ADVERSE EFECTS OF BANKING COMPETITION IN ALBANIA

Abstract

Albanian banking system is relatively new and banks operate in a relatively new and small market economy 
with many country-specific features. Given these characteristics, and the fact that the new market in 
Albania with unconsolidated businesses and relatively big number of banks, with lots of cheap funds to 
lend, there has been room for a stiff and rather unfair competition among banks for market share, thus 
causing a low-quality loan portfolio and  liquidity problems in the market. In the frame of too much cash, 
flowing in the country from sources other than banks, like FDIs, remittances, donations, etc., have 
conditioned banks in investing in risky projects, while the economic infrastructure is not yet consolidated 
and prepared to employ such considerable funds in a healthier effective way. Besides the global and 
Albanian financial crises, the Albanian economy it also suffering from mistakes on lending, especially during 
the first wave of banking activity expansion. Notwithstanding positive effects of banking competition during 
this phase, banks have adopted and seek for very high targets on lending, by funding risky projects which 
failed to produce success. When twinning this fact with the actual global and local financial crises, the 
situation is affecting the stability of the banking system in Albania.  
The paper analyses the loan-making approach & practices of commercial banks in Albania, during the last 
decade, and provides some recommendations on improving lending practices, procedures, portfolio 
diversification and aggregating risk within tolerable and manageable limits, which all together aim 
preserving the stability of the banking system in Albania.