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Pelivani Xhevair, Phd., student, Faculty of Economy University of Tirana E-mail: [email protected]
MICROFINANCE SECTOR IN ALBANIA
Abstract: After the collapse of the public sector in Albania, people became entrepreneurs overnight, in spite of the fact that economic initiative had been prohibited for more than 40 years. Efficient financial markets are essential for economic development. The purpose of this paper is to examine the growth pattern of the microfinance sector in Albania. Keywords: microfinance, indicators, evolution, Albania.
Evolution of microfinance sector gaged in the fight against poverty, this later period
Microfinance (MF) is a concept introduced in was characterized by numerous structural changes
Albania in the post 90's by the international community, as one of the best and most innovative practices for the period to withstand the socio - economic crisis faced by the country.
In the early stages of the functioning of microfinance institutions, the market was different, as it was generally characterized by a non-competitive environment, as a result of poor financial services providers for micro and low-income households. In these circumstances, in general, each institution had a specific targeted clientele and excessive demand was relatively high. At the outset of their activities, the institutions were mainly oriented towards improving lending methodology, increasing institutional capacities, maximizing coverage and increasing the size of the loan portfolio with the aim of sustainability. The situation in recent years has undergone major changes due to formalization, the involvement of commercial banks and the introduction of new institutions in the market. Significant changes have also occurred in the clientele of microfinance institutions, as customers are more informed and sophisticated in terms of the variety and quality of the products and services they wish to benefit.
The Microfinance sector had a very good institutional consolidation period after 2000. If in its beginnings Microfinance was seen as the financial arm of the activity of non-governmental organizations en-
which strengthened the position of microfinance in the Albanian financial market. Institutional innovation capacity, co-ordination of strategies with the Bank of Albania, legislative support and donor financial support, enabled almost all microfinance actors to engage in different structural changes. After 2010, the expansion of the market and credit or deposit portfolios placed MFIs in front of a series of challenges that became more consolidated. The main challenge was on the operational level.
Overcoming the figure of 50.000 customers served in 2010 was made possible by the ability of MFIs to adapt in time to the needs created by the management of a large financial and commercial flow. All MFIs invested in IT technologies by providing automated management systems, expansion of regional branches in order to move closer to the final beneficiaries, staff training in accordance with the new benchmarking criteria set by the Bank of Albania, and introducing marketing practices obtained from the banking sector. Microfinance institutions started adopting one after the other a series of regulations and internal practices on collateral, risk and currency management etc. Gradual detachment from founding / donor organizations encouraged independence and increased internal MFI capacities bringing more maturity and consolidation to the entire sector.
Microfinance sector overview
The Microfinance sector is of great importance in Albania as it enables access to financial services in regions, areas or sectors that are excluded from the formal banking sector, and as such occupies a significant share in lending to the domestic economy.
Sectors of the Albanian economy such as agriculture, livestock, mountain tourism, rural areas, etc., continue to be far from real lending opportunities by banks, and as such, constitute the main items in the portfolio of microfinance institutions. Albania's rural, mountainous and peripheral regions are mainly the area served by the microfinance sector, where Albanian MFIs make a significant contribution.
At the end of 2016, the financial sector in Albania was represented by banks, credit organizations, insurance companies, investment companies, foreign exchange bureaus and money transfer companies. The total assets of all credit organizations amount to ALL 17.9 billion, accounting for 1.3% of the sector, and the loan portfolio amounting to ALL 16.3 billion, accounting for 3% of the sector. (AMA) [1]. Customers include borrowing individuals, farmers engaged in agricultural activities, small and medium-sized enterprises. The range of products includes various types of consumer loans, loans for agricultural activities, SMEs and home loans, etc.
A major obstacle faced by these poor people who want to improve their livelihood is lack of capital. Without capital people cannot invest in the productive activities, improve existing businesses, and fulfill consumption needs when needed, thus limiting their chances ofescaping poverty (Gonzalez-Vega et al.) [6].
Regarding the legal form, credit organizations in Albania are registered as a limited liability company or as a joint stock company. Two institutions are registered as credit / agricultural cooperation and only one institution in the market is registered as an NBFI organization.
Microfinance clients are heterogeneous with respect to income, occupation, education level, asset ownership, gender, age. Poor people also have vari-
ous motives for utilising microfinance. While some utilise microfinance services to support production, others may seek to finance consumption, child education, emergency expenditures (e.g., medication), and many social activities, such as religious ceremonies and funerals.
As far as geographic coverage is concerned, the extension of AMA's member organizations has developed quite well, as branch offices are represented in all regions of Albania and also cover most of the remote and border villages, which generally do not have access to traditional banking services. By the end of 2016, MFIs had a total of 173 branches, out of which 87 branches or 50% in rural areas, and 86 branches or 50% in urban areas. Of these, 44 branches or 25% are located in the poorest areas (AMA) [1]. Some of the branches in the larger cities serve all the surrounding villages. Credit analysts usually work on the ground in close cooperation with local communities.
