Kosovo adopted the Euro as its official currency on 1 January 2002. With the use of this stable currency as an official means of payment, the prerequisite for the development of an efficient financial sector and stable macroeconomic environment was in place.

 
Benefits arising from the introduction of the Euro in Kosovo have been obvious and resulted in zero inflation rates and strict financial discipline. In particular, the Euro has given Kosovo a considerable advantage over its competitors in the region by making it more attractive to foreign investment, due to low transaction costs as well as the elimination of exchange rate and currency risk.

The absence of the traditional monetary policy instruments also enabled the establishment of a very strict and efficient regulatory framework, upon which a sound banking system has been developed.

Achievements in the banking sector in Kosovo have been significant in the last five years. They have resulted in the improvement of public confidence in the banking sector and the strengthening of the inter-mediation function of banks in the Kosovo economy.

Kosovo introduced a two-tier banking system back in 1999. The corner stone for the banking sector’s reorganisation was laid by UNMIK-Regulation 1999/20, based upon which the Banking nd Payment Authority of Kosovo was established. The BPK (transformed to Central Banking and Payment Authority of Kosovo in 2006) functions in practice as Kosovo’s central bank, which also embodies the characteristic features of an integrated financial supervisory agency. Its responsibilities cover licensing, regulation and the supervision  of financial intermediaries, and ensures the proper functioning of the payment system.

The financial sector in Kosovo is bank-based and all of Kosovo’s banks are private. There are eight registered banks, of which six are in foreign ownership. The Pro Credit Bank stablished at the initiative of several leading International Financial Institutions, and the Raiffeisen Bank of Austria, hold the largest market share in the sector.

With banking sector assets accounting for 53.5 percent of GDP in June 2007, Kosovo ranks below the countries of the region that attained an average ratio of 72.8 percent. In terms of lending activity, the Kosovo banking sector compares relatively well with other EE countries. Loans granted by the banking sector of Kosovo accounted for 33.9 percent of GDP in June 2007 compared to an average of 38.9 percent for other SEE countries.
 
The loan to GDP ratio in Kosovo ranks higher than the ratio attained in Albania (22.3 percent), Serbia (28.2 percent) and FYROM (29.6 percent).

The lowering of interest rates and the shift from short-term to long-term financing has had a very positive impact on the overall economic growth enabling intensive long term capital investments.

 

 

This report is part of a series prepared by the Economic Initiative for Kosovo (ECIKS), an organization supporting the economic development and foreign investments in Kosovo.