The difference between the average interest rate of loans and deposits constitutes “the spread” of interest rates. The real interest rate is the difference between the nominal interest rate of treasury bills and 1-year inflation. Risk premium on lending is the difference between the 1-year loan rate and the Treasury bill rate with the same maturity.
Graphically the average rate of loans in ALL and EUR in the last 5 years is presented as follows:
Source: Bank of Albania
Analysis and comments: ODA
Average one-year deposit in EUR and ALL in the last 5 years is presented as follows:
Source: Bank of Albania
Analysis and comments: ODA
The “Spread-? Loans – Deposit (the difference between the interest rate of loans and deposit):
Source: Bank of Albania
Analysis and comments: ODA
In 2009, the average one-year loan rate in ALL was 15.71%, and by the end of February 2014 it was 12.93%, so, there was a decrease of 2.8%. At the same time, 1-year term deposit rate in 2009 in ALL was 6.75%, while at the end of February 2014 it was 2.46%, so there was a decrease of 4.3%. Therefore the “spread” credit-deposit (which constitutes the main factor of the gross profit of banks) has increased over the period, from 8.96% to 10.47% in ALL currency.
While the real interest rate is presented as in the following schedule:
Source: Bank of Albania
Analysis and comments: ODA
The real interest rate is calculated as the difference between the interest rate at which the government borrows (Treasury bill rate), compared to the inflation rate. It has followed the same trend as the rate of 1-year treasury bills, given the fact that inflation has been slightly volatile, but under control. In 2009, the real interest rate was 5.41%, while by the end of February 2014 it was 1.86%. So for an investor who buys one-year treasury bills, real return is reduced by about 3.6%, while the opposite happens for the government, the real cost of borrowing is reduced by the same amount.
Risk premium on lending shows the additional rate of return required by the lender (banks) to lend in comparison to the other alternative, which is to invest in government treasury bills (risk-free). As a result it can be used as a good indicator of risk in one economy (example: the risk of default on loans). It is calculated as the difference between the 1-year loan rate and the Treasury bill rate with the same maturity.
Graphically in recent years is presented:
Source: Bank of Albania
Analysis and comments: ODA
As can be seen from the graph, the risk premium on lending has increased in recent years, reaching 9.14% in February 2014 compared to 6.57% in 2009, hence banks in recent years have had more difficulty in the collection of loans granted, and consequently, the rate of return that they have asked to lend against the alternative of investing in government treasury bills increased. This indicates a higher risk in the economy, the increased risk in recent years.