Document of The World Bank FOR OFFICIAL USE ONLY Report No: ICR00006687 IMPLEMENTATION COMPLETION AND RESULTS REPORT IDA-6416-XK ON A CREDIT IN THE AMOUNT OF SDR 18.8 MILLION (US$25 MILLION EQUIVALENT) TO THE REPUBLIC OF KOSOVO FOR THE KOSOVO FINANCIAL SECTOR STRENGTHENING PROJECT June 30, 2024 Finance, Competitiveness And Innovation Global Practice Europe And Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2024) Currency Unit = Euro (EUR) EUR 0.93 = US$1 US$1.32 = SDR 1 FISCAL YEAR July 1 - June 30 Regional Vice President: Antonella Bassani Country Director: Xiaoqing Yu Regional Director: Asad Alam Practice Manager: Mario Guadamillas Task Team Leader(s): Blerta Qerimi, Alper Ahmet Oguz ICR Main Contributor: Keler Gjika ABBREVIATIONS AND ACRONYMS CPF Country Partnership Framework CBK Central Bank of Kosovo CGS Credit Guarantee Scheme DFC The United States International Development Finance Corporation E&S Environmental and Social EIB European Investment Bank ERP Economic Recovery Package ESMF Environmental and Social Management Framework ESMS Environmental and Social Management System FSSP Financial Sector Strengthening Project GDP Gross Domestic Product ICR Implementation Completion and Results Report IFC International Finance Corporation IFRS International Financial Reporting Standards IMF International Monetary Fund ISR Implementation Status and Results Report IT Information technology KCGF Kosovo Credit Guarantee Fund KFW German Development Bank M&E Monitoring and Evalution MCC Millenium Challenge Corporation MFI Microfinance Institution MSME Micro, Small and Medium Enterprise MoFLT Ministry of Finance, Labor and Transfers NPL Non-Performing Loan PAD Project Appraisal Document PDO Project Development Objective PFI Partner Financial Institution SIDA Swedish International Development Cooperation Agency USAID United States Agency for International Development WB World Bank TABLE OF CONTENTS DATA SHEET .......................................................................................................................... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 5 A. CONTEXT AT APPRAISAL .........................................................................................................5 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION ................................................................8 II. OUTCOME .................................................................................................................... 10 A. RELEVANCE OF PDOs ............................................................................................................ 10 B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 11 C. EFFICIENCY ........................................................................................................................... 15 D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 18 E. OTHER OUTCOMES AND IMPACTS ......................................................................................... 19 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 20 A. KEY FACTORS DURING PREPARATION ................................................................................... 20 B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 20 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 21 A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 21 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 22 C. BANK PERFORMANCE ........................................................................................................... 22 D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 23 V. LESSONS AND RECOMMENDATIONS ............................................................................. 24 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 26 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 34 ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 36 ANNEX 4. KCGF PERFORMANCE AND ECONOMIC RECOVERY PLAN GUARANTEE WINDOW ... 37 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 49 ANNEX 6. SUPPORTING DOCUMENTS .................................................................................. 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) DATA SHEET BASIC INFORMATION Product Information Project ID Project Name P165147 Kosovo Financial Sector Strengthening Project Country Financing Instrument Kosovo Investment Project Financing Original EA Category Revised EA Category Financial Intermediary Assessment (F) Organizations Borrower Implementing Agency Republic of Kosovo Kosovo Credit Guarantee Fund Project Development Objective (PDO) Original PDO The objective of the Project is to improve access to finance for Micro, Small and Medium Size Enterprises by strengthening the financial and technical capacity of the Kosovo Credit Guarantee Fund. FINANCING Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing 25,000,000 25,000,000 26,769,052 IDA-64160 Total 25,000,000 25,000,000 26,769,052 Non-World Bank Financing 0 0 0 Total 0 0 0 Total Project Cost 25,000,000 25,000,000 26,769,052 Page 1 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) KEY DATES Approval Effectiveness MTR Review Original Closing Actual Closing 14-May-2019 21-Sep-2020 31-Dec-2023 31-Dec-2023 RESTRUCTURING AND/OR ADDITIONAL FINANCING Date(s) Amount Disbursed (US$M) Key Revisions KEY RATINGS Outcome Bank Performance M&E Quality Satisfactory Satisfactory Substantial RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 17-Sep-2019 Satisfactory Satisfactory 0 02 25-Mar-2020 Satisfactory Satisfactory 0 03 21-Dec-2020 Satisfactory Satisfactory 26.24 04 30-Jun-2021 Satisfactory Satisfactory 26.36 05 09-Feb-2022 Satisfactory Satisfactory 26.36 06 30-Jun-2022 Satisfactory Satisfactory 26.36 07 18-Apr-2023 Moderately Satisfactory Satisfactory 26.54 Page 2 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) SECTORS AND THEMES Sectors Major Sector/Sector (%) Financial Sector 100 Capital Markets 96 Public Administration - Financial Sector 4 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 52 Jobs 52 Job Creation 52 Finance 100 Financial Infrastructure and Access 100 Credit Infrastructure 100 MSME Finance 52 Human Development and Gender 52 Gender 52 Environment and Natural Resource Management 2 Climate change 2 Mitigation 2 ADM STAFF Role At Approval At ICR Regional Vice President: Cyril E Muller Antonella Bassani Country Director: Linda Van Gelder Xiaoqing Yu Director: Alfonso Garcia Mora Asad Alam Practice Manager: Mario Guadamillas Mario Guadamillas Blerta Qerimi, Alper Ahmet Task Team Leader(s): Blerta Qerimi, Cevdet Cagdas Unal Oguz ICR Contributing Author: Keler Gjika Page 3 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Page 4 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. CONTEXT AT APPRAISAL Context 1. At time of approval, Kosovo, as Europe’s youngest country with a majority of its population under 30, faced a unique blend of challenges and opportunities. Despite being one of the poorest European countries in terms of gross domestic product (GDP) per capita, Kosovo had made significant socioeconomic strides since declaring independence in 2008, aided by international support and its diaspora. However, the nation grappled with high poverty rates, with 17.6 percent of its population living below the national poverty line as of 2015. To bolster its progress, Kosovo needed to focus on strengthening its institutions, legal frameworks, and government capacities, which are vital for private sector productivity and competitiveness. Investments in infrastructure, particularly in energy, roads, and information communication and technology, are also crucial for supporting private sector development. 2. Since independence, Kosovo has enacted reforms aimed at fostering a dynamic economy and aligning with its goal of joining the European Union. From 2008 to 2017, GDP per capita grew by an average of 3.5 percent annually, yet Kosovo still had one of the lowest living standards in Europe. Despite improvements in the business climate, the economy faced barriers such as a narrow export base, insufficiently transformative foreign direct investment, and limited private sector competitiveness. Additionally, Kosovo’s economy was hampered by low labor force participation and high unemployment rates, particularly among women and youth, which constrain its growth potential. Addressing gender disparities in employment and tackling the high youth unemployment rate, which stood at 55.4 percent in 2018, were among the key challenges that needed urgent attention. 3. The financial sector in Kosovo was dominated by its banking sector, predominantly composed of foreign banks that control the majority of assets. As of February 2019, the sector was well-capitalized and profitable, with a high return on equity and return on assets, at 16.6 percent and 2 percent respectively, as well as a capital adequacy ratio at 16.8 percent, well above the regulatory minimum of 12 percent. Microfinance Institutions (MFIs) also played a significant role (22 in number), especially in lending to underserved markets, but their growth was hindered by regulatory limitations. Despite a notable increase in credit provision in recent years, financial intermediation in Kosovo remained low, with a private sector credit to GDP ratio at 39.6 percent, that is modest relative to its income level, suggesting potential for further credit expansion. 4. Kosovo’s financial stability had been a focus for its authorities, who have implemented key reforms and recommendations from the Financial Sector Assessment Program. The Central Bank of Kosovo (CBK) was focused on maintaining stability, especially given the country’s adoption of the Euro and the absence of independent monetary policy tools. Challenges persisted, particularly in cross-border supervision, supervisory capacity, financial safety net and crisis preparedness, which were being addressed with support from the World Bank (WB) and the International Monetary Fund (IMF). Further reforms were recognized as necessary to enhance financial intermediation, including improvements to the judiciary, cadaster systems, and the MFI sector, with the WB providing ongoing assistance. 5. Micro, Small and Medium-sized Enterprises (MSMEs) are vital to Kosovo’s economy, making up a vast majority of the private sector, yet they faced limited access to finance. These enterprises are predominantly micro enterprises and are largely concentrated in the trade sector and geographically within the capital, Pristina. Page 5 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The concentration of MSMEs in specific sectors and locations indicates a need for broader financial support to diversify economic growth and development across different industries and regions within Kosovo. 6. The financial sector in Kosovo could play a stronger role in support of MSMEs, which are key players in job creation, accounting for 65 percent1 of employment. Micro enterprises alone contributed 36 percent to total employment, which is a higher proportion compared to larger firms in other countries. However, MSMEs faced substantial hurdles in accessing finance, with a third of them financially constrained and estimated finance gap amounts to at least EUR 304 million. High collateral requirements and a conservative lending approach by banks, which prefer financing larger enterprises, exacerbated this issue. Despite banks having sufficient liquidity, they remained risk-averse, relying on non-interest income and maintaining high interest rate spreads, which raised concerns about competition and efficiency. 7. To address the financing challenges of MSMEs, public credit guarantee schemes have been implemented as effective tools. These schemes reduce the collateral needed from borrowers by covering a portion of the loan’s default risk. In Kosovo, the Kosovo Credit Guarantee Fund (KCGF) was established to support MSMEs lacking collateral or credit history, with an initial capital of EUR 8.6 million provided by various sources including the government and international donors. The KCGF operated conservatively, with restrictions on the types of businesses it supported, and the amount of loan guaranteed. Initially, it excluded start-ups and businesses with lower debt service coverage ratios, and the maximum guaranteed amount was capped at EUR 250,000, with a limit of 50 percent of the principal amount. The KCGF conducted due diligence on lenders and requires portfolio performance reports, maintaining oversight to ensure compliance with its requirements. The leverage of the KCGF was conservative, aiming to build lender trust and gain operational experience before potentially increasing leverage to meet demand. 8. The KCGF was projected to be financially self-sustainable for the next decade, with a capital base of EUR 15 million during project preparation. The Fund, which set aside a significant portion of its capital for agricultural loans, charged a 2 percent annual fee on MSMEs guaranteed balances, and earned interest on its capital. It also benefited from a secondary guarantee agreement with the Swedish International Development Cooperation Agency (SIDA), which covered 50 percent of the risk for certain loans. The KCGF’s financial model, which assumed a conservative default rate and a moderate recovery rate, indicated profitability over the next 10 years. 