Microfinance MFIs started operations immediately after the war as financial aid and micro-lending programs in support of the small business initiatives in Kosovo. Their contribution has been important to kick-start the post-war economic growth in a period when the financial sector was almost inexistent.
After the initial support of donors, MFIs have been funded by commercial loans from international financial institutions at an interest rate between 6.5-9% p.a. In general, these institutions are development banks and socially responsible investors, who support certain activities and sectors in developing economies that contribute to improve the standards of living of marginalized groups of society. Some of the renowned lenders to the MFIs in Kosovo are EBRD, FMO, EFSE, Blue Orchard, Symbiotics, OIKO Credit,Triple Jump and etc..
The vast majority of MFIs in Kosovo have NGO status. They are licensed as microfinance institutions and are supervised by the regulations of the Central Bank of Kosovo (CBK). MFIs submit annual audited financial statements to CBK and annual reports to the NGO Office. Furthermore, MFI report on monthly and quarterly basis to CBK.
The benefits that the microfinance industry provides to the people of Kosovo and economic development of the country are multiple. However, the most important is the MFI impact in financial inclusion of the poorest layers of society. The microfinance sector serves a group of the population that would otherwise not be served by commercial banks. Financial inclusion of all layers of society reduces the necessity of people to address their financial needs in informal loan markets where financing conditions are unfavourable, unsafe and always with bad consequences.
The microfinance industry also plays an important role in the financial education of clients, who receive guidance on how financial products work, allowing clients to move from the informal to the formal economy in post-war country and giving them and their families’ opportunities to new entrepreneurships. Microfinance has a powerful effect in the community, as its benefits touch the clients and their small businesses, the clients’ families (e.g. extra income is often used to improve the nutrition and education of the children) as well as other individuals who benefit from the additional employment opportunities that growing businesses create. MFIs in Kosovo play an important role in empowering women through small loans. KGMAMF, which is a MFI associated to Grammen, offers small loans only to women, while a substantial percentage of the overall loan portfolio of the sector is lending to women.
Today, MFIs continue to meet the Kosovo market needs, by lending to small businesses and individual entrepreneurs, including farmers, in amounts that average EUR 1,900 in 2017. As of the Monthly Report of AMIK Members of December 2017, MFIs have 109 branches covering the entire territory of Kosovo, they serve about 70,000 active customers and employ around 900 people. These statistics demonstrate the contributions of MFIs to the economy of Kosovo.
Without the MFIs sector, these customers would remain un-served. The banking sector typically avoids micro loans because they are riskier and banks prefer to better exploit the economies of scale that arise from larger loans. Credit cards are not a typical product to assist micro clients or clients near poverty level while when used they are most of the times more expensive than a microloan.
Although interest rates are at first look high, they are approximately at the level of coverage of costs and are comparable to the region. Competition, the removal of restrictions on services and the inclusion of the private capital will significantly affect the reduction of interest rates.
NGO MFIs are common in emerging markets and developing countries, including in our region. Such institutions have become popular, especially after Muhammad Yunus (founder of Grameen) received the Nobel Peace Prize for his groundbreaking work in microfinance. The operating model in Kosovo is similar to the model in those countries, where interest rates are priced to cover financing costs, the risk of lending to small and informal businesses and other operation costs, which are higher for small loans.