ALBANIAN MICROFINANCE:

25 YEARS SUPPORTINGFREE ENTERPRENEURSHIPLessons and future perspectives in the framework of the

Introduction

approach, this paper attempts to identify as outputs some ideas, initiatives or potential products with the sole purpose of instigating an alternative opinion on

25 years of Albanian microfinance:A multiple model for a single target

The creation phase (1990 - 2000)The creation phase (1990 - 2000)

The challenging phase

25 YEARS OF ALBANIAN MICROFINANCE: A MULTIPLE MODEL FOR A SINGLE TARGET

Faza e krijimit (1990 – 2000) Microfinance (MF) is an international concept introduced in Albania after the ‘90s from the donor community as one of the best and more innovative practices of the time to stand against the socio-economic crisis the country was facing. As such, the concept enjoyed an extraordinary support for a successful implementation. The challenges of the legislative framework, those arising from the competition or due to infrastructure, could be easily coped thanks to their support.

The first microloans approved in November 1992 were in total of 121 and amounted to $20.000 provided by the French Foundation “Frères des Hommes”. Its purpose was to test how Albanian villagers would react toward such an initiative, and luckily, it resulted successful. From that moment on, the rural loan process would not cease. The needs for financing and the market economy demand were two factors progressing along each other.

Despite the fact that microfinance was introduced at the same time in other countries that had just left communism, microfinance did not manage to have the same success as it had in Albania, where, within 25 years more than one billion dollars were granted supporting the creation of over 350.000 job positions. The extraordinary success of microfinance in Albania is definitely related to other factors that go beyond the international intervention.

The limited competition is one of the initial factors of this unique success. The existence of only two banks in Albania after the ‘90s, the Agrarian and the Savings ones, facilitated a faster, simpler and more competitive distribution of the MFs. The

infrastructure of the two banks was quite limited, with small amount funds, very inexistent in rural areas, which were deeply excluded by the national financial market. In combination with the support provided by other important partners such as the World Bank, USAID, Irish League or the Soros Foundation, the Albanian microfinance managed to enter the market quite rapidly as a financial instrument that aimed at achieving:

- Detachment from cooperatives or other state enterprises and the transition of individuals in a free and competitive market;- Reduction of poverty in urban areas, and especially by financing production mini-activities for job creation;- Financial education of a population totally excluded from the financial system;- Introduction of a new organizational culture of financial institutions in a financial market still inexistent;- Empowering the role of women in the economic decision-making of the Albanian families and their orientation toward self-employment and free enterprise.

Based on these social objectives, microfinance has been conceived, in the first steps of its activity, as a development intervention serving the government and international action in the fight against poverty. So it is no surprise that microfinance has its first footsteps as part of the public structures and the Albanian Development Fund (ADF), created in 1993 with the support of the World Bank aiming at institutionalizing the work already done and paving the way for more important projects toward rural and urban micro-loans.

In combination with the international support and the lack of a competition, through a professional dedication and commitment of the Albanian staff, consultants and different strategies or projects, microfinance managed to set up home in both urban and rural areas targeted by its activity. These were the main institutional features of the microfinance market in Albania until 1999.

Besides the lack of competition from an almost inexistent banking sector, it should be highlighted the fact that the success of microfinance in Albania is due to an extremely high demand of the market for financial products. Maybe, instead of the word “demand”, it would be more appropriate to use the word “need”. Individuals in the vast majority of the population had almost no practice at all or at least basic knowledge regarding the concepts of credit, collateral, calendar or costs of a loan. The lack of financial education was even deeper in rural areas. In addition of serving as a financing for survival or a promoter for the self-employment of farmers or small entrepreneurs during their first commercial steps, microfinance took over a second equally important mission as the first: that of the financial education. Microfinance has allowed the vast population, and in particular the rural population, which was almost ‘forgotten’ by the bank infrastructure, to practice the basic financial, numerical, administrative and even human knowledge by approving loans with very small amounts, up to 100/200 $.

Thirdly, another reason for the success of the microfinance system in Albania is that it was based on a series of other institutional actors complementary between them, who helped for a more rapid positioning in the market and, in accordance with different variations of demand for urban/rural microloans. Almost at the same time, during 1998-99, the Albanian Development Fund Project provided the necessary space for the creation of two independent entities that resulted from its two Urban and Rural Loan Department: respectively the creation of the “Rural Financing Fund” and of the “Besa Foundation”. This was followed by the establishment of other MFIs as the “Albanian Partner in Microcredit”, as well as the introduction of the Foundation for Development (Irish model of MF) and the “World Vision” Foundation in Albania. The voting of the Law on Savings and Credit Associations, the transfer of all remaining ADF activity to microfinance institutions and the creation of a new MFI providing services to mountainous areas, the formalization of the activity of this sector through the Central Bank licensing as a non-bank financial institution, the access bigger funding sources, especially those provided by the World Bank, etc. – jointly all these elements enabled the Albanian Microfinance to create a dynamic market positioning which is highly valid up to date.

