That's how “credit is functioning, bejelud” in Kosovo

“The interest-free loan”, this is the motto of some of the microfinancial institutions in Kosovo using Islamic banking regulations. “Start” is one of them and is present in the microfinancial sector since 2002. It releases loans like all other competitors, but it does not apply interest to its clients.

In Kosovo, there are only two financial institutions that apply this model, but very little is known about how they function. The Economic Bulletin has researched the functioning of these institutions, the way they win, and whether they are licensed by law.

Research reveals that there is uncertainty about their functioning; sufficient legal base is lacking, and much is known how they make profits without using interest.

In their work these institutions enforce Islamic rules and apply no interest to their clients at all. To earn money without the use of interest, they use participation systems through equity. Turnout means that if such an institution lends it to a business, then this business will pay off the loan without interest, but it's bound to give some of its profits to the institution. If the business fails or fails to make any profit, then neither does the institution, which has given the loan, benefit.

“Start” and “Tim Invest” are two of the institutions operating in Kosovo with these rules. Both are licensed by the Kosovo Central Bank (BQK). While there is still no licensed one in the banking sector.

“Start” had been operating since 2002, at its beginnings only as NGOs, but then as licensed by the CEC, as a microfinancial institution.

According to Star's official, Vehbi Zeqiri, the goal of establishing this institution has been financial support for families in need, with the aim of leaving the need for humanitarian aid from them, but the revenues can provide from their business activities.

Start now offers two types of financial loans to citizens, the first is a charity loan at the only cost of 60 euros on behalf of administrative tax, which according to Start, most of these types of loans are extended in about 1,000 and 500 euros. Meanwhile, the second financial package is the financing of retail, where Start finances the goods that the client chooses for.

But, in conventional Start terms, also charges a fixed annual rate for financed goods. Calculation according to the CEC for this service is around 13.5% (most effective), Start say.

“START offers two financial products: a) charity loans at the only cost of $60 on behalf of administrative tax. Most of these loans are about 1,500 euros; and b) trading financing, where START finances the goods that the client chooses for. In conventional START terms, charge a fixed annual rate for financed goods. Calculation according to the CEC for this service is about 13.5% (most effective)”, the Start told the Economic Bulletin.

Milaszim Abazi, a financial sector connoisseur, says Islamic banking is necessary to function as well as in Kosovo as in many other countries around the world. According to him, in Kosovo at least 20 per cent of the population refuse to take loans from existing commercial banks because this part of the population is against lending that applies interests.

So somewhere around 20% of the population is eager for a bank or more banks to be licensed in Kosovo that would act according to principles at the Islamic banking. This would be good for these citizens, but for Kosovo's economic development itself because financial and investment potential would increase and opportunities would increase to finance that part of citizens who would refuse to receive loans with principles of banking interest”, Abazi says.

Insufficient Legal Rules

However, to license one or more banks that would operate according to the principles of the Islamic banking, according to Abbas, the CEC must also have specialists in this area, who would handle their license and supervision.

Before that, however, sufficient legal regulations are lacking. In the Law for Banks, Microfinancial Institutions and the Nonbank Financial Institutions, there is only one provision that speaks about it overall. “Islamicfinance” is among the allowed financial activities.

“Islamic funding or Islamic banking activity, with the consent of the BQK and under these conditions and in compliance with regulations that can be determined by the CEC”, says Article 44, provisions 1.17, of this law.

The Economic Bulletin has also sent questions to the Central Bank of Kosovo about the licensing of these institutions and waiting applications for licensing, but the same has not returned even after numerous institutions.

Meanwhile, Abazi explains that these institutions function on the basis of the partnership principle in business or in the form of a treat. If the bank becomes a partner in the client's business through business financing, it will also participate in profits based on participation in partnership. In this case, if the business amounts to losses, Abazi says that the bank does not execute punishment but also participates in sharing the loss. The other form of business financing is calculated by imagining the rent. If the business financed by the bank was rented, then the profit would be shared according to participation in financing.

If the bank becomes partner in your business through business financing, it will take part in profit based on participation in partnership. In this case, if the business amounts to losses, the bank does not enforce punishment but also participates in sharing the loss. The other form of business financing is calculated by imagining the rent. If the business financed by the bank was rented, then the profit would be divided according to participation in financing”, Abazi said.

Kosovars' interest rise for “interest-free credit”

And citizens' interest in these types of loans seems to be great. From 2002 to September 30th of 2020, the amount of loans distributed by Start has reached the value of 30m euros, distributed through 18 thousand individual loans. Vehbi Zeqiri says that the Start as a microfinancial institution has always had more credit requirements than funding, and as such prefers business loans to consumer ones. This is because consumer loans, according to him, do not provide regular household income.

And the sectors Start supports the most and at the same time are the most wanted by Start's credit clients, are the service sector, the trade, agriculture, livestock and construction sector.

According to the assessment of this microfinancial institution, Kosovo's market would welcome any sound competition of these institutions, as a market would also be secured for customers. They claimed there is an increase in Kosovars' interest in these Islamic banking institutions, as is happening worldwide.

But, the CEC, according to them, needs to prepare a regulation for the licensing and supervision of Islamic financial institutions in order to enable their activity in the right, effective, and transparent form, especially for Islamic banks, which may have a wide range of services, while microfinance institutions have only loan distribution.

According to Milazim Abbas, if the bank were licensed according to the Islamic Banking principle, certainly would benefit a part of Kosovo's citizens who so far have not approached commercial banks because part of citizens have the full belief that credit interests in banks are contrary to their religious faith. He says that if we say 20% of Kosovo's citizens would find solutions to fund their businesses across banks, operating according to Islamic banking principles, then he believes that the reasonableness to license such banks is argued and that they must be licensed. But, Abazi stressed that in parallel with the licensing of these institutions, even the CEC must gain professional competence.