Albania MSME Finance for Growth Assessment JUNE 2018 © 2018 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, the World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Contents Acknowledgements iii Abbreviations iv Executive Summary 1 1. MSMES: OVERVIEW OF ECONOMIC AND FINANCIAL CONDITIONS 5 General Overview 6 MSMEs’ Contribution to the Economy 8 MSMEs’ Access to Credit Products 10 Access to Formal Accounts and Electronic Products 14 2. OVERVIEW OF THE SUPPLY SIDE 16 Overview of the Financial Sector 17 Analysis of the Banking Sector 18 Analysis of the NBFI Sector 20 Microfinance Institutions (MFIs) 20 Savings and Loans Associations 21 Financial Leasing and Factoring 21 Alternative Delivery Models and Financial Innovation 22 3. GOVERNMENT POLICIES AND PROGRAMS IN SUPPORT OF MSME FINANCE 25 Government Strategies and Policies 26 Public Sector Funding for MSMEs, Credit Guarantee Schemes, and Donor Interventions 26 Using G2B payments to unlock finance 30 4. FINANCIAL INFRASTRUCTURE 33 Credit Infrastructure 34 Payments Infrastructure 35 Debtor’s and creditor’s rights 36 5. REGULATION AND SUPERVISION OF THE FINANCIAL SECTOR 39 Contents | i Table of Figures Table 1. Summary of key recommendations 3 Table 2. Definition of MSMEs in Albania and EU 7 Table 3. Overview of the enterprise sector in Albania 9 Table 4. Overview of MSMEs access to finance in the Western Balkans region 11 Table 5. Selected access to finance indicators for MSMEs, by subtopic 15 Table 6. Factoring annual volumes and balance at December 2016 21 Table 7. Initial capital requirements 41 Box 1. Different stages of MSMEs’ funding 6 Box 2. Different approaches to promote Fintech and financial innovation 24 Box 3. WB Principles for Public Credit Guarantee Schemes for MSMEs 28 Box 4. Reverse factoring and invoice discounting platforms 31 Box 5. QR code payments 38 Figure 1. Structure of value added by economic activity and size of enterprise, 2016 8 Figure 2. Number of registered businesses over recent years 9 Figure 3. Perception of obstacles in obtaining access to finance and its impact on doing business 11 Figure 4. Enterprises relationship with banks and their expectations for the future 12 Figure 5. Types of credit products which MSMEs use 13 Figure 6. Number of access points in Albania and comparable economies (per 100,000 adults) 14 Figure 7. Annual costs for businesses by payment instrument as % of 2014 GDP 15 Figure 8. Financial depth in Albania and comparable economies (Private Credit/GDP, %) 17 Figure 9. Overview of the bank lending portfolio for the four largest banks 18 Figure 10. Loan portfolio vs NPL for the four largest banks over a 5-year period (mln ALL) 19 Figure 11. Return on Assets and Return on Equity for MFIs and SLAs 20 Figure 12. Funding structure of the two largest MFIs 20 Figure 13. Functions and roles of the MSME unit 29 Figure 14. Overview of number of institutions reporting to the Credit Registry 34 ii | Contents Acknowledgements This report was prepared by Ivor Istuk (Senior The team is grateful to Linda Van Gelder (World Bank Financial Sector Specialist) and Marco Traversa Regional Director for the Western Balkans), Maryam (Financial Analyst). Technical guidance and inputs Salim (World Bank Country Manager for Albania), were provided by Johanna Jaeger (Senior Financial Mario Guadamillas (World Bank Practice Manager Sector Specialist and task team leader) as well as for Finance, Competitiveness and Innovation), Marco by Keler Gjika (Financial Sector Specialist). Kozeta Hernandez (Program Leader for the Western Balkans Diamanti (Program Assistant) provided administrative – Equitable Growth, Finance and Institutions) and the assistance throughout the preparation of the report. Western Balkans Country Management Team for their guidance and support throughout this task. The team would like to thank the peer reviewers of this report – Gunhild Berg, Uzma Khalil (both Senior Finally, the team owes their particular appreciation Financial Sector Specialists) and Hilda Shijaku to all counterparts in Albania – both from public and (Economist) - for their valuable comments. private sector - for their excellent cooperation and insights provided during the assessment. Acknowledgements | iii Abbreviations AML/CFT Anti-Money Laundering / Combating the Financing of Terrorism ALL Albanian Lek ATM Automated Teller Machine BIH Bosnia and Herzegovina BoA Bank of Albania CGS Credit Guarantee Scheme CRS Credit Reporting Systems EBRD European Bank for Reconstruction and Development EU European Union FYROM Former Yugoslav Republic of Macedonia G2B Government to Business GoA Government of Albania IMF International Monetary Fund INSTAT Albanian Institute on Statistics MOFE Ministry of Finance and Economy MSME Micro, Small and Medium Enterprise MFI Microfinance Institution NBFI Non-Bank Financial Institution NPL Non-Performing Loan PE Private Equity POS Point of Sale PSP Payment Service Provider PSD Payment System Directive RXIL Receivables Exchange of India Ltd SLA Saving and Loan Association TREDS Trade Receivables Discounting System VC Venture Capital QR Quick Resolution WB World Bank iv | Abbreviations Executive Summary Despite being the backbone of the Albanian alternative data processors with appropriate data economy, micro, small and medium sized enterprises and consumer protection safeguards. Improvements (MSMEs) face difficulties in accessing finance are needed with regard to the movable collateral which impedes their growth. MSMEs in Albania are registry in order to enable seamless real-time access significant contributors to the economy. In 2016, and registration of notices creating security interests. MSMEs comprised 99.9 percent of active enterprises and 81 percent of the total number of employed The availability of a wider range of financing people.1 According to the World Economic Forum instruments that meet the varying needs of Global Competitiveness Report2 access to finance is MSMEs should be further enhanced. Microfinance the third biggest constraint in Albania for enterprise institutions (MFIs), the second largest providers of development and competitiveness after tax rates finance, especially in rural areas, face difficulties and corruption. This is in line with a recent EC survey in either accessing affordable wholesale funding which found that only 17 percent of MSMEs believe or appropriate risk sharing mechanisms. Financial that there are no obstacles to obtaining finance, a leasing is limited mainly to motor vehicles, number significantly lower than in other comparable with a weak secondary market for repossessed economies.3 The number of MSMEs having used equipment presenting the biggest constraint for its bank financing is low compared to the European development. Venture capital funds and/or angel Union (EU) average at 29 percent for overdraft/ investors networks that would target start-up or revolving facilities and 14 percent for other bank scale-up ready MSMEs are also missing. Accounts loans respectively. At the same time, the number receivable based finance (e.g. factoring or invoice of Albanian MSMEs which financed their operations discounting) is barely practiced. Measures that could from retained earnings stands at 24 percent, while be beneficial to increase availability of alternative 15 percent stated using informal third-party finance sources of finance include: (family, friends, etc).4 The MSME sector is generally •• Explore options for non-deposit taking MFIs characterized by high informality (especially in to increase their access to wholesale funding agriculture), limited availability of collateral, low and ensure proportionality of the regulatory levels of financial capability, and limited uptake of framework; digital transactions. •• Introduce partial credit guarantee schemes based Bank lending represents a key element of financial on international best practices to facilitate lending intermediation which needs to be further developed. to MSMEs; The financial sector is dominated by banks which •• Take measures to increase usage of electronic are characterized by high levels of liquidity, strong invoices linked to the tax administration and risk aversion after the financial crisis, increasingly explore the development of platforms for reverse conservative policies from their parents, and lack factoring or invoice discounting; of proper incentives or capacity to explore new and innovative approaches to finance. Provision •• Develop grant and financing programs to of credit to MSMEs is further undermined by weak efficiently facilitate early stage finance (seed law enforcement, shallow secondary markets finance) of innovative firms. This should for collateral, and in some instances stringent accompany support for development of networks customer-due diligence and documentary policies. of well-organized incubators / accelerators Strengthening financial sector infrastructure as well providing appropriate mentorship programs, as the legal and regulatory framework for secured especially in business skills; transaction and credit reporting could support an •• Explore the feasibility of establishing a regional expansion of lending to MSMEs. Measures include platform for cross-border sale of re-possessed the creation of an enabling legal framework allowing equipment to improve liquidity and attractiveness for the development of private credit bureaus and of financial leasing for financial services providers; 1 INSTAT, Statistics on small and medium enterprises, 2016. 2 World Economic Forum, The Global Competitiveness Report 2017-18, available at https://www.weforum.org/reports/the-global-competitiveness- report-2017-2018. 3 European Commission, Survey on the access to finance of enterprises – Analytical Report, 2017. 4 European Commission, Survey on the access to finance of enterprises – Analytical Report, 2017. Executive Summary | 1 •• Consider development of a warehouse receipt stakeholder coordination structure is needed for financing strategy to support agribusinesses in access to finance activities across all major sectors accessing post-harvest finance for working capital of the economy. It is suggested that a dedicated unit needs, as well as the options of fostering other or department is established within the Ministry of underdeveloped agri-financial products (e.g. agri- Finance and Economy (MoFE) to promote relevant insurance). policies for MSME access to finance and coordinate and streamline existing ones. Promotion of digital transactions and digitalization of the economy, including through finance for Lack of consolidated and reliable data on MSMEs e-commerce could further enhance MSME’s access presents an obstacle to the efficient prioritization to finance. Penetration of digital financial services is and implementation of MSME development policies, very low limiting the potential to reduce information including on access to finance. Clarity on the size asymmetries and decreasing transaction costs. and diversity of the MSME sector enables authorities Banks recently started investing in digital channels to identify realistic opportunities for growth and to (on-line banking primarily) and point of sale (POS) efficiently formulate adequate reform measures. systems are becoming more and more accessible, Mapping MSMEs, collecting and processing MSME however the level of innovation and uptake of disaggregated data using a uniformly applied digital payments is still low. This is primarily due definition, and implementation of regularly updated to the still high costs of POS services, lack of new analytical practices should therefore be a priority for entrants into markets with innovative approaches the authorities. (disruptors ) pushing incumbent players to innovate, inaccessibility of access points in rural areas, and the Government to business (G2B) payments volumes cash-based culture in general. Fintech companies can be leveraged to unlock potential finance for offering specialized cloud-based business services MSMEs and attract Fintech investments under to MSMEs (accounting, supply chain management, certain conditions. Market participants report that e-commerce, payments, etc.), partnering with credit long payment terms and weak payment discipline providers to offer alternative data processing, or in both G2B and business to business transactions offering stand-alone finance (payment) services do continue to put pressure on MSMEs as the weakest not yet appear to have entered the market. Innovation participants in the transaction chain. Improving in the financial sector should be supported through payment discipline by strict implementation of the development of a Fintech strategy encouraging the late payments laws and offering G2B (MSME) innovation. Moreover, payments system regulation invoices for discount on on-line platforms could should be introduced that will facilitate usage of significantly improve conditions for working capital application programing interfaces, seamless access finance of MSMEs and serve as an anchor for Fintech to payments hubs (interoperability infrastructure), companies interested in this market. and facilitate development of alternative payments providers and/or products. MSMEs low financial and business capacity, and gaps in the financial consumer protection framework, The Government appears committed to improve should be addressed. Many MSMEs, especially MSME finance to support MSMEs’ contribution in the agricultural sector, lack understanding of to economic growth, but better coordination and financial products and the potential benefits which structure is needed to facilitate implementation various formal financial solutions might have for their of initiatives and regulatory reforms. There is a businesses. Financial reporting practices need to piecemeal approach to MSME access to finance improve as the quality and credibility of financial development and coordination of donor driven statements remains low especially for MSMEs. projects. In addition to policy initiatives, various Relatively narrow consumer protection regulation MSME funding facilities that vary in sizes, conditions and its implementation contributes to the status of finance, and focus have been established. quo of mistrust some MSMEs exhibit towards formal However, these initiatives are fairly small and could financial services, showing preference for informal benefit from better targeting. There is a lack of sources of finance. Capacity building programs resources and capacity to support development of including linked to financial support facilities, MSMEs is scattered through various agencies and improved levels of consumer protection as well as public institutions without proper coordination. An enhanced financial reporting practices are required organized, transparent, and accountable public to further strengthen the bankability of MSMEs. 5 Technological innovation in the financial services spaces is rapidly growing, technology companies are more and more offering financial services (FinTech) in a nontraditional manner. These FinTech companies are often defined as disruptors as they lower the cost of financial services, and improve financial products and delivery techniques, pushing incumbents also to innovate. 