ISSN 2039-2117 (online) ISSN 2039-9340 (print) Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy Vol 6 No 6 November 2015 291 The Financial System and Its Impact on the Albanian Economy Orion Garo, MSc. Candidate of Sciences, Economics Webster University Graduate, University of Minnesota Undergraduate Doi:10.5901/mjss.2015.v6n6p291 Abstract This is a problem-related analytical article whose aim is to offer an in-depth description and exploration of the shortcomings of the Albanian financial system. Its analysis focuses on pinpointing the incompetent measures and misjudged fiscal and monetary policies applied by the government and its main financial supervisory body, the Albanian Central Bank, in order to establish and administer and adequate market economy’s financial system for the country, since the fall of the single-party system 24 years ago. Furthermore, it explores various fiscal and monetary standards that should have been considered, and need to currently be put to practice, in order to avoid deeper financial disappointments in the face of a seven-year-long financial crisis that continues to sway over Southern Europe. Finally, it draws several conclusions on what the country’s fiscal and monetary approaches should be in the near and mid-term future in order to start building a solid financial system, which rigorously reflects Albania’s economic potential, deficiencies and particularities as a small developing country in Europe. Keywords: Financial System; Insurance Market; Micro-credit; Stock Market; Bank; Recession; Economic Model. Introduction 1. This analytical work is an attempt to explore several social properties of the financial system and to determine what its impact on the Albanian economy is. We have put together an overview of the development of the financial system after the 90s, pointing out this system’s main characteristics; the bi-model: “stock market ņ bank” and “bank ņ stock market”, and we have determined several weaknesses of the model applied in Albania. Our focus is mostly narrowed on the banking market, and we have done so by analyzing the monetary policies in support of the fiscal ones during the 2006-2013 period. This is because fiscal policies adopted in Albania have progressed in an expansionary continuity shown by a growth of government expenses and a decline of tax revenue. Overall, the economic direction chosen by the government is theoretically fair, but in our view, the means chosen are not grounded in theory. In relation to the latter, we have presented a table with the main macroeconomic indicators for the 2005-2013 period. When designing and implementing the monetary policies in support of fiscal policies, Bank of Albania did not take into account that the factors specific to the Albanian economy were: lack - or irrelevant presence - of real estate market, housing market, capital and financial capital market. It acted and took decisions as if its principal objective was to reach and maintain a safe inflation level. Bank of Albania did not follow the policy guidelines of major banking institutions like the Fed and Central European Bank, neither did it support government’s fiscal policies, thereby influencing negatively in: currency diversification, “crowding out” effect, investment stimulation in production sectors, making local currency (Albanian Lek) efficient, etc. In order to maintain the inflation rate in the pre-assigned levels, applying very high levels of interest rates in relation to other national banks, BOA influenced negatively the national economic growth. In fact, BOA’s applied policies do not have any impact on the inflation rate. This is proven in this paper, through the relation between the interest rate and inflation rate. The respective curves show the same tendencies. This is further sustained by the connection of the interest rates with loan rates (in Lek and foreign currency). The impact of BOA’s policies is clearly expressed in the level of monetary aggregates in which the monetary base, out-of-bank (loaned) money, and M1 aggregate, have mostly had a declining trend. - The insurance market, as an integral part of the financial system, has experienced growth, but its revenues are mainly obtained through obligatory insurance policies such as car insurance, insurance of assets accounted as collateral, etc. There exist considerable differences between insurance costs (borne by the clients) and insurance due payments (borne by the insurance companies). - Social security market is weak and has started only after 2009. - Micro-credit institutions have seen a notable expansion; there are 135 of them in the country. A shortcoming in