (like sectoral and international CIRT-s). Further and continued cooperation with NATO will help our country approaching the other NATO’s member countries in this field.

alCirt’S CUrrENt CommitmENtS The following section describes briefly some ALCIRT's commitments and its ongoing initiatives to create a safe cyber environment for citizens, businesses and the government. The agency has chaired the Inter-in-stitutional Working Group, under the auspices of Mrs. Harito, Minister of State for Innovation and Public Admin-istration, which is engaged in drafting the Policy Document on Cyber Securi-ty. This document, the first of its kind in this area, is based on European best practices and models, in terms of ob-jectives and solutions, taking into ac-count the specific features of Albanian society and economy. In this document, a special attention is paid to critical in-frastructures. The attacks on crucial in-formation infrastructure all around the country may have serious consequences on their functionality, causing huge fi-nancial losses. Therefore, it is necessary their early identification and then take strong security measures to keep the se-curity of these infrastructures, deemed as most vital for the society, at the highest possible level. Since these systems, in most cases do not belong to governmental sector, but to private one, ALCIRT has continuously promoted the cooperation and exchange of information with this sector, especially the banking sector, to ensure the basic

safety of these systems. In addition to protecting these systems, their “resil-ience" is also crucial, which enables busi-ness continuity, in case of force majeure, or various cyber-attacks’ occurrence. The protection and the resilience of critical infrastructures and the encouragement of their owners to implement compre-hensive security architectures (including risk and emergency management) would guarantee the effectiveness, reliability and continuity of services provided by them. Changes in current legal framework take a special importance, in order to ensure a proper protection for its us-ers, and to increase their confidence on information technology and to encour-

age advanced and safe use of ICT. Fol-lowing the approval of regulatory and legal framework on which we are still working, the operators of critical infra-structure will need to report on grave cyber incidents. In any case, evidenced or not as cybercrime, a proper analysis will follow, in order to understand caus-es of its occurrence and the tasks to be performed, such as: rearranging and im-proving work processes and procedures, amending regulations and legal acts, to fully eliminate their reoccurrence. As the man is the key to success, we will encourage the certification of security professionals, as well as their functional

independence from information technol-ogy units and put them directly under CEO’s reporting authority. In this frame-work, it is strongly recommended taking some specific measures and actions to in-crease the company’s awareness, regard-ing potential risks in terms of system and network security, eliminating such risks, including child protection from illegal contents of cyber space. ALCIRT, in cooperation with the Albanian School of Public Administra-tion (ASPA), has organized for the first time a training activity with the topic: "Computer Security for IT employees in Public Administration”, in order to strengthen the institutional capacity through increased technical skills of hu-man resources. The activity started in September 2014 and it will be followed by advanced training modules for secu-rity specialists. ALCIRT has started ad-ditional activities, like: awareness cam-paigns, focusing on students of public and private universities majoring in ICT, ensuring their education as current users and future professionals. ALCIRT, has dedicated part of its ac-tivities to the general public, establishing an electronic portal (www.cyberalbania.al), aiming at promoting a safe digital society, by using secure internet at home, workplace and school. Also, ALCIRT has built bridges of cooperation with other institutions operating in this area, starting with the Commissioner for the Freedom of Information and Protection of Personal Data, with Electronic and Postal Communications Authority and General Directorate of Police, through cooperation agreements. On the other hand, the collaboration with the Institute of Education Development (IED), con-sists in inclusion of some topics, address-ing the online security, in the pre-univer-sity curricula. Finally, I would like to thank the ac-ademia and the private sector, especially the AAB Information Security Commit-tee, for the support they have provided for ALCIRT and its initiatives. I fully be-lieve that working together does create a safer, reliable and stable cyber space for citizens, businesses and the government in general.

The cyberattacks can potentially damage severely the exchange of information in public institutions, in telecommunication entities and in financial and banking system, causing financial loss and disruption of vital services. These attacks create new risks and threats to the development of the information society.