2 | Executive Summary Table 1. Summary of key recommendations Recommendation Authority Timeframe GOVERNMENT POLICIES AND PROGRAMS IN SUPPORT OF MSMES Designate unit/department within or subordinated to the MoFE with the GoA, MoFE Short term overall responsibility for MSME development and a specific mandate to enhance MSMEs’ access to finance. Improve coordination of existing public and donor-funded GoA, MoFE, Medium empowerment funds and risk-sharing facilities for MSMEs to increase donors term economies of scale and promote linkages between these facilities and business advisory initiatives. Develop grant and financing programs to efficiently facilitate early GoA, MoFE Medium stage finance (seed finance) of innovative firms. term Introduce partial credit guarantee schemes based on international best GoA, MoFE Short term practices to facilitate lending to MSMEs. Strengthen reporting of MSME disaggregated data from regulated GoA, BoA Short term financial institutions and the enterprise sector more broadly based on a uniformly applied definition of MSMEs. Allow public sector accounts payables to MSMEs to be offered for GoA Short term sale on web-based invoice discounting platforms and strengthen enforcement of the late payment law. FINANCIAL INFRASTRUCTURE Improve the movable collateral registry to enable seamless real-time MoFE, MoJ Medium access and registration of notices of creation of security interests. term Review the need for participation of public notaries in movable collateral contract creation / registration process, and applicable fees. Create an enabling legal framework allowing for the development of GoA, MoFE Short term private credit bureaus and alternative data processors (e.g. postpaid utility services, payments data, etc.) with appropriate data and consumer protection safeguards. Improve retail payments infrastructure to enable interoperability BoA, GoA, Short term between bank accounts and e-money accounts to facilitate development MoFE of alternative payments providers, reduce transaction costs for MSMEs and support development of e-commerce. PROVIDERS REACH, DIVERSITY AND SUSTAINABILITY Revisit prudential regulations of non-deposit taking institutions based BoA Short term on principle of proportionality and strengthen focus on AML/CFT, fit and proper management and financial consumer protection. Conduct a feasibility study outlining options for non-deposit taking MoFE, BoA Medium MFIs to increase their access to wholesale funding. term Executive Summary | 3 Recommendation Authority Timeframe Support innovation in the financial sector by developing and adopting BoA, MoFE, Medium a Fintech strategy. associations, term private sector participants PRODUCT DIVERSITY AND APPROPRIATENESS FOR MSMES Take measures to increase usage of electronic invoices linked to the MoFE, BoA Medium to tax administration, in particular by mandating B2G electronic invoicing Long term and exploring the development of platforms for reverse factoring/ invoice discounting. Explore feasibility of creation of regional e-platforms for exchange/ BoA, MoFE, Medium to sale of repossessed collateral among lenders with the aim to increase MoJ Long term the efficiency of movable collateral execution and hence its perceived value. Establish a regulatory framework that supports creation of venture MoFE, Medium capital funds. Albanian term Financial Supervisory Authority Conduct a feasibility study on the need for public warehousing services MoEF, MoA Medium to in agriculture and develop a warehouse receipt financing strategy to Long term support agribusinesses in accessing post-harvest finance for working capital needs. Support development of agri-insurance products accompanied by MoFE, Medium to business development activities for farmers Albanian Long term Financial Supervisory Authority, industry CONSUMER PROTECTION AND FINANCIAL CAPABILITY Enhance financial consumer protection through adoption of BoA, MoFE Short term strengthened rules on fair treatment of consumers (including financial advice and product suitability), cover micro-enterprises and provide guidelines on complaints handling at the level of providers of financial services. Conduct a study on usury/informal lending. BoA, MOFE Medium term Introduce targeted financial capability programs focused on improving MoFE, Medium MSME’s financial reporting, financial management and business Business term planning capacity. associations 4 | Executive Summary 1 MSMES: OVERVIEW OF ECONOMIC AND FINANCIAL CONDITIONS 1. MSMES: Overview of Economic and Financial Conditions | 5 General Overview Although an official legal definition of micro, small, Differences between the existing legal definition of and medium enterprises (MSMEs) exists in Albania MSMEs and the definitions used by banks makes it is not uniformly used in practice. The Law on Small it difficult for the Bank of Albania (BoA) and other and Medium Enterprises6 defines MSMEs based relevant government authorities to gather and on the number of employees and annual turnover analyze lending data in a consistent manner. The lack (Table 2). The Albanian Institute on Statistics (INSTAT), of standardization, although not unique to Albania, however, categorizes MSMEs by the number of limits the ability to efficiently process and analyze people employed rather than by employees, and data on MSMEs, including data on lending to MSMEs local banks, claiming that the current legal definition and MSMEs access to finance in general.7 This in turn is too broad, have adopted their own definitions undermines the prioritization and implementation based on exposures. The Albanian definition also of policies that would successfully target different differs from that used by the European Union (see needs of MSMEs depending on the stage of their Table 2), which is broader and would include many development (see Box 1). A uniformly applied enterprises not considered locally as MSMEs. definition of MSMEs would allow clearer reporting of MSME disaggregated data from regulated financial institutions and the broader enterprise sector, and enable efficient prioritization of policy actions. Box 1. Different stages of MSMEs’ funding New MSMEs tend to be highly risky with intangible assets, a lack of trading history, and informational opacity. The most important sources of initial and seed stage financing for small businesses are the personal savings of entrepreneurs, family, and friends, as well as second mortgages on property. At the second phase of development during the start-up stage, external sources of funding become necessary. Investment in small businesses at this stage is still regarded as high risk and the business is not large enough to attract the attention of venture capitalists. Government grants or other programs for seed funding become relevant, especially for innovative firms. Wealthy individuals, like business angels, can also fill the gap between personal funds and institutional finance. After the small business has passed through the early stages a further injection of capital is required to fund growth. The MSME may still not qualify for longer term debt financing due to its reliance on intangible assets, inability for investors to assess its future growth prospects, low profitability, and short track record. This is where alternative lending products such as leasing and factoring, invoice discounting platforms, marketplace finance platforms, integrated on-line merchant platforms, and alternative credit scoring are useful. Once the firm has established a track record, has the ability to provide collateral and information regarding its performance, and has become more transparent it may access longer term lending. Development of corporate governance structures, real-estate registries, as well as debt and potentially equity capital markets become relevant in this stage. 6 Law No.8957 of 2002, as amended in 2008 7 For example, the INSTAT Statistics on small and medium enterprises and the Survey on the access to finance of enterprises conducted by the European Commission use two different definitions. 6 | 1. MSMES: Overview of Economic and Financial Conditions Table 2. Definition of MSMEs in Albania and EU Albania European Union8 INSTAT No. of No. of No. of Turnover Turnover Turnover Employees Employees Employees Micro ≤ Albanian < 10 ≤ EUR 2 < 10 Same Same Enterprise Lek (ALL) 10 employees million employees as legal number million (ALL turnover definition as legal equivalent to or definition EUR 70,000) balance but based turnover and/ sheet on people or balance employed sheet and not employees9 Small ≤ ALL 50 < 50 ≤ EUR 10 < 50 Same Same Enterprise million (EUR employees million employees as legal number 360,000) turnover definition as legal turnover and/ or definition or balance balance but based Sheet sheet on people employed and not employees10 Medium ≤ ALL 250 < 250 ≤ EUR 50 < 250 Same Same Enterprise million (EUR employees million employees as legal number 1.8 million) turnover definition as legal turnover and/ and/or definition or ≤ EUR 43 but based balance million on people sheet balance employed sheet and not employees11 Source: Art 4 of the Law on Small and Medium Enterprises 8 The category of micro, small and medium-sized enterprises (MSMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro. 9 Employed are people who work at the enterprise regardless of whether they are paid or not. Thus, employed includes employees, owners and unpaid family members. 10 ibid 11 ibid 1. MSMES: Overview of Economic and Financial Conditions | 7 MSMEs’ Contribution to the Economy MSMEs in Albania are significant contributors to the Despite recent progress in increasing the number economy. In 2016, according to INSTAT, 99.9 percent of registered businesses (Figure 2), they often still of active enterprises were MSMEs12, employing 81 do not declare taxes or workers and mainly transact percent of the total number of employed people (see in cash. Informal businesses generally have lower Table 3).13 The highest number of MSMEs were in the productivity than formal businesses, which is both a trade sector (41.5 percent), followed by the services drag on firms and a drag on the economy. Workers in sector (20 percent). 66.9 percent of value added the informal sector lack social protection, especially was realized by MSMEs in 2016, compared to 66.3 insurance and pension benefits. Public revenues percent in the previous year. The highest percentage are reduced by hidden economic activity, resulting of value added in micro-enterprises is realized in in diminished provision of public goods. Business the accommodation and food services sector (69.2 conducted outside the regulated economy raises percent). The trade sector has the highest percentage safety, health, and environmental risks for workers realized by small enterprises (28.6 percent). Medium and communities. Widespread informality impedes enterprises realized the highest percentage of value not only the development of those businesses that added in manufacturing industry (38.2 percent). See decide to remain informal but is also a hindrance to Figure 1. the formal companies faced with competition from the informal sector. By being outside the formal economy Sectors of the economy dominated by MSMEs are these companies lack the opportunity to benefit from characterized by high levels of informality. Many access to formal finance, access to formal markets, MSMEs in Albania operate on an informal basis. and from the legal protection of their property, Figure 1. Structure of value added by economic activity and size of enterprise, 2016 Other Other services 30.8% services 17.9% 24% 27.3% Transport Transport && , information ,information communication 14.4% communication 17.2% 12.5% 55.8% Accommodation Accommodation && food food services 69.2% services 18.6% 10.7% 1.5% Trade 37.6% Trade 28.6% 19.3% 14.5% Construction 20% Construction 27.4% 29.1% 23.5% Electricity, gas, water Electricity, supply gas, water & waste supply & 5.2% 18.4% 6.4% 70.1% waste management management Manufacturing 14.9% Manufacturing 19.6% 38.2% 27.3% Mining Mining and and quarrying 4.1% 18.3% quarrying 14.3% 63.3% Micro enterprises (1-9 employed) Small enterprises (10-49 employed) Medium enterprises (50-249 employed) Large enterprises (250+ employed) Source: INSTAT, 2016 12 This is according to the INSTAT’s definition used in Albania, which slightly differs from the official one and also from the European Union’s definition. See Table 2 for further information. 13 INSTAT, Statistics on small and medium enterprises, 2016. 8 | 1. MSMES: Overview of Economic and Financial Conditions contracts, and investments. The Government of Figure 2. Number of registered Albania has previously taken measures aimed businesses over recent years at increasing registration of companies, greater declaration of workers, improving tax collection, and 150,000 granting of fiscal amnesties. To allow businesses to better contribute to the economy it is important that the government continues to invest substantially in 100,000 formalizing these MSMEs, through efforts that go beyond mere registration. 50,000 The quality of MSMEs financial reporting in Albania needs to improve to increase credibility with 0 providers of finance. The legislative and institutional 2013 2014 2015 2016 financial reporting framework, and professional capacity in financial reporting and auditing have 1-4 employees 5-9 employees improved recently. Albania has achieved a high 10-49 employees 50+ employees degree of alignment of corporate financial reporting legislation with the EU acquis communautaire. The Source: INSTAT, 2016 public availability of financial statements of MSMEs is currently being improved. However, these positive developments have not yet adequately translated and their own verification methods. An Action Plan into an increased quality of financial statements, for Non-Performing Loans (NPL)14, endorsed by the especially for MSMEs. According to anecdotal Prime Minister and BoA, requires banks and NBFIs to evidence, while commercial banks ask for financial grant loans based only on tax-compliant statements statements and audit reports (where applicable) they starting from January 1, 2018. This might significantly rarely trust this information and instead base their reduce the ability of MSMEs to attract lending in the financing decisions on alternative sources of data short run, thereby limiting their growth potential. Table 3. Overview of the enterprise sector in Albania Enterprises Employed Turnover Investments Value Added Enterprises size class no. % no. % min ALL % min ALL % min ALL % Total 108,526 100 469,665 100 1,881,662 100 221,404 100 491,026 100 MSME 108,373 99.9 380,302 81 1,464,739 77.8 165,844 74.9 328,591 66.9 (1-249 employed) Micro 102,965 94.9 194,015 41.3 480,991 25.6 30,397 13.7 116,583 23.7 enterprises Small 4,413 4.1 87,796 18.7 563,124 29.9 86,318 39 107,491 21.9 enterprises Medium 996 0.9 98,491 21 420,624 22.4 49,130 22.2 104,518 21.3 enterprises Large 152 0.1 89,363 19 416,923 22.2 55,559 25.1 162,435 33.1 enterprises (250+) Source: INSTAT Survey 2016 1. MSMES: Overview of Economic and Financial Conditions | 9 Recommendation Reporting of MSME disaggregated data from and success of measures already taken is suggested regulated financial institutions and the enterprise in order to learn from past experiences in this area. sector more broadly should be strengthened, The Government should continue to implement based on a uniformly applied definition of MSMEs. carefully balanced measures15 that provide the Definitions should be harmonized to better reflect right controls and incentives while minimizing the realities of the market and enable relatively moral hazard created by forgiving non-compliant seamless reporting for financial institutions and the taxpayers. A new policy requiring lending decisions enterprise sector as a whole. Another potentially to be based only on financial statements that have useful source of data could be the credit registry been certified for tax declaration purposes should and the BoA should review the ability to process be adjusted in line with Action 11 of the formally and make use of this data, in an aggregate form, for endorsed National Action Plan on Non-Performing government and BoA policymaking purposes. Loans. A tiered (as per exposure) and gradually phased-in approach is recommended to mitigate the Reducing informality amongst MSMEs should risk of financially excluding informal and semi-formal be a priority; however, it should be undertaken MSMEs. Measures to reduce informality should be in a balanced manner to avoid curbing existing accompanied by strong efforts to increase access economic activity. A detailed review of the impact to finance, productivity, and bankability of MSMEs. MSMEs’ Access to Credit Products Access to finance for MSMEs in Albania is significantly finance, a number significantly lower than in other constrained, much more than in other comparable comparable economies.16 Lack of appropriate economies in the region. Hindered access to finance significantly impedes the competitiveness finance for MSMEs in Albania impairs their growth of local MSMEs. According to the World Economic and development. Many MSMEs are dependent on Forum Global Competitiveness Report17 access internal funding or borrowing funds from family and to finance is the third most problematic factor friends to finance their operations. While this would influencing low competitiveness in Albania, following be understandable in the early phase of business tax rates and corruption. In comparable economies development, it seems to be the case regardless such as Greece, Croatia, and Serbia access to finance of the stage of the development of an enterprise is ranked 6th, 7th, and 2nd respectively in terms of the in Albania. Only 17 percent of Albanian MSMEs most problematic factors for doing business.18 believe that there are no obstacles to obtaining 14 Action Plan for Non-Performing Loans was endorsed by the Prime Minister and BoA’s Governor in August 2015: https://www.bankofalbania.org/ Supervision/Action_plan_for_non-performing_loans/. Action 11 of the Plan requires introduction of the obligation for banks and NBFIs starting from January 1, 2018 to grant loans only based on tax-compliant statements (above a certain threshold exposure). 