is dynamic, but remains constrained by high administrative costs

and the loans are reclassified, there may be an increase in NPL. Certain banks whose loans focus specifically on sectors affected by the crisis (hotel industry, services) may find themselves in difficulty if there is an increase in NPL. However, the strong resilience of the financial sector makes it possible to rule out the hypothesis of a systemic risk, even in worst-case scenarios (CBK, 2020).

5.2 – Private sector credit is dynamic, but remains constrained by high administrative costs

Private sector credit, which accounted for 47.9% of GDP in 2020, has more than doubled over the last decade, with an annual average growth of 10% (see Graph 20). It supports household and business consumption, in particular in the sectors of trade (45% of total loans), manufacturing (15%) and construction (13%). Loans to the agriculture sector account for barely 3% of total loans. The Central Bank’s measures in response to the Covid-19 crisis mentioned above led to a 7% increase in loans in 2020 year-on-year (YoY). In 2021, there was dynamic growth in private sector credit, at +13.4% according to the IMF (Article IV 2021).

However, the loans allocated by banks remain constrained by an incomplete dispute resolution environment and constraints on the collateralization of these loans. Some 7,000 disputes between banks and their clients were pending resolution in 2020, amounting to some €150 million, in particular due to ineffective contract enforcement mechanisms and the slowness of the justice system. This low level of effectiveness of the justice system is partly related to the limited capacity of Courts of Justice and the lack of training in commercial litigation for judges. A Commercial Court should be set up under the new Government’s program.

The average interest rates on loans are gradually decreasing, in continuity with the rate dynamics seen at the sovereign level and in connection with the low borrowing rates in the euro area. While they reached around 12% in 2012, they have since been halved and stood at 6.12% at the end of March 2021 (see Graph 21). Graph 20 – Acceleration in private sector credit growth since 2016 (% of GDP)

50 45 40 35 30 25 20 15 10 5 0

14 12 10 8 6 4 2 0 2008 2010 2012 2014 2016 2018 2020

Domestic credit provided to private sector by banks

Source: World Bank

Graph 21 – Average interest rates on loans have halved since 2012 (%)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Average interest rate on loans Average interest rate on deposits

Source: Kosovo Banking Association (March 2021)