SURVEY OF LENDERS IN ALBANIA EDEM/USAID April 2004 EXECUTIVE SUMMARY During the transition period (1990-2000) Albania faced major challenges in the development of the SME sector, partly due to the lack of the financial instruments needed to support this sector. Although new financial instruments were being created, the business environment was generally unprepared to absorb them. At that point, the SME sector in Albania was poorly organized, development was limited and somewhat regional in focus, and there was insufficient support from financial institutions and banks. During this period, the banking system attempted to develop the types of services required by businesses operating in a market economy. Even though there was a demand for loans, businesses were not developed enough to make full use of many of the new services banks had to offer. Meanwhile, important financial instruments were still not adequately developed. Now, however, there are three levels of SME financing available in Albania consisting of: Micro-Credit, with seven major institutions; the formal banking loan sector, with 15 fully licensed Commercial Banks; and three Equity Funds. Most micro-lending institutions have been funded by and operate with donor funds. The Savings and Credit Association network credit unions are the exception, operating with member funding only. Several commercial banks have their own capital available for limited SME lending and do not rely on external sources for lending capital. Most banks prefer to lend to big companies or larger SMEs, although long-term SME investment credits are an exception. Some banks were established with co-funding by international finance institutions and/or government sources. Now the banks are trying to shift their focus towards SMEs. At this point, only one bank (Procredit) actively lends to SMEs; a second (Raiffeissen) is expected to enter the market soon. The three equity funds presently operating in Albania generally target big companies or somewhat larger SMEs, but have little impact on small enterprise development at this time. For several reasons, the majority of SMEs have problems obtaining normal banking loans. A key reason is insufficient collateral, which most banks which most banks require to offset risk. Several banks have expressed an interest in increasing SME lending using their own funds if effective loan guarantee systems were put into place. However several other constraints – both internal and external - must be addressed at the same time if SMEs hope to regularly access commercial loans. Micro-credit institutions have started to fill the SME credit gap, but require additional funding in order to meet demand. A large number of the lenders felt that there is a need for more co-ordination and better communications regarding SME finance. This was especially true of the micro-credit institutions, which could benefit from better use of the Micro-credit Association. Some of the banks suggested the creation of a “Centre of Coordination” to be used by any bank wishing to check a client’s activity and loan history. EDEM would like to thank the directors and representatives of all the micro-credit institutions, commercial banks, equity funds and specialists from the Bank of Albania for their input, ideas and cooperation in completing this study. TABLE OF CONTENTS 1. INTRODUCTION AND USED METHODOLOGY 2. OVERVIEW OF THE SME FINANCE LANDSCAPE 2.1.1 MICRO-CREDITS 2.1.2 SME LOANS 2.1.3 SME EQUITY FUNDS 3. CONCLUSIONS AND RECOMMENDATION 4. IMPROVE SME FINANCE COORDINATION ANNEXES ANNEX 1: MICRO-CREDIT INSTITUTIONS IN ALBANIA ANNEX 2: COMMERCIAL BANKS ANNEX 3: EQUITY FUNDS ANNEX 4: DEVELOPMENT BANKS ANNEX 5: COVERAGE AREA FOR LENDER INSTITUTIONS ANNEX 6: SUMMARY LENDER’S SURVEY ANNEX 7: SURVEY FORM 1. INTRODUCTION AND USED METHODOLOGY The objective of this study is to help the entrepreneurs with complete and updated information regarding the funding sources and the funding conditions. This study comprising all key players in SME financing on three levels i.e. micro- credit institutions; commercial banks and equity funds, was intended to present an overview of the SME finance situation at this moment. This information will be updated and reviewed and Banks, Micro credit Institutions and equity funds will take part in this process (it is good to be published on the website, so it can be used from SME sector, from SME service providers and other support institutions, to have at any moment, with a simple click, the most updated information on what SME finance for different levels and types of activity, is available in Albania, where and at what conditions). Some banks spontaneously came up with own suggestions to improve the situation. One stated that for economic development in Albania it was vital to obtain a good working stock exchange system. Another bank specifically mentioned the need for adequate enforcement of collateral in case of default. Methodology used: A questioner was designed to collect information from the banks and micro-credit institutions. (A copy of this questioner you’ll find in Annex 7). The questioner was delivered to all the financial institutions by e-mail or by direct contacts with them. After that, in order to get the right information a second meeting was scheduled with the interested institutions. Most of the financial institution were opened and ready to provide the right and needed information, even that in few cases it was difficult. So the questioner was delivered to 15 commercial banks and to 7 micro- credit institutions. From 15 commercial banks – 13 of them were very interested to cooperate with our project, 2 of them were not very much interested to fill out the questioner, and they gave us only the basic information. About the micro-credit institutions, in general they were more flexible with information and they provided what was needed. 2. OVERVIEW OF THE SME-FINANCE LANDSCAPE SME financing – apart from own/family funds – in Albania derives from three sources: - Micro-Credits for family businesses, mostly via Foundations - SME loans via the formal banking system, but also partly via Micro-Credit bodies - SME Equity Funds. 2.1 MICRO-CREDITS This could also be considered as a kind of SME pre-financing. The family businesses concerned have no access to formal banking credit. At present there are 7 micro lending institutions operational in Albania. These are: 1) Albanian Saving and Credit Union 2) Besa Foundation 3) Mountain Areas Financing Foundation ((MAFF), linked to IFAD/FAO Rome 4) Albania Partner in Micro-Credit (PSHM), linked to Opportunity International 5) National Union of Albanian Savings-Credit associations (SCA) ‘JEHONA’, supported by ‘Development of savings and credit associations’ Foundation (DSCAMF), linked to Federation of Irish Credit Unions. 6) For the Future Foundation (FFF), linked to NOVIB Holland 7) World Vision Lezhe, linked to World Vision International Micro-credit in Albania is mainly provided by a group of non-banking institutions that are governed by a special central bank regulation, as well as by a growing network of savings and credit associations (SCAs), established on the village level in several rural areas but based on the SCA law. However it should be noted that ProCredit Bank also provides micro-loans. At present most of Albania seems to be well covered with various micro-credit institutions as well as with SCAs, at least regarding the institutional framework. However their actual lending resources may not be adequate to cover all the needs of their intended target groups. Some of them are now also extending credits to the SME sector, involving higher amounts and duration than for simple micro-lending. Most of these micro-lenders have been established as “foundations”. They operate as non-profit organisations which re-invest possible profits into the global capital funds they have for lending to micro businesses or use them to become self-sustainable to cover all operating costs in the long run, once their original source of funding and assistance is scheduled to be terminated. The SCA network is quite different in scope and operations. They completely depend for their lending on their own accumulated group savings and members’ contribution. Their lending base therefore is very limited. They themselves take all credit decisions via village credit committees. They have no foreign staff to manage their operations, are often staffed on a voluntary basis, and must be trained to fulfil all functions themselves, which takes much time and effort. However this should also ensure their long-term sustainability. There are many similarities between them with regard to objectives, operations, interest rates and coverage of lending risks. They all started with the objective to provide private individuals or micro- businesses with small loans, for the purpose of financing simple income generation activities or to start and develop a small business – loans which these persons were unable to obtain via formal commercial banking credit. These institutions operate via well known micro-lending best practices, which are based on regional or even worldwide experiences. They often start providing very small loans and, once this short-term loan has been repaid, the client can obtain a new loan that is somewhat bigger and sometimes for a longer period of time, if required (graduation principle). Most loans are intended as a kind of working capital, or to purchase some simple equipment, and cover rather short periods. Repayment is done by small monthly or quarterly instalments, interest rates are still high, but in general the clients seem to be quite happy with the system, especially since at present there is no other alternative for obtaining banking loans anyway! There are clear differences in some other fields. They include specific target groups as well as geographical areas, activities in rural or urban centres, or for specific economic activities. They have a separate technical assistance department that is able to provide advice and technical support, as required. For example, LOL, in Dairy (they have specialists in this field), For the Future Foundation, they have specialists in vine production etc. New trends and potentials for micro-credit funds Micro-credits have been playing an important role in both income generation and in economic development. They have been providing small loans to people that were excluded from the formal banking credit. They have given a chance to establish and to strengthen micro-business development especially in rural and semi-urban areas that, partly for lack of banking network capacity, have been de facto neglected by the commercial banking system up to now. A recent trend however shows that some micro-credit institutions, within