How Remittances Support the Growth of Albanian Businesses

Remittances are one of the main pillars of the Albanian economy, supporting 23% of households and representing 13% of the GDP. They provide a direct source of funding for small and family-owned businesses, often more accessible and quicker than bank loans or Foreign Direct Investments (FDI).

Key Points:

• Total Value: $2.34 billion USD (2023).

• Usage: Opening small businesses (shops, restaurants) and investments in agriculture.

• Challenge: 37% of remittances are sent through non-formal channels, making monitoring difficult.

• Comparisons: Remittances are more accessible for families, while FDI and bank loans focus on larger projects and have stricter terms.

Conclusion? Remittances are a valuable resource for local economic development, but to maximize their impact, better financial management and strategic use are required.

1. Remittances

Remittances are an important source of funding for Albanian businesses, providing direct capital without the usual bureaucratic hurdles of credit. These funds support families and entrepreneurs, fostering economic development.

Accessibility and Ease of Use

One of the main advantages of remittances is their easy accessibility. Unlike bank loans, remittances reach families directly without complicated conditions, making them particularly useful for those just starting a business.

"Remittances ease credit constraints and provide risk insurance, which supports small enterprises, entrepreneurial skills and possibly a temporary fall in production." - Bimal Ghosh

This aspect makes remittances a significant support for family businesses and small enterprises, which are the mainstay of the Albanian economy.

Main Investment Sectors

Remittances have impacted many economic sectors. Families often use these funds to open small businesses, like shops and restaurants, or to invest in agriculture, building greenhouses and improving production equipment.

Role as Financial Insurance

Besides investments, remittances serve as a safety net for individuals willing to take entrepreneurial risks. These funds have helped decrease poverty by 8 percentage points. Moreover, remittances improve living conditions and consumer purchasing power, creating a positive effect on the local economy.

Challenges and Limitations

Despite numerous benefits, remittances face several challenges. About 37% of funds are sent as cash, outside formal channels, making monitoring difficult. Prime Minister Edi Rama has emphasized that remittances from emigrants are declining every year, highlighting the need for other financial sources. Nevertheless, thanks to their stability and broad economic impact, remittances remain an important source alongside tourism and Foreign Direct Investment.

Development Potential

To increase the impact of remittances on Albanian businesses, it is essential to improve the financial infrastructure and raise awareness of financial management. Currently, only 44.17% of adults in Albania have bank accounts. When used carefully and strategically, remittances can aid the development of small and medium enterprises, contributing to economic diversification and job creation. These benefits position remittances as a significant resource compared to other financial sources like bank loans and foreign direct investments.

2. Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is a crucial source for financing the Albanian economy, bringing in not just capital, but also new technology and experiences. Unlike remittances, which often support the family economy, FDI brings in investors with a long-term vision, providing a different approach to economic development.

Current Performance and Trends

During 2023, the flow of FDI reached 1.6 billion USD, while total accumulated investments exceeded 14 billion USD. In 2024, there was an increase of 5.6%, reaching 1.583 billion euros from 1.499 billion euros the previous year. Additionally, reinvested earnings increased by 6.2%, reaching 853 million euros, a clear indicator of investor confidence in the future.

Key Sectors and Sources of Investment

FDI has mainly focused on a few key sectors:

• Real estate: 22% of the 2023 inflows.

• Extractive industries: 18%.

• Banking and insurance: 16%.

• Energy: 11%.

Meanwhile, Switzerland, the Netherlands, Canada, Italy, Turkey, and Austria are among the main countries contributing to Albania's FDI. Furthermore, investments from the United States have shown a notable increase, reaching 300 million USD at the end of 2023, from just 100 million USD in 2020.

Advantages and Economic Impact

FDI brings more than just money: it brings new technologies and managerial practices that help improve the country's efficiency and competitiveness. Additionally, these investments create jobs and contribute to the development of infrastructure, such as transportation networks and energy systems.

"The government has diligently worked to create an environment welcoming to all – from tourists to big investors. For many, engaging with Albania has proven to be both rewarding and inspiring." - Igli Hasani, Albania's Minister for Europe and Foreign Affairs

Challenges and Barriers

However, FDI does not come without challenges. Albania is often perceived as a difficult country to do business in due to corruption, the informal economy, and weak contract enforcement. In 2023, the country ranked 98th out of 180 countries in the Corruption Perceptions Index. Another problem is the emigration of skilled labor, creating gaps in the workforce and negatively impacting investor attraction.

Accessibility for Small and Medium Businesses

Unlike remittances, which directly help families and small businesses, FDI usually focuses on larger projects. This makes it more difficult for small and medium-sized Albanian businesses to benefit from it. Furthermore, equity investments fell by 3.5% in 2024, indicating that the entry of new investors into the market is still limited.

Sustainability and Long-term Prospects

FDI is an important indicator of investor confidence in a country. Currently, the main focus remains on traditional sectors, such as energy and construction, while newer and high-potential sectors remain underdeveloped. To attract new investments and create a more favorable climate, Albania must take concrete steps to improve the business environment and attract new capital.

3. Bank Lending

Bank lending is a classic source of financing that presents specific challenges compared to remittances and foreign direct investments (FDI). In this section, we will examine its role in the development of Albanian businesses and how it stands concerning other sources of financing.

Current State of the Banking Market

The banking system in Albania is undergoing a phase of consolidation, aiming to increase competition and improve banking services for citizens and businesses. Despite this, the pace of lending remains low, primarily due to stringent credit issuance standards and weak demand from the private sector. Currently, credit to the private sector accounts for only 33% of GDP, a significantly lower figure compared to over 50% in other region countries.