9. Operationally, the KCGF was robust, with a rigorous due diligence process for lenders and active oversight to ensure adherence to guidelines and prudent credit decisions. The Fund’s governance structure was sound, with a Board providing policy guidance and a legal framework aligned with WB principles. However, there was a need for product differentiation, strategic revisions, and enhancements in risk assessment, monitoring, and financial management to better serve its objectives. The payment process was strict, with a 30-day period for eligibility checks post-claim, and banks handled moral hazard issues differently, with some informing borrowers about the guarantees and others not, to avoid non-repayment assumptions. 10. The KCGF has had a positive initial impact, providing guarantees to loans totaling EUR 87.1 million and contributing to the creation of over 3,500 jobs by end of 2018 (the time of project preparation). Demand for the Fund’s services was expected to grow, with plans to introduce new products and expand to different financial institutions. Regulatory revisions by the CBK would likely increase the profitability of guaranteed loans for banks, further stimulating demand. Despite this potential for expansion, the existing capital level was inadequate to meet the anticipated demand without additional capital injection. To ensure the Fund’s continued success and financial sustainability, institutional development need to be supported, including improvements in information technology (IT), risk assessment, financial reporting, and product marketing. 1 WB Job Diagnostic Report (2017) Page 6 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Theory of Change (Results Chain) 11. The Project Appraisal Document (PAD) included the following results chain. Project Development Objectives (PDOs) 12. The development objective of the project was to improve access to finance for Micro, Small and Medium Size Enterprises by strengthening the financial and technical capacity of the Kosovo Credit Guarantee Fund. Key Expected Outcomes and Outcome Indicators 13. Core expected outcome under the project was: Improved Access to Finance for MSMEs. 14. The PDO indicators were the following: (i) total amount of outstanding guaranteed loans through the project; (ii) number of guaranteed loans. Page 7 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Components The Kosovo Financial Sector Strengthening Project (FSSP) had two main components: 15. Component 1: Enhancing the Credit Guarantee Framework (EUR 21.4 million). Under this Component, the project planned to provide additional capital to KCGF to issue partial credit guarantees to support access to finance to eligible MSMEs, including specific segments and sectors that have strategic importance for supporting the sustainable growth of the Kosovo’s economy: • Subcomponent 1.1: Increasing the capital base for KCGF’s general window. Under this subcomponent, the WB would provide EUR 17.7 million to expand the capital base for the KCGF’s general window. The KCGF estimated the leverage ratio to be around 2.5:1 for this subcomponent. • Subcomponent 1.2: Establishing a window for underserved and strategic segments. Under this subcomponent, the WB planned to provide EUR 3.7 million to be used for the capitalization of a new KCGF window which would provide partial credit guarantees for specific topics. These were expected to include startups, young entrepreneurs, women business owners and others. For this subcomponent, the KCGF aimed to keep the leverage ratio at around 1.5:1 given the higher risk profile of the segments and possible changes in fee and guarantee structure. 16. Component 2: Project implementation and institutional strengthening of the KCGF (EUR 0.9 million). The funding under this subcomponent was planned to be used to: (i) strengthen KCGF capacity to implement the project; (ii) improve its information technology; (iii) enhance its risk assessment policies and procedures; (iv) enhance its internal control framework and financial reporting process; (v) strengthen the project’s monitoring and evaluation (M&E) framework, including environment and social safeguards; (vi) design and develop new products tailored for MSMEs in segments and sectors that have strategic importance for supporting the sustainable growth of the economy; (vii) design and implement a marketing and public awareness campaign and a communications strategy, and (viii) training for financial institutions’ loan officers to raise their awareness and knowledge of KCGF products. B. SIGNIFICANT CHANGES DURING IMPLEMENTATION Revised PDOs and Outcome Targets N/A Revised PDO Indicators N/A Revised Components N/A Other Changes 17. The disbursement under component 1 (allocation of KCGF capital of EUR 21.4 million) was fully completed and frontloaded through a single tranche in December 2020 following the project effectiveness in September 2020. Along with the capital disbursement, an additional EUR 100,000 was included as retroactive financing for hiring of a consultant to advise on implementation of International Financial Reporting Standards (IFRS) implementation. Page 8 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Rationale for Changes and Their Implication on the Original Theory of Change 18. At the time that the project became effective in September 2020, the government was putting together an ambitious Economic Recovery Package (ERP) to support economic recovery following the impact of COVID- 19 pandemic. In face of the pandemic, Kosovo experienced its first recession, with output contracting by 5.3 percent in 2020 and public revenues dropping by close to 9 percent year-on-year. Due to negative impact of the pandemic on the economy the financial position of enterprises deteriorated. Increased weaknesses of the private sector also heightened the risks to the financial sector (CBK Financial Stability Report, June 2021). The loan demand slowed down, quality of the loan portfolio started to deteriorate, and provisions increased. However, full materialization of the increase of credit risk in the banking sector was avoided through easing measures taken by the CBK, including a loan moratorium, suspension of rules on provisioning and regular credit classification, as well as loan restructuring. 19. The front-loading of the capital allocation for KCGF was done in support of measures taken by country authorities in response to COVID-19 impact. In a unilaterally Euroized economy without any monetary levers and no access to international debt markets, expansion of the nascent credit guarantee scheme was among the few, and hence critical, policy tools available to the authorities to mitigate the impact of the pandemic shock. KCGF was given a key role by the government under the ERP. Ministry of Finance, Labor and Transfers (MoFLT) worked with KCGF (and in consultation with WB, German Development Bank [KfW], and United States Agency for International Development [USAID]) to develop measures to be incorporated in the Law on Economic Recovery (which was implemented during Jan-Dec 2021). These measures included: (i) increasing the available maximum guarantee percentage for KCGF from 50 percent of principal loan amount of a loan to 80 percent, and (ii) providing budget support up to EUR 5 million to cover the guarantee fees issued under the new ERP guarantee window. In addition, MoFLT and KCGF in close coordination with the WB worked to develop focused ERP guarantee sub- windows to address the access to finance challenges of the most vulnerable and negatively impacted sectors in the economy. While MoFLT’s interest was wider, most of the identified sectors were in line with FSSP project target groups including women in business, young entrepreneurs, and manufacturing sector companies. 20. The team reviewed the risks of front-loading disbursement and found them acceptable. There was the risk that KCGF may not utilize the funds if the demand for new loans from MSMEs was insufficient. However, market analysis indicated an increased demand, and the Law on Economic Recovery was likely to stimulate further demand for partial credit guarantees. KCGF estimated an immediate additional demand for new loans of around EUR 150 million. To mitigate the risk of high losses due to increased credit risk, KCGF agreed to maintain a conservative leverage ratio, apply a maximum non-performing loan (NPL) loss cap, and set strict eligibility criteria for guaranteed loans. Additional capital from the FSSP funds would help maintain KCGF's institutional sustainability. The operational readiness of KCGF was deemed to be low risk, while the risk of fund over- subscription was moderate, with plans in place for additional capital injections from other sources, such as the European Investment Bank (EIB). The project team received written confirmation from the Director of Treasury at MoFLT that about EUR 21 million were allocated for FSSP in 2020. Furthermore, MoFLT informed the World Bank team that if the disbursement could not be completed within the 2020 calendar year, reallocating the budget for the FSSP in 2021 would not be feasible due to the necessity of parliamentary approval, a complex and difficult process. 21. The project did not undergo any restructuring since its components remained unchanged and there were no strong indications that the result indicators would not be met. Although the ERP guarantee window increased the guarantee coverage ratio limit to 80 percent, thereby restricting the maximum amount or number of loans to be guaranteed, this window was planned for only one year, allowing room for the achievement of indicators afterwards. In addition, any restructuring at the time of implementation start would have taken Page 9 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) considerable amount of time for agreement/approval by authorities and would have caused unnecessary delays at a time when fast action was needed. 22. There were no negative implications for the Theory of Change. The early disbursement of capitalization funds to support economic recovery measures was anticipated to hasten progress towards the development objective of improving access to finance for MSMEs. II. OUTCOME A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating 23. The PDO is to improve access to finance for MSMEs by strengthening the financial and technical capacity of the KCGF. It was closely aligned with the Country Partnership Framework (CPF) FY2017 – 20212 objectives at appraisal, and also with CPF FY2023 – 20273 objectives at project closing. Under the CPF FY2017 – 2021, the project was expected to directly contribute to the CPF objective 6 “Improve business environment and deepen financial integration”, while it was also supporting the objective 8 “Enhance employment opportunities for youth, women and vulnerable groups”. The new CPF FY2023 – 2027 strongly recognized the need to “Have more Private Jobs” (High Level Objective 2), and more specifically supported objective 2.1 “Enhance business climate and access to finance”, and objective 2.2 “Remove barriers to the economic empowerment of women and youth”. 24. Kosovo’s private sector is still characterized by low firm dynamism and limited access to finance, which hampers development and job creation4. The economy is heavily reliant on MSMEs with 98.6 percent of firms being micro and small (90.3 percent micro and 8.3 percent small). They face significant challenges in scaling up due to difficulties in accessing finance, limited market access, connectivity issues, and bureaucratic hurdles. Growth has not significantly improved employment rates, which remain particularly low for women and youth, reducing the country’s growth potential and hindering job transition for the young population. The government prioritizes increasing labor force participation among women and youth, as reflected in national strategies. The High-Level Objective 2 of the CPF FY2023 – 2027 aims to create more formal private sector jobs by strengthening the business environment and trade integration. This highlights the need to promote reforms in the business environment, access to credit, and financial market development, with a focus on innovative and green financing, as well as inclusion of women, youth, and marginalized groups. To note, Kosovo has amongst the lowest participation rates of women in the labor force in ECA and beyond, and a very low representation of women in firm management (9 percent according to Country Economic Memorandum, 20225), hence bringing forth even more the importance of specific support for this underserved segment. 25. Business landscape in Kosovo remains dominated by MSMEs with low productivity and poor survival rates which are in need of capital investment financed by long-term financial sources. Improving firm productivity will depend on more private investment in research and development, physical capital, and management training. Limited access to finance can severely affect firm productivity through preventing hiring 2 Kosovo - Country partnership framework for the period FY17-FY21 (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/297951496160148830/Kosovo-Country-partnership-framework-for-the-period- FY17-FY21 3 World Bank. Kosovo - Country Partnership Framework for the Period FY23‐FY27 (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/099041723104545397/BOSIB0a3dc36ae0c40be3c058429f10a40d 4 WBG Country Partnership Framework for Republic of Kosovo, 2023-2027 5 World Bank. 2021. Kosovo Country Economic Memorandum, November 2021: Gearing Up for a More Productive Future. © World Bank, Washington, DC. http://hdl.handle.net/10986/36896 License: CC BY 3.0 IGO. Page 10 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) workers, innovation, and investment. However, 74 percent of SMEs in Kosovo report needing a loan but being either rejected or discouraged from applying. Moreover, only 24 percent of micro firms have access to credit. Long-term finance, which is typically linked to productivity-enhancing investments, is scarce in Kosovo, with 70 percent of credit to the private sector consisting of short-term loans (Kosovo CEM – Raising Firm Productivity 20216). 