15 In the past governments have undertaken several measures including fiscal amnesties, tax exemptions, actions to punish tax evaders and informality preceded by awareness campaigns. 16 European Commission, Survey on the access to finance of enterprises – Analytical Report 2017. 17 World Economic Forum, The Global Competitiveness Report 2017-18, available at https://www.weforum.org/reports/the-global-competitiveness- report-2017-2018. 18 ibid 10 | 1. MSMES: Overview of Economic and Financial Conditions Figure 3. Perception of obstacles in obtaining access to finance and its impact on doing business 33% 31% 28% 17% 16.4 12.5 10.3 11% 10 5 Albania Croatia Greece Montengero Serbia Most problematic factor for doing business - Access to finance score % of MSMEs seeing no obstacles in obtaining finance Source: World Economic Forum Global Competitiveness Report 2017/2018 and European Commission Survey on the Access to Finance of Enterprises – Analytical Report 2017 Table 4. Overview of MSMEs access to finance in the Western Balkans region Percent of firms Percent of Proportion Value of with a checking firms with a of loans collateral needed Economy or savings bank loan/ requiring for a loan (% of account line of credit collateral (%) the loan amount) Europe & Central Asia 91 37.7 78.7 191.9 Albania (2013) 73.4 28.2 90.9 255.2 small 68 20.1 85.3 366.3 medium 88.6 57.5 98.4 149.2 large 96.6 55.9 93.9 N/A Bosnia and 98 66.3 82.4 190.1 Herzegovina (2013) Croatia (2013) 99.2 53.7 86.2 192.7 Macedonia, FYR (2013) 95.7 45.4 90.7 275.5 Montenegro (2013) 96 54.9 89.9 243.4 Serbia (2013) 100 40 66.4 149.8 Source: World Bank Enterprise Survey 1. MSMES: Overview of Economic and Financial Conditions | 11 Smaller firms are particularly disadvantaged in Rejection rates for MSMEs seeking formal finance access to formal finance when compared to medium are high. These rejections are mainly caused by and large ones. While this would be expected, the strict lending standards, high collateral demand, difference in terms of uptake of accounts, access low business capacity, and high opacity (informality) to credit, and the demand for collateral, is telling of MSMEs. Rejection rates are especially high in the of the underprivileged position smaller firms agricultural sector and among microenterprises. The find themselves in. According to the World Bank majority of agricultural enterprises which applied for Enterprise Survey the average collateralization of a loan in 2017 saw their loan rejected. Many micro loans offered to small firms stands at 366.3 percent. enterprises did not even apply for loans because they This significantly limits the potential to access formal either feared they will be rejected or they perceived credit, which is reflected in only 20.1 percent of small the processes as too complicated.19 The cost of loans firms having a bank loan / line of credit. does not appear to be perceived as a significant barrier. BoA data shows average interest rates around 5 percent for euro loans and 5.5/6 percent for ALL loans, in 2017.20 Figure 4. Enterprises relationship with banks and their expectations for the future Main reasons why micro enterprises do not apply Main reasons why agri-enterprises do not apply for formal financing for formal financing It is not It not necessary formy necessary for my It is It is not not necessary my for my necessary for 50% 41% business business business business I think I think it is it is aprocess a difficult difficult I think I think it is it is aprocess a difficult difficult 28% 32% process process It is easierIt for is easier me to for getme to get financing It is easier is easier Itfor me tofor me get to get financing financing from alternative from alternative sources 17% financing from alternative from alternative sources 21% sources sources I think my application I think will not my application be will I think my application I think will notwill my application be 5% 6% approved not be approved approved not be approved % of micro enterprises % of micro enterprises Percentage of agricultural enterpries which applied for a loan My application was approved My application was not approved 34% 66% Pending I did not meet the bank’s condition 19.8% 46.2% Source: Bank of Albania and INSTAT Survey of Agricultural and Micro Enterprises 19 Elona Dushku and Kliti Ceca, Agricultural Enterprises in Albania and their Financing, Bank of Albania Research Department, 2017; and Elona Dushku and Kliti Ceca, Use of external financing by micro enterprises (1-4 employees) in Albania, Bank of Albania Research Department, 2017. 20 Bank of Albania. 12 | 1. MSMES: Overview of Economic and Financial Conditions Figure 5. Types of credit 1. products which MSMEs use While the actual number of MSMEs using bank financing is very low compared to other countries 15% in the region; MSMEs still represent a big part 8% 0% of banks’ financing portfolios. In 2017, only 29 Owner’s funds, 5% percent, 14 percent, and 4 percent of Albanian Owner’s funds, family friends family friends 7% MSMEs respectively used an over-draft or revolving 5% 5% credit/loan facility, a loan from a bank for investment 5% purposes, or leasing. These figures are not only behind the EU average of 35 percent, 17 percent, and 24% 15% 24 percent but Albania also lags behind countries in 7% the region such as Serbia and the Former Yugoslav Retained 14% Retained earnings 6% Republic of Macedonia (FYROM).21 Based on BoA earnings 14% data, the MSME sector nevertheless represents 7% a large part (over one third) of banks’ lending 18% portfolios.22 This implies that banks are lending 29% significant amounts to a small number of MSMEs, 35% mainly a few larger MSMEs. This data is also in line 34% Overdrafts 26% with recent BoA research which showed that MSMEs Overdrafts (credit lines) (credit lines) 19% who access formal financing generally show relatively 32% 19% high leverage.23 23% There is a lack of alternative credit products for 14% MSMEs that could help overcome issues of limited Collateralized 17% 20% access to immovable collateral or high levels of term loans Collateralized term l oans for 19% information asymmetry. The majority of loans are investment purposes for investment 23% 12% collateralized (land or real estate) and many MSMEs purposes do not have such collateral available to offer as 16% 15% security for finance. Only 14 percent of MSMEs had 4% a collateralized term loan for investment purposes. 24% The uptake of alternative credit products is even 8% lower. For example, leasing and investment finance Leasing 9% Leasing 5% have a similarly low uptake, as shown in Figure 5, and 20% factoring is barely existent, with less than 2 percent 11% 18% of MSMEs using it.24 2% While use of formal financing is very low, many 6% 0% MSMEs rely on informal sources or retained Factoring Factoring 4% earnings to finance their activities. 15 percent of 5% Albanian MSMEs use informal third-party finance 1% 5% (family, friends, etc.), significantly more than MSMEs 5% in Bulgaria (5 percent), Montenegro (7 percent), Serbia (5 percent), Croatia (5 percent) or FYROM (2 percent).25 24 percent of Albanian MSMEs finance Albania EU 28 FYROM their operations from retained earnings, much Serbia Montenegro Bulgaria higher than for Bulgaria (14 percent), Montenegro Greece Croatia (6 percent), Serbia (14 percent), Croatia (18 percent) or FYROM (7 percent).26 Source: European Commission, Survey on the Access to Finance of Enterprises – Analytical Report 2017 21 European Commission, Survey on the Access to Finance of Enterprises – Analytical Report 2017. 22 Bank of Albania. 23 Elona Dushku and Kliti Ceca, Agricultural Enterprises in Albania and their Financing, Bank of Albania Research Department, 2017; and Elona Dushku and Kliti Ceca, Use of external financing by micro enterprises (1-4 employees) in Albania, Bank of Albania Research Department, 2017. 24 European Commission, Survey on the Access to Finance of Enterprises – Analytical Report 2017. 25 ibid 26 ibid 1. MSMES: Overview of Economic and Financial Conditions | 13 Access to Formal Accounts and Electronic Products In terms of people having access to an account, Figure 6. Number of access points in Albania performs worse than any other regional Albania and comparable economies economy, and below the regional average. (per 100,000 adults) According to 2017 Global Findex Data, only 40 percent of Albanian adults had an account at a 2012 36 formal financial institution, compared to 77 percent 24 Albania in FYROM, 68 percent in Montenegro, 59 percent in 2014 35 22 BIH, and 52 percent in Kosovo. 68 percent of small 2016 34 firms, 88.6 percent of medium firms, and over 96 22 percent of large firms have an account at a formal 42 2012 Herzegovina financial institution.27 Use of accounts for payments 32 Bosnia and for goods and services is very low. 2014 47 33 There is a significant gap between urban and 2016 50 rural populations in accessing formal accounts. 29 Significantly more adults in urban areas have access 2012 50 Macedonia 25 to an account; implying that those living in rural 2014 56 areas, including for example smallholder farmers, 25 may have difficulties not only accessing credit but 60 2016 also in accessing formal financial services in general. 25 Account ownership of the adult population living 2012 70 Montenegro in rural areas in Albania did not grow between 41 2014 and 2017, standing still at 31 percent, while 2014 71 42 in comparable countries like Kosovo, BIH, and Montenegro it followed overall trends of account 2016 78 44 ownership growth.28 Automated Teller Machines (ATMs) Beyond cultural barriers, insufficient access points Branches of commercial banks may also contribute to the limited use of formal Source: IMF, Financial Access Survey 2016 accounts. Albania has fewer bank outlets and automated teller machines (ATMs) per 100,000 Cash is predominant in all payment transactions of than other comparable economies (see Figure 6) businesses, both received and initiated. Albanian but, while the number of bank branches and ATMs businesses initiate approximately 18.2 million have steadily declined, point of sale (POS) terminals payments annually, or 792 payments per business and e-money agents have seen a slightly positive annually, of which 66 percent in cash. Cash usage trend. According to a World Bank and BoA study“The varies by business size. While micro businesses Retail Payment Costs In Albania”29 (cost study) the net initiate 93 percent of their annual volume of payments growth rate of bank branches and ATMs per 100,000 in cash, this percentage falls to 47 percent for large adults during the period 2015-2016 was negative businesses. Direct credit transfers (both paper-based (-4.2 percent and -3.2 percent, respectively) while the and electronic) and direct debit transfers are the net growth rate of e-money agents and POS terminals second and third most used instruments, respectively, was positive (+25.7 percent and +6.3 percent, regardless of business size. On the receiving side, respectively).30 While this is a positive outcome it is 99 percent of all payments across businesses are still not substantial enough to visibly influence uptake received in cash. When breaking down volumes of electronic transactions in the country. received by business size, it emerges that debit and 27 The World Bank Enterprise Survey, 2013 28 World Bank Global Findex Database. 29 Bank of Albania and World Bank, The Retail Payment Costs in Albania, 2018. 30 ibid 14 | 1. MSMES: Overview of Economic and Financial Conditions credit card payments are received by all types of Figure 7. Annual costs for businesses by businesses, but occupy a larger share among large payment instrument as % of 2014 GDP businesses. Electronic credit transfers and direct debit transfers are not relevant among micro and Cash Cash 0.3 small businesses, while they are more heavily used among medium and large businesses.31 Paper-based Paper-based credit credit transfer 0.134 transfer The overall prevalence of cash adds a substantial Electronic Electronic credit credit transfer 0.048 cost for business. The recent cost study revealed transfer that businesses in Albania incur annual costs equal debit Directdebit Direct 0.042 to 0.6 percent of GDP in the context of receiving and initiating payments across all payment instruments, Debit card Debit card 0.03 with cash representing half of total costs (0.3 percent of GDP). In comparison, the cost of paper-based Credit card Credit card 0.028 credit transfers is estimated at 0.134 percent of GDP, electronic credit transfers at 0.048 percent, direct debits at 0.042 percent, debit cards at 0.03 percent, Source: Bank of Albania and World Bank, The Retail and credit cards at 0.028 percent. Payment Costs in Albania, 2018. Although banks recently started investing more in prevalent cash-based culture in general. The lack of digital channels (on-line banking primarily), and digitalization of MSMEs, especially in key sectors POSs are becoming more and more accessible, the such as tourism and trade, undermines the potential level of innovation and uptake of digital payments to reduce information asymmetry by collecting and of enterprises is still very low. This is primarily due processing alternative (payments) data, decrease to the reported high costs of POS services, lack of costs of transactions by lowering cash dependence, disruptors pushing incumbent players to innovate, and ultimately increase tax revenues through more inaccessibility of access points in rural areas, and the transparency. Table 5. Selected access to finance indicators for MSMEs, by subtopic Macedonia, Global indicators Albania Serbia FYR PRODUCT DIVERSITY AND APPROPRIATENESS FOR MSMES % of MSMEs which see no obstacles in obtaining financing from a 17 40 33 financial institution (2017) % of MSMEs with a line of credit at formal institution (2017) 29 34 26 % of MSMEs accessing investment loans (2017) 14 20 19 % of MSMEs using leasing or hire purchase (2017) 4 8 9 % of MSMEs using factoring for working capital finance (2017) 2 - 4 % of MSMEs using returns or profits to finance their activities (2017) 24 7 5 PROVIDER REACH, DIVERSITY, AND SUSTAINABILITY # of bank branches per 100,000 adults (2016) 22 25 30 # of accounts per 1,000 adults 1722 2232 N/A Source: IMF Financial Access Survey, European Commission, Survey on the Access to Finance of Enterprises 31 Bank of Albania and World Bank, The Retail Payment Costs in Albania, 2018. 1. MSMES: Overview of Economic and Financial Conditions | 15 2 OVERVIEW OF THE SUPPLY SIDE 16 | 2. Overview of the Supply Side Overview of the Financial Sector Albania’s banking sector is small and dominated by The banking sector dominates the market (banks’ foreign banks. 