The Savings and Credit Associations for years were the sole financiers of the rural areas in the country, or of specific professional groups, such as teachers, nurses, etc. Non-bank institutions managed to establish a substantial relationship with small entrepreneurs in urban areas. The single state-owned financial institution continued to focus mainly on the mountain areas, as well as the charity funds that were invested in funding projects of the most vulnerable groups. Since 2000, and for more than 10 years, the territorial division and market fragmentation among the Albanian microfinance actors has been almost intact, leaving the necessary space for each financial institution to grow pursuant to their ambitions, resources and individual strategies without harming the competition between these categories or from the banking sector. This ‘fertile’ situation enabled the microfinance institutions to successfully accomplish their socio-economic mission changing from 5,000 individuals in 2000 to more than 50,000 in 2010.

Shifra ndër vite

The consolidation phase (2000 - 2010) The microfinance sector has experienced high quality institutional consolidation period after 2000. Although, on its beginnings, microfinance was seen as the financial arm of the activity of non-governmental organizations engaged in the fight against poverty, later this period was characterized by numerous structural changes that reinforced the position of microfinance in the Albanian financial market. The capacity to innovate the institution, coordinating the strategy with the Bank of Albania, in support of the legislative and financial support from donors, enabled almost all actors of microfinance to engage in various structural changes.

The beginning of the 2000s marks the establishment of many Savings and Credit Associations, which required the support, assistance and above all the financial resources in order to become a strong voice in the microfinance market and almost an exclusive one to rural areas. Out of this need, the Albanian Savings and Credit Union and Jehona Union emerged. The unions operated in intensive agricultural areas, which gave even the best example of re-boosting the farms, already private and the development of different agricultural activities.

In 2007, the “Albanian Partner in Microcredit” (PSHM) with the support of USAID changed to Opportunity Albania allowing the injection of the foreign private capital in its microloan activity and being presented since 2010 as NOA.

In 2008, Besa Foundation changed to Besa Fund receiving a license as a non-bank financial institution from the Bank of Albania and creating at the same time the ABC Foundation, which would serve the social financing by reinitiating its financial activity in the society.

The state mountainous development fund (FFZM) also changed in 2008 to FAF sh.a aiming at an institutional policy more and more independent from the public sector and in compliance with the regulatory requirements of the Bank of Albania.

Meanwhile, the Vision Fund Albania, which started its activity in 2001, continued to cooperate and keep contacts with World Vision, by being part of a more regional and global network. As of today, the legacy of this project is carried on by Agro & Social Fund, an MFI under full Albanian capital owenership.

Finally, in 2006 these six leading microfinance institutions joined together by creating for the first time the Albanian Microfinance Association in order provide regularly, more intensively and better quality services to the promotion of the sector and the development of an alternative finance.

Besides the changes in their names or their organizational structure, microfinance institutions (MFI), continued to have internal changes between them.

SCAs are non-profit cooperative structures with the right to accept deposits. Besa Fund and NOA are non-bank financial institutions licensed by the Bank of Albania without the right to accept deposits. While Besa Fund is owned by domestic shareholders, NOA is under foreign ownership. On the other hand, FAF sh.a. is subordinate to the Ministry of Finance since the State continues to be its sole shareholder. But if, according to a simple market reasoning, these differences between MFIs allowed for a more comprehensive territorial and market coverage, they were also a real obstacle to the adequate understanding of this sector’s specifications by third parties. It can be affirmed that despite the creation of the AMA (Albanian Microfinance Association), the sector was developed more due to the individual initiatives of its constituent actors rather than in the framework of a government or donor comprehensive strategy supporting its further empowerment. This is a considerable change compared to the previous ten years, in which the sector growth came because of the financial national policies.

The period beginning from 2000 to 2010 was a way to test the capacity of independence and maturity of MFIs. This was entirely proved throughout the years from MFIs by finding tens of independent funding sources from international and bank sources, beginning with the World Bank.

The challenging phase After the 2010s, the expansion of markets and credit or deposits portfolios, made the MFIs face several challenges out of which they came out more consolidated. The main challenge was in the operational perspective. The provision of services to more than 50.000 clients in 2010 was made possible through the MFIs capacity to timely adapt to the needs emerging from the management of a considerable financial and commercial flow. All MFIs invested in information technologies by providing automated management systems, the expansion of regional branches in order to move closer to the final beneficiaries, staff training in compliance with the new supervision criteria established by the Bank of Albania, as well as introducing marketing practice from the banking sector. Microfinance institutions started approving one by one a series of internal regulations and practices on collateral, risk or/and foreign currency management, etc. Gradual detachment from the founding/donor organizations urged the independence and increase of the internal capacities of MFIs, by bringing more maturity and consolidation to the whole sector.

We may mention that in the field of human resources there used to be more investments during this growth period by ensuring that despite structural changes or enlargement of the financial activity, Albanian MFIs still comply with their social vision. Microfinance would continue to preserve a substantial difference from the banking sector.

MFIs approach people by adapting to their needs for financing, meanwhile banks anticipate people to go toward them, asking the latter to adapt to their criteria for financing.

This would remain the main difference between microfinance and the Albanian banking sector. Serving this comparative advantage - the mobility of loan officers and the personal contact with the client -the microfinance sector managed to establish a long-term relationship with the beneficiaries of the funding they offer. The referral system and frequent refunds enabled the microfinance to maintain a stable relation in the field, almost an exclusive one, keeping banks away from the served population.

The lack of road or banking infrastructure, the high informality hardly accepted by the banking sector, the high remittances due to migration, as well as the refocusing on agriculture and family enterprises made Albanian Microfinance reach a constant, substantial and optimistic development. MFIs were fulfilling their primary mission and objective for which they were created, by providing loans or accumulated deposits, under a mission of raising financial awareness, to a population that was excluded from being provided with financial /banking services. This success of microfinance became also the source of the challenges that characterized the sector during 2001 - 2010.

Despite some new products, such as currency loans or variable calendars, it can be said that in general, the microfinance sector during the consolidation period did not invest in new financial products, but focused almost exclusively on delivering credits or accumulating deposits. This came from the extremely high demand from the field and the market expansion, which was still eager for basic financing and financial services.

The extraordinary expansion of microfinance, both in terms of its human, infrastructural or financial resources during this period, raised issues that were previously unknown to the MFIs. Exposure to risk due to the high level of informality in the Albanian economy, and in particular that of the rural population, the economic crisis, a financial culture still quite unknown to the population it was being provided to, and the abuse related to the confidence in the field, caused an increase in the number of non-performing loans. Despite this, microfinance always presented a level of non-performing loans much lower than that of the banking system, and as a sector never surpassing the level of 5%, while the Albanian banking sector level was approximately 25%. This phenomenon was a catalyst for all microfinance institutions to further engage in the introduction of new stricter regulations and protocols (especially after the inclusion of SCAs in the ASD) which have shown positive results for the past years enabling a level of non-performing loans many times lower than the banking sector while improving the quality of the loan portfolio as a whole.

The redimensioning of a successful financial model in face of the recent market and public policies transformations

The banking sector: a challenge for microfinance?Is there a repositioning of the microfinance sector?

Social dimension and development impact. Is there a need to update?

THE REDIMENSIONING OF A SUCCESSFUL FINANCIAL MODEL IN FACE OF THE RECENT MARKET AND PUBLIC POLICIES TRANSFORMATIONS

The microfinance sector faces a potential competition from the banking sector considering that institutions themselves have invested a lot during the recent years in increasing the institutional capacities and financial stability, meanwhile the social dimension and investment on the promotion of the sector as a whole seems to be neglected.

The banking sector: a challenge for microfinance? Microfinance services have been successfully provided in Albania during 25 years since its establishment to the main social and economic target groups for which it was created. Fight against poverty, enhancement of access to finances, education of the population not familiar with financial products, greater engagement of women in household finances, increased productivity of supported farmers and small entrepreneurs, the promotion of the self-employment culture, etc. have been the driving targets for a staff of more than 1,100 individuals engaged in the Albanian microfinance sector.

In addition to the fact that the current period coincides with the 25th anniversary of Albanian microfinances (92-17), the global economic crisis leads us to consider its model more strategically. What were the reasons that made possible the extraordinary success and impact of microfinance during this period? Can the same factors ensure that sector growth continues in the next 25 years? Given the economic growth, the country has experienced, should the social and economic target groups, which enable the existence of “micro” financing be reviewed, and if so, what should this review be based on? The historic description at the beginning of this paper provides an adequate answer to some elements of the questions above. Three main reasons led the microfinance sector as a whole, to national success. In addition to the support of public authorities/

donors, at a market level the combination of 1. The low level of competition among banking service providers; 2. High demand from beneficiary populations; and 3. Diversity of microfinance actors covering the entire country, led to the success of micro financing.