26. One of the key reasons of limited access to finance for MSMEs in Kosovo is high-risk perception, resulting in high collateral requirements and conservative lending practices by banks. The FSSP was designed to alleviate these financing constraints, particularly for the MSMEs sector in Kosovo, by enhancing the KCGF. The KCGF’s mandate is to provide partial credit guarantees to share the risk with financial institutions and unlock credit for MSME sector. 27. The relevance of the PDO is rated High, as it is fully aligned with the current CPF objectives, and the need to continue supporting access to finance for MSMEs. B. ACHIEVEMENT OF PDOs (EFFICACY) Assessment of Achievement of Each Objective/Outcome 28. The development objective indicators and some of the intermediary indicators were not achieved by the project’s closing date of December 31, 2023. However, they are on a solid path to being fully achieved in the near future. The project has made significant contributions to improving access to finance for MSMEs in Kosovo, particularly supporting the authorities’ efforts to mitigate the negative impact of COVID-19 on the enterprises and the financial sector. The capital allocation for KCGF was fully disbursed in a single tranche, earlier than expected, to support the dedicated temporary guarantee window as part of the ERP (implemented through KCGF). The ERP was key in kick-starting economic activity and restoring the confidence of the banking sector. After the ERP window expired, the WB-financed capital was used to guarantee loans under the standard window (with WB capital guaranteeing 30 percent of loans issued), as well as newly created windows for women in business and start-ups. 29. The total amount of guaranteed loans through the project was at 93.3 percent of target on December 31, 2023. Guaranteed loans reached EUR 84.7 million (figure 1) by December 31, 2021 (one year after disbursement), EUR 121.3 million by project closure (end of December 2023), falling short of EUR 130 million target. However, guaranteed loans were at EUR 141.6 million by April 30, 2024 (time of Implementation Completion and Results Report [ICR] preparation), fully achieving the indicator on this date (see Tables 1 & 2). 30. By the end of 2021, the number of guaranteed loans was 1,573; this increased to 2,279 by the project end date and 2,632 by April 30, 2024, falling short of the target of 3,700 loans. This lower number of guaranteed loans resulted from the higher than anticipated average loan size under the ERP window (reflecting the need for increased liquidity due to COVID-19 related circumstances) and the higher coverage ratio (up to 80 percent), which reduced the number of potential loans compared to the original expected scenario with a lower average loan amount (see paragraph 31 for more details). A significant measure of outreach is the intermediate indicator of the number of MSMEs supported with loans: 1,370 by December 2021 (end of ERP), 1,953 by December 2023 (end of project), and 2,220 by April 2024 (time of ICR preparation), against an expected result of 2,000 MSMEs. As KCGF continues to successfully operate and enhance its guarantee operations, the PDO indicator of the number of loans guaranteed is on a solid path to being fully achieved. Figure 1: Loans and Guarantees under ERP window using WB provided capital (source KCGF) 6Castro,Lucio; Iacovone,Leonardo; Senkal,Asli; Qerimi,Blerta; Myderrizi,Besart; Taskin,Temel. Kosovo Country Economic Memorandum: Raising Firm Productivity (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/099135201212235843/P17195107602a90bd086730a54423f6b077 Page 11 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Table 1: Achievement of PDO indicators (Source: KCGF) PDO Indicators End Target Baseline Outcome Dec 2021 Dec 2023 (end of April 2024 (time of (expiration of ERP) project) ICR preparation) Total amount of guaranteed loans EUR 0 EUR 84,672,789 EUR 121,317,930 EUR 141,564,731 through the project (Number) 130,000,000 Number of Guaranteed Loans 3,700.00 0 1,573 2,279 2,632 (Number) Intermediate indicator of number of 2,000 1,370 1,953 2,220 MSMEs receiving a loan Table 2: Total loans and guarantees using WB capital (Source: KCGF) until April New Loans and Guarantees 2021 2022 2023 TOTAL 2024 Loa n 84,672,790 € 84,672,790 € ERP Wi ndow Gua ra ntees 59,934,673 € 59,934,673 € Women i n Loa n 3,383,300 € 1,856,800 € 1,526,500 € Bus i nes s Wi ndow Gua ra ntees 1,002,220 € 845,650 € 1,847,870 € Sta rt Up Wi ndow Loa n 973,100 € 976,001 € 1,949,101 € 2023 Gua ra ntees 1,443,131 € 736,330 € 706,801 € Sta nda rd Loa n 33,815,240 € 17,744,300 € 51,559,541 € Wi ndow Gua ra ntees 16,725,018 € 8,776,331 € 25,501,349 € Loan 84,672,790 € 0€ 36,645,140 € 20,246,801 € 141,564,731 € Total Guarantees 59,934,673 € 0€ 18,463,568 € 10,328,781 € 88,727,022 € 31. The achievement of intermediate indicators is substantial and provides additional supporting evidence on achievement of project’s outcome. - As mentioned in para 27, during the year 2021, under the ERP window implementation, 1,370 MSMEs— nearly 70 percent of the end target—received guaranteed loans through the project. This number increased to 1,953 (reaching at 97.7 percent of target) by December 31, 2023, falling short of the target of 2,000 MSMEs. However, this number was 2,220 MSMEs (110 percent of the indicator) by the end of April 2024. - The share of guarantees issued to firms with no credit history reached 25 percent, compared to the expected end result of 30 percent. Although the ERP was also intended for companies with no credit history, it was extensively utilized by established MSMEs due to their financing needs resulting from the impact of COVID-19. Consequently, the result indicator for firms with no credit history was diluted by the Page 12 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) large number of beneficiary MSMEs, making 2021 the year with the highest number of guarantees issued by KCGF. Given the uncertainties related to COVID-19, achieving a 25 percent issuance to firms with no credit history is considered a good result. - The temporary ERP window included five sub-windows for specific sectors/segments: manufacturing, service, trade, women in business, and startups (all supported by FSSP capital), and agriculture (utilizing KfW capital). In 2023, in order to ensure the alignment with the project objectives, with the support of the World Bank team KCGF launched permanent windows for women in business and startups. Women- owned or managed MSMEs greatly benefited from the project, with the target exceeded by more than 300 percent by end December 2023, from an expected 5 to 18 percent of the total number of guarantees, and 16 percent of guaranteed loan volumes (19 percent and 16 percent respectively in April 2024). - The financial quality of credit guarantees issued was maintained at satisfactory levels, with the ratio of outstanding guarantees remaining below 2.5 (1.71 at project end, and 1.9 on 30 April 2024) and the proportion of guarantee claims paid out well below the target of 5 percent (0.44 percent on December 31, 2023, and 0.28 percent on April 30, 2024). 32. In implementation of sub-component 1.2 of the project, two dedicated permanent credit guarantee windows targeting women in business, and start-ups were established in 2023. The window for Women in Business is aimed at facilitating access to finance for women entrepreneurs as well as advancing their financial literacy. This window offers favorable terms, for instance guarantees are offered for the amount up to 70 percent of the loan principal (see Annex 4 for more details). In addition to the financial component, KCGF is also offering the non-financial component or the technical assistance program for women in business who are being supported in terms of capacity building (financial education and formalization), networking, as well as mentoring. The Start- Up window aims to facilitate access to finance for new enterprises. Guarantees cover up to 80 percent of the loan principal. In addition to the financial component, KCGF also initiated a non-financial component providing financial education trainings and technical assistance on business formalization, as well as networking and mentoring. It is important to note that the non-financial business support programs were not in the original design of the project but identified as a need during implementation. The World Bank team organized additional internal resources to support KCGF’s capacity in this area7. In addition, a pilot business advisory program was financed through funds under component 2. Table 3: Achievement of intermediate indicators of Enhancing the Credit Guarantee Framework (source KCGF) Intermediate Results End Target Baseline Outcome Enhancing the Credit Guarantee Framework Dec 2021 Dec 2023 (end April 2024 (time of (expiration of ERP) of project) ICR preparation) Number of MSMEs receiving 2,000 0 1,370 (Dec 2021) 1,953 2,220 guaranteed loans through project (Number) Share of guarantees issued to firms 30 25 25 (Dec 2021) 25 percent 25 percent with no credit history (Percentage) Share of guarantees issued to 5 0 15 (Dec 2021) 18 percent 19 percent women owned or managed MSMEs (Percentage) The ratio of outstanding guarantees below 2.5 0 1.88 (Dec 2021) 1.71 1.9 to equity (Text) 7The WB team commissioned LANDT, a financial advisor focused on credit guarantees, to write a report for KCGF on business support services. In addition, the WB own funds were used to support two other activities, the KCGF program impact evaluation, and technical assistance on risk-based pricing. Page 13 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Proportion of guarantees paid out below 5 0 0 (Dec 2021) 0.44 percent 0.28 percent (Text) percent Percentage of beneficiaries that feel 75 0 71 (Dec 2021) project activities reflected their (survey held in needs (Citizen Engagement 2022) Indicator) (Percentage) 33. In addition, the intermediate indicators related to project implementation and KCGF institutional strengthening were fully achieved at the ICR preparation time. As planned, KCGF hired legal, procurement, and financial management specialists, as well as environment & social, monitoring & evaluation, and public relations and external communication experts. No separate PIU creation was envisaged in the PAD due to KCGF being an independent and sustainable institution that provided reasonable guarantees to implement the project. Component 2 support was expected to strengthen KCGF capacities and provide for sustainability of these functions in the future. The results under this component include: - KCGF, improved its IT infrastructure, modified its systems to accommodate new credit guarantee modules, and its ability to prepare IFRS financial statements. - With support of KCGF, the Partner Financial Institutions (PFIs) have established an Environmental and Social Management System (ESMS) to continually identify, assess, manage, and monitor environmental and social risks and impacts of projects financed of their entire portfolio. With a hands-on support from the WB environmental specialist KCGF worked on increasing the capacities of PFIs to implement the ESMS by providing relevant trainings to 1,538 loan officers on ESMS and KCGF products. - Outreach with PFIs, and beneficiary MSMEs improved, including carrying out a survey with beneficiaries and workshops. Survey showed that 71 percent of respondents (slightly less than the target of 75 percent) felt that KCGF products (under this project) reflected their needs. - Additionally, the World Bank team working with World Bank Development Impact Evaluation (DIME) group and KCGF carried out an impact assessment using data from the Central Bank of Kosovo Credit Registry, Tax Administration and KCGF to analyze the impact of the KCGF credit guarantee programs and key determinants of access to finance in Kosovo. Extensive data collected under this initiative enabled the team to compare the performance (productivity, sales, employment) of firms benefitted from the KCGF programs with similar firms that haven’t benefitted from KCGF. Results provide clear evidence of the additionality of KCGF programs (refer to Annex 4.C. on KCGF Impact Evaluation). Table 4: Achievement of intermediate indicators of Project Implementation & Inst. Strengthening (source KCGF) Intermediate Results End Target Baseline Outcome Project Implementation and Institutional Strengthening Dec 2021 (expiration of ERP) Dec 2023 (end of project) Procurement, Financial No distinct The recruitment of Procurement, Financial Procurement, FM Management and functions for procurement and safeguard Management and and Environmental procuremen specialists was completed Environmental environmental Monitoring capacity of t, FM and while financial management is Monitoring functions specialists are the KCGF is improved environment ongoing. TA component established permanently hired. (Text) progressed as planned. at KCGF. Number of loan officers 600.00 0 1,320 1,538 trained (Number) Page 14 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Justification of Overall Efficacy Rating 34. The early disbursed KGCF capital of EUR 21.4 million was fully utilized at the expiration of the Economic Recovery Program at end December 2021. With the guarantee coverage ratio increasing to up to 80 percent and an outstanding guarantee/equity limit of 2.5, the World Bank capital for the ERP window was exhausted by December 31, 2021. Within the first year, the amount of loans guaranteed reached EUR 84.7 million (65 percent of the PDO target of EUR 130 million over four years), and the number of guaranteed loans reached 1,537 (42.5 percent of the target of 3,700). Under normal circumstances and for use under the regular window, the original design anticipated that full capital utilization would achieve EUR 130 million in guaranteed loans by the project’s closing date, spread across 3,700 loans—assuming a leverage ratio of 2.5:1, an average loan size of EUR 35,000, and a 50 percent guarantee coverage. During the ERP window implementation, the average coverage was 70 percent (with a ceiling of 80 percent), the average loan amount was about EUR 52,000, and the leverage temporarily exceeded the 2.5 limit (with agreement from the World Bank team, but leverage reduced quickly below 2.5 in 2022). Consequently, the maximum loans amount of EUR 84.7 million was reached. However, the higher than anticipated average loan size, due to COVID-19 related circumstances, reduced the number of potential loans compared to the original expected scenario with a lower expected average loan amount. 