The "paradise" of quick loans is coming to an end, the Bank of Albania is preparing regulations that will limit lending

2024-06-17 07:27:00, Ekonomi CNA

The "paradise" of quick loans is coming to an end, the Bank of Albania

Illustrative photo

The Bank of Albania is working on regulatory changes, which are expected to bring significant restrictions on lending to microfinance institutions, especially those that provide quick loans.

Sources say that they are working with the World Bank consultancy to draft a regulation that aims to limit lending and the client base in consumer microfinance.

Some of the principles on which the new regulation will be supported will be an increased financial analysis of borrowers, the establishment of a credit scoring (scoring of borrowers) and limitation of the number of loans for a single borrower. The goal is to have the new draft regulation ready by early fall.

These changes are coming after a growing pressure from the public opinion and the Parliament of Albania, driven especially by the criminal case brought against a financial institution of collecting bad loans and the executors connected with it, for legal violations in the process of collecting these obligations.

The draft resolution of the Assembly "On the assessment of the activity of the Bank of Albania for the year 2023", which also includes the main recommendations for the institution's work during 2024 and beyond, requires engagement in drafting the necessary legal changes, with the assistance of international institutions, for consumer protection in the activity of non-banking financial entities.

According to the draft resolution, the Bank of Albania is also required to analyze the regulatory framework for the licensing of Non-Bank Financial Institutions, with the aim of further strengthening the criteria for licensing these entities, as well as to draft a licensing policy document for banks and non-banks, where to take into account elements such as consumer protection, the country of origin of the ultimate owners, experience in the European financial systems of the subjects applying for licensing.

Also, the Bank of Albania must ensure the improvement of the transparency indicators of all institutions that are licensed by the Bank of Albania, especially Non-Bank Financial Institutions, so that the information reflected by them is complete, in a simple language and easily accessible to consumers, through all communication channels, whether physical or digital.

Non-banking financial institutions doubled their profit last year

Non-bank financial institutions earned five billion lek or about 48 million euros last year. According to data from the Bank of Albania, the profit of these institutions increased by more than two times compared to a year ago.

However, it should be noted that part of the profits of non-banking financial institutions may be related to the dividends received from the companies in which they are shareholders. Two of the non-bank financial institutions are shareholders of commercial banks and their profits are also affected by the distribution of dividends of these banks. Also, this includes not only the profit of lending entities, but also those of payment services.

By the end of 2023, 27 licensed non-bank financial institutions were operating in Albania. They are divided into two main activity profiles: lending institutions (including leasing, factoring or collection of bad loans) and payment services or electronic money institutions.

Last month, Bnaka of Albania decided to revoke the license for two of them, after the initiation of criminal prosecution against their shareholders.

According to data from the Bank of Albania, the loan portfolio of non-bank financial institutions at the end of 2023 reached ALL 56 billion or almost EUR 540 million. The loan portfolio granted by these institutions has increased by approximately 14% compared to the end of 2022.

The sector of other service activities and wholesale and retail trade are the most financed business sectors, with about 25% and 16% of the total business stock, followed by construction, with approximately 10%.

Microfinance in Albania mainly fulfills the consumer needs of individuals and the activity of small and micro businesses. It mainly targets the segment that has difficulties in securing access to financing from the banking sector, including subjects with less formalized income and farmers.

However, by using technology, fintech model institutions have gained a competitive advantage in providing loans in a very fast time and with minimal procedures, even without the need for the customer to appear to identify and sign physically. The more dynamic practices give these institutions an advantage in relation to the banking sector, but the other side of the coin is that, in general, the credit given by them is significantly more expensive compared to the banking sector.

This sector has experienced rapid growth in the loan portfolio, accompanied by large profits and high levels of return on capital, despite the imposition of ceiling interest rates by the Bank of Albania.

Since 2022, the Bank of Albania has started applying a ceiling interest rate for consumer loans in Albania. According to the Bank of Albania, the main reason was consumer protection from potentially abusive interest rates, applied mainly by some non-bank financial institutions. Based on the data of the Bank of Albania, effective interest rates before the entry into force of the regulation reached up to 256% for loans in small amounts and minimum maturities.

According to the regulation "On consumer and mortgage loans", the maximum NEI is calculated by the Bank of Albania on a six-monthly basis, based on the data of the Credit Register administered by it. Maximum NEI levels are published at the beginning of each 6-month period and are based on loans disbursed in the previous six-month period. This indicator is constructed as the average of the effective interest rate for each product and interval, increased by one third. The maximum NEI is mandatory to be respected by all banks and financial institutions licensed for lending activity in Albania.

At the beginning of this year, ceiling interest rates for small consumer loans have suffered a significant drop. According to data from the Bank of Albania, the effective maximum interest rate (maximum NEI) for consumer loans in ALL, for amounts up to ALL 200,000, has been reduced to 100%, from 118.96% that was until the end of last year. The maximum effective interest rate includes the nominal interest rate, commissions applied by the lender and all loan costs that are passed on to the customer.

Always for amounts up to ALL 200,000, the maximum NEI for overdrafts (advances) has decreased to 18.6%, from 18.95% in the second half of last year.

For credit cards, the maximum NEI will be 27.4%, from 28.23% that was for the second 6 months of last year.

The maximum NEI for loans from ALL 200,000 to ALL 600,000 has also suffered a significant decrease to 40.6%, from 47.07% until the end of last year.

For overdrafts in the 200-600 thousand ALL range, the maximum NEI has increased to 17.55%, from 17.15% in the previous 6 months.

While for loans with a value of 600,001 to 2,000,000 ALL, the maximum NEI has decreased significantly to 15.6%, from 17.27% that was until the end of 2023./ Monitor Magazine