Banks and government must work together on a relief strategy to get the country and the economy through a painful winter.
There are 11 commercial banks operating in Kosovo. Nine are foreign owned and, with an overall $6,184.6 (bn) in assets (you read that, yes that is in billions), they operate in a very healthy credit environment with healthy returns and robust balance sheets; every one of these institutions is highly profitable with low levels of leverage (No debts). This is all good so far! Or is it really?
As someone who has worked in the financial services, albeit not in Kosovo, I feel a slight uneasiness about the current prospects of the banking ecosystem in Kosovo. This is for the sole reason that, at the current pace, the banking system is not providing that edge that the economy of Kosovo needs.
What do I mean by that? The time has come to grasp that this level of healthy capital base of these banks should be put in use more broadly in the overall economic system of Kosovo. How can this be done? First by focusing the right minds (Government) and the financial operators (Banks) into an urgent relief strategy that will entail a coordinated effort to ease the financial and economic pain that is coming this winter.
We can do this through a debt and credit forgiveness measure in which banks would issue the relief and the government can oversee and monitor the process via the Central Bank. Credit relief would focus on banks’ $1.548.4 retail credit lines, and the metrics of credit relief could be set by the banks themselves, without damaging their balance sheets or their cost and investment operations.
This relief could come in very handy for many households this winter, when they will face a treble whammy of high energy costs, stagnating wage growth and persistent bank payment demands, adding here the tough APR conditions which are attached to Kosovar customers by those banks.
I will not propose any specific amount of relief that could be distributed, but it is important to emphasize that a good percentage of the overall lending metric ($1,548.4) should be considered, excluding the debt cancellation measure which is the next proposal I am keen to give away.
Debt relief can be strategically designed by banks without damaging their balance sheets but by having at the heart of their strategies the interests of households and others who are already in the greatest financial difficulty, which will worsen as the harsh winter is approaching.
Kosovar companies and the service industry as it stands do not carry a lot of debt-weight on their balance sheets due to dynamic cash circulation and healthy balance of non-performing loans, NPLs, and robust cash generation businesses. All of this can be utilized to improve the capital-accumulation prospects for businesses.
For instance, banks can use the low levels of company leverage to forgive the outstanding credit balances for businesses that accrue profit margins at minimum levels.
Banks can also rebuild their new credit-portfolios with these companies by encouraging responsible lending with low interest margins and higher accumulated debt base. So, for instance, a company could have its past five years of debt annulled in return for a new credit facility with short-term returns but higher levels of facility.
Banks then can recuperate the “loss” of credit that has been forgiven by maximizing their long-term lending facility with low-cost, low annual percentage rates for each of the lending units/products.
Banks with the systemic risk metrics can be selected to participate in the scheme by re-evaluating their loan books without damaging their core lending liquidity processes.
It is important to note that it is essential that other economic actors play a part in regenerating economic activity and supporting the economy which will be taking a hit in the coming months.
The Kosovo Pension Savings Trust, TRUST, as a pension provider, has a special role to play in supporting the banking system to deliver a sustainable level of support for the economy.
TRUST can do this by establishing clear and efficient lines of lending to the banking system via the Central Banking facilities. This can be achieved in three ways.
First, by lending at a non-market rate over the counter to the banks. Second, by using Central Bank facilities to process excess capital from investments and leverage that as a lending function. Finally, for every lending metric, the central bank will be the institution of last resort to evaluate, process and execute the support scheme.
Therefore TRUST can play an important role in the process if the Board of the institution builds enough resilience in terms of rapid capital dislocation and relocation if need be. This can be done by using current capital markets’ access to the outside investment pool and channeling strategic investments to replace the departed capital.
In this way, we can ensure a liquid transfer or a redistributive capital strategy into the economy but also the government can maintain its current strategy of retaining capital investments in favour of regenerating public cash, which will benefit the overall economic system and support prosperity and wealth creation whilst keeping our people safe and protected in the coming months of a potentially harsh and difficult winter.
Emanuel Bajra is a former London City banker and is now a writer and financial markets and geo-political analyst. He is a member of the Kosova Sovereign Wealth Fund Working Group, appointed by the Government of Kosova.
The opinions expressed are those of the author and do not necessarily reflect the views of BIRN.