16 banks were operating in Albania assets in 2017 stood at 92.5 percent of GDP) while as of December 2017. By mid-2018 this number is non-bank financial institutions (NBFIs), namely expected to decrease to 14 as two banks are in the microfinance institutions (MFIs), leasing, factoring process of acquisition by other banks in the system. companies, and savings and loan associations (SLAs) Banks account for the bulk of financial sector assets are small in terms of their assets. As of December and the majority are foreign owned. Concentration 2017, there were 31 registered NBFIs in Albania: their of the 3 largest banks, in terms of assets, stood at total assets amounted to ALL 45 billion, accounting 55.8 percent, slightly below the regional median for 3.1 percent of total banking system assets. Recent but higher than other economies in the region such consolidation of SLAs has reduced their number as Bosnia and Herzegovina (BIH) (41.8 percent) and from over 120 down to 13. In December 2017, the Serbia (44.9 percent). 33 total assets of all SLAs amounted to ALL 7.7 billion, accounting for only 0.5 percent of the banking In terms of financial sector depth, domestic deposits system. and private credit to GDP are low in comparison to other countries in the region. At the end of 2016, domestic bank deposits to gross domestic product (GDP) stood at about 68.6 percent. At the same time bank credit to GDP stood at only 34.7 percent, far below that of comparable countries in the region and the EU (see Figure 8). Figure 8. Financial depth in Albania and comparable economies (Private Credit/GDP, %) 100 80 60 40 20 35.44 36.92 37.51 39.46 39.06 38.01 37.53 35.64 34.72 29.96 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Albania Bosnia and Herzegovina Kosovo Macedonia, FYR Montenegro Serbia Euro area Source: Finstats 2018 33 Finstats 2018. 2. Overview of the Supply Side | 17 Bank lending is mainly based on traditional plain in the agriculture sector where agricultural land is vanilla products, with the majority of MSMEs partitioned into small unconnected plots, often with using revolving facilities and overdrafts. Most of unclear ownership status due to unfinished land these facilities are secured and tend to be over- reform and ownership restitution process. High collateralized, with land and real-estate the dominant collateral requirements, caused by the perception collateral type. High collateral demand and low value of risk and shallow secondary market for collateral, of collateral in general are seen as a considerable makes it difficult for most MSMEs to qualify even for access to finance obstacle. This is especially true plain vanilla loan products. Analysis of the Banking Sector Albanian banks, despite a declared focus on MSMEs, Despite having branches in all prefectures, banks’ have rather rigid lending and product innovation clients are mainly in urban areas, possibly because policies in place. Most banks have a dedicated rural clients (including farmers) are perceived as MSMEs department, although they approach and riskier/less profitable clients as well as due to the define MSMEs in different ways. Some smaller lack of trust in the formal financial sector caused banks focus exclusively on MSME and retail markets. by lower levels of financial education. At the end Recently, due to adverse effects of the global financial of 2017, banks operated 488 branches / agencies crisis, even larger banks are declaratively shifting across the country.35 The geographical distribution of their focus towards MSMEs as this sector is perceived bank branches/ agencies covered the entire territory as less risky in comparison to larger corporations. of Albania with a high concentration in Tirana (42 Overall, as shown in Figure 9, over one third of the percent), where the population concentration is total banking portfolio is focused on MSME lending. greater (29 percent). The focus on urban areas is partially a reflection of operational issues, including Figure 9. Overview of the bank infrastructure development; but there appears to be lending portfolio for the four largest a reluctance to expand into rural areas because the banks financing of agricultural activities is seen by some as high-risk. In addition, banks seem to perceive that 17.7% 20.0% the depositor base they could attain in rural areas 39.3% 43.8% 44.6% may be less active due to less financial literacy and lower levels of disposable income. Hence, expanding in rural areas requires more investment per unit of 82.3% 80.0% return when compared to other types of businesses 60.7% 56.2% 55.4% and clients. All Banks Raiffeisen Credins BKT ISP Bank Loans to Other Businesses Loans to MSMEs Source: Bank of Albania 34 Microcredit institutions are non-bank financial institutions that meet all the following criteria at the same time: i. lending and advisory services on lending are the sole scope of its activity; ii. average value of a loan extended to a borrower is not higher than the value of the microcredit (up to ALL 600,000); iii. at least 50 per cent of the credit portfolio is composed of micro credits. 35 Albanian Association of Banks Statistics, 2017. 18 | 2. Overview of the Supply Side High levels of NPLs in the aftermath of the global Banks should explore alternative financial products financial crisis have been reduced but bank lending and innovative business models to better serve has remained fairly stagnant in recent years (see MSMEs. Concentration in the banking sector, Figure 10). Total credit grew by around 0.6 percent resulting in limited competition, the adoption of in 2017.36 In the same period, bank assets increased conservative lending policies post-financial crisis, by 2.8 percent; however, this increase was limited and a lack of capacity and proper incentives have with regards to client activities. While treasury and resulted in banks appearing not to be focused on interbank transactions increased by 4.5 percent, developing new strategies to meet the specific there was an increase of only 0.2 percent of client financing needs of MSMEs. Anecdotal evidence transactions. Security transactions with foreign suggests that banks mainly base their lending on institutions decreased by 3.1 percent. availability of collateral. In addition, beyond online banking offered by the majority of banks, there As a response to the financial crisis, banks have seem to have been no serious attempts to explore adopted more conservative policies, seeking highly partnerships with financial technology (Fintech) firms collateralized loans in particular by real estate. In in order to offer alternative solutions that could help 2016 the major share of the credit portfolio (71.2 facilitate a shift from a cash-based economy to a more percent) was collateralized.37 By type of collateral, digital (electronic transactions) one. the largest share of loans in the system, around 49.4 percent were collateralized by real estate.38 Loans to households had a higher rate of real estate collateralization (65.1 percent) compared to loans to enterprises (43.4 percent).39 Figure 10. Loan portfolio vs NPL for the four largest banks over a 5-year period (mln ALL) 97,998 95,112 87,940 85,748 80,446 77,012 73,937 71,414 65,595 61,207 45,180 45,204 45,033 43,152 41,647 40,803 39,410 37,676 36,703 36,283 30% 31% 33% 23% 20% 22% 22% 21% 23% 33% 16% 28% 16% 12% 13% 19% 12% 13% 10% 9% 2013 2014 2015 2016 2017 Raiffeisen Credins Bank BKT ISP Total loans NPLs Total loans NPLs Total loans NPLs Total loans NPLs Source: Bank of Albania 36 Bank of Albania, Financial Stability Report H2 2017. 37 Bank of Albania, Annual Supervision Report, 2016. 38 ibid 39 ibid 2. Overview of the Supply Side | 19 Analysis of the NBFI Sector As of December 2017, 31 licensed NBFIs40 operated Microfinance Institutions (MFIs) in Albania, their size and role vary substantially.41 Eight are registered to perform regular lending activities (solely or combined with other services),42 MFIs are the largest and most prominent NBFIs, five to conduct microcredit activities, 10 offer leasing with a substantial presence in rural areas where products, six offer factoring services, and 10 are they, jointly with SLAs, serve this segment of the licensed to conduct payment services. Despite market. While there are currently 8 licensed MFIs the relatively large number of NBFIs, their assets and 5 microcredit institutions, 2 of them dominate represent only 2.8 percent of the total financial sector the sector. MFIs serve in particular smaller and micro assets (2.3 percent for MFIs and 0.5 percent for SLAs). enterprises as well as farmers. The quality of their The MFI sector is profitable, although profitability has portfolio demonstrates their ability to be able to lend been decreasing in recent years. SLAs, on the other to MSMEs while managing risks. hand, increased profitability in 2017. MFIs overall lending portfolio is stable and NPLs Figure 11. Return on Assets and do not represent a major problem for the sector. Return on Equity for MFIs43 and SLAs The NPL ratio for MFIs in September 2017 was 12.5 percent, slightly higher than the 11.6 percent Return on Assets recorded at end 2016. The figures are influenced by a few smaller MFIs. The two largest lending MFIs have 2.68% NPLs ratio below 7 percent. 2.28% 2.17% Figure 12. Funding structure 1.32% of the two largest MFIs 0.94% 0.45% 2% 2015 2016 2017 15% MFIs SLAs Return on Equity 22% 61% 26.21% 23.5% 12.3% 10.1% 11.01% 9.49% Loans Capital Bonds issued Other debt 2015 2016 2017 Source: Annual reports of 2 largest MFIs. MFIs SLAs Difficulties accessing long term and low-cost Source: Bank of Albania funding is limiting MFIs sustainability in providing credit, including long term credit to MSMEs. The two largest MFIs have the potential and capacity to adequately serve the MSME market, including in rural areas, and have a business model oriented towards productive lending for small farmers and 40 The term NBFI in this report refers only to those non-deposit taking institutions that provide mainly credit and payment services, and excludes insurance, pension funds, investment funds and other participants of capital markets (e.g. brokers). 41 Bank of Albania, Register of Supervised Entities, December 2017. 42 At present in Albania there is distinction between lending and micro-lending, based on the limits regarding the size of the loans they are allowed to provide. Lending institutions are non-deposit taking microfinance institutions which can provide larger loans than the one which can be offered by microlending institutions. 43 Data are for the two largest lending MFIs dominating the sector. 20 | 2. Overview of the Supply Side enterprises, but they have limited funds. As outlined Financial Leasing and Factoring in Figure 12, MFIs cannot take deposits and they face difficulties in either accessing affordable wholesale funding or developing new services due to a shallow In terms of other NBFIs, financial leasing and capital base which is based on some investors, donor factoring companies play a small role in the market. interventions, and the issuance of small bonds. The leasing portfolio is fairly small (about USD 8 million in 2017) and dominated by the financing of motor vehicles. Factoring barely exists. Factoring companies total assets were USD 1.3 million in 2017. The annual factoring portfolio turnover in 2016 Savings and Loans Associations amounted to ALL 6.63 billion with the number of invoices financed at 950 (see Table 6).45 SLAs, following restructuring of the sector, have Financial leasing activities are constrained by a weak begun reviewing their business model seeking to secondary market for re-possessed assets, especially better serve small and micro enterprises. The SLA specialized equipment. Leasing is mainly limited sector had faced difficulties in the past, but has been to the financial lease of personal transport vehicles completely revised as a result of a consolidation (54.8 percent in 2016) and work transport vehicles process and the entry into force of new legislation.44 (24.1 percent in 2016). Weak secondary markets for This restructuring has allowed SLAs to become repossessed equipment is a significant constraint to more profitable and grow bigger; hence, the two further development of leasing services, although major players are now seeking to “expand” towards at least one provider is solving this issue by selling the MSMEs sector. NPL levels for SLAs are low at repossessed assets through its international network around 4.8 percent in September 2017 down from of sister companies. While it should also be possible 6.7 percent in 2016. for financial leasing companies to offer operational While they do not yet have enough capacity, SLAs lease products, there is a lack of clarity on this issue could potentially be leveraged more to serve rural in the Financial Leasing Law. MSMEs given their presence in rural areas. SLAs Factoring and accounts receivable based finance have a strong presence in rural areas; in fact, the in general is barely practiced in the market. There recent consolidation process avoided closing the seem to be concerns that financial institutions do not smallest associations, transforming them instead fully understand the product, that courts lack capacity into branches of larger associations. Although at to understand the commercial construct of factoring present SLAs mainly offer loans to their members for transactions, and that limited trust exists in business consumption purposes, their deposit base is growing partners and enforcement of creditors’ rights. fast. Together with their strong rural presence and their knowledge of the agricultural sector, this could enable SLAs to increasingly serve MSMEs. SLAs have potential to provide more business advisory services to increase the bankability of MSME clients, especially in rural areas. Table 6. Factoring annual volumes and balance at December 2016 Annual turnover Portfolio balance Factoring No of Invoices Value (ALL millions) Value (ALL millions) Total 950 6,639.71 566.19 Source: Bank of Albania 44 Law No.52 dated 19.05.2016 On Savings and Loan Associations and their Unions. 45 Bank of Albania, Annual Supervision Report, 2016. 2. Overview of the Supply Side | 21 Recommendation Supporting the increased usage of e-invoicing linked to the tax administration (as enabled by the latest amendment of the VAT law), the development of platforms for reverse factoring or invoice discounting, as well as reforms to the moveable collateral registry (see financial infrastructure section) would increase trust and appetite for account receivable financing. This would ultimately provide an additional financing source for working capital to MSMEs and thereby enable them to more efficiently finance their business cycles. Alternative Delivery Models and Financial Innovation Supply Chain Finance (reverse factoring) is also not the creation of private equity funds; (ii) low supply- widely offered. Unlike traditional factoring, a reverse side activity, which makes it difficult for entrepreneurs factoring product represents a buyer-centric model of to find external sources of funding to support their accounts receivable finance.46 This direct relationship businesses; and (iii) an underdeveloped high-quality helps to bridge some information asymmetries and pipeline of investable companies on the demand- other risks (e.g. invoice fraud) and is what makes this side. With respect to potential institutional investors model especially well adaptable for MSME finance in the private equity/venture capital (PE/VC) industry in developing markets. the supply is almost inexistent. The domestic pension funds nor the insurance companies appear to be Agricultural warehouse receipts financing is also eligible to invest in alternate assets, nor do they missing from the market. As the country further seem to have the capacity to do so. According to develops infrastructure in the agricultural sector, the World Bank Albanian Venture Capital Ecosystem a vision about the nature of warehousing capacity Diagnostic report (WB VC Report), the multilaterals development in Albania will be needed. appear to be have been the most active partners in Albania, albeit to a very small degree. The World Albania does not currently have the comprehensive Bank’s Enterprise Development and Innovation and well-developed venture capital ecosystem Facility program, along with the European Bank for required to support business innovation, productivity Reconstruction and Development (EBRD) and its gains, and sustainable economic growth. This is the subsidiary, the European Investment Fund, have co- result of a combination of factors including: (i) lack invested in South Central Ventures, an early stage of a legislative/regulatory environment conducive to and growth VC fund focused on Albania and the 46 In the case of reverse factoring, the lender purchases accounts receivables only from specific informationally transparent, high-quality buyers. The factor only needs to collect credit information and calculate the credit risk for selected buyers, such as large, internationally accredited firms. Like traditional factoring, which allows a supplier to transfer the credit risk of default from itself to its customers, the main advantage of reverse factoring is that the credit risk is equal to the default risk of the high-quality customer, and not the risky MSME. This arrangement allows creditors in developing countries to factor “without recourse” and provides low-risk financing to high-risk suppliers. 22 | 2. Overview of the Supply Side countries of the former Yugoslavia. Of its 40 million though act as incubators, providing office space and euros fund, which closed in late 2015, 1.5 million some training but little or no financing.47 euros was earmarked for seed-investments in start- ups (up to 100,000 euros per investment) and shared Online banking and POS services are increasingly within targeted markets. widely available, but penetration of digital credit and digital financial services in general is very low. Banks Limitations also exist on the demand side for PE/VC recently started investing more in digital channels investments. The small pipeline of potential investee (on-line banking primarily), and POS services are companies is attributed to the lack of entrepreneurial becoming more and more accessible. However, the attitudes that do not reward risk-taking behavior. level of innovation and uptake of digital payments These challenges are reflected in the fact that the is still very low which undermines the potential to tech startup sector in Albania is estimated to have reduce information asymmetry by collecting and a total of only 50-60 groups with innovative ideas, processing alternative (payments) data, decrease compared to other countries in the region that can costs of transactions by lowering cash dependence, offer a larger pipeline. Incubators and accelerators and ultimately increase tax revenues through more can play an important role in helping develop the transparency on the market. This is primarily due to entrepreneurial environment and provide support the high costs of POS services, lack of disruptors to inexperienced graduates who want to succeed pushing incumbent players to innovate, a lack of in business. Albania has no accelerators as strictly access points in rural areas, and the prevalent cash- defined, that is organizations that provide equity based culture (e.g. unwillingness of many merchants financing, co-location, intensive mentoring, and to accept electronic payments). help with networking activity. Several operations do Recommendation Authorities should create a favorable framework for Greater support should be available for innovative Fintech to stir competition and develop innovative firms. Programs in the form of co-investment products. Different types of frameworks and tools exist VC and seed funds should be developed. for authorities to stimulate Fintech and innovation in Mentoring-based “investment readiness” training the market. In this respect, implementation of the for companies receiving financial support/grants EU PSD II Directive and establishment of a clear and should be established. This should focus on ensuring transparent framework of licensing of innovative consistency in financial reporting and forecasting, providers as well as their access to the financial sector developing a complete “pitch deck” with standard infrastructure in general should be supported. A information required by investors, and improving Fintech strategy should be developed and adopted presentation and negotiation skills. Development focused on identifying barriers and opportunities to of accelerator programs linking innovative firms the development of financial innovations in Albania with potential investors, business skills trainers, and proposing solutions and actions that will enable and mentors should also be prioritized to support financial services to reach greater numbers of low- creation of sustainable demand of innovative start- income individuals and small firms at lower cost and ups. risk. See Box 2 for further detail on different types of approaches to promote Fintech and financial innovation. These examples based on the WB VC Report include Yunus Social Business, Talent Garden, Protik ICT Resource Center, Albanian Innovation 47 Accelerator and Tirana Business Park 2. Overview of the Supply Side | 23 Box 2. Different approaches to promote Fintech and financial innovation Policymakers in developed countries and increasingly in the developing world have adopted a wide variety of policies and tools to promote financial innovation: •• Innovation hubs: financial regulators offer assistance to firms not used to dealing with financial regulations and/or which have doubts as to whether certain regulation apply to their activities. •• Regulatory sandboxes: financial regulators offer a controlled environment for testing financial innovations that meet certain criteria. Sandboxes typically lower barriers to testing within the existing regulatory framework, while ensuring participating customers, institutions, and the broader financial system are appropriately protected. If, after sandbox testing, the firm wants to offer its services to the wider market, it shall comply with existing regulatory frameworks applicable to that type of activity. The regulatory sandbox approach also enables regulators to closely observe the innovations in a live environment and thereby have a better understanding of the risks and opportunities. This could also lead to fine-tuning regulatory frameworks. •• Public-private partnerships: public authorities support private entities and create a forum for incumbents and start-ups to exchange resources, know-how, and experiences and cooperate in the funding and development of innovative solutions. An agricultural warehousing capacity strategy The feasibility of regional e-platforms for the should be developed. Efforts to develop agricultural exchange/sale of repossessed collateral among warehousing should be accelerated and a feasibility lenders, with the aim to increase the efficiency study for development of warehouse receipt of movable collateral execution and hence its financing48, supporting agribusinesses in accessing perceived value, should be explored. The creation post-harvest finance for working capital needs, of regional e-platforms would improve the liquidity should be considered. The strategy should focus on of movable assets and increase execution value. necessary credit infrastructure (electronic register of Financial services providers may then be more willing receipts), regulation, and supervision of warehouse to use it as collateral or develop various leasing receipt financing as well as establishment of a product lines for tourism, agriculture, and trade. guarantee fund serving as a performance guarantee in case of fraud by the licensed warehouse operator. 48 Warehouse receipt financing is a collateralized commodity transaction where the goods themselves provide security for the loan. This type of financing allows lenders to immediately sell off a very liquid asset, namely the commodities they grow, if a farmer defaults on the loan. The underlying collateral is usually a soft commodity like grain. 24 | 2. Overview of the Supply Side 3 GOVERNMENT POLICIES AND PROGRAMS IN SUPPORT OF MSME FINANCE 3. Government Policies and Programs in Support of MSME Finance | 25 Government Strategies and Policies The Government is committed to improve MSME A coordination structure to facilitate implementation access to finance and in general to enable economic of initiatives and regulatory reforms is required. development and MSMEs’ contribution to economic There is a piecemeal approach to MSME access growth. Albania has introduced many laws over the to finance development and coordination of last decade, and as a result it has a fairly developed donor driven projects. Given limited resources legal and regulatory framework to support the creation and capacity scattered through various agencies of various financial products suitable to finance the and public institutions, an organized, transparent, needs of MSMEs. Relevant examples include laws and accountable public stakeholder coordination on secured transactions, financial leasing, factoring, structure is important to ensure access to finance and late payments. Additional effort now needs to be activities across all major sectors of the economy. invested in effective implementation of the reforms. Implementation of initiatives and regulatory reforms The Government has developed and is approaching needs further strengthening. Reforms can appear the implementation phase of several national more focused on complying with international strategies which are relevant for MSMEs. The standards and guidelines rather than addressing an Business and Investment Development Strategy for identified issue. Implementation of several crucial the Period of 2014-2020 has a particular focus on access to finance reforms seem to have been MSMEs. It identifies the development of MSMEs suboptimal. For example, the uptake of usage of as a key factor for the economic development of factoring did not follow the enactment of the factoring the country, including through the promotion of law, payment practices have not yet reflected the late innovation in the MSMEs sector. Further, it underlines payment law, and movable collateral lending did not MSME financing as a constraint for the development substantially develop following the implementation of the sector and envisages the scaling up of existing of a secured transaction system. government and donor funded programs to support MSMEs. Public Sector Funding for MSMEs, Credit Guarantee Schemes, and Donor Interventions While several government programs to support Ministry of Finance and Economy to support MSMEs MSMEs finance are in place, these are relatively access to finance innovation. However, the grants it small with limited impact. The Government has offers are of very small amounts (most of them are set up and runs several financial programs (direct less than 10.000 Euros with the ones concerning subsidies or other types of support) through various start-ups/ innovation being less than 2000 Euros). Governmental Agencies, such as the Agency for AIDA, has very small programs, reaching between Research, Technology and Innovation and the 60 to 90 SMEs per year (between 2014 and 2017). Albanian Investment Development Agency. Limited It manages several funds through which it disburses funds, lack of visibility, and poor coordination of grants: (i) Competitiveness fund; (ii) Startup fund; (iii) these programs has produced limited results. For Innovation fund; and (iv) Tourist entrepreneurship example, the Albanian Investment Development fund. The average disbursed grant goes from 9.500 Agency (AIDA) is an agency sub-ordinated to the USD in 2016 to 5100 USD in 2017. Less than 1 26 | 3. Government Policies and Programs in Support of MSME Finance percent of Albanian MSMEs received a grant or a •• EBRD (operational since 2016): This is a non- subsidized loan in 2017.49 A number of donor-funded sector specific guarantee fund put in place by the interventions also aim to support MSMEs access to EBRD to stimulate lending to MSMEs. It is unfunded finance, but they appear to lack coordination among and is rolled out in partnership with several donors and target different areas and sectors.50 financial institutions, including the biggest banks. Funding and support for MSMEs varies widely in its In addition, EBRD has a framework operation of amount and nature, with both gaps and overlaps up to EUR 100 million for the implementation and only very limited joint and coordinated focus of the Albania Agribusiness Support Facility. on priority sectors.51 This consists of a combination of credit lines for agribusiness lending and unfunded risk-sharing Some of the available programs also lack appropriate facilities for agribusiness loan portfolios of business advisory services to leverage the provided selected partner financial institutions in Albania. It lending. Programs that target the development of also holds a senior unsecured loan of up to EUR 5 particular sectors in parallel with supportive business million to NOA, a non-bank microfinance lending advisory services would increase the bankability of institution, for on-lending to agribusinesses – MSMEs. the first project under the Albania Agribusiness Support Facility. In addition to direct support through subsidies and grants, some donors have set up specific guarantee There is a strong demand and appetite for partial schemes to help support MSMEs finance in Albania. credit guarantee schemes and other types of credit Briefly, these schemes cover the following: enhancement funds in the market. While larger •• Albanian Guarantee Fund (within the Italian- banks prefer unfunded guarantees, smaller ones and Albanian Program for SME Development since MFIs desire funded resources (wholesale credit lines). 2009): This Guarantee Fund was set up under the As mentioned previously, the Albanian financial Italian-Albanian Program for the Development of sector is extremely liquid and interest rates are low; Albanian SMEs. It seeks to provide guarantees however, Albanian banks are reluctant to lend to in the form of collateral to stimulate credit from MSMEs as they perceive the sector as risky and financial institutions to MSMEs that face difficulties there is a limited secondary market for movable and in accessing bank loans due to insufficient immovable collateral. Considering liquidity issues guarantees. This guarantee fund is connected are not a problem, unfunded guarantee schemes are to the subsidized loans given to MSMEs to buy preferred by the larger banks in Albania. For smaller Italian goods with a percentage of the proceeds. institutions (smaller banks, SLAs and MFIs) funded In terms of funding i) the credit line amounts to credit lines should be encouraged. EUR 25 million; ii) the guarantee fund amounts to EUR 2.5 million; and iii) a grant of EUR 1.7 million While some interventions target the rural / for capacity development support to the MoE. agricultural sector, none of the reviewed financial support programs or guarantees currently support •• The Rural Credit Guarantee Fund (operational introduction of agricultural insurance. The lack of since late 2015): This is a guarantee fund set up agricultural (yields or weather) insurance is limiting by the KfW to encourage banks and non-bank agricultural lending as banks are particularly reluctant financial institutions to provide financial services to to lend to farmers due to the high risks of unmitigated farmers and rural businesses in Albania. The fund natural disasters or lack of skills negatively influencing also supports tailor-made technical assistance to yields. Despite this need, no government program the fund’s partner financial institutions in order nor donor funded intervention appears to focus on to increase their willingness and capability to developing agricultural yield or weather insurance. provide financial services to rural MSMEs. 49 European Commission, Survey on the access to finance of enterprises – Analytical Report 2017. 50 For example, EU has a program to promote and assist start-up business and promote innovation. The Italian Cooperation has partnered with several financial institutions to set up a set of subsidies to lower interest rates which does not target any particular sector but have a sole requirement to be using part of the proceeds of the loan to buy Italian products. 