The current presence of more than 16 banks in the Albanian market has increased competition against the microfinance sector. Banks are increasingly aiming their loan products at loans (small consumer loans), which in 2016 made up approximately 36% of their loan portfolios. Consumer loans have increased by almost 10% year on year from 35 billion ALL in 2014, to nearly 40 billion ALL by the end of 2016, equivalent to 280 million Euro. This consumer loan growth in the banking sector is mainly due to simpler approval criteria by banks, the lower interest rates, high levels of liquidity, but also due to improved access to the banking sector. Does this situation represent a risk for microfinance?

It should be noted that microfinance does not target consumer loans. “Micro Loans” is aimed at social targets, mainly related to the revenue generation

from production activities. It is a loan that carries risk, as it is related to “the production capacity” (i.e. to create added value) of the borrower and not to a fixed contractual income, such as salaries. The ‘micro’ borrower’s income is undefined and depends on the activity, while that of the “Consumer” is expected and automatic at the end of each month. “Consumer Loans” are designed to provide everyday goods to a family, ‘micro’ loans are aimed at daily products of entrepreneurs and farmers. Thus, there is a considerable difference between the two financial products “consumer” and “micro” that seems to keep the banking sector out of the microfinance sector. Will this last? Two main approaches became relevant during the various exchanges in the framework of the development of this document.

On the one hand, experts believe that soon enough banks will be investing in the microfinance sector, and they even provided examples of banks currently establishing microloan departments. In addition, banks have invested in financial products for the agricultural industry, even though results are still not on par with expectations. The low level of non-performing microloans compared to the banking sector non-performing loan portfolio is another factor that drives the potential interest of the banks. Lastly, figures are a factor, with over 60,000 microloans approved nationally each year, making up approximately 20% of the total number of loans, which is a relatively high number of clients that the banking sector cannot ignore. This team of experts believes that sooner or later, microfinance institutions will have to face competition from the banking sector. This rationale is supported by two important structural factors: 1. All microfinance institutions feed their financial transactions through banks; 2. Bank loan interest are generally lower than microfinance rates. This implies that banks have adequate physical access to micro-clients and it is easy enough for them to retain these clients. Considering also the fact that banks have changed more than MFIs in the last 15 years in both coverage and products due to resources and opportunities to innovate and introduce new products, then the microfinance sector faces a real risk. Comparatively, banks have 500 branches all over Albania staffed with 6,800 employees, while the microfinance sector has 157 branches and 1,100 employees. Similarly, according to DIA, by the end of 2015, there were 2,117,389 individual deposit holders in the Albanian banking system. Based on these figures, can

we discuss about financial inclusion in Albania through microfinance?

On the other hand, there is another team of experts who believe that microfinance requires different expertise and approach, which banks do not have. Microloans are an operational culture, resource organization, and a sales methodology completely different from those of the banking sector. As was previously noted in this paper, in the banking operation model the client seeks the bank, while the opposite happens in the micro operation model. The microfinance institution invests in the individual’s inclusion (farmer or entrepreneur) in the financial system, in formalizing their business plan, in identifying the loan needs of their activity, and in estimating the lending potential. Microloans are based on an expertise network that takes years to establish. An expert provided a significant example: Microfinance requires the loan officer to be informed on: the quantity of milk produced by a cow per month, the furniture that three men can make in a week and the number of vehicles a mechanic can repair in a day. Due to the great contrast between the strict administrative procedures of banks and the insufficient financial and economic information on the micro client base (i.e. informality, especially in the agriculture sector), this team of experts believes that banks do not have microfinance sector capacities. In addition, the banking sector competing with lower interest rates is considered to be wrong. Microloan costs are much higher than bank loans due to the approach and the demanding engagement in the field. One employee in the banking sector manages an annual loan portfolio of 79 million ALL, while in microfinance employees manage an annual loan portfolio of 14 million ALL, while the administrative costs for a loan are higher in microfinance because of their short maturity period and low amount installments. Microfinance is a financial activity of a social nature, with relatively high operational costs and requires human expertise and contact, which currently cannot be provided by the banking sector.