Financial Auditorium

Practicing the art and science of project management in today’s business

by ms Bianca dUroManaging director of Training Institute WIFI ALBANIA1

modErN ProJECt maNaGEmENt: liFEliNE oF BUSiNESS todayThe view of business in year 2015 is defi-nitely not a pretty one worldwide. Le-thargic economic growth continues, put-ting additional emphasis on how well organizations execute their strategic ini-tiatives. This, in turn, requires more rig-orous project, program, and portfolio management. Yet over the past few years, many findings about how well organiza-tions are delivering on their strategic initiatives have remained largely un-changed. This leads us to ask “how” or-ganizations may still deliver well-man-aged project and carry on strategic ini-tiatives. The fact that many firms are now facing losses and many deficiencies can only suggest that it’s time for organiza-tions to revisit the fundamentals of proj-ect management and, essentially, go back to the basics. Project management is not

Project management aims to improve the performance of a business organization. It is a discipline that combines technical skills, tools and human skills. Many companies engage in a project because they believe that it is vital in order to be competitive in the industry, the changing needs of their customers must be met.

a new practice of modern generations. Starting its history since the ancient times, project management has ever been the core process of all small and big en-deavors. It has since become an ever per-fection-aiming art and science. Neverthe-less, in today’s business world, project management has developed to become a premier and key solution in any business operation.

CHaNGE, tHE oNly CoNStaNt lEadiNG to SUCCESSMany of scientific findings have remained stable for the past four years, not show-ing significant decreases-or increases. Why aren’t these numbers moving? What will cause noticeable change? PMI’s PULSE of the PROFESSION re-port, shows that successful organizations meet goals two-and-a-half-times more often and spend 13 times less money than their counterparts (Project Management Institute, Chapter Austria, 2015). This reality, reported annually by the Pulse study, demonstrates the value project management delivers-and is fully under-stood by more than half of all organiza-tions (55%) in this year’s findings. While that would seem to be good news, the number of organizations recognizing and capturing this value remains unchanged

since 2012, so there is more work to be done. Culture - The most effective organi-zations recognize the need for formal project and program management in their “change the business” initiatives. Creating a culture that embraces project management and increases the business value it delivers involves:• Fullyunderstandingthevalueofproj-

ect management,• Requiringactivelyengagedexecutive

sponsors on projects and programs,• Aligningprojectsandprogramstothe

organization’s strategy,•Having highly mature project, pro-

gram, and portfolio management. Talent - A key factor in fostering a culture that values project management is, understanding the importance of skilled talent. According to the 2014 PMI and EIU global survey, Rally the Talent to Win: Transforming Strategy into Reality, only 17 percent of respondents say their talent management strategies are quick to react to changing business conditions, whereas for one-third, effective response takes several years or longer. Such wide-spread weakness takes its toll: On aver-age, for all companies surveyed, talent deficiencies significantly hamper 40 per-cent of strategy implementation efforts.

1 Exclusive partner of PMI- Chapter Austria in Albania


Process - For the past several years, research has confirmed that organiza-tions can clearly benefit from maturing their project, program, and portfolio management processes, and that process maturity leads to success. Latest find-ings reveal high-performing organiza-tions are supporting project, program, and portfolio management through the use of standardized project management practices throughout the organization. In addition, their projects are highly aligned to the strategy of the organiza-tion. “I do not differentiate strategy im-plementation and project success,” said Daniel Svoboda, PMP, Program Manag-er, Key Bank. “Every project that a com-pany does should align with the strategy in some way.” Knowledge Transfer - From captur-ing and sharing lessons learned to easing the impact of losing experienced staff, knowledge transfer represents a criti-cal-but often undervalued-organization-al competence. Recent study finds few organizations are highly effective with knowledge transfer. For knowledge transfer to become routine but effective, it must be culturally imbedded. Re-search also shows that high-performing organizations recognize the need to fo-cus on talent development and training to achieve superior project performance and execute strategic initiatives. Risk Management - Risk manage-ment is at the heart of project manage-ment. Any number of risks can befall a project and drive it off course, often through no fault of the project team. Research reveals that 64 percent of or-ganizations report the frequent use of risk management practices, down from a high of 71 percent in 2012. While this number has declined and is something we will continue to monitor, the study does find that 83 percent of high per-formers report frequent use of risk man-agement practices, compared to only 49 percent of low performers. Organizational Agility - Organiza-tional agility is the ability of a business to respond and adapt quickly in re-sponse to changes in the market or oth-er parts of its external environment. The use of the agile/incremental/iterative tools and techniques of project manage-ment is vitally important in such scenar-ios as they impact projects and pro-grams, and the use of these tools and techniques is on the rise.