35. As the loans under the ERP window were being repaid, KCGF planned to start re-allocating up to 30 percent of the released capital under their standard window, and the rest to be reserved as capital for the newly created windows. This did not happen immediately for two reasons: (i) awaiting for the approval of the KCGF law amendments (incorporating WB comments and lessons learned from the ERP implementation) – which happened in August 2022, (ii) as part of introduction of new capital from EIB for the standard window, KCGF re- assessed eligibility of participating financial institutions to comply with EIB requirements, a process which also affected the pace of use of World Bank provided capital, and (iii) time needed for designing the windows informed by stock taking exercise from ERP guarantee window. 36. The reallocation of capital released due to repayment of loans under ERP window to the standard window, and increased utilization under newly created women in business and start up windows, provide strong assurance for full achievement of the PDO indicators. As of end April 2024, the accumulated guaranteed loans amount stands at EUR 141.6 million, and number of guaranteed loans reached 2,632. The indicator of the number of loans is in a path to be achieved in the near future due to use of WB financed capital under the standard window and newly created special purpose windows. Table 5. Use of FSSP provided capital (December 31, 2023) (source KCGF) ERP window Standard windows Women in Start-ups window (FSSP portion) business window Amount of loans EUR 84.7 million EUR 30,4 million EUR 1.86 million EUR 0.97 million guaranteed Number of loans 1573 271 76 33 37. The achievement of project development objectives is rated Substantial. C. EFFICIENCY Assessment of Efficiency and Rating 38. The project was efficient in improving access to finance for MSMEs, especially during post COVID-19 pandemic. The FSSP disbursement of EUR 21.4 million to support KCGF ERP window played a major role in supporting government’s COVID-19 response Program of Economic Recovery (Jan-Dec 2021). As the meetings with authorities and banks showed, there is a strong belief among stakeholders that the ERP window played a Page 15 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) paramount role in economic recovery – it was helpful to return trust of the financial sector and restart economic activities. During 2020, the banks slowed new lending considerably as the economy was in standstill (see figure 2). The ERP window provided for a strong jumpstart of lending in 2021. The program provided access to finance during the recovery period to a large number of viable companies at the time it was needed the most. Figure 2: Change in non-financial private sector credit outstanding Kosovo World Bank’s Western Balkans Regular Economic Report, Spring 2024 39. In total, KCGF outstanding loan portfolio in 2021, for all windows, registered an annual growth of 88 percent (new loans supported increased by 147 percent) and outstanding guarantees registered a growth of 125 percent (new guarantees 212 percent) by December 2021. KCGF guaranteed 17 percent of all loans under EUR 100,000 issued by the financial sector in 2021. The ERP, supported by the government subsidy for guarantee fees (EUR 3.1 million) and strong demand for access to finance from the companies during the recovery period, played an important role in the growth of KCGF portfolio in 2021. KCGF mobilized in total EUR 180 million new loan portfolio to MSMEs in 2021 (through ERP and its regular window), backed by EUR 111 million new guarantees, issued for 3,961 loans, and funded 3,315 MSMEs. By the end of 2021 the cumulative total new loans mobilized by KCGF programs since its introduction in 2016 amounted to EUR 408.7 million backed by a total cumulated new guaranteed amount of EUR 221.8 million. Cumulatively KCGF has mobilized financing to 7,767 MSMEs since its establishment. 40. The World Bank funding through FSSP backed almost half of the new loans and guarantees in the KCGF portfolio during 2021 (Figure 3), under all its windows. 47 percent of the new loans and 53 percent of the new guarantees were backed by the World Bank financed capital under the ERP program. Share of the World Bank backed part in the existing outstanding portfolio was lower (30 percent of loans and 36 percent of the guarantees) as the outstanding portfolio included loans and guarantees that were still active from earlier programs. The ERP window attracted high demand during 2021 mainly driven by manufacturing (30 percent), services (26 percent) and trade sector (29 percent) loans. Figure 3: Share of loans/guarantees supported by FSSP funding Page 16 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Source: KCGF reporting 41. Project achieved a positive net present value of close to EUR 77 million as early as the end of 2021. The additional capital of EUR 21.4 million, disbursed in December 2020, was used to provide partial credit guarantees to 1,573 loans, with the total amount of loans provided to MSMEs reaching EUR 84.7 million over a one-year period. The additional loans guaranteed over the remaining period, till the closure of the project added to the positive net present value of the project (estimated at about EUR 91 million by December 31, 2023)8. 42. An impact evaluation carried by the World Bank with support of KCGF showed important benefits for firms supported by KCGF guarantees compared to the ones that were not covered by KCGF (see Annex 4.C). Participating firms had an increase in turnover almost 10 percent higher than the comparison group. The results also indicated that firms that benefited from KCGF became more productive (5.8 percent) and expanded employment (2.8 percent). Impact on firms’ growth is small in absolute terms as the median firm size in the sample is only three employees. Also, firms included in KCGF were nearly 5 percent less likely to stop their operations. According to the information KCGF received from beneficiary MSMEs covered through the ERP guarantee window, about 3,600 new jobs were created as result of investment made through these loans. 43. The project required a fair level of operational support from the World Bank, both during project preparation and implementation. 174 staff weeks of support over 6 years in areas of project design and management, procurement, environmental and social compliance, monitoring and evaluation, as well as technical expertise to MoFLT and KCGF in shaping the project, advising on Economic Recovery Program, shaping of new guarantee windows, amendments to the KCGF Law, capacity building on risk based premium, business support programs, and impact evaluation. This amounted to operational costs of US$0.79 million or 3.2 percent of the project loan amount. The core team was organizing annual supervisory missions (and more frequently during preparation), several virtual meetings during the year, and in addition the main Task Team Leader located in the country was in continuous contact with KCGF, MoFLT, and Central Bank, as needed, as well as keeping the country management unit informed. 44. Apart from a delay of 12 months in making the project effective, the project implementation was completed within the closing date, with no extensions or major issues. Effectiveness date was extended twice, first till July 2020 (Board approval on May 14, 2019, and Financial Agreement signed on September 19, 2019), and then till September 23, 2020, with project declared effective on September 21, 2020. The first extension was requested due to dissolution of Parliament on August 22, 2019, which impacted the Parliamentary ratification of the Financing Agreement. The formation of the new Government in February 2020 was followed by a vote of no 8 Present value is estimated by discounting the amount of loans generated using the WB financed capital with a discount rate of 10 percent (same as used in PAD). As KCGF is responsible to cover the losses and additional cost of capital is zero (MoF transferred the funds to KCGF as grant), only the portion of losses (which were very low) is used to adjust these positive inflows. Page 17 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) confidence on May 28, 2020, that led to yet another change and announcement of a new Government on June 3, 2020, therefore triggering the request for the 2nd extension. Following the completion of effectiveness conditions, the implementation kicked-off in December 2020 (disbursement of KCGF capital), with KCGF proving to be a reliable partner, as expected. 45. Component 2 which focused on project implementation and institutional strengthening was implemented and provided added value to the project and KCGF, however less than half of the funds were disbursed. KCGF hired in due course the procurement and environment specialists, the legal expert, M&E expert, and the public relations expert. Though, the financial management specialist was hired later, in August 2022. This did not significantly impact implementation due to low numbers of disbursements under component 2 and KCGF already having a financial management function. KCGF was very cautious on spending funds sourced through the loan and tried to optimize use of project funds. Less funds than planned were spent on IT hardware and software. KCGF gave priority to ESMS trainings, awareness, guarantee products knowledge for PFIs and beneficiaries, and own technical capacity strengthening. Availability of technical assistance funds by World Bank and other donors provided additional options to KCGF to finance their technical assistance and capacity development activities. To note, the two new windows on women in business and start-ups, both included non-financial component in support of the beneficiaries. 46. Overall project efficiency is rated as Substantial as the project efficiency in achieving objectives was at the expected level. D. JUSTIFICATION OF OVERALL OUTCOME RATING 47. The overall project outcome is rated as Satisfactory, based on the ratings assigned to the PDO on its relevance, efficacy, and efficiency dimensions. Table 6. Summary of Outcome Ratings Sub-Ratingsa Overall Outcome Ratingb Relevance Efficacy Efficiency High Substantial Substantial Satisfactory Note: a. The scale is High, Substantial, Modest, or Negligible. b. The scale is Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. 