Beyond comparative elements and perceptions, in the long run the microfinance sector should prepare for a much more different competitive landscape than previously. This is a result of the economic crisis, which for the past 5 years has impacted the normal progress of the country’s economic activity, and also as a result of:

- The operation of 16 banks in the market, which constantly search for alternative resources to marginally grow their activity in the absence of the natural economic growth in the country;- The wide gap between the banking sector and the microfinance sector interest rates that may increasingly attract customers to the banking system and retain them there;- The expansion of the banking infrastructure and the improvement of the transport and telecommunications infrastructure at the national level, enabling cost reduction for the banking sector regarding the potential provision of microloans.

Is there a repositioning of the microfinance sector? For years to come, microfinance will be an important factor in the country’s economic development and for small farmers and entrepreneurs financing. Financing demand will increase the same as macroeconomic indicators, which are not at the same level as the neighboring European countries. Currently, the private lending ratio in the country is about 40% compared to the GDP, while in European Union countries it is approximately 100%. In other words, from the current level of 535 billion ALL, lending to the private sector may reach 1,000 billion ALL. This hike will be majorly impacted by agriculture, because even though the sector employs over 40% of the workforce in the country and generates about 18% of the GDP (with the tourism sector generating 35%), it is only allocated only 4% of the total business loan portfolio. Due to the features of the country’s rural economy (informality, production origin tracking, land issues, costs identification difficulties, etc.) microfinance will inevitably have a major role in increasing loans to small farmers.

Aiming at a sound financial growth for the future, in the recent years, the Albanian microfinance sector has invested in the consolidation of its activities. Microfinance institutions have applied multiple various commercial and financial strategies aiming at the maximum reduction of risk exposure, operational performance increase, staff training provision, new regulation introduction, and international and governmental lobbying for a review of the financial policies regulating the sector. In this context of institutional strengthening, the Albanian microfinance sector is increasingly becoming a financial sector, thus evolving from its micro roots. In recent years, the risk portfolio has not exceeded 5%, while in the banking sector it varies depending on the year, from 18% to 25%. In the context of the adoption of the regulatory framework, SCA Unions are being reorganizing and becoming stronger and more competitive. The microfinance institutions first ever inclusion in the EBRD Guarantee Fund, cooperation for the first time with EIF, Rabo Bank and JICA, attest to the financial maturity of the institutions and the trust that international partners place in them. In line with the above, the inclusion of SCA deposit-holders in the DIA scheme proves that

continued investment in internal processes and financial performance in recent years has been successful.

This institutional consolidation of the sector is also shown in financial terms with MIA (Microfinance Institutions Association) member assets increasing from a total of 18,8 billion ALL in 2012 to 21,3 billion ALL in 2015. This is an important growth considering the financial crisis of the recent years, as well as the restructuring of SCA sector. On the other hand, it should be emphasized that these structural, legal, or financial improvements are mainly a result of the combination of microfinance institutions and international partners’ engagement, notably that of the World Bank. Cooperation with public authorities, due to the high number of actors (tax, NRC, BA, etc.) should be intensified taking into consideration the social impact of the Albanian microfinance sector, especially regarding new jobs openings because these institutions have limited or no information on the sector.

Regardless of the positive steps undertaken during this period, one of the major challenges for the microfinance sector is related to costs of financing resources. With the exception of SCAs, which have the right to accept deposits, other financial institutions do not have this privilege. This has led to a relatively expensive microfinance funding, often from foreign sources or commercial loans. While treasury bonds are relatively inexpensive, a funding line in the market for a microfinance institution may reach 7-8%, while as an investment fund, the interest rate may reach 10%. After also considering operational costs, which are higher for the microfinance sector, the loan interest rate offered by these institutions is higher compared to those of the banking sector. Alternatively, when a microfinance institution aims at ensuring a financial partnership with new shareholders, financing poses a challenge. Albania, just as the entire Balkans region, is considered risky. The financial sector is not considered stable, when taking into account the fact that out of 16 banks in the market, some are rumored to be for sale. This situation casts doubts on the quality of return on investment for every potential shareholder. As a consequence of this institutional pressure resulting from the expensive financing resource and increase of financial supervision, in recent years the microfinance institutions have focused on their financial objectives, thus not being able to innovate with the same intensity in their socio-development components. We note that none of the microfinance institutions provide checking accounts, electronic portfolios, revolving credit, overdrafts or letter of credits. We can also mention the lack of specific loans specifically designed for youth, women or returning emigrants. The high funding costs in the microfinance sector is a challenge that requires more attention from the public, international and banking partners. The more microfinance costs are reduced, the more financing can be dedicated to small farmers and entrepreneurs in the country and as a result more jobs will be created and economic growth will thrive. Aware of the untapped lending potential of the economy, as well as the potential competition that may come from the banking sector, the microfinance sector has invested in strengthening its operational capacities. One of the goals is promoting new technologies, such as the use of electronic tablets in the field, aimed at reducing administrative costs, accelerating loan procedures, and increasing administrative process security, especially in rural or peri-urban areas. This technology will gradually