In the banking sector, many banks are continuing to roll out huge projects around cost efficiencies, risk manage-ment and front office integration, which means the spiked demand for project managers is showing no sign of abating. Project managers have been riding on the crest of unprecedented demand as banks battle regulatory change, integration challenges and the ongoing quest for op-erational efficiency. “A lot of the project management work is still being driven by integration challenges after the post-cri-sis merger activity,” says Mark Weller, director of Hays Projects & Change. “But there are also regulatory pressures, with compliance projects around Basel, FSA, Know Your Customer (KYC) and AML regulations. Investment banks, in particular, are recruiting people to run credit and market risk change projects, as well as front office integration initia-tives.” Understandably, considering the rel-atively finite nature of these projects, much of the recruitment has been aimed at contractors. But, because of ongoing need for PMs and a relative shortage of experienced candidates, banks are in-creasingly hiring for permanent staff, he suggests. Project management aims to improve the performance of a business organiza-tion. It is a discipline that combines tech-nical skills, tools and human skills. Many companies engage in a project

because they believe that it is vital in or-der to be competitive in the industry; the changing needs of their customers must be met. The need for management is also necessary, so that the organization's pro-cess can be made more efficient to match the changes in the global environment. Managers and other employees, who participate in management training, learn the techniques to use in improving their skills. If you are a manager and you took a project management course, you will be taught the basics of management and improve specific skills, like: cost es-timation, scheduling and risk manage-ment. You will also gain by acquiring knowledge on leadership and other peo-ple management. Once you get certified in management, you will be highly val-ued by the company you are working for and usually you can demand for a better pay because of your specialized skills. Firms with employees who under-went management training also benefit because then they will have better con-trol on their projects and the company develops improved customer relations. Their project delivery quality will be much better which will then lead to more profits for the company. Different divisions of the company will learn to coordinate with each other, realizing higher return on investment for the amount of money invested by the firm for the further development of their em-ployees.

ICC Academy a new global standard in professional education

In a global economy, driven by innova-tion and knowledge, professional edu-cation is now the bedrock of business

competitiveness.Too often, companies of all shapes and sizes are held back by skills shortages in the workforce. The ICC Academy addresses practically this problem!The International Chamber of Commerce (ICC), the world business organization, has launched the ICC Academy project in March this year, in Singapore setting a new standard for professional education.

WHat iS iCC aCadEmy?The Academy will initially offer a faculty in banking including almost 70 online courses and two global certificates in trade finance. This wide range of specialized programs, will leverage ICC’s position as a world leader in defining commercial rules

and standards, to support international commerce.How are ICC Academy courses, delivered?The ICC Academy courses are delivered via a dynamic digital platform, by using innovative tools for combining digital learning with group-based project work, enabling the ICC Academy to reach the largest numbers of potential participants around the world.The ICC Academy provides rigorous, rel-evant and applicable business education, encouraging individuals to reach their highest potential with respect to profes-sional competency and ethical conduct.

