financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
was noticed in the Foreign Direct Investments (FDI), which fell down by 53.3 percent,
adversely affecting the financial account balance. Unlike in 2011, the prices during the first
half of 2012 grew more slowly. Inflation rate was 1.5 percent compared to 9.6 percent in the
previous year.
The close link between the real and financial sector in Kosovo's economy is reflected in the
fact that the financial sector, alongside with the real sector, recorded slower growth during
the first half of 2012. Real sector problems posed augmented risks to the financial sector,
which among other things, was reflected in the slowdown of lending activity. Nevertheless,
Kosovo’s financial sector continued to be highly stable. Financial sector assets, which
continue to have a structure similar to the previous periods, grew at a slower pace. Total
financial sector assets recorded an annual growth rate of 4.8 percent compared to 13.2
percent in June 2011, and reached a total value of 4.8 billion euros. Banking system assets
continue to represent the largest share of these assets, accounting for 74.6 percent of the
total financial sector assets in June 2012. The degree of market concentration in the
banking system remains high; however, the increasing competitive pressures from smaller
banks have led to a downward trend. Moreover, in November 2012, the Central Bank of the
Republic of Kosovo approved the operating license for a branch of a Turkish bank, thus
contributing even further to the banking competition in the country.
In line with the slowdown of the banking system total assets growth, lending activity
growth decelerated. In June 2012, the value of banking system loans increased by 9.3
percent, as opposed to 15.7 percent growth in June 2011. As a result, the total value of
loans issued by the banking system amounted to 1.77 billion euros, representing 36.2
percent of the GDP. Loans to enterprises continue to dominate, accounting for 76 percent of
the total loan portfolio in June 2012. Consequently, the slower growth of enterprise loans
has been the major contributor of the growth slowdown of the overall loan portfolio. The
main reasons for the slowdown in lending to enterprises, according to the survey conducted
with banks in Kosovo by the CBK, are the tightened credit standards and procedures
employed by banks as a result of the negative perceptions for the real sector developments,
and the high sensitivity of certain industries to these changes in the real sector. The
structure of enterprise loans continues to be dominated by loans to the trade sector, while
agriculture remains the lowest recipient of bank lending. In terms of loan maturity
composition, loans with a maturity term of over two years continue to prevail, having also
increased their participation compared to the previous year.
Banking system loans, which represent the major share of the system’s assets, have been
concentrated within the Kosovo’s economy, which in the one hand increases the risk of
exposure to a single economy, but on the other hand reduces the potential risk from
exposure to foreign markets. Nevertheless, the diversification of assets and loans in various
sectors and sub-sectors within the economy minimizes the risk from ‘over’ exposure to the
local economy; the commencement of Government treasury bills market in January 2012
has further contributed in this regard. Whereas, as regards the risk of exposure to external
markets, it is mainly limited to investments in securities and placements with banks
abroad, whose share in the total assets has declined over the observed period.
Deposits collected within the country continue to be main funding source for the banking
activities in Kosovo. However, deposits have suffered a growth slowdown in the observed
period. In June 2012, the value of deposits in the banking system amounted to 2.1 billion
euro, recording an increase of 7.7 percent compared to 11.8 percent in the previous year.
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