feed into a fully automated process of reading customer biometric data. MFI macro level evaluation is relatively positive. New technologies are expected to make microfinance faster, safer, and more competitive. However, it has been noted that during the work done in the framework of this paper, due to the high level of innovation required by new technologies, financial institutions do not have a consolidated estimation of the real costs of these technological transformations. Technological changes, no matter how small, require relatively high maintenance and update costs. It is worth mentioning the legal framework and culture in Albania, which pose a real legal risk management challenge. In addition, technology service providers are currently not yet able to ensure a rapid implementation of the technology at controlled cost and guaranteed results. Lastly, over reliance in new banking technologies may contradict the comparative advantage of microfinance noted above: the importance of human contact. New technologies aim at reducing or replacing human manual interventions by automating the process (remember online banking, where each action is carried out without the help of a loan officer). While it is true that microfinance high costs come as a result of engagement in the field, this is its main competitive advantage against the banking sector. Thus, the microfinance sector needs more time to test the most efficient models of new banking technologies. For example, the introduction and consequent failure of the M-Pesa service clearly showed that new technologies, such as mobile payments, do not necessarily comprise a comparative advantage, while also showing that the current microfinance model is an efficient, profitable and promising model. Legal, technical, human, infrastructure, or financial assistance from the donor community to test and identify the most appropriate technologies for Albania would be welcomed in the microfinance sector.

Another factor that has changed in recent years, as compared to the beginning of microfinance in Albania, is client relations. As emphasized in this paper, microfinance has a comparative advantage and added value in the importance it places on direct relations between loan officers and borrowers. Nevertheless, this relationship has changed. The sector’s restructuring and the consolidation of microfinance financial institutions has affected activities in the field.

Nowadays it is more difficult to promote borrowing in villages or urban areas. Individuals have a better grasp on credit matters, because throughout the years they have become familiar with the obligations and the rights within these contractual relations. In every exchange, potential customers request more information on the product being promoted, their exposure, and dealing with collateral in cases of default. Decision-making periods for entering into contracts have increased obligating loan officers to spend more time in the field providing information on the terms of the loan, visiting the enterprise or farm on site, physically auditing referrers and co-signatories, etc. In addition to the financial performance pressure, this whole situation causes a relatively high workload for officers in the field, who should be loan officers and business consultants at the same time. In some cases, this has been translated into a stronger relationship between the officer and the client, which encourages building trust, getting familiar with the business in question and as a result enabling quicker refinancing. In some other cases, this workload has resulted in a higher staff turnover caused by individuals who view it as additional work and believe that the microfinance social mission provides less professional reputation as compared to being employed in more comfortable job positions in traditional banks. Employment standards enhancement, additional training provision, attraction of ambitious individuals with high social integrity, and greater youth promotion, especially of those who come from the banking sector, are some of the measures undertaken simultaneously by microfinance institutions to address this phenomenon that affects human resources.

Social dimension and development impact. Is there a need to update?

The financial crisis, legal framework changes, internal restructuring investments, market expansion, and other similar factors (including limited resources) have obligated microfinance institutions to engage in strengthening their respective institutions rather than promoting the sector as a whole. Thus, before 2015 the Microfinance Association did not play the same role as the Albanian Association of Banks, which has been investing for a long time, as well as lobbying for the law on bankruptcy or law on bailiff’s services, or signing a Cooperation Agreement with the Bank of Albania. Promotion of the microfinance sector has been viewed as detached from the activity of microfinance institutions also because of the high diversity of the latter, where some institutions accept deposits and some do not; some are cooperatives; some are foundations and some others are state structures; some are urban and some are rural; some are for profit and some are not for profit, etc. Such a high diversity has made it difficult for different microfinance partners, especially public authorities to become familiar with the sector. However, all microfinance institutions operate according to a common model, which is lending for productive activities of small farmers and entrepreneurs. This common milestone is at the core of the social and development dimension that characterizes Albanian microfinance. This dimension requires intensified development.