48. The project provided important contribution to improving access to finance in the country, through significant private capital mobilization, a topic which remains highly relevant for the economy. It helped the authorities address the need for boosting financing in support of economic recovery post COVID-19. Additional capital provided to KCGF mobilized private capital to finance MSMEs and increased and scaled up support for the real economy where MSMEs have a substantial contribution. During the project implementation World Bank funds provided as capital to KCGF (Euro 21.4 million) mobilized 6.7 times more private finance in the form of loans from private banks (Euro 141 million till April 30, 2024). Moreover, KCGF will keep utilizing the additional capital provided under FSSP for further guarantees in the future considering the persisting high demand for credit and current stricter loan terms by banks and MFIs which will endure private capital mobilization. While the funds under component 2 were not fully utilized, KCGF achieved expected results under component 2. It has bolstered its capacities and expanded its outreach, with a heightened emphasis on environmental and social aspects, along with improvements in its ability to measure the impact of its operations. Page 18 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) E. OTHER OUTCOMES AND IMPACTS Gender 49. The impact of FSSP on gender was significant. The ERP window included a Women in Business window. By end December 2023, 18 percent of number of loans and 16 percent of loans amount benefited women owned or managed businesses (respectively 19 percent and 16 percent on April 30, 2024). Following the expiration of ERP window, a dedicated / permanent Women in Business window was established in 2023. As of end April 2024, EUR 3.4 million loans were guaranteed by KCGF through this window. World Bank closely cooperated at the design stage of the window in the preparation of operations manual and later designing non-financial support programs prepared for beneficiaries under the woman in business window through a technical assistance on best practices of business support programs Institutional Strengthening 50. KCGF capacities were strengthened as result of support under component 2. All the PIU functions planned by the project such as Environmental, Procurement, Financial Management and M&E were permanently established at the KCGF, ensuring a continuation after the project closure. Additionally the FSSP funding, coupled with World Bank technical assistance, was useful on (i) equipping KCGF’s with an Environmental and Social Management Framework and ability to monitor its implementation by PFIs, (ii) improving its capacities to run awareness and training programs for PFIs and MSME beneficiaries, (iii) providing best practices for non-financial business support programs, (iv) increasing capacities for moving to risk based fees, as well as (v) carrying out impact evaluation exercises. Particularly on business support programs, risk-based fees and impact evaluation the WB team provided support through analytical work, multiple workshops, and experience sharing from best practices. 51. Overall, KCGF is recognized as a dependable partner and an effective institution with professional management in advancing access to finance for MSMEs which is considered as a good practice in line with World Bank Principles for Public Credit Guarantee Schemes for SMEs9. Since KCGF is recognized as a good practice in partial credit guarantee schemes, World Bank team presented and shared KCGF experience with multiple countries including North Macedonia, Nepal, Laos, Albania. KCGF generously participated in World Bank experience exchange programs which involved workshops, and site visits and follow-up exchanges between credit guarantee funds. Finally, KCGF experience has been shared multiple times within the World Bank to share experience with teams working on similar programs in other regions. Mobilizing Private Sector Financing 52. WB provided capital of EUR 21.4 million helped to mobilize EUR 141.6 million on lending through KCGF guarantees till April 30, 2024. Additional details are provided in the sections on outcomes achievement and efficiency, describing the mobilization of financing for MSMEs through credit guarantees to domestic financial intermediaries. It is important to highlight that private capital mobilization occurred at a critical time when firms most needed liquidity during the COVID-19 recovery period, and banks were increasingly reluctant to lend despite having accumulated liquidity on their balance sheets. Additionally, one of the project’s strongest aspects is that the financing provided by the World Bank will continue to mobilize capital and generate new loans even after the project’s conclusion. 9https://documents.worldbank.org/en/publication/documents-reports/documentdetail/559781468196153638/addis-ababa- enhancing-urban-resilience-city-strength-resilient-cities-program Page 19 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Poverty Reduction and Shared Prosperity 53. MSMEs are beneficiaries of 98 percent of guarantees provided by KCGF. ERP reporting data and impact evaluation showed important benefits to MSMEs with regard to turnover, productivity, and employment (refer to section on Efficiency). More than 3,600 jobs were created due to ERP window impact, and the KCGF has put specific attention on inclusion dimensions like gender and start-ups. To note, KCGF is mandated by its law to work only with MSMEs so the poverty impact will continue even after project closes. III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION 54. The project was prepared in close cooperation with KCGF, Central Bank of Kosovo and the MoFLT. The project was expected to contribute to poverty reduction and shared prosperity by improving access to finance for MSMEs, especially among youth and women. It was aligned with the objectives outlined in the government’s Economic Reform Program (2018-2020) to increase access to finance through the increase of capital for KCGF. The preparation was supported through MSMEs and financial sector data collection and analysis, and coordination with other development partners. The design of the project was simple, focused on providing additional capital to KCGF and strengthening its capacities. The project effectiveness was delayed with about 12 months due to dissolution of Parliament in August 2019, which impacted the parliamentary ratification of the Financing Agreement, and changes of governments in February and June 2020. Following the project becoming effective in September 2020, implementation of the project continued as expected. 55. KCGF was already a well-established institution. It had many unique features in line with best practices, including independent audit, independent and professional management with all private banking background, a clear legal framework, participation by international development institutions, but lacked enough capital to expand and needed some more institutional capacity development. Financial sector was stable with several reforms in pipeline and ready to take off. Government was fully supportive of KCGF, as well as the Central Bank who acknowledged KCGF’s regulatory framework, adjusted its credit risk regulation to provide capital relief to financial institutions, and shared banks’ CAMEL ratings though a Memorandum of Understanding. Coordination with International Finance Corporation (IFC) was important - IFC has provided loans to private banks and MFIs that KCGF worked with. B. KEY FACTORS DURING IMPLEMENTATION 56. Implementation was affected by the need of authorities to address COVID-19 impact on the economy. The FSSP project funding was planned to support the regular guarantee window of KCGF over a four-year period. However, capital was disbursed early and fully and the FSSP financing was the main contributor in the ERP guarantee window implemented during 2021. 57. After the ERP window expired, there were delays in reallocating contributed capital from FSSP to the regular window and the new windows for women, start-ups, and exports. These delays were attributed to several factors: firstly, the approval of amendments to the KCGF law, which occurred in August 2022; secondly, the reassessment of participating financial institutions’ eligibility to comply with EIB requirements, as part of the introduction of new capital from EIB, a process that also impacted the utilization of capital provided by the World Bank; and thirdly, the time required for designing, consulting on, and introducing the new windows, informed by a stock-taking exercise from the ERP guarantee window. The WB contributed to defining jointly the eligibility criteria in the guarantee agreements and supporting the KCGF in designing the new windows. While returning to business as usual through the standard window, KCGF completely revamped Page 20 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) its legal framework, operational capacity, and window design to adjust to the post-COVID era which took some time. Banks also reduced their risk averse behavior and started increasing lending while still maintaining their prudential parameters in post-COVID period. 58. Due to the success of the KCGF program and its unique status as the sole government-involved financial institution focusing on development and MSME finance, new development institutions have partnered with KCGF. Notably, the EIB contributed a substantial amount of new capital (EUR 40 million), while other donors, such as KfW, the United States International Development Finance Corporation (DFC), and SIDA, expanded their partnerships with additional capital and counter guarantees. IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design 59. The Results Framework, along with the PDO and intermediate indicators, were in general effectively established to track the progress towards achieving the PDO. Two primary PDO indicators gauged the direct influence on enhancing access to finance for MSMEs, while the intermediate indicators encompassed the factors and additional effects of credit guarantees and assistance to KCGF on project execution and institutional enhancement. The design was clear and straightforward. It would have made more sense to have as PDO indicator “the number of MSMEs” rather than “the number of loans guaranteed” since the number of MSMEs is more meaningful regarding developmental impact. There is a slight difference between the theory of change and the component 1 activities and result framework. The outputs part of the theory of change envisaged: (i) increase of capital, (ii) establishment of strategic windows, and (iii) new / redesigned products. There is no activity foreseen for this under component 1 (or sub-component 1.2), and no related intermediate indicator. However, it is not clear in PAD whether the new / redesigned products refer to something specific or are another way to refer to new guarantee windows with tailored terms (for instance windows for women in business and start-ups). M&E Implementation 60. KCGF served as the primary entity responsible for monitoring and evaluating project advancement and outcomes, boasting reliable data collection and reporting systems. Progress data adhered to established templates. As part of project component 2, KCGF utilized the expertise of M&E specialist. Moreover, KCGF conducted surveys and workshops with PFIs and beneficiaries to gather feedback on the project’s benefits. Under the technical lead of the World Bank, KCGF in coordination with the CBK and MoFLT conducted an impact assessment to evaluate the effect of guaranteed loans on MSMEs, as well as to assess potential unmet demand for MSME loans. This also helped to build capacities at KCGF to repeat the impact evaluation post project closure. M&E Utilization 61. The M&E reports played a crucial role in shaping KCGF’s future actions. The reports were regularly shared with the World Bank. KCGF utilized statistical insights on the performance of the ERP and its various windows, alongside survey findings and impact evaluation results, to develop new guarantee windows, such as those for women in business, startups, green projects, and exports, as well as to form informed projections for its standard window. This information proved instrumental in securing additional capital from development partners, with the EIB injecting EUR 40 million under the standard window. While the PAD indicated that certain information should have been provided to the WB semi-annually, formal reporting occurred annually; nonetheless, KCGF consistently supplied information to the WB team upon request, as needed. Page 21 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Justification of Overall Rating of Quality of M&E 62. The overall rating of M&E quality is Substantial. Both, the Theory of Change and Results Framework were in general appropriately formulated, and the implementing entity, KCGF, along with complementary WB technical support, established effective mechanisms for data collection and monitoring of issued guarantees and their effects. In addition to meeting the reporting standards set by the World Bank, the data was actively utilized by KCGF to refine and enhance its guarantee program further. However, there were instances where reports should have been submitted semi-annually rather than annually or upon request. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE 63. The environmental and social risk associated with the project was evaluated as moderate. The World Bank’s environmental policy Operational Policy (OP) BP 4.01 applied to the activities financed by this project. In compliance with the Environmental and Social Management Framework (ESMF) prepared for this project, the client supported 11 partner PFIs to develop ESMS, and more than 1,500 loan officers of PFIs were trained on applying the ESMS. As part of the ESMS the partner PFIs have appointed a dedicated Environmental and Social (E&S) specialists to oversee E&S risks management of portfolio investments. The project exclusively backed sub- projects falling under categories C and B. To bolster capacity building among PFIs, KCGF enlisted the expertise of an environmental specialist. Throughout the project’s duration, the Implementation Status and Results Reports (ISRs) consistently maintained a rating of Moderately Satisfactory. 