51 An exception in size is the joint EU –GoA Instrument for Pre-Accession Assistance in Rural Development (IPARD) program. The program has approved a budget of EUR 71 million from EU and EUR 24 million grant from the GoA (75 percent EU and 25 percent GoA). The total EUR 94 million grant is available for investments in rural areas during the period 2014 – 2020. Utilization of this fund will require increased efforts both by the GoA as well as the financial services providers in order to find and train agribusiness to be able to extend funding under the program. 3. Government Policies and Programs in Support of MSME Finance | 27 Recommendation A dedicated unit within the MOFE should be created and target donor activities towards agreed upon to promote MSMEs development. The unit should development goals. Working holistically with all coordinate the development and implementation relevant public and private sector stakeholders the of MSME focused policies, consolidating as well as unit would increase the efficiency of the available coordinating financial support funds, and integrating capacity and resources across various agencies and activities focusing on MSMEs across all public institutions. sector stakeholders. It could effectively coordinate Box 3. WB Principles for Public Credit Guarantee Schemes for MSMEs Public credit guarantee schemes (CGSs) are a common form of government intervention to unlock finance for MSMEs. More than half of all countries in the world have a CGS for MSMEs and the number is growing. CGSs can contribute to the expansion of MSME finance. They may also generate positive externalities by encouraging banks and non-bank financial institutions to get into the MSME market, thus improving institutions’ lending technologies and risk management systems. However, CGSs may add limited value and may prove costly when they are not designed and implemented well. In January 2015 the World Bank Group and the Financial Sector Reform and Strengthening Initiative, in coordination with the SME Finance Forum, convened a global task force to identify and draft principles for the design, implementation, and evaluation of public CGSs to improve access to finance for SMEs. The 16 principles cover four key areas that are critical for the success of CGSs. Legal and regulatory framework Operational framework 1. Establish the CGS as an independent legal 9. Clearly define eligibility and qualification entity. criteria for SMEs, lenders, and credit instruments. 2. Provide adequate funding and keep sources transparent. 10. Ensure the guarantee delivery approach balances outreach, additionality, and financial 3. Promote mixed ownership and treat minority sustainability. shareholders fairly. 11. Issue partial guarantees that comply with 4. Supervise the CGS independently and prudential regulation and provide capital relief effectively. to lenders. Corporate governance and risk management 12. Set a transparent and consistent risk-based 5. Clearly define the CGS mandate. pricing policy. 6. Set a sound corporate governance structure 13. Design an efficient, clearly documented, and with an independent board of directors. transparent claim management process. 7. Design a sound internal control framework to Monitoring and evaluation safeguard the operational integrity. 14. Set rigorous financial reporting requirements 8. Adopt an effective and comprehensive and externally audit financial statements enterprise risk management framework. 15. Publicly disclose non-financial information periodically. 16. Systematically evaluate the CGS’ performance and publicly disclose the findings. 28 | 3. Government Policies and Programs in Support of MSME Finance Figure 13. Functions and roles of the MSME unit MoFE - MSME Unit Unit to coordinate, promote and drive all MSMEs access to finance related activities including funding activities. MSME A2F Angel investor / VC CGS and other development Public sector networks - linked economic policies at various employees with to government/ BoA data on empowerment government training on MSME donor supported lending to funds (public agencies / donor business capacity Start-up innovation MSMEs sector, donors, initiatives - all building skills accelerators / mixed) sectors of economy mentoring programs BoA and MSME Existing credit Unit to work guarantee MSME Unit to take on a definition Existing policies to MSME Unit to promote schemes and stock of existing of MSMEs and be streamlined and the creation of funding programs human capital with streamline data coordinated by the networks linking these to be coordinated knowledge on collection and MSME Unit. types of interventions. and consolidated MSME finance. reporting to by the MSME Unit. inform policies and reforms. Improving coordination of existing public and Moreover, the development of agri-insurance donor-funded initiatives would be beneficial to products accompanied by business development increase economies of scale and promote linkages activities for farmers should be supported. Apart from with business advisory initiatives. To further promote sporadic attempts by local insurance companies in MSME finance, the GoA should rationalize the existing the past, the agriculture sector does not have access interventions based on a review of the efficiency and to affordable agriculture insurance products (such as reach of the existing programs, to avoid overlaps and yield or weather). Development of those products gaps, while at the same time ensuring that they cover can be supported through research / data collection, all priority sectors. Linkages with business advisory insurance model developing, increasing the network initiatives should be strengthened. of agricultural extension officers supporting farmers with knowledge and skills, and potential financial Promoting further development of partial credit support through premium subsidies. Business guarantee schemes based on international advisory services for farmers could be provided best practice to facilitate lending to MSMEs is through the network of financial services providers recommended. This would help further address (MFIs mainly) and non-financial conglomerates (such the perceived risks of lending to MSMEs. These as agricultural cooperatives) and linked to lending programs should be accompanied with simultaneous combined with agri-insurance products. business advisory and training activities. They should be established based on international best practices concerning governance, independence and sustainability, and any business capacity and financial capability programs should have clear success evaluation mechanisms built in (see Box 3). 3. Government Policies and Programs in Support of MSME Finance | 29 Using G2B payments to unlock finance Securing adequate cash flow to execute operations specifies that the creditor is entitled to interest profitably is one of the most critical issues facing payment in case of delay in payment for a good businesses across the world today, and Albania is or service without even the need to notify the no exception. Long payment terms and late payment debtor.57 The payment and interest under the law (arrears) for products and services put a heavy burden are considered an enforceable title.58 on MSME working capital management. A major cause of liquidity problems are long payment terms Interviews with the local private sector reveal that and late payments of accounts receivable, i.e. delays the late payment law is not yet adequately enforced in incoming cash flows after the sale of products and enterprises rarely seek enforcement for delayed and delivery of services. Based on discussions with payments (usually finally paid without interest). There local private stakeholders it appears that payments seems to be a lack of trust that a payee, particularly for products and services in Albania often have long a public entity, would pay another creditor (with and delayed payment terms. or without interest). Hence, making a cost-benefit analysis, many MSMEs accept late payments without The GoA has invested considerable efforts to tackle the due interest. Creditors do not seek enforcement the problem of arrears in public sector payments. against public companies, fearing either that courts The late payment law52, passed in 2014, follows other would not rule against the government or that they recent positive international examples (e.g. EU53, would not be awarded contracts in the future. This India54, Turkey55). In addition to the establishment pervasive lack of trust affects the ability of MSMEs of strict payment deadlines, the law provides the to trade with their invoices. Account receivables are automatic application of statutorily set amounts of difficult to be sold by MSMEs and there is no formal penalty interest in the supply of goods or services platform (market) where they could easily sell and from commercial undertakings to other commercial buy electronic invoices. undertakings and public authorities.56 The law also Recommendation Consider allowing public sector accounts payable cheap working capital finance. The potential volume to MSMEs to be offered for sale on web-based of finance on such a platform could attract Fintech invoice discounting platforms to further support companies to operate in Albania hence increasing access to working capital finance and to improve competition and bringing innovations to the rather payments liquidity in the country. This could have stiff market. Box 4 outlines examples of such reverse multiple positive effects. Payees accept having to pay factoring and invoice discounting platforms in other interest in case of delayed invoice payments, allowing countries. MSMEs to sell the invoices and receive relatively 52 Law No. 48/2014, On Late Payment in Contractual and Commercial Relations. 53 The Late Payment Directive, 2011/7/EU. 54 Act on Payment Terms in Commercial Contracts (30/2013). 55 Article 1530 of the Turkish Commercial Code, No. 6102. 56 Law No. 48/2014, On Late Payment in Contractual and Commercial Relations, Article 1. 57 Law No. 48/2014, On Late Payment in Contractual and Commercial Relations, Article 4. 58 Law No. 48/2014, On Late Payment in Contractual and Commercial Relations, Article 16. 30 | 3. Government Policies and Programs in Support of MSME Finance Adequate implementation and enforcement on how to apply and enforce the law. The strict of the late payment law should be ensured. The implementation of automatically applied minimum Government should build public confidence by penalty interest would also enable the financial sector improving application of the terms of the law to to properly ascertain the risk of providing finance public institutions, including paying interest when against accounts receivables and, hence, set realistic due. Stakeholder awareness of the scope and and more affordable pricing of such finance which application of the law should be enhanced, and is still perceived as too risky and too expensive in capacity should be built amongst the judiciary Albania. Box 4. Reverse factoring and invoice discounting platforms In addition to promoting a culture of prompt payment in private and public sector, local MSME suppliers should also be provided with viable and realistic financing options enabling them to bridge their existing needs for cash injections. This can effectively be done through promotion of financial instruments that are well designed to allow efficient and cheaper access to working capital finance leveraging MSME relationship with their large private and public sector customers, such as factoring, invoice discounting, and reverse factoring. A special type of receivables finance known as reverse factoring (or supply chain finance) is especially well placed to offer such access to working capital finance. Development of platforms for reverse factoring or invoice discounting that attract substantial numbers of large buyers can open up access to working capital finance to a vast number of MSMEs located in remote areas of the country and reduce overall costs of financing transactions (due to the increased competition between available financiers). In the case of reverse factoring, the financier purchases accounts receivables only from selected MSME customers of its large corporate or public sector client based on a pre-agreed financing program. Thereby the financier increases its risk exposure to one customer, but the costs of acquiring information and assessing credit risk are lower and typically only high-quality receivables are accepted. Reverse factoring is suitable for financing of receivables from accredited firms that are more creditworthy than the MSME seller, such as large firms. Public sector payables for goods and services (central government, local government, specialized agencies, as well as state owned enterprises) are also very suitable for this type of finance. The most apparent benefit of reverse factoring for an MSME supplier is the access to immediate cash at lower rates (since the financier takes a risk position against a large buyer and not an MSME supplier). By selling the accounts receivable to a financier MSMEs are able to rapidly convert accounts receivable into another asset – cash. One of the benefits for the buyers is that in exchange for working capital financing, the MSME sellers may agree on more favourable sales terms. Reverse factoring programs are made particularly efficient and accessible to many MSMEs when offered through an on-line platform interconnecting buyers, financiers, and MSME suppliers. These platforms could be owned and operated on a private basis or specifically developed for a national body supporting MSME access to finance such as a development bank. The Government could support the creation of an initial reverse factoring market by allowing public sector payables to be listed and financed on such platforms. With enough potential business volume created, private start-up Fintech investments could become justifiable and attractive. This could in turn lead to further development of Fintech services providing the same type of finance in the private sector domain, as well as gradually developing other features and potential products for the Albanian market. These additional products and benefits could include processing and usage of alternative credit information (big data), increased formality in microbusiness (through use of transaction accounts as a condition to access finance), on-line invoice discounting (sale of receivables on a secondary market), and progressively to even equity crowdfunding and peer to peer lending. 