In 2023, this indicator was only 30.6% of GDP, placing Albania at the bottom of the list in the region. This indicates the conservative approach of Albanian banks, especially when it comes to financing small and medium enterprises, which often face significant barriers to obtaining credit.

Challenges for Small and Medium Businesses

Small and medium-sized enterprises (SMEs) are among the most affected by difficulties in accessing financing, which limits their growth opportunities. For example, 16% of small enterprises and 34% of medium-sized enterprises report that financing is one of the main obstacles to their development. Furthermore, less than 20% of small rural enterprises have access to bank loans or credit lines.

Some of the main obstacles for these businesses include:

• High collateral requirements: In 2019, banks required collateral worth 177% of the requested loan amount.

• Complex processes: Procedures are often unclear and involve unjustified fees, making the process even more difficult.

• High-interest rates: Micro and small businesses often face high-interest rates and collateral that exceeds the value of the loan.

These financial barriers negatively impact the sustainability and growth of these businesses, limiting their economic potential.

Initiatives for Improvement

To address these challenges, the Albanian government has established the New Albanian Development Bank, which aims to cover the financing gap for SMEs and startups. The government has committed 10 billion Lek in capital for this bank over a four-year period.

Another positive example is the cooperation between the Council of Europe's Development Bank and ProCredit Bank Albania. In 2021, the Council of Europe approved a 15 million euro loan for ProCredit Bank Albania, aiming for long-term financing for SMEs in sectors like trade and manufacturing. This initiative is expected to support around 100 projects.

Digital Transformation and Perspectives

The banking sector in Albania is experiencing significant digital transformation. However, barriers such as low digital literacy levels, a preference for cash transactions, and cybersecurity risks remain problematic. Despite 93% of banks having established digital departments, only 68.19% of assets show limited engagement in this area.

Bank lending continues to be an important source, but existing challenges require deep reforms to improve access and support the growth of Albanian businesses.

Advantages and Disadvantages

To understand the impact of remittances on the development of Albanian businesses, it is essential to examine the three main sources of financing: remittances, foreign direct investment (FDI), and bank lending. Each of them has characteristics that affect enterprise growth differently. The following comparison helps to evaluate each source's strengths and limitations.

Comparison of Financing Sources

This comparison helps assess which funding source is best suited for businesses' varying needs.

Advantages of Remittances

Remittances are a significant source for financing small enterprises. They offer stability for businesses and help mitigate financial risks. They are often used to start businesses in sectors like retail and hospitality, including shops, bars, restaurants, and hotels. Furthermore, remittances have a positive economic effect, aiding in the creation of new jobs.

Disadvantages of Remittances

However, remittances have limitations. The funds are usually small, limiting the potential to finance large projects. Moreover, the flow of remittances is influenced by external factors, such as the economic conditions of host countries and immigration policies, making them unpredictable.

Advantages of Foreign Direct Investment (FDI)

FDI brings large funds and creates opportunities for major developmental projects. Besides capital, it offers access to advanced technology, expertise, and international markets, providing a significant economic boost.

Disadvantages of Foreign Direct Investment (FDI)

On the other hand, FDI can create challenges. The competition to attract investments often leads to lowering local standards. Additionally, foreign investments are sensitive to global crises, and investors may withdraw suddenly, leaving projects incomplete.

Advantages of Bank Lending

Bank lending is a useful option for long-term financing. It offers flexibility in fund usage and is a good solution for businesses that meet the required criteria.

Disadvantages of Bank Lending

However, borrowing comes at a high cost. Interest rates and collateral requirements are often barriers for small businesses. According to data, 16% of small businesses and 34% of medium-sized enterprises consider financing as one of the main challenges, while the funding gap for these businesses is estimated to be around 9% of GDP.

Conclusion

The analysis of key financing sources highlights the features that distinguish remittances from foreign direct investment (FDI) and bank lending. While FDI reached nearly $1.6 billion USD in 2023 and is suitable for large projects, remittances are a more accessible and stable source, especially for family businesses. These findings encourage enterprises to effectively utilize remittances, giving priority to economic development.

Prime Minister Edi Rama has emphasized the importance of harnessing local resources to stimulate economic growth:

We turned toward the country's potentials and its great resources and use them in a way that they produce growth and prosperity.

One of the main challenges remains the high cost of remittances. For example, sending 200 USD to Albania has an average cost of 8.7%. Utilizing digital channels can help reduce these expenses, particularly when 37% of remittances are still transported in physical form. Technology has the potential to simplify this process and make remittances more affordable.

Another important step is financial education. By focusing on families receiving remittances, educational programs can help turn these funds from a source of consumption into an investment tool. This transformation can support the development of small businesses and create a more sustainable impact on the local economy.

Moreover, remittances offer a particular stability during periods of economic uncertainty, making them a reliable source for sectors such as retail, hospitality, and agriculture. In contrast, FDI is more sensitive to global fluctuations. This stability makes remittances an appropriate choice for small businesses seeking financial security.

Based on this analysis, Albanian businesses can benefit from a balanced approach. Remittances can be used to start small businesses, while combining them with bank loans or foreign direct investments offers more opportunities for greater growth. This combination not only reduces dependence on a single funding source but also creates a more sustainable base for economic development.

Challenges Faced by Albanian Businesses in Utilizing Remittances

Businesses in Albania face several obstacles when attempting to use remittances as a source of financing. One of the main issues is the lack of sustainable stability, as remittances are often unpredictable and cannot be guaranteed as a regular income source.

Another challenge is that most remittances are used to cover family needs and daily expenses, leaving limited room for funding larger projects.

For these businesses, having access to financial advisory services and support networks is crucial. Organizations like Business Network Albania offer valuable assistance to families receiving remittances and could help transform these funds from a consumption source to an investment tool. This transformation can support the development of small businesses and create a more sustainable impact on the local economy.