Bank Competition in Transition Economies: The Case of Albania

Abstract

The Albanian banking system coming from a centralized economy’s heritage went through a long transition phase, to be converted, during recent years, into a modern banking system, reflecting the developing market economy in Albania, with many country-specific features. Given such characteristics, and the fact that the new market economy in Albania with still-to-be-consolidated businesses and relatively a big number of banks, with lots of cheap funds to lend, there has been room for a stiff, if rather unfair competition among banks for market share, thus causing a low-quality loan portfolio and liquidity problems in the market. New entrants in the banking market, mainly foreign ones, may have induced too much entry and relatively too many bad loans. Notwithstanding positive effects of banking competition during the entry phase, banks have adopted and seek very high targets on lending, therefore funding risky projects, which failed to produce success stories. When twinning this fact with the actual global and local financial crises, the situation is practically affecting the stability of the banking system in Albania.

The paper analyzes and investigates how bank competition affects efficiency of credit allocation, using the historic data of the last decade, and provides some recommendations on improving lending practices, procedures, portfolio diversification, aiming to preserve the stability of the banking system in Albania.

Keywords: Credit portfolio, bank competition, NPL (Non-performing loans), market structure

JEL Classification: G201, G32, L11