3. Government Policies and Programs in Support of MSME Finance | 31 Two examples of public initiatives to create platforms for nation-wide public use are Mexico’s development bank NAFIN reverse factoring program, and a similar recently introduced Indian TreDS model. An interesting regional example is the Bulgarian model for factoring municipal payables to contractors under PPP projects by the Bulgarian Development Bank. In response to lack of financing in the formal sector, NAFIN developed an electronic platform for reverse factoring through a program called Cadenas Productivas (productive chains). The productive chains program works by creating chains between large buyers and small suppliers. It started out as a public sector institution and after 8-10 years became a quasi-private sector entity. The role of NAFIN is only to provide a platform (to coordinate the on-line factoring services) and not to purchase receivables directly. It maintains an internet site with a dedicated page for each large buyer. Suppliers are grouped in ‘‘chains’’ to their buyers. NAFIN also plays a critical role in handling the sale and delivery of electronic documents. The suppliers and NAFIN sign a pre-agreement allowing the electronic sale and transfer of receivables. Additional contracts between the financiers and buyers and NAFIN define their obligations, such as the requirement for buyers to pay sold receivables to the financiers directly. Once a supplier delivers its goods and an invoice to the buyer, the buyer posts a negotiable document on its NAFIN webpage equal to the amount that should be factored. The supplier accesses the buyer’s NAFIN webpage and clicks on its receivable. Any financier that has a relationship with the buyer and the supplier and is willing to factor the receivable will appear on the next screen, along with a quote for the interest rate at which it is willing to discount this specific receivable. To sell its receivable, the supplier clicks on a shown financier and the amount of its negotiable document less interest is transferred to its bank account. When the invoice is due, the buyer pays the financier directly. All factoring is also done without recourse, which lets small firms increase their cash holdings and improve their balance sheets. The sale of receivables from the supplier to the financier and the transfer of funds from the factor to the supplier take place electronically. The electronic platform allows all commercial banks and MSMEs to participate in the program and gives national reach to regional banks and access by rural firms to banks. In addition, it allows multiple financiers to electronically compete for a supplier’s receivables. The Reverse Bank of India has recently introduced a legal and regulatory framework that would allow the start-up of Fintech reverse factoring platforms on a national level. This followed the introduction of the Factoring Regulation Act of 2011 which addressed some major concerns of low penetration of factoring in India, caused among other things by high stamp duty on assignment, an inadequate legal framework, and a lack of clarity on the roles and responsibilities of parties to the transactions. The envisaged reverse factoring process is almost identical to NAFIN. The “Trade Receivables Discounting Systems” (TReDS) are electronic platforms, operated by an independent, registered / authorized entity. Receivables Exchange of India Ltd (RXIL) launched India’s first TReDS on January 09, 2017. RXIL is a joint venture promoted by the Small Industries Development Bank of India and National Stock Exchange of India Limited. In June 2016 Axis Bank Ltd, India’s third-largest private-sector lender, formed a joint venture with Mjunction Services Ltd to start up a TReDS operation in India. Several other companies have also started the process. The Bulgarian Development Bank purchases receivables of construction companies which have concluded contracts with municipalities pursuant to the procedures of the Bulgarian Public Procurement Act. The projects should have been correctly completed and the relevant certificates and invoices proving the payments made should have been issued. This reverse factoring mechanism enables the companies to transfer the debts due by the municipalities in their capacity as contracting authorities to the Bulgarian Development Bank by signing a debt purchase agreement. The bank requires the construction companies to provide evidence that the debts exist and that they are payable and recognized by the municipality. Many private invoice discounting platforms have also emerged in recent years across the world. These are online marketplaces for sale of receivables to interested investors (peer to peer or institutional investors). Receivable exchanges enable suppliers to individually sell (offer for auction) their receivables and gain quick access to working capital. 32 | 3. Government Policies and Programs in Support of MSME Finance 4 FINANCIAL INFRASTRUCTURE 4. Financial Infrastructure | 33 Credit Infrastructure The existing credit infrastructure could be improved To address this issue the banking association is to better respond to the financing needs of MSMEs as working with the EBRD to set up a credit bureau; well as the needs of financial institutions. While there but the timeline for implementation of the project have been ongoing reforms, the credit infrastructure is unclear and it is not known if non-bank payment in general could benefit from modernization. The service providers, mobile network operators, and current infrastructure has failed to take advantage utilities providers would be involved. of global technological advancements, such as the establishment of fully on-line accessible movable Figure 14. Overview of number collateral registries, uptake of electronic invoicing, of institutions reporting to the or harnessing alternative data for credit referencing Credit Registry purposes.59 31 35 39 25 27 29 The credit reporting system (CRS) has been 20 significantly improved over recent years, but still lacks credit referencing properties and does not collect all potentially valuable credit data. The 2010 2011 2012 2013 2014 2015 2016 current CRS is based on a credit registry operated by BoA. Since April 2016, all banks and other financial Source: Bank of Albania. institutions report loans, including loans subject to a judicial process, restructured loans, and sold loans, There is no specific legal framework that would which are also identified in the borrower’s report that support development of privately-operated credit is generated by the credit registry. Thanks to these bureaus. At present the Banking Law62 governs reforms, Albania is performing relatively well in terms the operation of the credit registry within BoA. of getting credit according to the World Bank Doing The regulation covers some important aspects Business Report 2018; in fact, it ranks better than such as data accuracy63, access to information, and countries like Croatia and Greece. While strength correction rights,64 but due to the secondary nature of legal rights (6) and credit registry coverage (at of a regulation it does not create a framework that 51.6 percent of adults) are higher than the regional would be applicable to the operation of private Europe and Central Asia average, the depth of credit credit bureaus. A credit reporting law would provide information is slightly lower than the average (6 vs. a comprehensive, transparent, and legally certain 6.3).60 framework regulating the type of data which can be reported, collected, and analyzed, as well as Despite recent positive developments, the BoA credit obligations of financial institutions and rights of registry coverage remains limited to traditional data consumers, such as their right to access their data on borrowing, although a project to create a credit and request, rectification, cancellation and oppose bureau is reported to be underway. Albania does any incorrect data for both public credit registry as not yet have private credit bureaus operating and well as for potential private sector entrants into the the BoA credit registry collects information only from market (credit bureaus). credit providers.61 The potential of payment data and utility bills has not yet been explored, limiting the ability of financial institutions to conduct credit risk- assessments and develop credit scores for MSMEs who have been outside the formal credit market. 59 For example, it is estimated that Total Transaction Value in the “Alternative Lending” segment amounts to US$6m in 2018 in Croatia and it is expected to grow to over US$11m by 2022; while in Serbia for 2018 it is estimated only at US$3m it is expected to increase to over US$18m by 2022. 60 World Bank, Doing Business Report, 2018, available at http://www.doingbusiness.org/data/exploreeconomies/albania#getting-credit. 61 The reporting entities as of mid-2017 were 16 banks and licensed NBFIs that are involved in lending and leasing 62 Law, No. 9662, dated 18.12.2006, On Banks in the Republic of Albania, Article 127. 63 Bank of Albania, Decision N. 67 dated 13.10.2010, On the Information Content and Functioning of Credit Registry at the Bank of Albania, Article 16. 64 Bank of Albania, Decision N. 67 dated 13.10.2010, On the Information Content and Functioning of Credit Registry at the Bank of Albania, Article 10. 34 | 4. Financial Infrastructure The level of satisfaction with the services provided The limited secondary market for movable collateral by the moveable collateral registry (Registry of is an additional bottleneck for the development Securing Charges) is reported to vary amongst of lending against movable collateral. The shallow financial institutions. The Registry is online, but secondary market represents a serious constraint to does not offer the ability to file notifications nor to the re-sale of repossessed collateral; in fact, beyond consult the registry in real time. Only public notaries immovable property, financial institutions appear have real-time access to the registry. The fact that to be taking moveable collateral more as a moral registration is not done in real time creates issues pledge rather than for their economic value. The especially for accounts receivable finance since market for repossessed collaterals in Albania is factoring (assignment) of accounts receivable very shallow and it is difficult to sell a repossessed needs to be registered in the registry to be valid. asset. While the sub-regional market could provide Delays between submission of notice and the actual an opportunity to deepen the re-sale market for registration add additional time and administrative repossessed collateral, there are no formal platforms burden on these types of transactions. Moreover, to access it, and only large financial institutions with a the notary fees and the number of procedural steps strong presence in the entire sub-region have begun needed to create collateral when public notaries exploiting this option. need to be involved present further hinderance. Payments Infrastructure While BoA is actively working on improving the The uptake of electronic money is still very limited. National Payment System, the retail payments Only one non-bank e-money issuer is operating infrastructure is still not developed to a satisfactory in Albania. In fact, the uptake of e-money has not level. Although BoA operates a real time gross attained the results expected and providers which settlements system and automated clearinghouse, originally entered the market, such as M-Pesa, exited at present there is no local infrastructure in place for the market completely. In addition to remittance the exchange of payment card transactions. In most services, non-bank payment services providers cases this is done via an international card network currently operating in the market mainly offer bill which increases the costs of these transactions.65 payments, and peer to peer transactions are mainly For instance, according to anecdotal information done informally. received from the Albanian Tourism Association, in Albania a POS transaction cost is 2.5 percent to 4 percent, while in Montenegro it is 0.7 percent to 1.2 percent. In addition, there is no system of e-money issuer to e-money issuer interoperability, or interoperability between e-money accounts and bank accounts. It is possible to withdraw cash/pay with a Visa or MasterCard branded card issued by a local bank at the ATM/POS terminal of another local bank as 65 most of these card acceptance devices in the country are “interconnected” via the Visa and MasterCard global processing networks. 4. Financial Infrastructure | 35 Debtor’s and creditor’s rights Albania performs above the regional average and Unpredictable and slow court decisions contribute more advanced economies such as Greece and to the perception of riskiness of lending and hinder Croatia when it comes to creditors’ rights.66 Although MSME access to credit. There is a market perception Albania had a reasonably modern insolvency that courts are slow, unpredictable, and subject to framework on paper since 2002, it has been scarcely external influence. Moreover, it appears that there are used by businesses. A new bankruptcy law was issues with the enforcement of contracts and court approved in 2016 with support from the World Bank orders. Recent reform to the Private Bailiffs Law67, Group. The law which is yet to be efficiently applied in which would introduce success fees related to bailiffs’ practice, awaiting approval of accompanying bylaws, performance, is not yet implemented in practice, is expected to bring the following improvements: awaiting the amendments to the fees regulations (a) strengthen creditors’ rights, including to ensure issued jointly by the Ministry of Finance & Economy further creditor participation in the process and and Ministry of Justice. Private bailiffs are currently an adequate regime of priorities, (b) bring an paid large remuneration upfront leaving them little expedited reorganization mechanism that allows incentive to enforce court orders. court confirmation of workouts (‘pre-packaged plans’ or ‘pre-packs’), (c) allow for post-filing financing, (d) The 2014 Value-Added Tax Law introduced improve the company reorganization process, and electronic invoices as equivalent to paper invoices (e) simplify and strengthen the system of avoidance but the uptake is still very low. In order to issue actions against fraudulent transactions. electronic invoices and to ensure the authenticity of the origin and the integrity of the content of the Immovable collateral is the preferred type of risk electronic invoice, taxable persons must use an mitigation in the market, but the secondary market advanced electronic signature or electronic data for on-sale, especially for agricultural land, is limited interchange. However, uptake of e-invoicing seems and there can be issues around multiple legitimate to be very low. There is no efficient public register of claims on the same land. For nearly all types of loans, electronic invoices available to be used for registering financial institutions demand immovable collateral as accounts receivable financing transactions. Possible guarantee; however, these are often undervalued as use of the movable collateral registry for this purpose the secondary market is also shallow for immovable is hindered by it not allowing seamless real-time collateral. Following the “construction crisis” and registration. spike in NPLs many financial institutions found themselves having to manage immovable properties due to a lack of buyers. Further, it is often very difficult for farmers to use land as a collateral as there can be issues with registration of property, or multiple claims on the same land lot. 66 World Bank, Doing Business Report, 2018, available at http://www.doingbusiness.org/data/exploreeconomies/albania#getting-credit. 67 Law No 10 031, dated 11.12.2008, For the Private Bailiff Office. 36 | 4. Financial Infrastructure Recommendation The movable collateral registry should be improved Improvements in credit infrastructure and product to enable seamless real-time access and registration innovation need to be accompanied by increased of notices of creation of security interests. Also, the capacity of the judiciary to interpret and efficiently need for participation of notary publics in movable enforce creditors’ rights. The ability to effectively collateral contract creation / registration process, execute collateral is of the utmost importance and and applicable fees charged should be reviewed to efforts should be invested to explore possible decrease administrative burden and costs of lending solutions for the rather shallow secondary market. A against movable collateral. feasibility study on the creation of regional e-platforms for exchange/sale of repossessed collateral among An enabling legal framework allowing for the lenders could be explored to increase the efficiency development of private credit bureaus and of collateral execution and hence its perceived value. alternative data processors (e.g. postpaid utility services, payments data, etc.) with appropriate data and consumer protection safeguards should be developed. With the progressive digitization of the economy, financial institutions should be able to adequately exploit digital transaction data as well as utility payments within a framework adequately guaranteeing the privacy and protection of consumers’ data. Payments system regulation and infrastructure should be introduced enabling interoperability on various levels and facilitating the development of alternative payments providers and/or products. This will incentivize use of electronic payments, facilitate development of innovative approaches to finance, reduce transaction costs for MSMEs, and increase e-commerce. Improvements in infrastructure should be accompanied by awareness raising campaigns and measures, especially in the trade and tourism sectors but also in other sectors of the economy with large volumes of payments. Enabling interoperability between e-money accounts, and e-money accounts with bank accounts would support innovation and the development of alternative payment products, such as for example white label POS68 and Quick Resolution (QR) codes. This would in turn have potential to reduce transaction costs for MSMEs and increase the attractiveness of electronic payments for users, influencing more merchants to accept electronic payments. 