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Moldova's banking sector dodged the global financial crisis bullet, as the country has little to no exposure to the international capital markets. However, it has still suffered, as the crisis crept in through the real economy.

Only one bank from a total of 16 was closed in the last year; the central bank pulled PrivatInvestBank's license not because it ran out of money, but because its owners had been using the bank's assets for real estate investment funds and were fried when the market collapsed.

The rest of the sector has fared reasonably well. The National Bank of Moldova (NBM) acted fast last September, slashing the obligatory reserve requirements from 20% of capital to 8% and cutting interest rates from 20% to 7%. On top of this, local banks had been prudent, typically running capital adequacy ratios of over 20%, which give them some wiggle room.

However, non-performing loans have been rising steady, reaching about 12% in September, and are expected to top 15% by the end of this year. At the same time, the sector's profits have all but disappeared, tumbling from MDL880m in the first eight months of last year to just MDL88m over the same period this year.

Moldova's banks had been growing strongly in recent years, but the president of the Moldovan branch of Romanian lender BCR, Andrei Sorin, complains that now there is very little business to do as no one is borrowing. "The bank sector has been growing very fast with assets increasing by 20-30% a year for the last years, but it remains a young banking sector and we have been working like a traditional banking sector, collecting deposits and lending locally. We have a retail banking sector, but most of our business is corporate," says Sorin. "The bank system is stable and there is no crisis on the horizon. In six months, we will be able to push the grow button again."

The penetration of the banking sector is small and the retail banking segment, which has driven the growth of so many other markets in the region, has yet to take hold in the small republic. The early stage of development is nowhere clearer than in the structure of banking sector deposits: corporate deposits make up 70% of all banking liabilities, whereas consumer deposits account for just 30%.

Despite the small size of the market, foreign banks have already moved in. Austria's Erste Bank inherited the local branch of BCR when it bought the Romanian mother bank of the same name in 2006. French bank Societe Generale bought Mobiasbanca in 2007, joining Italy's Veneto Banca, which owns Eximbank, and Germany's ProCredit Bank. In all, the central bank estimates that three-quarters of the bank sector capital is foreign money.

"We need government action to resuscitate the economy, but there has been no functioning government. And we need the economies of our neighbours to recover as, if they rise, we will be lifted too, says Sorin.

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