The Role of Collateral in Bank Lending: Albanian Case

Abstract

Lending is the main activity of second level banks. Banks in Albania were very aggressive during 2003– 2008. But as the world financial crisis hit, even the Albanian banks were negatively affected. Problem loans increased and as today (September 2014) the official NPL ratio is 25%. It is important for banks to be prudent in lending. One way they manage credit risk is by requesting collaterals from the borrower. The collaterals can be of different types, forms but they must fulfill certain conditions. Although banks try to be selective in accepting collaterals, the test of their validity will only be realistic in times of crisis. In this paper we will provide some theoretical approach on objects that can be accepted as collaterals and then we will concentrate on immovable properties, as they play a very important role. Then we will derive some numerical data regarding the problem loans for which the banks have sequestrated the collaterals and have put them on sale. What type of collateral is mostly accepted by banks, which are more problematic for sale, what is their proportion in respect to problematic loans? Have banks been able to recuperate the outstanding loan amounts and what kind of problems do banks face when they try to sell the collaterals? These are the questions we aim to answer in the paper.