Agriculture support is one of the main microfinance sector areas of financing with considerable development impact. More than half of the current microfinance loan portfolio or over 50 million Euros is allocated to farmers financing. This value is greater than the agricultural lending portfolio of the whole banking sector nationally. Nevertheless, this type of financial exposure in agriculture poses a risk because microfinance institutions are simultaneously exposed to natural disasters, livestock disease, a volatile market without added value, and a sinlge sector. Meanwhile, regardless of this exposure and socio-economic engagement of microfinance in the agriculture sector, public authorities in the country do not provide instructions on the primary financing subsectors, areas, and incentives to support microfinance and small farmers financing, etc. In other words, there is a low level

of cooperation in development policy-making and their interaction with microfinance activities. Public institutions currently have no microfinance experts or a “sector” that tracks development activities. Microfinance is not a recognized notion; despite being responsible for 20% of the loans disbursed annually in the country and for leading to the opening of 90,000 jobs.

Even though public authorities were the ones to initially start microfinance in the ‘90s aiming to encourage financial inclusion, paradoxically the same institutions are indifferent to its activity. Perhaps the reason is related to the fact that the microfinance notion has remained unchanged in the last 25 years of its activity. At its conception, only two banks were operating in Albania, but today that number has risen to 16 banks with 3,000,000 bank accounts nationally. Under these conditions can we say that the microfinance objective is always that of financial inclusion? Or is it time to talk about development financing? Or about employment financing? Or sustainable financing? The microfinance notion does not affect the daily activity of the institutions. What determines the level of success is the relationship between the loan officer and the individual. Sometimes this relationship is so close that the borrower does not know almost anything about the microfinance institution (and the sector). However, at the policy-making level, the sector has different implications and relevance. If the sector is properly understood, the national development impact will be higher. All public and international actors are interested in actively providing information on what microfinance represents in Albania today.

The strengthening of the sector approach would lead to quality promotion of the best financial practices. Thus, even though the majority of microfinance institutions have signed the Microfinance Best Practices Guidelines, there are a myriad of papers, strategies and financial notions that aim at preventing over-crediting, promoting higher transparency or standard grievance processes, communicating actual final interests, privacy and personal data protection, etc. Not only the banking sector but also the microfinance sector can fall prey to large-scale risks and this can be prevented only through close cooperation among all actors, where the most important is the Bank of Albania. Greater investment in a sector approach is necessary, starting with

obtaining more information on the market, competition, product segmentation, geographic coverage or client base according to their education, profession, age, etc. In order for microfinance to have a higher development impact, it is necessary to understand best practices so that they are easily adapted.

Building a long-term strategic vision and potential perspectivesRegarding daily microfinance activities

Regarding public authority policy making Regarding the market

In the next decade, Albanian microfinance may follow a series of directions, initiatives or potential pilot projects aimed at enhancing the unique relationship between microfinance institutions and beneficiary communities in the field. Microfinance may be more actively engaged in national development policies or the competition coming from the banking sector in the market by consolidating its unique social dimension.

BUILDING A LONG-TERM STRATEGIC VISION AND POTENTIAL PERSPECTIVES

A) Regarding daily microfinance activities

1. The conceptualization, testing and promotion of new products

Microfinance institutions must be supported in understanding and analyzing new products that strengthen their social dimension. In an approach that goes beyond “Financial inclusion” and more towards “Financing for development”, microfinance should be based on long-term testing of several new products, such as: overdrafts; payment of services; youth loans (studies or start-up); loans designed specifically for returning emigrants; gender equality loans; retirement financial products, including complementary retirement deposit products, etc. Another future product could be social group financing, for example, financing minor infrastructure works, like bridges, health and education centers and sports grounds that can be reimbursed through income generated by their utilization, or through the financial institution’s profit, which will be considered as a donation to the community, etc. More testing opportunities and different micro insurance forms, especially in agriculture, can be provided for microfinance institutions.

2. Cheaper financing sources and promotion of more competitive offers

If banks have surplus liquidity, public authorities can support microfinance, in order for these funds to be better addressed to the needs of small local entrepreneurs and farmers. The microfinance sector can freely cooperate with the relevant financial actors through cooperation memorandums, round tables, legal amendment proposals, etc., in order to be able to create a guarantee fund, funding resources or dedicated technical assistance to its activity. Deposits can be offered not only to ASCs, but also to microfinance institutions. In addition, further market analysis studies on the alternative distribution channels, like online banking, ATM banking resources or mobile payments, etc. can be conducted, in order to increase competitiveness and reduce operational costs in the microfinance sector.