Members provide services to all sections of the population, including people living in both rural and urban areas, without gender discrimination. However, credit products are only available to adults, although some of the products are used for the needs of adolescents and young people under the age of 18. Rural areas have 25.850 clients or 42%; urban areas have 34.996 clients or 56%, and others 1.170 clients or 2%. Some of the institutions pay special attention to pensioners and low-income entrepreneurs, as specific target groups. Women account for 17.399 or 28% of total active clients and men account for 44.617 or 72% of all clients. The percentage ofwomen clients is not in line with the total number of women of the population, which is 51%, so more work is needed for the totality of women's clients [1].
Since the end of 2016, the total number of unpaid loans was 62.016, with a gross loan portfolio of ALL 16.3 billion or 120.5 million. 42% of the total loan portfolio has been disbursed in rural areas. If a few years ago, when microfinance had just begun to evolve, the percentage of group loans was high,
at present they accounted for 15% of the total loan portfolio, as organizations choose individual loans as a preferable lending method. Institutions pay much attention to preventing customer over-accreditation, which is also at the center of their attention. The MFIs show clients openly all the prices, installments, terms and conditions of all financial products, including all fees and taxes, associated prices, penalties, related products, fees of the parties third and whether they can change over time.
The microfinance industry is beginning to mature, and with maturity comes change. The growth in competition in many markets has resulted in a growing numbers of microfinance institutions (MFIs) seeking to better understand their clients' demands and preferences and thus taking a market-led approach to their business.
Drivers of success and microfinance impacts
Though microfinance was introduced in parallel and in other countries that just emerged from the communist regime, not all microfinance countries succeeded in the same successes as in Albania where, over 25 years, over $1 billion were invaded by supporting the creation of over 350.000 countries new jobs.
Limited competition is one of the first factors of this unique success. The existence of only two banks in Albania in the post 90's, helped a faster, simpler and more competitive spread ofMF. The infrastructure of these two banks was very limited, with small funds, and completely inexistent in rural areas, which were deeply detached from the national financial market.
In addition to the lack of competition from an almost non-existent banking sector, it should be noted that the success of microfinance in Albania is also due to an exceptional market demand for financial products. Individuals in the broader population had virtually no practice or knowledge of the basic concepts of lending, collateral, calendar, or cost of a loan. In rural areas, the lack of financial education was deeper. In addition to being a subsistence funding or to promoting self-employment of small farmers or small entrepreneurs at their beginnings, microfinance has
taken on a second as equally important mission as the one of financial education. Microfinance enabled the widespread and in particular rural population that was completely forgotten by banking infrastructure to practice basic financial, numerical, administrative and human knowledge even by receiving a loan with very small amounts of up to $100-200.
Third, another reason for the success of the Albanian microfinance is that it relies on a series of complementary institutional actors among them, which enabled a rapid positioning in the market and in accordance with the variations of the microcredit / urban microcredit demand.
The rapid evolution of microfinance has generated another essential and closely related trend: commercialization. Commercialization process implies opening up the microfinance industry to application of market-based principles and to moving from donordependant and subsidized operations to commercial debt financing (Christen & Drake) [3].
As traditional banks are venturing into microfinance services provision, as number of players in the microfinance industry is increasing, as there are a myriad of challenges confronting the microfinance industry, and as there is increasing complexity in demand for microfinance services among clients, the role of innovation is very crucial, particularly in developing countries. Filpo [5] found the impediments to the success of MFIs in developing countries to relate to scalability, sustainability, outreach and the impact of the various MFI initiatives; and indicated that these impediments can be overcome through the adoption of innovative strategies to maximize outreach and sustainability.
Competition among MFIs may contribute to well-functioning markets, protection of consumers, promotion of allocative and technical efficiency, and the provision of incentives to develop new products (Motta) [10], Ngumbao [11] presents that at the core of success of an MFI is a good marketing strategy. There is need to examine financial packages and the delivery system to better adopt to the ever
dynamic client needs as well as enhance customer loyalty, for this reason goal achievement for MFIs need proper marketing and competitive positioning.
In developing countries and particularly in deprived regions, microfinance is relevant to stimulating entrepreneurship (Nugroho & Miles) [12], Donou-Adonsou & Sylwester [4] find that microfinance loan growth increases economic growth and total factor productivity in developing countries. Several studies have found beneficial effects upon consumption or income and housing conditions (Berhane) [2], village-level wages and investment in agriculture (Kaboski & Towsend) [8], savings (Kondo et al.) [9], and health and food security (StewartStewart et al.) [13]. In some cases that MFIs not only raise output, but decrease disparities between rich and poor. Microfinance programmes and institutions have become increasingly important as
a strategy to reduce poverty and promote micro and small enterprise development (Hulme) [7].
Conclusions
Over the years microfinance has proven to be a successful, and even profitable, model of financial intermediation. Because the objective of many MFIs is poverty reduction, they often wish to focus on the poorest segments of the population. Results of microfinance can be measured in various ways such as; number of clients served, portfolio quality and financial sustainability (profitability). MFIs need to determine their own objectives, understand what motivates a group of clients, and assess whether the target market can be reached in a way that will eventually be financially sustainable. Competitive pressure from banks may stimulate MFIs to diversify their financial services to keep clients or attract new ones.
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