64. The fiduciary compliance risk was initially assessed as Substantial during project approval and remained so for much of the project’s implementation phase. The most recent Procurement Risk and Performance Assessment report from September 2023 rated procurement performance as Satisfactory and identified procurement risk as Moderate. KFCG, as an independent institution, does not adhere to public procurement laws, which are typically relied upon to ensure compliance with World Bank Guidelines. Limited experience with procurement processes and turnover in procurement staff (due to the resignation of a previous staff member) led to delays, thereby maintaining a Substantial procurement risk and Moderately Satisfactory procurement performance throughout much of the project’s implementation. Financial management did not encounter major issues, with performance consistently rated as Satisfactory. However, the fiduciary risk remained Substantial. A World Bank review affirmed that the project’s disbursement and financial management arrangements, including project accounting and reporting, internal control procedures, planning and budgeting, and audit, were deemed adequate. In addition, KCGF, by law, is subject to independent audit and publicly issuance of financial statements with reports available on its web site. C. BANK PERFORMANCE Quality at Entry 65. The quality assessment at the project’s inception is Satisfactory. During the appraisal phase, the project’s design was strategically relevant and well prepared, drawing from robust analytical foundations and aligning with the country’s needs and strategy. Project preparation incorporated insights and lessons from other projects. The ICR report of the Financial Sector Strengthening and Market Infrastructure Project underscored the importance of thoroughly assessing all requisite actions during the project preparation phase and evaluating the implementing agency’s internal capacity to execute or manage all necessary functions. Consequently, the project team conducted a diagnostic assessment of KCGF, with the findings informing the PAD and guiding the design of project components. Furthermore, lessons from analogous projects in various countries, including Jamaica, Papua Page 22 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) New Guinea, Jordan, Sri Lanka, Ghana, Croatia, and the Organization of Eastern Caribbean States, were incorporated. The World Bank Principles for Public Credit Guarantee Schemes served as a benchmark for evaluating Kosovo’s existing credit guarantee framework. Project preparation spanned approximately 21 months from the initiation of activities and 13.7 months from concept to board approval, a relatively prolonged duration for a project comprising two straightforward and targeted components. Quality of Supervision 66. The quality of supervision is Satisfactory. The World Bank team monitored the implementation progress and adeptly responded to the evolving circumstances stemming from the COVID-19 crisis. Close collaboration with MoFLT and KFGC facilitated the provision of technical assistance on ERP preparation and the assessment of risks associated with funding utilization for the ERP guarantee window. Regular communication channels were maintained with the KCGF team, encompassing discussions on guarantee windows performance, data collection, PFIs compliance, the status of the financial sector, and procurement and financial management matters. ISRs were regularly submitted, and the project’s performance remained satisfactory throughout the implementation period, except for the April 2023 ISR, where it was rated moderately satisfactory due to delays in introducing new credit guarantee windows (refer to section III/B for details on the delay reasons). The team could have potentially exerted greater influence on KCGF to utilize more of the Component 2 funding, as less than half of it was utilized. A restructuring of the project could have been discussed with authorities to potentially add new activities to be implemented with remaining funds. The restructuring could also have been used to modify the PDO and intermediary indicators to more realistic targets, reflecting thus the change in terms under the ERP window (increasing the coverage to 80 percent, and the higher-than-expected average loan size). Justification of Overall Rating of Bank Performance 67. The overall World Bank performance was Satisfactory, with minor shortcomings in quality at entry and quality of supervision. D. RISK TO DEVELOPMENT OUTCOME 68. The overall project risk is deemed Moderate. This assessment is primarily influenced by a relatively fragile political and institutional landscape. Despite this, KCGF stands as an independent and dependable institution with sufficient institutional and technical capabilities, along with well-established governance structures including having other donors (USAID, KfW) as shareholders in addition to the MoFLT. The institution has demonstrated diligence and collaboration with PFIs. However, the potential for frequent political changes in the country may impact the representation of MoFLT and the Ministry of Trade and Industry on the KCGF board, rendering KCGF susceptible to external influences. Nevertheless, the robust legal framework ensuring the independence of KCGF, coupled with a significant donor presence on its board, is anticipated to mitigate this risk. The macroeconomic risk is also assessed as moderate. According to an IMF assessment in April 2024, Kosovo ’s economy has exhibited resilience despite challenging external circumstances. Satisfactory growth has been propelled by robust private consumption and accelerated investment. The authorities have maintained prudent macroeconomic policies while continuing to advance structural reform agendas. Financial sector risks remain low, with the banking sector capital adequacy ratio exceeding 15 percent and NPLs ratio standing at 2 percent. Credit growth in 2023 reached 13 percent. 69. From the development sustainability objective perspective, World Bank financed capital will continue enabling access to finance for MSMEs and endure mobilizing private capital from financial institutions in the Page 23 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) form of loans to private sector. Considering that the capital injection to KCGF will be permanent, and KCGF is well managed to protect the value of the capital, the purpose of the project which is increasing the access to finance to MSMEs will continue to be served in the foreseeable future. V. LESSONS AND RECOMMENDATIONS 70. Being responsive to unexpected developments and engaging in close collaboration with client authorities is crucial to ensure that project financing effectively provides support when it is most needed. The emergence of COVID-19 underscored the urgent need for the government to address the economic recovery requirements, particularly focusing on MSMEs, which form the backbone of the economy. The World Bank team maintained close communication with the MoFLT, as well as KCGF, during the preparation of the ERP, which included a dedicated recovery credit guarantee window. The decision by the World Bank to front-load the disbursement of capital for use under the ERP window was the right one. Without this decision, the project would not have been able to provide timely assistance to the country when MSMEs were grappling with investment and working capital needs due to the pandemic’s impact. In 2021, KCGF guaranteed the highest amount of loans to date during a year, with the ERP window accounting for more than half of these loans. 71. Impact assessments, facilitated by robust data quality and quantity, serve as invaluable tools for comprehending the effects on MSME beneficiaries and gauging loan demand to shape future strategies. The KCGF’s impact assessment study, supported by the World Bank, leveraged tax filings of companies and credit register data from the Central Bank of Kosovo, covering a substantial sample size that closely mirrored the actual business population. This assessment played an important role in understanding the economic impact of KCGF guarantees in comparison to a counterfactual scenario. Additionally, it shed light on the determinants of access to finance in Kosovo as well as the existing population of MSMEs not served by banks and KCGF guarantees but deemed equally viable and be potential target group. World Bank team is planning to work with KCGF and the banks on unbanked borrowers based on these findings in a follow-up engagement. This insight was instrumental in understanding the potential loan demand. KCGF plans to re-run this exercise regularly in the future as it also internalized the techniques that was share during the exercise and increased its capacity with a dedicated M&E specialist. 72. Coordination among International Financial Institutions adds value in avoiding overlapping and ensuring optimization of resources. There were several development institutions supporting KCGF, or planning to provide support, including KfW, USAID, World Bank, SIDA, and the US Millenium Challenge Corporation (MCC). Good and continued communication as well as close collaboration ensured that there was clarity on the type and amount of support offered. For instance, KfW funding was focused more on supporting the regular/standard window (along with EIB), and the agriculture lending, MCC recently supported the green window, SIDA providing re-guarantees, and WB supporting the ERP window, and the new women and star-ups windows, as well as the standard window. Furthermore, WB team ensured exchange of views during critical times such as designing ERP or targeted windows and during amendments in the KCGF law. 73. Inclusion of micro-finance institutions as partner financial institutions of KCGF improves the outreach and support with access to finance for micro enterprises. KCGF has included four microfinance institutions (starting in 2021) in its list of registered financial intermediaries. MFIs play an important role for lending to micro businesses in Kosovo. Thirty-six percent of their lending in 2022 went to micro businesses (as of end Dec 2023, according to CBK stability report 2022). The KCGF support channeled through MFIs is important to further increase lending in the future to micro-businesses that otherwise would not be served with lending by the banking sector. 74. KCGF is a demonstration of what it takes to achieve an efficient and effective Credit Guarantee Scheme Page 24 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) (CGS) and it was very useful to present to other countries intending to introduce CGSs during pandemic. CGSs became a frequently introduced instrument especially after the pandemic started to impact economies around the world, with many experiences not as successful. KCGF is an example of a focused, lean and efficient institution with solid legal framework, institutional capacity, sustainable dedicated funding and independent and professional management. Sharing KCGF experience with other countries in the region (for example, North Macedonia) was instrumental. 75. Supporting KCGF through technical assistance and capacity building beyond the project resources paid out for lasting impact. World Bank team has supported KCGF in developing non-financial business support programs, risk-based pricing methodology, and impact evaluation during the life of the project. These created sustainable capacity at KCGF which will be utilized in the longer term, beyond the project life. A good example is piloting the non-financial support programs for women in business and start-up window clients as well as internalized M&E capacity. . Page 25 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS A. RESULTS INDICATORS A.1 PDO Indicators Objective/Outcome: Improved access to finance for MSMEs Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Total amount of guaranteed Number 0.00 130,000,000.00 121,317,930.00 loans through Project 31-Dec-2019 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): The total amount of guaranteed loans through the project reached EUR 84.7 million (figure 1) by December 31, 2021 (one year after disbursement), EUR 121.3 million by project close (end of December 2023), and EUR 141.6 million by April 30, 2024 (time of ICR preparation), fully achieving this indicator. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of Guaranteed Loans Number 0.00 3,700.00 2,279.00 30-Apr-2019 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): Page 26 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The number of guaranteed loans was 1,573 by the end of 2021, 2,279 by the project end date, and 2,632 by April 30, 2024, still short of the end target of 3,700 loans. As the KCGF continues to successfully operate and enhance its guarantee operations, this result is on a solid path to being fully achieved. A.2 Intermediate Results Indicators Component: Enhancing the Credit Guarantee Framework Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of MSMEs receiving Number 0.00 2,000.00 1,953.00 guaranteed loans through project 30-Apr-2019 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): During the year 2021, under the ERP window implementation, 1,370 MSMEs, nearly 70% of the end target, received guaranteed loans through the project. This number increased to 1,953 (97.7 percent) by December 31, 2023, and to 2,220 (110 percent) by the end of April 2024. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Share of guarantees issued to Percentage 25.00 30.00 25.00 firms with no credit history 26-Dec-2018 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): Page 27 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The share of guarantees issued to firms with no credit history reached 25 percent, compared to the expected end result of 30 percent. Although the ERP was also intended for companies with no credit history, it was widely used by established MSMEs due to their financing needs stemming from the impact of COVID-19. Consequently, the result indicator for firms with no credit history was diluted because of the large number of beneficiary MSMEs, making 2021 the year with the highest number of guarantees issued by KCGF. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Share of guarantees issued to Percentage 0.00 5.00 18.00 women owned or managed MSMEs 26-Dec-2018 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): The temporary ERP window included five sub-windows for specific sectors/segments: manufacturing, service, trade, women in business, and startups (all supported by FSSP capital), and agriculture (utilizing KfW capital). In 2023, KCGF launched permanent windows for women in business and startups. Women-owned or managed MSMEs greatly benefited from the project, with the target exceeded by more than 300 percent by end December 2023, from an expected 5 to 18 percent of the total number of guarantees, and 16 percent of guaranteed loan volumes (19 percent and 16 percent respectively on 30 April 2024). Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion The ratio of outstanding Text 0.00 below 2.5 1.71 guarantees to equity 31-Dec-2019 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): Page 28 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The financial quality of credit guarantees issued was maintained at satisfactory levels, with the ratio of outstanding guarantees remaining below 2.5 (1.71 at project end, and 1.9 on 30 April 2024), leaving room for further growth in guarantees while maintaining a cautious position (leverage less than 2.5 percent). Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Proportion of guarantees Text 0.00 below 5 percent 0.44 percent paid-out 26-Dec-2018 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): The proportion of guarantee claims paid out was well below the target of 5 percent (0.44 percent on December 31, 2023, and 0.28 percent on 30 April, 2024). Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Percentage of beneficiaries Percentage 0.00 75.00 71.00 that feel project activities reflected their needs (Citizen 26-Dec-2018 31-Dec-2023 31-Dec-2022 Engagement Indicator) Comments (achievements against targets): Outreach with PFIs, and beneficiary MSMEs to provide information and get feedback improved. Survey carried by KCGF showed that 71% of respondents (slightly less than the target of 75 percent) felt that KCGF products reflected their needs. Page 29 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Component: Project Implementation and Institutional Strengthening Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Procurement, Financial Text No distinct functions Procurement, FM and Procurement, Management and for procurement, FM environmental Financial Management Environmental Monitoring and environment specialists are hired and Environmental capacity of the KCGF is Monitoring functions improved at KCGF are in place. 26-Dec-2018 31-Dec-2023 31-Dec-2023 Comments (achievements against targets): As planned, KCGF hired legal, procurement, and financial management specialists, as well as environment & social, monitoring & evaluation, and public relations and external communication experts. KCGF, improved its IT infrastructure, modified its systems to accommodate new credit guarantee modules, and its ability to prepare IFRS financial statements. With support of KCGF, the Partner Financial Institutions (PFIs) have established an Environmental and Social Management System (ESMS) to continually identify, assess, manage, and monitor environmental and social risks and impacts of projects financed of their entire portfolio. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of loan officers Number 0.00 600.00 1,538.00 trained 31-Dec-2019 31-Dec-2023 31-Dec-2023 Page 30 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Comments (achievements against targets): KCGF worked on increasing the capacities of PFIs to implement the ESMS. It provided relevant trainings to1,538 loan officers on ESMS and KCGF products. Page 31 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) B. KEY OUTPUTS BY COMPONENT Objective/Outcome 1: Improved access to finance for MSMEs 1. Total amount of guaranteed loans through Project Outcome Indicators 2. Number of Guaranteed Loans Enhancing the Credit Guarantee Framework 1. Number of MSMEs receiving guaranteed loans through project 2. Share of guarantees issued to firms with no credit history 3. Share of guarantees issued to women owned or managed MSMEs Intermediate Results 4. The ratio of outstanding guarantees to equity Indicators 5. Proportion of guarantees paid-out Project Implementation and Institutional Strengthening 1. Procurement, Financial Management and Environmental Monitoring capacity of the KCGF improved. 2. Number of loan officers trained Component 1: Enhancing the Credit Guarantee Framework 1. Increasing the capital base for KCGF – project disbursed EUR 21.4 million as capital for KCGF. Key Outputs by 2. Establishing a window for underserved and strategic segments – project supported establishment of specific windows for women in Component business and start-ups. (Linked to the achievement of the Component 2: Project implementation and institutional strengthening of the KCGF Objective/Outcome 1) Project implementation was supported – relevant procurement, finance management, ME staff hired, and other activities took place strengthening capacities of KCGF. See table below for more details. Component 2. Institutional Strengthening of KCGF – activities/contracts and budget spent as of December 31, 2023 Contract name/description Initial Estimated Cost Contract Amount Consultant for training of loan officers 20,000 Canceled Public Relation specialist 48,000 40,299 Consulting firm to conduct survey on new products 90,000 43,943 Local experts on economy/business (summer interns) 7,200 1,500 Media campaign for new product announcement 40,000 49,884 System modification of four new windows (current vendor) 70,000 23,393 Hardware equipment to support the capacity of the operating system 30,000 21,756 Page 32 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Legal expert 9,000 7,500 Monitoring & Evaluation / Reporting specialist 48,000 27,180 Environmental and social expert 60,000 52,301 Consulting firm for IFRS compliance 60,000 58,600 E Internal process review and control 10,000 Canceled Procurement expert 30,000 15,089 FM specialist 48,000 23,120 IT and office equipment for PIU 20,000 13,363 Training Specialist 23,400 Operational Risk Framework-Consultant 14,014 Web Officer Consultant 5,616 Training (leadership, corp. governance, media etc.) 80,000 7,353 Operating cost 139,800 47,763 other 80,000 - TOTAL 890,000 476,075 Page 33 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION A. TASK TEAM MEMBERS Name Role Preparation Blerta Qerimi, Cevdet Cagdas Unal Task Team Leaders Arben Maho Procurement Specialist Jonida Myftiu Financial Management Specialist Ivana Ivicic Environmental Specialist Ifeta Smajic Social Specialist James Walter Hammersley Team Member Gynedi Srinivas Team Member Lindita Lepaja Team Member Natasa Vetma Environmental Specialist Jane C. Hwang Team Member Anne Muuna Kisumo Team Member Jasna Mestnik Team Member Fabiola Altimari Montiel Counsel Satoshi Ishihara Social Specialist Supervision/ICR Blerta Qerimi, Alper Ahmet Oguz Task Team Leaders Carlos Lago Bouza Procurement Specialist Jonida Myftiu Financial Management Specialist Bekim Imeri Senior Social Specialist Anne Muuna Kisumo Team Member Shpresa Kastrati Environmental Specialist Lindita Lepaja Team Member Kushtrim Plakolli Procurement Specialist Tatjana Markovska Team Member Page 34 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) B. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY18 21.343 174,923.96 FY19 30.312 131,897.60 FY20 .750 3,490.40 FY21 .060 249.22 FY23 .050 236.64 Total 52.52 310,797.82 Supervision/ICR FY20 16.294 60,325.66 FY21 33.984 125,028.68 FY22 30.432 120,078.01 FY23 25.767 118,620.57 FY24 19.953 72,038.18 Total 126.43 496,091.10 Page 35 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 3. PROJECT COST BY COMPONENT Amount at Approval Actual at Project Percentage of Components (EUR M) Closing (EUR M) Approval (%) Enhancing the Credit Guarantee Framework 21.41 21.41 100 Project Implementation and Institutional 0.89 0.48 55.1 Strengthening of KCGF Total 22.30 21.9010 98.2 10The approved project amount was US$25 million equivalent, which converted to EUR was EUR 22.3 million. Actual disbursement at project end was EUR 21.9 million, or converted to EUR this is US$26.77 million. Page 36 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 4. KCGF PERFORMANCE AND ECONOMIC RECOVERY PLAN GUARANTEE WINDOW A. KCGF Performance11 The Kosovo Credit Guarantee Fund is an independent legal entity, established in 2016 through a dedicated law, that provides credit guarantees for MSMEs, by sharing the credit risk with financial institutions. Its mission is to enhance access to finance for MSMEs, support entrepreneurship development, support domestic production and services that create an added value, create new jobs and support overall economic development, through guaranteeing the credit portfolios of financial institutions. Kosovo Credit Guarantee Fund is governed by a Board of Directors, consisting of seven (7) members: one member (ex-officio) from Ministry of Trade and Industry, one member (ex-officio) from Ministry of Finance, Labor and Transfers, four (4) independent members proposed by the donors, and KCGF Managing Director (ex-officio). The Board of Directors has established two committees to supervise specific areas, the Risk Management Committee; and the Audit Committee. KCGF is managed by the Managing Director and team of experts for specific areas. The Kosovo Credit Guarantee Fund (KCGF) was established with an initial capital of EUR 8.6 million which was provided by the government, USAID and KFW. Later on, capital was increased, and re-guarantees provided through contributions from World Bank, KfW, EIF, SIDA, COSME program, USAID, EIB. Outstanding KCGF Capital by source and by windows (December 31, 2023) KCGF (USAID, MTI KFW and Window KfW WB EIB Ret. Earnings) Loan 7,899,486 € Agro Window Guarantee 3,813,425 € Loan 17,058,618 € Agro Window 2022 Guarantee 8,613,329 € Loan 5,850,443 € 29,364,221 € ERP Window Guarantee 4,206,642 € 20,426,981 € Loan 11,094,966 € 51,806,056 € Regular Window Guarantee 5,380,976 € 25,276,062 € Loan 361,394 € Start Up Window Guarantee 287,102 € Loan 28,800,221 € 34,679,750 € 14,055,247 € Standard Window Guarantee 14,246,637 € 17,071,491 € 6,897,492 € Start Up Window Loan 895,733 € 2023 Guarantee 677,461 € Women in Bus ines s Loan 1,666,425 € Window Guarantee 902,656 € Loan 1,974,595 € 790,992 € GROW Window Guarantee 1,382,793 € 395,496 € Total Capital 24,100,000 € 21,410,000 € 22,631,590 € 12,225,311 € 11 as per publicly available information in KCGF web page and reporting to the WB. Page 37 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Participating Financial Institutions include 7 banks, 4 microfinance institutions, and one leasing company. KGFC started in its early days with a regular window (currently called standard window). In 2021 it introduced the Economic Recovery guarantee Window which contained several sub-windows (agriculture, services, trade, production, women in business, start-ups). To date, KCGF operates the following guarantee windows: • Standard Window: It is an all-inclusive window that guarantees larger amounts of credit, with a long repayment period of up to 120 months. Dedicated to long-term investments as well as for higher amounts, with guarantee coverage of up to 50 percent. • Agro Window: It provides guarantees for loans to MSMES in agriculture sector. It offers guarantee coverage of up to 60 percent of the agricultural loan principal, for guarantees up to 50,000 euros, while for guarantees over 50,000 euros, a guarantee of up to 50 percent of the principal is offered. The maximum repayment term of the guaranteed agricultural loan is 120 months. • Grow Window: The Recovery and Green Opportunities Window aims to support access to finance in the field of renewable energy and energy efficiency. Guarantees are offered for the amount up to 50 percent of the loan principal but not more than 500,000 euros. The maturity of the guaranteed loan is up to 84 months. • Export Window: This window is focused in supporting exporting businesses. The maximum loan amount is EUR 3,000,000 (For Leasing is EUR 1,000,000). The maximum amount of the guarantee is EUR 500,000. The repayment period of the guaranteed loan is up to 120 months (84 months for leasing) • Window Women In Business: It is aimed at facilitating access to finance for women entrepreneurs. Guarantees are offered for the amount up to 70 percent of the loan principal for loans up to EUR 50,000 and term up to 84 months. In addition to the financial component, KCGF is also offering the non-financial component or the technical assistance program for women in business who are supported with capacity building (financial education and formalization), networking, as well as mentoring. • Start Up Window: It aims to facilitate access to finance for new enterprises. Guarantees