Interest rates increase, experts: inflation and institutional crisis are affecting

Radio Reporter Free Europe, presenting itself as interested clients, tested the banking market in late August.

The difference was obvious: some banks offered loans at interest rates of over 7%, one 8% of about 6% as long as they previously were, while business rates rose above 10%.

Bank employees gave similar answers: “Daggers have grown a lot”, but no one gave a clear explanation of why.

In questions to several banks on this matter including Raiffeisen, BKT, ProCredit, NLB, TEB and BPB Radio Free Europe received no answers.

But, the rise confirms the Kosovo Central Bank (BQK), even though in lower figures than banks present.

According to BQC data, sent REL, the average interest rate in credit in July 2025, was 6,38%, down from 6.17% a year ago.

According to bank employees, actual growth began from August onward.

Factors That Affected Growth

Financial experts say increasing interest rates are mainly linked to three factors: Kosovo Central Bank policies, inflation and the institutional crisis.

Former BQ Governor Fehmi Mehmeti explains that a major impact has had the rise of mandatory reserves that banks must maintain.

While banks previously kept capital of 8% to 12% of endangered assets, from June of this year the CEC has increased this rate to 10% to 14%.

This means that for any loan granted, banks must retain more stock capital. And, to compensate for this “capital deadlock”, banks often increase interest rates towards customers, Mehmet says.

For example, if a bank lends 100m euros, it had to keep eight million euros in capital, while now it's ten million euros more blocked than two million euros that cannot be used for new loans”, explains Mehmeti, founder of the Economist and Finance Research Institute, for Radio Free Europe, broadcast Periscope.

This issue was regulated by the regulation for the Adecademity of the Banks Capital in 2015, which defined holding capital from 8% to 12% of the total of endangered assets.

But, the CEC confirmed to Radio Free Europe that it has placed an additional 2% on dangerous assets.

This decision was made last year, but its implementation began in June and aims at “strengthening the sustainability of the financial sector in Kosovo”.

Mehmeti says another reason for increasing interest rates is increasing inflation.

In August of this year, inflation reached 4.5%, compared to 1.4% in August last year.

When prices rise, money loses”, Mehmeti says, and, to protect against this loss, banks increase interest rates.

High subx0 inflation increases the risk of citizens failing to afford credit payments, as daily expenses are higher. This moves banks to demand a greater price for danger, leading to higher interest”, Mehmet adds.

In addition to economic factors, University of Pristina Economics Professor Majid Bektash says the political crisis has also affected interest rates.

Kosovo, now and many months, is with Government in office and with no fully-constitutiond Assembly.

Bektash says that the non-submission of international donations or loans, requiring approval by two-thirds of the vote in the Assembly, has reduced the circulation of the euro into the market.

The lack of money lowers the bid and increases the demand for loans, pushing banks to increase interest”, Bektas explains Radio Free Europe.

Due to the institutional blockade, eight international funding and credit agreements with the European Union, published last year on the official site of the Parliament, have not yet been approved.

For both Mehmet and Bektas, the situation is interesting for the banking market, as interest rates for credit are increasing, while those for deposits are slower.

Bektash says lowering credit interest rates can be achieved through increased competition.

Allow new banks to enter the country's market in order to force existing banks to lower interest rates”, Bektash says, adding that bank profits are currently high.

Commercial banks in Kosovo individually define interest and deposit rates, based on their business policies, and the CEC has no right to intervene directly on them.

According to the CEC, the banking market functions as a free market, where market conditions determine the cost of funds and loans.

In Kosovo, 11 commercial banks operate, while nine microfinancial institutions that offer loans to citizens operate. Although conditions of the latter are easier, the interest rates they apply are markedly higher, about 20 percent. /Periscope/