68 POSs not affiliated with any bank or any international card network. 4. Financial Infrastructure | 37 Box 5. QR code payments Over the past few years, technologies have been transforming the payments landscape, providing payers and payees with a wide variety of new methods through which e-payments can be made. Recognizing the fast-paced change, in 2017 the Committee on Payments and Market Infrastructures expanded its Red Book statistics to begin collecting information on online and contactless payments.69 When revising the indicators, it took a broad interpretation of contactless payments and included QR codes as one type, showing that this payment method is becoming common. What are QR codes and how do they work? QR codes are two-dimensional bar codes with data encoded within, which allow a mobile phone or tablet (with a camera able to read such codes) to access information about a product, service, or person by scanning it. In the payments sphere, two types of codes have been adopted to facilitate merchant payments: •• Consumer-presented codes (linked to the customer’s account): when paying the customer shows the QR code to the merchant who optically scans it; and •• Merchant-presented codes (linked to the merchant’s account): the merchant displays the code and the customer must use his/her mobile device to read it. Regardless of the type of code, several steps are required to effectuate a payment using a QR code: i) using an appropriate device with a relevant app the customer (or the merchant) scans the QR code. The app can be developed directly by a payment service provider (PSP) or another app connected to the customer’s (or merchant’s) account; ii) the option to make a payment using a QR code is selected in the app to open the camera; iii) the payment amount is entered; and iv) the authentication process is completed. What are the benefits of using QR codes for merchant payments? More and more PSPs and regulators are advocating or encouraging for the use of QR codes to make payments as a practical and more convenient way to introduce e-payments in predominantly cash-based societies. These solutions, in comparison to card-based payments, are more infrastructure light, as POS machines are not needed, making them cheaper and easier to be adopted. Furthermore, merchant-presented codes can be safer for clients, as consumers do not share any details with the merchant, eliminating the risk of card details being copied when using POS. What are the downsides of using QR codes for merchant payments? Although using QR codes does not require additional instruments like cards, the payment experience may not be seamless, as it involves prerequisites (having the app) and several steps at the moment of payment. Similarly, while QR codes eliminate the need for POS terminals, their bi-dimensional nature requires the usage of a smartphone camera which not all users or merchants necessarily have. Finally, while for merchant-presented codes the consumers do not share their information, when making payments they are redirected to a payment page, app, or internet browser, posing the risk that the code presented may have been replaced with a malicious code containing viruses or risks of fraud as the transaction may take place in an unsecured environment over the internet. How are regulators and other entities responding? Regulators and other entities are responding in different ways to this phenomenon: some regulators have banned or partially banned the use of QR codes70 for electronic payments, others are working with other stakeholders on developing a common code and issuing standards to avoid fragmentation and to ensure simple, swift, and safe transactions for everyone.71 69 Committee on Payments and Market Infrastructures , Methodology of the statistics on payments and financial market infrastructures in the CPMI countries (Red Book statistics), Bank for International Settlements, August 2017. 70 Notably, the People’s Bank of China temporarily banned QR code payments in 2014. 71 The Monetary Authority of Singapore, through the Payment Council has set up a task-force to develop a Common QR code for Singapore. Similarly, NACHA in the United States and NPCI in India have issued guidelines on the process of a QR code transaction. 38 | 4. Financial Infrastructure 5 REGULATION AND SUPERVISION OF THE FINANCIAL SECTOR 5. Regulation and Supervision of the Financial Sector | 39 BoA is the sole regulator and supervisor of banks, to limit the number of players in the market, and SLAs, MFIs, leasing, and factoring companies. The BoA has additionally issued a comprehensive set Banking Law72 lays down the regulatory landscape of risk management rules for non-deposit taking for providing credit products and related financial institutions from maximum exposure rules74 to overly services in the country. A separate law on SLAs73 prescriptive capital adequacy and provisioning provides provisions for their creations, governance, requirements for lending institutions (MFIs)75 and risk management, supervision, and liquidation. There factoring companies.76 is no specific law for other MFIs, their licensing and prudential regulations and supervision is referenced Financial institutions which should be suitable to under the Banking Law. develop various products targeting MSMEs, such as leasing, factoring, or supply chain finance, are also The Banking Law specifically regulates banks and prudentially regulated despite the fact that they do banking activities. It defines banking business as not take deposits. Leasing companies have rather any business which implies the receiving of funds high capital and reporting requirements although from the public by accepting them as deposits, or they are not allowed to take deposits. These types by borrowing from the public or other banks and of companies are not in a credit intermediation using these funds to grant loans, advances, and credit business (deposit taking and on-lending) and these facilities, and by investing in other means. Further, requirements are a burden which act as a deterrent it defines which institutions have the right to carry to both international and domestic investors in out banking activities. It provides minimum capital this usually lucrative and MSME supportive type of requirements and other prudential requirements. As financial service. provided in the Law, the BoA licenses and oversees banks. Albania has a stricter approach to regulation of factoring activities than other countries in the region. SLAs legislation includes the calculation of risk- Some even feel that factoring is over-regulated in weighted assets which may affect their ability Albania considering its risks. Albania is the only to lend. The regulation on the licensing of SLAs country in the region that has liquidity standards, establishes licensing conditions, financial activities classification rules and provisioning requirements allowed by SLAs, and capital requirements. While the applicable to factoring companies. However, there are variation in capital requirements, as shown in Table no capital adequacy rules nor mandatory exposure 7 below, between MFIs, banks, and SLAs is justified limits, except for related persons exposure.77 by their activities there is some divergence in terms of calculating risk weighted assets between banks Only banks and SLAs are allowed to take deposits; and SLAs. For instance, exposure to international however, all credit institutions are prudentially organizations, including loan guarantees by regulated and supervised by BoA. SLAs are only guarantee schemes, does not affect the weighting allowed to receive deposits from and provide coefficient for SLAs but does for banks. Similarly, lending to their members. The legal framework for mortgages on real estate are weighted differently; microfinance is established under the Banking Law loans guaranteed by a real estate mortgage should and the Regulation on “Licensing and Activity of have a risk co-efficient of 35 percent for banks and Non-Bank Financial Institutions”. On top of restrictive 50 percent for financial cooperatives. prudential requirements, growth of MFIs have been hindered by limited options to raise funding. All While rules on risk management are present for institutions, including non-deposit taking ones, all types of financial institutions; rules applicable have initial capital requirements (shown in Table 7), to non-deposit taking institutions may be overly specific capital adequacy ratios, and are prudentially restrictive. NBFIs have initial capital requirements, supervised by BoA. 72 Law, No. 9662, dated 18.12.2006, On Banks in the Republic of Albania. 73 Law, No 52/2016, dated 19.05.2016, On the Saving and Lending Associations and their Unions 74 Bank of Albania, Decision No. 02 dated 17. 01. 2013, Approval of Regulation “On Risk Management in the Activity of Non-Bank Financial Institutions”, Article 7. 75 Bank of Albania, Decision No. 02 dated 17. 01. 2013, Approval of Regulation “On Risk Management in the Activity of Non-Bank Financial Institutions”, Article 11. 76 Bank of Albania, Decision No. 02 dated 17. 01. 2013, Approval of Regulation “On Risk Management in the Activity of Non-Bank Financial Institutions”, Article 15. 77 Bank of Albania, Decision No. 02 dated 17. 01. 2013, Approval of Regulation “On Risk Management in the Activity of Non-Bank Financial Institutions”. 40 | 5. Regulation and Supervision of the Financial Sector Table 7. Initial capital requirements Entity Minimum initial capital Bank 1 billion ALL Non-bank financial institutions that may conduct one of the following financial activities: All lending types 100 million ALL Factoring 20 million ALL Leasing 20 million ALL Payment services and money transfer 20 million ALL Guarantees and commitment 20 million ALL Foreign exchange 1.5 million ALL Advisory, intermediation and other auxiliary financial services of all the 10 million ALL above activities Microcredit financial institution 15 million ALL Non-bank financial institutions that purchase non-performing loans 50 million ALL Electronic money institutions 50 million ALL Savings and loans associations: When conducting only the activity of accepting deposits and granting loans 5 million ALL to the members of the association. When SLA also seeks to exercise at least one of these activities (all payment 20 million ALL and money transfer services; foreign exchange; financial leasing) Unions of savings and loans associations 20 million ALL Foreign exchange bureaus 1.5 million ALL Source: Based on legislation and Bank of Albania data Informal lending is widespread and common informally also represents a lost opportunity for in Albania. Borrowing informally leaves MSMEs development of the MSME sector as formal providers exposed to financiers without any systemic consumer of financial services such as banks or MFIs often offer protection. This is in turn then reflected in the lack various business support and training services that of transparency of pricing, clarity of contract terms, contribute to the improvement of productivity in and questionable collection practices. Borrowing other countries. 5. Regulation and Supervision of the Financial Sector | 41 Lack of financial and business capacity further informal lending. The financial consumer protection undermines access to finance, productivity, and framework is based on three regulations which focus potential for growth. Many MSMEs, especially almost solely on disclosure and transparency.78 There in the agricultural sector, lack understanding of is a lack of guidance to the supervised entities on how financial products and the potential benefits various to set-up complaints handling systems, and a lack of solutions might have for their business. There is also clarity about potential alternative dispute resolution a very weak demand for innovative IT solutions and channels in case of unsatisfactory resolution of e-commerce services in trade business and tourism the consumer complaint. The financial consumer which is partly linked to lack of proper products protection framework does not apply to MSMEs, or being offered but also to the prevalent cash based at least to micro enterprises which would face same culture. A lack of comprehensive financial consumer issues with imbalance of power and lack of financial protection regulation and its proper implementation acumen as individual consumers. There is also a lack contributes to the status quo of mistrust some MSMEs of rules and guidance on fair treatment of consumers exhibit towards formal financial services. that would encompass rules on, for example, sales tactics, affordability and suitability of products for Supervision and enforcement of financial consumer consumers, and collection practices. Further, no rules protection rules should be enhanced, and there is prevent or limit the widespread practice of informal no measure in the legal framework directly limiting lending. Recommendation Prudential regulation requirements for non-deposit material which can be used to train their clients during taking financial services providers should be relaxed, so called teachable moments (for instance when and the focus should shift instead to AML/CFT, fit clients approach them to ask for a financial service). and proper management, and financial consumer Albanian MSME lenders understand the value of protection. It is important to regulate non-deposit providing such support to their clients and many of taking institutions from a consumer protection, fit and them have, on an ad-hoc basis, invested some efforts proper management, and AML/CFT perspective, but into educating them. These private initiatives should as these institutions are not allowed to take deposits be supported through an organized approach at the from the public their prudential regulation and systemic level and leveraged by meaningful support. supervision may be less justified. It is recommended that BoA reviews the necessity of regulating non- The financial consumer protection framework deposit taking institutions with strict capital adequacy should be enhanced and expanded to cover micro requirements. Instead the maintenance of minimum enterprises. The system already provides for rules capital necessary for sound operations should be on disclosure and transparency, but rules on fair emphasized and regular reporting required on treatment of consumers (including financial advice exposures per sector and type of client to enable and product suitability) should also be adopted. efficient monitoring. Further, the Authorities should Guidelines for financial institutions on how to set- try to identify solutions that provide opportunities up their complaints handling function should be for non-deposit taking credit institutions to secure developed. Finally, since unregulated informal funding and thereby expand their lending capacities. lending is high and costly for MSMEs, a study on how to adequately prevent and regulate this sector MSME lenders should be supported to help improve from a consumer protection perspective should be MSMEs financial knowledge and capacity. The conducted and a set of concrete measures developed authorities will need to work with MSME lenders to and implemented. provide them with adequate training and educational 78 Bank of Albania, Decision No. 60, Dated 29.08.2008, On the Approval of the Regulation For the Minimum Requirements of Disclosing Information from Banks and Foreign Bank Branches; Bank of Albania, Decision No. 48, Dated 1.7.2015 Approval of Regulation On Consumer Credit and Mortgage Credit; and Bank of Albania, Decision No.59, Dated 29.08.2008 Approval of Regulation On Transparency for Banking and Financial Products and Services. 42 | 5. Regulation and Supervision of the Financial Sector