This interest rate differential vis-à-vis any benchmark country—be it Germany or Montenegro—reflects the additional “risk premium” that banks perceive and charge on loans. It comprises essentially three types of perceived extra risk, viz., (i) the business climate (collaterals, contract enforcement, or property rights); (ii) business conduct (high degree of informality, lack of financial transparency, or the lack of viable business plans); and (iii) the Damocles’ sword faced by foreign-owned banks in Kosovo of being merged by their respective headquarters into the group of troubled banks elsewhere in Eastern Europe and confronted with corporate strategies to deleverage out of (perceived) high-risk markets. Faced with this particular set of constraints, the banking sector in Kosovo has, in fact, adapted well to the existent environment, focusing its activities on remaining healthy, liquid, profitable, deposit-based, and with portfolios that contain but manageable risks.
It is apparent why banks in Kosovo have been conservative in their lending decisions; and these have served the sector and the economy well in recent years, especially if compared to the experiences made in neighbouring countries. At the same time, demands on the banking sector, by the public and polity alike, have been increasing to contribute (even) more to the country’s development. For financial institutions to be in a position to do support the “macroeconomic” development objective, the “microeconomic” aspects (of an underlying business case) have to be in place as well—thereby begging the overarching question as to whether, for banks, there is an optimal degree of risk-taking.
The inherent costs of a banking sector that is too willing to take risks are well-understood and, given the recent financial history, well documented. The opposite case, when banks are too risk-averse, has similarly clear macroeconomic consequences, posing the risk of asphyxiating an economy’s innovation and growth potential. The corresponding “vicious cycle” starting with (i) weak businesses and unknown start-ups; (ii) leading to considerable hesitation among banks to lend; (iii) as manifested in banks’ requiring for loans with (overly?) short-term maturity, if granted at all, high collaterals and high interest rates; (iv) which leaves the private sector with reduced rates of returns on its investments; (v) cementing their financial vulnerability; and (vi/i) leaving them still weak and unattractive to the banking sector. In this context, banks would need to ask themselves whether extending loan maturities would not effectively reduce default risks, as loan repayment profiles become more closely aligned with investments’ (expected) revenue and amortisation profiles.
There are considerable options to assess the extent, to which banks’ risk exposures could be reduced further so as to allow for a tangible reduction in the real cost of credits. One could add a whole array of other potential changes to the banks’ conduct, all sound from a business perspective and desired from an economic policy-making point-of-view, but let me just mention one: the delayed modernisation of the insurance sector could be accelerated by linking it explicitly to mortgage lending, offering to insure borrowers against incapacitation, unemployment, and death. This would not only protect the interests of both contracting parties but also open doors for the diversification of insurance products.
Evidently, demands to the banking sector for lower interest rates and more favourable conditions to the private sector must not come at the expense of increased vulnerability and fragility to the financial sector—the macroeconomic costs alone would be far too high and detrimental to the development objective motivating said requests. But a debate of this nature, in the context of the Finance Fair, does warrant the question of whether it would not also be in the financial sector’s interest to move towards the edge of, or go beyond, the current comfort zone. It is true for all market participants in the financial and private sectors: unrealised opportunities (if viable) are very costly to the country and its citizens’ socio-economic welfare.