HoW to rEGiStEr?Registration will be possible in the respec-tive sessions at the official website www.icc.academy. Registrations for the courses will be acces-sible in Fall 2015.

aBoUt iCC alBaNia

ICC Albania is the National Commit-tee of the International Chamber of Commerce in Albania. It has been established in October 2012 by several founding partners, among which are the Albanian Association of Banks, Boga & Associates, Banka Kombetare Tregtare and Albtelecom & Eagle Mobile. Currently it counts 24 members, of which: 9 banks, 5 law firms, 3 insurance companies, 6 businesses, the Union of Chambers, the Albanian Association of Banks.www.icc-albania.org.al

aBoUt tHE iNtErNatioNal CHamBEr oF CommErCE (iCC)

ICC was founded in Paris in 1919, as the world business organization, whose primary aim is to offer service to businesses, by promoting trade and investment, open markets for goods and services and free move-ment of capital. Today, the global network of the ICC includes over 6 million companies, chambers of commerce, business associations, in more than 130 countries. www.iccwbo.org


aSSoCiatE mEmBErSHiP

Open to all professionals regardless of job, industry and experience level.

Associate membership gives you the knowledge, resources and training you need to do your job now and at every stage of your career.

While we encourage every member to continually expand their business education, we don’t expect, or need, all Associates to become ICC Academy certified members. Each person joins with different goals and aspirations, and we value all our members.

ovErviEW

Entry level to the ICC Academy

BENEFitS

Access to:•ProfessionalNetworking

Communities•ExclusivePublicationsand

information•CareerDevelopmentPath•Specialmembershipsavings

(to training, events, etc.)

CErtiFiEd mEmBErSHiP

Open to Associate Members, including students, who are interested in taking their careers to the next level by gaining general, introductory knowledge in their profession.

Increasingly, more and more businesses, governments, and multilateral institutions prefer to recruit people with ICC Academy certifications.

BENEFitS

Recognition in the market-place for level of competency + standard benefits available at Associate Member status level.

How to become a full Professional mEmBErPass the Global Trade Certificateor3 years Associate Membership, earning 30 points per year.

ovErviEW

Professional level to the ICC Academy

SENior mEmBErSHiP

Open to certified ICC Academy members who believe in continual professional development.

BENEFitS

Recognition in the market-place for advanced level of competency + standard benefits available at Associate Member status level.

How to become a full Senior mEmBErPass the Certified Trade Finance Professional examinationor5 consecutive years at MEMBER, level earning 30 points per year.

ovErviEWSenior membership level indicates advanced professional competency.



tRaI

nIn

Gs

AAB Activities aaB AKTIVITETE

aa

B AK

TIVITETE

2ND SWiFt ComPliaNCE

ForUm iN alBaNia

The 2nd SWIFT Compliance Forum, hosted by AAB,

was organized with the support of SWIFT Austria, at

SKY Hotel Tirana. The focus was on the services,

tools and roadmap addressing the community issues

and needs on compliance. Some 40 representatives

of Payments and AML Department of member Banks,

Bank of Albania, and the Anti Money Laundry agency

in Albania attended the event.

"BaNKiNG For SoCiEty" - toGEtHEr For liFE, HEaltH, ENviroNmENt...AAB published, for the first time, the special edition entitled: "CSR Report 2014 – Banking for Society ", which was promoted during a ceremony held at Hotel Rogner. The purpose of this report is to introduce some of the projects which cover health, social, education, environment, cultural and sportive issues, undertaken by banks during 2014, in the framework of CSR, hoping to inspire more such in the future. The ceremony was attended by personalities in the economic and banking system, politics, businesses and foreign representations in Albania.

aa

B AKTIVITETE

iNNovatioN WEEK 2015: "iNNovatioN iN tHE BaNKiNG SECtor"In the frame of the Innovation Week 2015, at the

premises of Bank of Albania took place the activity

entitled: "Innovation in the banking sector". The activity

was organized under the auspices of the Minister for

Innovation and Public Administration and the Governor

of the Bank of Albania, This activity, promoted the new

technologies that the banking sector uses to provide

products and services for the Albanian citizens. The

AAB Chairman delivered an opening speech at the

event, regarding the increasing attention paid by banks

to the development in innovation and technology, and

several banks’ representatives presented their latest

products or projects in this field.

aa

B AK

TIVITETEtHE FirSt ForUm oF iNtErNal

aUditorS iN alBaNia

AAB and the Albanian Institute of Internal Auditors

(AIIA) organized the 1st Annual Internal Audit Forum,

focused on the development and situation of the internal

audit profession in the state of internal audit profession

in the Albanian banking sector. The forum held on 18

June at Hotel Tirana International, was attended by

internal auditors, CEOs and Senior Management

representatives of the banking sector in Albania,

representatives from Bank of Albania, Ministry of

Finance, Central Bank of Kosovo, international

companies of consultancy etc.


tRaI

nIn

Gs HR stRateGIC ManaGeMent1-2 APRIL 2015

Training tailored for HR professionals with 3+ years of experience, in cooperation with WIFI Albania. The training course was attended by 10 participants of member banks and it was delivered by Mrs Larissa Winter an HR international expert.

RIsk ManaGeMent23-24 APRIL 2015

The two-day training was conducted by Mr Udo Scheder, an international Financial Advisor, organized in cooperation with WIFI Albania, was attended by 8 participants of 4 member banks. The session on organiza-tional aspects course covered the integration of the credit risk management into the overall bank’s organization, along with addressing the analysis of some case studies of manufacturing, tourism and trading companies

on tHe IMPleMentatIon of tHe law on PReventIon of

Money laundeRInG and fInanCInG of teRRoRIsM

26 JUNE 2015

AAB in cooperation with the General Directorate of Prevention of Money Laundering (FIU) organized, at “Vlora International Hotel”, a training seminar for employees of banks’ branches of Southern Albania. The training was delivered by Mr Ndue Maluta, from BKT and Vice Chairman of AAB Compliance Committee, Mr Agim Ismaili and Mr Artan Shiqerukaj from FIU.

CoRPoRate RestRuCtuRInG21-22 APRIL 2015

The course provided an overview of bank corporate financing facilities, manag-ing corporate exposures and corporate insolvency, the methods and techniques used by banks in dealing with distressed corporate debt, etc. The training, organized in cooperation with WIFI Albania, was attended by 10 participants of 4 member banks.

seMInaR onletteR of CRedIt

27-28 APRIL 2015

AAB, in cooperation with ICC Albania, organized a seminar on Letter of Credit, which was delivered by Mr Peter Thiel, Vice. Director WZG Bank in Dusseldorf, Germany. Ten representa-tives from banks in Albania and Kosovo, as well as business and government representatives, attended this activity.

oPeRatIonal RIsk17-18 JUNE 2015

The training course was organized in cooperation with BACEE and was attended by 16 participants from member banks. The agenda looked at the key areas for high quality risk management, risk reporting and the use and presentation of risk indicators, and the management for large exposures.

seMInaR on Bank GuaRantees

14-15 MAy 2015

AAB, in cooperation with ICC Alba-nia, organized a seminar on Bank Guarantees. The seminar was delivered by Mrs Andrea Hauptmann, Director for Bank Guarantees at Raiffeisen Bank International and Chairman of ICC Working Group on Banking Guarantees. The event was attended by 17 representatives from banks in Albania and Kosovo, as well as representatives of business, trade financing specialists, lawyers and representatives from the Ministry of Finance.

neGotIatIon In tHe sale PRoCess

7-8 MAy 2015

AAB enabled the attendance of representatives from member banks in the training seminar, organized by Lincoln Center. The training was delivered by Mr David Turner, a trainer with international experience.

Bankieri No.16 - July 2015

Documents

Transcript of Bankieri No.16 - July 2015