Kosovo’s highly capitalised and liquid banking sector has benefited from its relative insulation from international markets, but its banks must develop and diversify their activities in order to put their funds to work.

January 2012 marked an important milestone for Kosovo, when the Central Bank of Kosovo (CBK) issued the first treasury bill on behalf of the government, for €10m. This is the beginning of a programme of about €100m in borrowings for 2012, intended to provide financing for key infrastructure in Kosovo as well as promoting financial sector development. The country declared independence in 2008, but is still awaiting official recognition from a number of governments worldwide, including five in the EU.

“The treasury bill is a modest amount, but it is a good start in that we are gradually creating conditions for bringing more liquidity into the economy of Kosovo, because currently we have a lot of our surplus liquidity invested abroad, so issuing well-planned and rational amounts creates the conditions to develop a securities market,” says CBK governor Gani Gerguri.

While investors elsewhere in Europe are worrying about too much government debt, banks in Kosovo would be happy to see a little more issued locally. The government typically runs a budget deficit of less than 3% of gross domestic product (GDP), and total government debt is just 7% of GDP.

The economy appears to be resilient to the events in the eurozone in other ways, too. Exports play only a small role in total economic activity, accounting for no more than 10% of local output. And while remittances play a vital role, most of Kosovo’s expatriate workers are based in Germany and Switzerland, where employment remains robust. This should make Kosovo less vulnerable than neighbouring Albania, where most remittances come from workers in some of the eurozone’s worst-hit economies such as Greece and Italy.

This country needs a mortgage market – the demographics are perfect, new supply is being built everywhere, but we are cautious because of both legal and affordability issues

Robert Wright

Given Kosovo’s considerable economic interaction with Albania, there will be some spillover. But development from a low base means the International Finance Corporation (IFC) forecasts GDP growth of about 4% to 5% for 2012 in Kosovo, which will make it one of Europe’s top performers.

Banking stability

Alongside this progress, Kosovo's banking sector also enjoys a very sound footing. Non-performing loans (NPLs) of less than 6% are healthy by Balkan standards, and provisions already cover more than 100% of bad debts. The banking system has a Tier 1 capital adequacy ratio of 17%. The CBK limits loan-to-deposit ratios to 80%, and in fact many banks have ratios well below this.

Indeed, part of the reason why the treasury bill issue was well received is because the growing roster of banks in the country have a shortage of other lending opportunities. Since the first local bank was licensed in 2001, after the separation from Serbia, the sector has now grown to eight banks, of which two are locally owned.

As Greece has not yet recognised Kosovo's independence, there are no Greek banks present in the country. Instead, most of the foreign owners have strong parents, including two Turkish-owned banks – TEB and Banka Kombetare Tregtare (BKT, which is headquartered in Albania) – and ProCredit, which numbers a trio of bilateral and multilateral development organisations among its shareholders.

This well-funded banking sector has so far offered only limited amounts of mortgage lending, which would normally be the backbone of a retail banking market. Demand for mortgages for new homes or home improvement is hardly the problem, especially as a significant proportion of local housing stock was damaged during the conflict with Serbia in 1999.

But Robert Wright, CEO of Raiffeisen Bank International in Kosovo, says prices of up to €700 per square metre in the country's capital, Pristina, stretch household incomes, even taking into account €500m per year in remittances. More importantly, there has been no registration office for apartments until recently, with a World Bank project initiating real estate registration in four major urban areas.

“Strategically, this country needs a mortgage market – the demographics are perfect, new supply is being built everywhere, but we are cautious because of both legal and affordability issues. It will need the government, the legal system and the construction industry to get into line, as well as the banks,” says Mr Wright.

Opportunities abound

There are still plenty of opportunities in other segments of banking, with assets at just 55% of GDP. Although bankers say competition is intensifying – especially for high-quality customers – Mr Gerguri says there are no obvious signs yet of excessive risk-taking behaviour by any of the banks.

“Our banking sector is assessed to be rather concentrated, which is good for stability but in terms of the efficiency of intermediation we would be happy to see new players active in the market. The margin on loans is currently about 10%, and while there are reservations to using this as an indicator, I think it is a sign that there is room for more competition,” says Mr Gerguri.

Many people in Kosovo watch Albanian television, where BKT’s adverts are frequently shown, so we had good brand recognition from when we set up the first branch in Pristina in 2007

Suat Albayrak

Banks in general are reluctant to take on much additional exposure to the country’s leading corporates, because there is relatively high concentration among the, at most 10, companies that have revenues of more than €100m per year. Moreover, many of these focus on the mining sector in the north of the country, which has been affected by rising tensions between the Serb community that dominates northern Kosovo and the authorities in Pristina. Vullnet Latifi, the CEO of locally owned Banka per Biznes (BPB), says despite its name, the bank has been repositioning toward retail and microfinance for the past two years.

