The banking and financial industry is one of the most successful sectors of Kosovo’s young and fragile economy. While this sector is in its infancy, it has continuously shown stability, growth, and profits. The best way to understand Kosovo’s banking and financial industry is to address its three primary components: banking, insurance, and securities.
First, banks (and other financial institutions) are the primary and most powerful segment of the industry. The sector is comprised primarily of two types of financial institutions: banks and microfinance institutions (“MFI”), with the latter group containing both privately owned and non-profit NGOs. The market is fairly saturated with commercial banks offering a limited set of financial products, with a primary focus on taking deposits, providing small to medium loans, and offering basic banking services (a couple of the bigger banks operating in Kosovo have also recently begun offering leasing products for homeowners and those purchasing vehicles and/or machinery). Several of the many MFIs in Kosovo have gathered capital that is commensurate to that of banks in the country. Most of the MFIs were established immediately after the war in Kosovo ended and provide micro-loans to those with difficulty getting access to credit, often with interest rates that surpass 20% annually. In fact, the banking sector (both banks and MFIs alike) receives regular criticism for alleged predatory lending, especially in view of interest rates that range from between 10% to sometimes more than 24%, as well as high (and surprisingly uniform) administrative fees for bank services. Some argue that this remains possible partly because the Kosovo Competition Authority – the agency charged with regulating competition in Kosovo – is seriously dysfunctional and does not have the capacity or the infrastructure to carry out its functions.
The primary and only regulator for the entire sector is the Central Bank of the Republic of Kosovo (the “CBK” or “Regulator”). The Regulator implements applicable legislation and engages in a regular examination of banks to ensure full compliance. The Kosovo government’s recent attempt to revamp banking legislation has met some difficulty due to the fact that the main law regulating financial institutions in Kosovo – the Law on Banks, Microfinance Institutions, and Non-Banking Financial Institutions – suffered a major blow when the Constitutional Court of the Republic of Kosovo declared portions addressing MFIs as unconstitutional, thereby hampering the Government’s endeavors to liquidate and privatize non-profit MFIs. This has left MFIs operating with little legislative guidance as to their operations, and the Regulator in the position of scrambling to enact secondary legislation to fill the void. Overall, the legislation regulating financial institutions in Kosovo remains fairly basic and does not much address problems brought to the surface by the 2008 crisis or the recommendations made by Basel III.
Second, the insurance industry in Kosovo is primarily focused on providing a limited set of products: car insurance and limited health insurance. Recently, some insurance companies have also begun offering limited life insurance and property insurance products. More sophisticated insurance products are not offered in Kosovo, despite the need, which means there is great opportunity for growth. Insurance companies in Kosovo are also regulated by the CBK, which regularly examines them to insure not only capital requirement compliance, but also – among other things – consumer satisfaction and claim compensation, which at times were somewhat problematic for some insurance companies. The legislation regulating the insurance companies is fairly basic and slightly outdated, but the CBK has made some efforts to address legislative deficiencies by enacting secondary legislation.
Last but not least is the securities leg of the banking and finance sector. With regard to stocks, other than the Law on Business Organizations – which permits the issuance of common and preferred stock – transactions in stocks in Kosovo remain largely unregulated. Moreover, there is no exchange in Kosovo, so transactions are private in nature. In the last couple of years, the Government of Kosovo has begun issuing a limited number of short-term bonds, but even these lacked proper underlying legislation and did not generate much interest from potential investors. In short, securities in Kosovo are barely regulated, if at all, and require legislative attention soon, especially in view of companies that have grown rapidly and will require proper legislation to raise necessary capital and prevent manipulative practices that may materially affect the investing market.
In sum, Kosovo presents a banking and financial sector that is very stable but in the early stages of its existence. Much remains to be done to bring this sector up to European and/or international standards. However, the performance of the players in this field has been stable and profitable, and provides optimistic trends for those wanting to venture in.
By Korab Sejdiu, Founder and Managing Director, Sejdiu & Qerkini
This Article was originally published in Issue 2.6. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.