BANKING SYSTEM IN MOLDOVA: AN OVERVIEW

Moldova has maintained an efficient, two-tiered banking system since 1993, consisting of the National Bank of Moldova (NBM) and commercial banks. The Moldovan banking sector is considered to be one of the strongest among the CIS-7countries.

The National Bank of Moldova was established in 1991, and modeled on the Central Bank of Romania. It is an autonomous legal entity, responsible only to the country's parliament. The functions of the central bank are as follows:

• Formation of monetary and foreign exchange policy, as guided by the Bank's own economic analysis;
• To act as banker and fiscal agent to the Republic of Moldova;
• To license, supervise and regulate the activity of financial institutions. Banking supervision in Moldova is completely in line with Basle Committee standards;
• To act as banker to the banks, providing them with credit facilities;
• To supervise and facilitate the payments system;
• To be the sole issuer of currency;
• To hold and manage foreign exchange reserves;
• To settle the country's balance of payments.

The NBM regulates and supervises banking practices throughout Moldova, and defines national monetary management and exchange policies. Increasingly, the NBM is relying less on exercising direct controls and instead utilizing indirect methods based upon market mechanisms. The regulatory system was developed with technical assistance from the IMF and USAID. Its main norms are in line with, or – concerning capital adequacy and loan provisions – even stricter than Basle prudential norms. Some of the most striking requirements are: financial reporting according to IAS, in force since January 1998; capital adequacy ratios which make 12%, and loan provisioning on a gross loan basis without taking into consideration loan collateral. The later is stricter than IAS norms, because of the difficulties of valuing and realizing collateral in an emerging market.

The regulation on risk-based capital adequacy establishes minimum capital requirements for all 16 commercial banks licensed in Moldova. The requirements vary by the type of license A, B or C. Banks with A license can operate only in domestic currency. Banks with C or B license can conduct international operations. Capital markets activities are only permitted with C banking authorization.

Today there are 16 commercial banks in Moldova. The largest members of the banking system are the four former state banks, privatized in 1994-95 period, and one initially private-owned bank. All five belong to the group of banks with assets of over Lei 500 million (about USD 35.7 mln.)

The group of banks with assets of over MDL 200 mln.(UDS 14.2 mln.), but less than MDL 500 mln., which accounts for about 18.92 percent of total banking system assets, also includes five private banks, established in 1993/94 period, which are serious about banking and which have grown to become significant members of the banking sector. Almost all these banks have foreign investors among their shareholders and due to this fact they are exempted from income tax. The predominant clients of these banks are exporters and the emerging private enterprise sector. A high proportion of their deposits is in foreign exchange and most of their lending is short term trade financing. This group is likely to lead the future growth of the Moldova’s banking sector.

The group, comprising about five banks with assets less than MDL 200 mln., is a mixed bag. It includes potentially good banks, which have not yet managed to fully develop their business potential and increase their market share. However this group also includes a number of banks, which neither takes deposits nor making loans. Such banks are still solvent and profitable, but it would appear that their main business orientation is not banking.

Although the banking system has been opened to foreign competition, the foreign presence in the Moldovan banking system is still low compared to other countries in the region with only two subsidiaries of foreign banks active in the country, Banca Comerciala Romana (a full subsidiary of the Romanian bank) and Unibank (fully owned by Petrocommerce, Russia).

Following recommendations of the World Bank the National Bank of Moldova intends to keep minimum capital requirements at the MDL-equivalent of EUR 5 million which will bring to the further consolidation in the banking sector.

Banking opportunities are scarce, which prompts most banks to avoid specialization. Corporate banking is the main source of revenues, whereas retail banking plays primarily a funding role. The involvement of banks in financial service such as capital markets, leasing, factoring, or insurance is low. Weak IT systems act as a constraint for developing the range and improving the quality of services available. The top tire private banks have been able to gain some advantage over the ex-state banks in this area.

Moldova’s commercial banks are still not fully being utilized. As in other developing countries, tax evasion and a lack of trust in the banking system are partly to blame. The riskiness of loans in Moldova -- exacerbated by the continued poor financial situation of many enterprises and a still unclear legal framework -- particularly regarding bankruptcy law -- adds a significant premium to lending rates charged by commercial banks. However, helped by falling interest rates and high liquidity, banks have substantially increased their lending volume over the last two years (by 86 per cent), but, with a loan to GDP ratio of 17 per cent, the level of financial intermediation is still low. The quality of the loan portfolio has improved, with the share of overdue loans decreasing during 2002 from 18% to 10.2% of the total banking system’ capitalization, and loan loss provisions from 7.9% to 6.2% of the total loan portfolio.

In the I half of 2003 assets of the Moldovan banking system made up MLD 8,69 billion ($ 620 mln.). According to the NBM's data, aggregated normative capital of all 16 commercial banks of the republic has increased during first 6 months of 2003 by MLD 64 mln. ($ 4.5 mln.) and reached MLD1.86 billion ($ 119,4 mln.); credit portfolio made up MLD 4.91 billion ($ 350.7 mln); deposits amounted to MLD 5.55 billion ($ 396.4 mln.).