“We want to focus on the segments that have the greatest opportunities for growth. There is great potential for salary savings products, and for micro-firms that have grown 20% per year since the war [in 1999]. We are in the process of making conceptual changes in our branches, which were focused mainly on customer’s cash boxes, to move to a sales layout with client relationship managers,” says Mr Latifi.

The small and micro-business sector is helped by the existence of an active credit registry in which all the licensed banks and some microfinance lenders participate. However, Mr Latifi says BPB also undertakes extensive due diligence, including in-company investigation, especially as company reporting to the tax authorities is not yet reliable.

Legal weakness

The weak rule of law remains a challenge to all businesses in Kosovo, with the country ranked number 117 out of 183 in the World Bank Ease of Doing Business rankings for 2012. This is well behind Albania at 82, and 19th out of the 24 countries ranked in eastern Europe and central Asia. Mr Wright says loan collateral often has limited real value, with a very slow legal system delaying foreclosure proceedings for up to five years.

Mr Gerguri’s predecessor at the CBK, Hashim Rexhepi, was dismissed in 2010 following corruption allegations. Although he was cleared of criminal charges in December 2011, the judge described some of Mr Rexhepi’s actions during his tenure as “inappropriate”.

“Obviously this was not good news, but the credibility of the central bank and the financial sector has been well maintained, and we did not see any reactions in the financial sector. The central bank has a good management structure and well-qualified board,” says Mr Gerguri.

Elira Sakiqi, the IFC’s country officer in Kosovo, says it is at least positive that the question of corruption is being addressed. She believes Mr Gerguri and the CBK as an institution have demonstrated integrity, and the monitoring of the financial sector is good.

Trade and agriculture

Despite the tough environment, the small business sector is relatively dynamic. In particular trading, retail sales and distribution companies are a crucial part of an economy that imports 90% of goods consumed.

Suat Albayrak, CEO of BKT in Kosovo, says the bank initially followed its Albanian clients to Kosovo, prioritising cross-border trade with the provision of treasury and trade finance products. But it has also found that its status as Albania’s second largest bank by assets is useful to expand its range of products into retail banking. It now has a 7% market share in Kosovo, with 23 branches, 100% geographic coverage and €140m in local assets.

“Many people in Kosovo watch Albanian television, where BKT’s adverts are frequently shown, so we had good brand recognition from when we set up the first branch in Pristina in 2007,” says Mr Albayrak.

Kosovo’s largest bank, ProCredit, lends 75% of its portfolio to small and micro-businesses, offering loans of up to €2m. CEO Philip Sigwart says that ProCredit is striving to diversify beyond the trading sectors. Agriculture should have significant potential, given very fertile farmland and a large, experienced rural workforce.

“We are by far the leading agricultural lender in Kosovo, but the challenge is that productive sectors are not very developed. We see some positive signs now, with recent investments in the agricultural sector, as high prices for agricultural goods have encouraged entrepreneurs,” says Mr Sigwart.

Dominant players

Between them, ProCredit and Raiffeisen currently control about 60% of Kosovo's market, presenting a significant hurdle for newer entrants. Multilateral assistance is available to redress the balance, with Turkey’s TEB receiving a subordinated loan of €7m from the IFC in 2010.

“We want to encourage south-south investment in Kosovo, inviting solid banks from the region to invest in Kosovo. There is a microfinance institution in Kosovo that we are targeting to help with an investment from a Turkish bank – the IFC is acting as an honest broker,” says the IFC’s Ms Sakiqi.

Although BPB’s local shareholders cannot compete with foreign-owned banks in terms of financial resources or expertise from a cross-border network, the bank has gradually built capacity with the help of multilateral organisations, particular the European Bank for Reconstruction and Development (EBRD). BPB has participated in the EBRD’s trade facilitation programme and received €500,000 in technical assistance to improve training and governance. Finally, in mid-2011 the EBRD approved a deal to buy 10% of BPB’s equity.

“This investment has a very positive effect for the reputation of the bank, because the EBRD only invests in banks that are sustainable. And we are drawing up a medium-term plan for common projects, the EBRD can help to bring our documentation and processes up to European standards,” says Mr Latifi.

And all banks stand to benefit from the development of market infrastructure, in an economy where continued heavy use of cash puts a burden on branch networks and deters the country’s large youth population from adopting banking services – the average age of the population in Kosovo is 25. Mr Wright chairs an industry commission created by the CBK to look at initiatives to bring down cash usage in the local economy.

“Kosovo does not punch its weight by the standards of the region in terms of alternative delivery channels such as ATMs or telephone banking, or the use of credit cards. It has the right demographic profile to do so, with a young population who are very comfortable using technology. But there is still too much cash sloshing around in bank transactions, even among corporates – utilities are collecting their €20 a month instead of using direct debits. The technology is in place, so it is about changing behaviour,” says Mr Wright.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter