Upward trend but some downsides in microfinance, need responsible finance practices

Microfinance Focus, March 24, 2010 – At an international conference held yesterday in Tirana, Albania, representatives from the Albanian financial sector and government, donor agencies, international financial institutions as well as microfinance practitioners called for greater efforts to promote responsible finance practices and principles. The event was hosted by the Bank of Albania and jointly organized with KfW Entwicklungsbank (The German Development Bank) and the microfinance investment fund European Fund for Southeast Europe (EFSE).

Over the past years, the financial and microfinance sectors in the region of Southeast Europe, including Albania, have experienced enormous growth rates. Enterprises and the overall population now have significantly better access to financial services. Yet, the panellists emphasized, that despite these positive impacts, the upward trend has also shown its downside – non-transparent lending practices, non-transparent pricing of financial products and ambiguous advertising have put many customers at the risk of over-indebtedness.

The panelists also emphasized the need for particular attention to be paid to the devaluation or depreciation of risks associated with foreign exchange and indexed loans. Particularly in volatile environments, fluctuations in foreign exchange rates could adversely affect the loan burden of the borrowers of such loans.

The conference also called for further efforts to increase financial literacy as a key component for ensuring fair and equal access to credit and banking services. For example in Albania, a study conducted by EFSE on the rural financial gap found that the majority (84%) of rural enterprises interviewed perceived the process of obtaining a loan from financial institutions to be challenging.

In his opening remarks, Ardian Fullani, Governor of the Bank of Albania, stated: “Responsible finance cannot be interpreted as a phenomena and responsibility that shall be left to the desire of the market participants. This should be understood not only as a right, but also as an obligation for all market participants. If you accept this principle, then you should be a promoter and this is the position that Bank of Albania has taken in this direction. Responsible Finance is the best term to sum up the overall efforts of the Bank of Albania during the last 3-4 years towards banking and financial supervision, monetary policy and public education”.

Underlining this, Ridvan Bode, Minister of Finance of the Republic of Albania, said: “This is certainly the right time to talk about responsible finance in the region, as it is everywhere else. The recent turmoil in the financial markets was to a large extent caused by irresponsible lending practices and limited oversight on the part of the financial regulatory authorities. In light of this, the regulatory institutions, both fiscal and monetary, should very carefully design and implement specific measures aimed at preventing irresponsible finance in the future. Although Albania’s banking sector was well-monitored and supervised during the financial crisis, there is much we can learn from what happened in the region and beyond, and put together safeguards in place to make the lending environment as transparent, and as “failure-proof” as possible. This conference is an important step in that direction.”

Roland Siller, First Vice President of KfW, highlighted the importance of considering responsible finance as a real cross-cutting issue for KfW which is at the core of sound business practices. Bad lending discipline and poor lending standards have led to a clear deterioration of portfolio quality in a number of countries in the Eastern Europe region, a phenomenon which cannot be explained by the crisis alone, but which was already in place well before the effects of the crisis set in. “We are pleased to see that Albania is not among the countries that were most hit by delinquency problems, but now it’s the right time to make a case for rigorous client selection, fair treatment of clients, transparency of loan conditions, and improving client financial literacy,” Siller said.

Sylvia Wisniwski, Chief Operating Officer of EFSE, and Managing Director of EFSE’s Fund Advisor Finance in Motion GmbH, emphasised that transparency and fair treatment of clients are at the heart of any financial transaction. “The causes of the global financial crisis lie in irresponsible lending practices, and its painful effects, which are now also negatively impacting the real economy, are felt around the globe by billions of people. This is why EFSE is committed to support responsible finance practices at all levels: the financial sector, individual financial institutions, investors and clients.”

EFSE is a putting effort in promoting responsible financing practices. In order to raise awareness for these issues, EFSE, together with KfW and central banks in its target region, organises workshops and conferences. The event in Tirana was the fourth conference on responsible finance supported by EFSE. Previous events were held in Serbia, Kosovo and Bosnia and Herzegovina.

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