their area of interest (specific sub-sector or limited geographical area), has been moving most of their loan-portfolio to SME credit. They have thus been filling de facto still another gap, namely the lack of formal banking credit for SME development in certain regions or activities. Some of these foundations do realise that they need commercial banking facilities or expertise to disburse or manage their somewhat larger development loans. Therefore they have established a practical working relationship with the banking system, which is being used in some cases to channel their larger loans to more important entrepreneurial activities in certain areas. In other cases they just use a nearby bank to provide cash to their small clients, based on checks- on-name, and to help them to collect the loan repayment in their bank too, like PSHM with Bank of Albania. This practical co-operation system could be further developed and be profitable mutually. Micro-credit funds’ network has a potential to do more than just lending. The Micro-Credit providers are in almost daily contact with their clients in rural areas and semi-urban areas. They therefore would be able to analyse quite well the potentials, needs and preferences of poor sections of the population. (For more information on Equity Funds in Albania, refer to annex 1.) 2.2 SME LOANS SME loans are disbursed via the commercial banking system, however some Micro-Credit have been providing SME loans as well. Credits are based on banks’ own funds and on soft loans from International Finance Institutions (IFIs) or donors. At present there are 15 commercial banks operating in Albania. These are: 1) Credins Bank, Albanian shareholders with banking expertise and completely based on domestic capital. 2) United Bank of Albania, the main shareholders are the government of Albania and three international Islamic banks. 3) Dardania Bank, the government of Kosovo is sole shareholder via Funds Union of Kosovo 4) Savings Bank of Albania privatized last year. 5) PROCREDIT Bank, established by Ministry of Finance (MoF) and KfW, plus IFC, EBRD, IMI as shareholders 6) American Bank of Albania, established and fully owned by Albanian- American Enterprise Fund 7) Italo-Albania Bank, established by Banco di Roma and MoF, with EBRD as partner. 8) Tirana Bank, linked to Pireus Bank in Greece 9) Alpha Bank, linked to Alpha Bank in Athens-Greece 10) National Bank of Greece, linked to National Bank of Greece in Athens 11) Commercial Bank of Greece, linked to Commercial Bank of Greece in Athens 12) International Commercial Bank, established and fully owned by IBC Malaysia 13) First Investment Bank (FIB), linked to First Investment Bank in Sofia Bulgaria 14) Banka Kombetare Tregtare (National Commercial Bank), a privatised bank with shareholders: Turkish government fund, EBRD and IFC 15) Credit Bank of Albania, (For more information on Equity Funds in Albania, refer to annex 2.) 2.3 SME EQUITY FUNDS At present there are three equity funds already established and operating in Albania. These are the ‘Albanian-American Enterprise Fund’ (AAEF), established with funds from the US government; ‘Albania Reconstruction Enterprise Fund’ (AREF), established with funds from EBRD and assistance from the Italian Government and ‘Small Enterprise Assistance Fund’ (SEAF), but still operating via Zagreb office. (For more information on Equity Funds in Albania, refer to annex 3.) The Impact of these three equity funds on small enterprise development seems to be quite low. The main problem encountered by equity funds is the poor quality of applications, as well as guarantees for loan. All three equity funds, with few exceptions, because of minimum-size requirements, seem to aim de facto at medium and larger enterprises. Addresses and Contact Persons: Micro-credit Address Contact Person Institutions 1 Albanian Partner in Rruga Gjin Bue Shpata 7/1 Mr. Jim Reiff Micro-credit (PSHM) Tirana, Albania Managing Director Tel/fax: 355 4 246267/68 [email protected] 2 Albanian Saving and Rruga Ismail Qemali, P. 32 Ms. Zana Konini Credit Union Tirana, Albania Executive Director Tel: 355 4 251910 [email protected] Fax: 355 4 241971 3 Besa Foundation Rruga Sulejman Delvina Mr. Bajram Muca Tirana, Albania Executive Director Tel: 355 4 253841/42 [email protected] Tel/fax: 355 4 253836 4 DSCAMF & Jehona Rruga Kajo Karafili 26/3, Mrs. Elvana Sharkaj Tirana, Albania DSCAMF Administrator Tel: 355 4 224 469 [email protected] Fax: 355 4 269 450 5 For the Future Pall. I Ri te Shalvaret, Kati i III Mr. Genc Juka Foundation Tirana, Albania General Manager Tel/fax: 355 4 251758 [email protected] 6 Mountain Areas Rruga Mustafa Matohiti, 12 Mr. Arben Jorgji Financing Fund Tirana, Albania Executive Director Tel: 355 4 250633, 259080/1 [email protected] Fax: 355 4 250633 7 World Vision Micro- Lagja Beslidhja PO Box 1725 Ms. Melanie Newman, credit Program Lezhe, Albania Manage Tel: 355 262 3590 [email protected] Commercial Nr. Address Contact Person Banks 1 Procredit Bank Rruga Sami Frasheri PO Mr. Elvis Mataj Box 2395 Client Manager Tirana, Albania [email protected] Tel: 355 4 271272/3/4/5 2 American Bank of Rruga Ismail Qemali 27 Mr. Artan Kadriaj Albania Tirana, Albania Manager Marketing and Tel: 355 4 248753/4/5/6 Corporate Fax: 355 4 248762 [email protected] 3 Italian Albanian Bank Rruga Barrikadave Mr. Ardian.Fullani Tirana, Albania General Manager