3. Promotion of “Corporate social responsibility” concepts on microfinance

Due to the large volume of microfinance loans, it is necessary to use the “corporate social responsibility” concept, both commercially and institutionally. It is necessary to consolidate the social connection between the MFIs (cooperative or not) and the beneficiary communities as much as possible. The role of the MFI boards of directors can be further strengthened by communicating more on the importance of their decision making and by promoting the role and function of the MFIs. Microfinance institutions should be supported regarding the development of their long-term institutional strategies, and also regarding their implementation through consultations with key members of the local communities served. A more intensive institutional communication, creation of partnerships with civil society organizations, charity work or supporting youth/cultural initiatives, etc. are required, thus helping in creating a more solid institutional perception according to the “corporate social responsibility” model.

4. More specialized training for institutions and beneficiaries of financing

Support through MIA and its mediator, could enable more training to be provided for the microfinance institution and their funding resources beneficiaries. MIA must provide a “menu” of their training options on best sector practices, latest supervisory framework developments, managing new technologies, etc. MIA can also function as a professional microfinance centre, which provides training for small entrepreneur and farmer groups that operate in the same field and also for different MFI clients. In the framework of the financing for development objective, microfinance need not be limited only to financing enterprises or start-up farms which are rejected by banks. From a long-term approach perspective, microfinance can contribute to growing the activity of small enterprises, thus enabling family businesses to have a family legacy, creating chain reactions in growth, expansion and modernization, which in turn create added value and require subsequent refinancing. Support for developing technical capacities of loan beneficiaries would encourage the engagement of youth in family businesses or farms, and transition from a “commercial/ survival” enterprise to a “production/profit” one. MFIs can generate added value for the national economy.

Regarding public authority policy making

5. A new Law on financial institutions

The concept of “Microfinance Banks” exists in many countries of the world, like the Philippines or Kenya. Public authorities consider these institutions as key actors and part of the national economic development strategy. Based on this reasoning, these microfinance institutions can hold deposits in accordance with the conditions stipulated by law. The regulatory framework is very flexible, in order for the loan costs to be as low as possible. Other additional products could be provided for in the law, such as “insurances”. For example, in the Philippines, there is no need for a specific license from the central bank. The law could also enable loans between financial institutions when an institution has surplus liquidity.

6. Microfinance as a intermediary agent

With its presence throughout the country, the microfinance institutions network can serve as a intermediary agent for public services that include financial transactions, such as the combination of agricultural micro-loans with ARDA funds; collecting taxes or social contributions from small entrepreneurs or farmers and even distributing pensions. A federate reasoning can be applied by organizing the agricultural loans borrowers into “financial interest groups”, which would be collectively financed, with the purpose of being collectively sold in local or export markets that require larger, better quality and more uniform volumes.

7. Microfinance as a development partner

The microfinance sector is not yet properly acknowledged by the media, economy experts, universities, etc. The proper promotion of microfinance throughout the years has been halted by the approach of focusing on daily field activities. Thus, better communication is needed with key actors in the financial sector at the national level. Some of these actors are: economy journalists and university researchers (holding informal meetings and supporting media or university research materials on the role of microfinance), financial experts (enabling periodic data exchange, site visits, organizing polls on behalf of public institutions, etc). Microfinance needs to be a proper and convincing spokesperson in every consultation in the framework of National Development Policy Making. With the initiative of MIA, the following need to be supported, without bureaucratic hesitation: organizing university seminars, competitions for the best micro enterprises in different categories, such as youth, women, farmers, etc, or round tables with social-financial development topics.

8. Encouraging financial social innovation

In cooperation with donors or technology representatives, MIA could be supported to start a “Financial Innovation Initiative” (FII) as a consulting process between MFIs, public authorities, banks, and business representatives with the objective to summarize data, proposals, analyses, etc., on the challenges or regulatory potential that could pose an obstacle to financial innovation. Financial innovation does not only include the market capacity to engage new technologies to increase performance, safety or adaptability of the existing products, but also the development of new products with high social impact through existing

Regarding the market

technologies. Simultaneously, the creation of a “Financial Innovation Fund” can be lobbied for, which would support small financial innovation projects, based on calls for open projects for financial institutions or social innovation businesses.

9 Encouraging new relations with banks

The microfinance sector has a special connection with the banking sector, due to the fact that all MFI actions are conducted through second tier banks. When the business of a client undergoes growth, it automatically passes on to the banking sector. On the other hand, banks have no interest in getting involved in microfinance while they continue to offer expensive financing. Thus, more detailed analyses of this connection, meetings and market studies and new approaches need to be encouraged and on a case by case basis, MFIs can be “attached” to the banks by becoming preferential shareholders, but with more competitive services and interests. Some of the MFIs could obtain a banking license and can use the bank activities in favor of their own social microfinance activities. They would thus lower costs and improve profit margins, while also testing the concept of “Cooperative bank bonds” with the purpose of diversifying funds used, etc.