Financial Monitor: Analysis of the key reforms in Moldova's financial sector, August – September 2017

Publishing date: Monday, 02 October 2017
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Banking sector reforms have recorded an increasing momentum once support programs from the IMF and the EU have been put in place, however, the main constraint remains the banking sector’s capacity to adapt to the new requirements. Between August and September, the NBM’s Executive Committee adopted a Regulation regarding the requirements for banks managers, which will ensure promotion of fit & proper persons, and subsequently improve the corporate governance of banks. At the same time, the results of these reforms has not been noticed yet – cumulative credit is shrinking, foreign investors have not showed up yet, lack of shareholders’ transparency continues to be an issue, and there is barely any progress on the infamous bank fraud. At the same time, adoption of certain legal acts is being delayed. These include the law regarding the macro stability mechanism and the law for preventing and combating money laundering and terrorism financing.

At present, the banks with the highest potential to attract investors are those that are under a different supervision regime. The financial situation in these three banks is stable, and after numerous on-site inspections, most of the losses have been recognized. This is namely the reason for an increase in the non-performing loan indicators for the three banks from an average of 10.03% in Jan:15 to 20.02% Aug:171. NBM decisions to force alienation of shares of a particular group of shareholders of Moldova-Agroindbank and Moldindconbank, indicated an eventual openness to attract investments. The ambiguous situation regarding the price forming mechanism, the selling period and potential lawsuits or arbitrations on behalf of former shareholders, could present important obstacles in the process of attracting investors.

Additionally, the small size of the economy and of the national banking system makes the country less attractive for the large foreign banks. At the same time, banks’ high profits during 2012–2016 do not derive from an organic growth of the lending activity, but are rather the result of the monetary policy promoted by the NBM, high level of inflation, which affected the rate structure, and the profits obtained by banks from areas other than crediting activity. A significant weight of banks’ profits comes from investment in fixed income securities – government bonds and National Bank certificates. Therefore, without a strong rebound of the crediting activity – banks’ fundamental purpose – the high profits of the recent years can quickly disappear.

To effectively reform the banking system and to make it more attractive for the fit & proper investors, we recommend the following priority actions:

1. Adopt the law on banking activity in the second reading, by transposing the highest international standards in this area.
2. Urgently revise the legal framework, in order to establish clear criteria for the share selling period and their pricing.
3. Continue reforms aimed at aligning the legal framework with the international standards, including close adherence to the strategy on implementation of Basel III standards.
4. In cooperation with the Ministry of Economy and Ministry of Finance identify policies which could support an organic growth of the loan applications, stimulating banks to return to their fundamental objective, also offering an incentive to the whole economy altogether.
5. Reform the non-banking financial market, which can create economic development also creating room for banks to diversify income sources

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This document is published by Expert Grup and Expert Forum with the financial support of the Netherlands Embassy in Bucharest. The opinions expressed in this document Opiniile are solely those of the authors and do not necessarily represent those of the donor.