are offered for up to 80 percent of the loan principal for loans up to EUR 50,000 and term up to 60 months. In addition to the financial component, KCGF is also offering the non-financial component or the technical assistance program for new businesses, which will be supported in terms of capacity building (financial education and formalization), networking as well as mentoring. Amount of guaranteed portfolios has been increasing, with year 2021 (during ERP window implementation) being the one with highest growth for KCGF provided guarantees. Page 38 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) New loan and guarantee KCGF total portfolio by Windows New Loans and Guarantees 2018 2019 2020 2021 2022 2023 April 2024 Regul a r Loa n 55,986,811 € 59,637,914 € 74,725,857 € 65,804,248 € 70,019,044 € Wi ndow* Gua ra ntees 18,690,706 € 27,480,399 € 35,674,736 € 32,083,059 € 34,131,572 € Loa n 237,500 € 9,507,700 € 7,289,844 € 8,596,800 € 6,689,400 € Agro Wi ndow Gua ra ntees 114,650 € 4,598,831 € 3,504,822 € 4,123,950 € 3,289,900 € Agro Wi ndow Loa n 2,109,600 € 17,817,150 € 5,374,500 € 2022 Gua ra ntees 1,084,350 € 8,990,915 € 2,668,686 € Loa n 104,841,105 € ERP Wi ndow Gua ra ntees 74,351,323 € Loa n 834,600 € Sta rt Up Wi ndow Gua ra ntees 657,650 € Loa n 3,048,000 € 870,000 € 400,000 € GROW Wi ndow Gua ra ntees 1,524,000 € 435,000 € 200,000 € Women i n Loa n 1,856,800 € 1,526,500 € Bus i nes s Gua ra ntees 1,002,220 € 845,650 € Wi ndow Loa n 973,100 € 976,001 € Sta rt Up Wi ndow 2023 Gua ra ntees 736,330 € 706,801 € Sta nda rd Loa n 15,768,500 € 93,864,786 € 37,846,621 € Wi ndow Gua ra ntees 7,753,250 € 46,428,983 € 18,194,311 € Loa n 4,747,000 € 3,393,500 € Export Wi ndow Gua ra ntees 2,304,000 € 1,650,750 € Loan 56,224,311 € 69,145,614 € 82,015,701 € 180,076,753 € 97,634,544 € 120,128,836 € 49,517,122 € Total Guarantees 18,805,356 € 32,079,230 € 39,179,558 € 111,215,982 € 47,783,072 € 59,897,448 € 24,266,197 € * Regular window was substituted by the Standard window In total, during its eight years of operations, KCGF has provided guarantees for 14,299 loans, for a total amount of EUR 626.4 million, and guarantee of EUR 329.5 million. B. ERP Implementation (as per KCGF Report) In response to the impact of COVID-19 the Government of Kosovo during 2020 undertook a series of coordinated actions, one of which was the design of the Economic Recovery Package. A working group was established including members from the office of the Prime Minister, relevant economic ministries, the Central Bank, the Kosovo Credit Guarantee Fund, the business community, and external experts. In December 2020, the Law on Economic Recovery was adopted which, among other objectives, aimed to establish the legal basis to modify the KCGF guarantee scheme, in order to fight the credit crunch which could exacerbate the negative effects of the economic crisis caused by the pandemic. The law provided for the KCGF to offer credit coverage to MSMEs with a guarantee of up to 80 percent, to allow credit guarantees to farmers, and to subsidize the guarantee fee (up to EUR 5 million). The implementation was made possible with the capital provided by the Government through the World Bank Program for Strengthening of the Financial Sector (EUR 21.4 million) and by the German Government through the Development Bank – KfW (EUR 5 million for agriculture sub-window). Page 39 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) KCGF through the guarantee windows within the ERP, aimed to restore the confidence in the financial sector and avoid credit crunch, to support the reorganization of the economy (production, agriculture, services, women in business, startups), a necessary action due to the negative impact of COVID-19 pandemic. The implementation of windows within the ERP started at the beginning of 2021 and ended on December 31, 2021, as provided in the Law on Economic Recovery - COVID-19. KCGF designed and implemented six windows: • Production window; • Agriculture window; • Services window (with special focus on HORECA); • Trade window; • The window for women in business and; • Window for new businesses (start-ups). Designed windows had features that differentiated them from the existing regular window, including: • Increase credit guarantee coverage up to 80 percent of the loan value; • Involvement of Farmers with Farmer Identification Number (FIN); • Increase of the guarantee exposure for the production sector up to 500,000 euros from the standard which is up to 250,000 euros; • Increase of credit exposure to over 1,000,000 EUR; • Guarantee fee - subsidized by the Government (up to 5.0 mil. EUR). KCGF drafted the Guarantee Agreements which were also agreed by the Participating Financial Institutions (PFIs). It also made the necessary changes to credit risk policy, to the internal MIS and NAV systems, and made the allocation of limits to PFIs. In addition to trainings (to PFIs) and awareness activities (including to companies and general public) on the new ERP guarantee window, KCGF with support of the World Bank Group developed an Environmental and Social Management System for PFIs and, provided support and training to the staff of PFIs on how to identify and assess environmental and social impacts before the investments starts, and implement the ESMS. The implementation of the Economic Recovery Package was accompanied by a communication plan. Communication was supported by news broadcast on media (TV, portals, press, KCGF website and social media) exclusive interviews with KCGF experts, stakeholder roundtables and other forms of information, including social media. The ERP guarantee window during 2021 enabled loans in the economy at the amount of EUR 105.6 million, distributed among 2,015 loans for 1,720 MSMEs, backed by guarantees in the amount of EUR 74.94 million. Page 40 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Among the 2,015 loans for 1,720 MSMEs, the most dominant Window and thus the most dominant sector in the loan portfolio guaranteed during 2021 within the ERP Windows was the Services Window with 29 percent followed by the Trade Window with 28 percent, Production Window with 20 percent, whereas the Agro Window participated with 8 percent. The women in business window had a share of 13 percent, which compared to the participation of the women in business in the overall guaranteed portfolio during 2021, was 8.5 percent higher. 27 percent of approved loans were invested in equipment (production machinery, agricultural equipment, other equipment); 17 percent on land, construction or renovation; 54 percent for working capital and 3 percent used for other purposes. Eight financial institutions were registered as PFIs under the ERP window, including a leasing company. There was no significant concentration of loans under one PFI. Total (WB and KFW) share per PFI - ERP Window % Approved Guarantee Financial Institution Name % Disbursed Loans amount Ba nka Ekonomi ke 9% 8% Ba nka Kombëta re Tregta re Kos ovo 10% 11% Ba nka per Bi znes 14% 14% NLB Ba nka 15% 13% Pro Credi t Ba nk 12% 19% Ra i ffei s en Ba nk Kos ovo 19% 17% Ra i ffei s en Lea s i ng Kos ovo 4% 2% TEB 17% 16% Total 100% 100% Loans guaranteed under ERP Window had a significant share in relation to the total loans approved during 2021 in the (customer segment under 1.0 million euros) in the banking sector. In the category of loans up to 100,000 euros, the share of ERP Window in total lending in the banking sector in the same category was 17 percent (in amount). Page 41 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The average loan amount supported by ERP window was EUR 52,000. Loans guaranteed by KCGF within the ERP Window compared to unguaranteed loans in the sector (up to 100,000 euros were 33 percent higher). The average maturity of guaranteed loans was 38 months, or 23 percent higher than the average unguaranteed loans. Making use of the coverage of 80 percent PFIs reduced the demand for collateral. While the standard PFIs collateral requirements are over 150 percent of the value of the loan, which includes real estate, the loans guaranteed under the ERP Window had significant reduction in the collateral requirement. 31 percent of loans were not collateralized at all, while for 33 percent less than 100 percent collateral was required. By analyzing the 2,015 approved and guaranteed loans within the ERP Window, KCGF estimated that MSMEs created 3,6451 new jobs or a 23 percent increase from the baseline. Page 42 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) C. Impact Assessment of KCGF (source WB, KCGF) The assessment combines data at the firm level from the Tax Authority, Central Bank, and KCGF to investigate the impacts of the fund on firms sales, productivity (proxied by sales per employee), employment, and probability of closing. Firms access to credit in Kosovo before KCGF In 2015, according to the Tax Authority, nearly 94% of the firms in Kosovo were classified as microenterprises (Figure 1) – 5.3% were small and less than 1% were medium or large. In that year, less than one-quarter of the micro firms had loans approved, whereas this percentage reached 63.4% among small and more than 70% for medium and large businesses (Figure 1). Figure 1: Firms size and percentage with approved loans, 2015 Among the factors that constrain micro firms access to credit is their lack of credit history, that is, no record of having approved loans by any bank. A small percentage of micro-firms had loans approved in 2015 since approximately 70% did not have a credit history back then and, therefore, were not yet able to show if they would be potential good borrowers by paying installments on time (Figure 2). Their average sales per employee are three times lower than the one presented by small, medium, and large firms. Besides, micro-enterprises are more likely to stop their operations, which might be seen as a high risk for the lenders. While more than 20% of the ones active in 2015 ended up closing between 2016 and 2018, 10% of small and 4% of medium and large firms did so (Figure 3). Page 43 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Determinants of access to credit The models indicate that credit history is by far the main determinant of the probability of having a loan. More than 60% of the micro firms with approved loans already had a history of at least one approved loan in any of the financial institutions in the country (Table 1). Indeed, Figure 4 shows that the probability of having an approved loan significantly increases with the number of previous loans already granted to the firms. Table 1 shows that the turnover of micro firms with approved loans is more than twice as high as the one reported by the firms without access to credit (63.4 versus 26.7 thousand euros), they are 40% more productive, slightly bigger (3.4 versus 2.3 employees), and older (7.7 versus 6.7 years). Even though micro-firms with approved loans are, on average, significantly different from credit-constrained ones, the Tax Registry data indicate that there would still be thousands of credit-constrained micro-firms that could be potential borrowers based on their size, turnover, productivity, age, and annual growth rates. Figure 5 and Figure 6 point to a significant number of credit-constrained firms with annual growth in total sales and sales per employee as high as the ones observed for the firms with access to credit. If one uses these variables as proxies for firms’ capacity to pay the loan back, these credit-constrained could be potential borrowers as well. results indicate that, among the more than 17 thousand credit-constrained firms shown in Table 1, there would be a subset of 2.5 thousand that are very similar to the ones with approved loans and that could be potential borrowers. These results suggest that financial institutions could use these variables in addition to information on credit history to target their borrowers. Page 44 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Number and amount of KCGF operations Since 2016, KCGF has guaranteed almost 13 thousand loans totaling more than 500 million euros. For comparison, in the same period, loans not covered by the fund totaled 4.3 billion euros. Around 8.5 thousand firms have at least one loan covered by the fund, with 84% of those being micro enterprises (13% are small, and 1% are medium). Among loans not covered by the fund, the percentage of operations designated to micro-firms drops from 84% to 24% (Figure 7). Figure 8 shows the number of KCGF operations approved by semester. According to official data on KCGF operations, 50% of the loans covered by the fund were approved and disbursed in 2021 and 2022. Between 2018 and 2022, the loans covered by KCGF represented 7% of all the loans approved to MSMEs in Kosovo (except in 2021, when the percentage reached almost 13%). KCGF Windows More than 90% of the loans covered by KCGF are under the regular window, except in 2021 with the introduction of the Economic Recovery Package (ERP). That year, slightly more than 50% of the covered loans were under this window (Figure 10). When comparing loans under the regular and economic recovery windows, there are no significant differences in the median loan amount, duration, the number of employees, and the percentage of an individual business (Table 2). Table 2 shows that firms included in the ERP had access to better credit terms, such as lower interest rates (7% versus 8%) and a higher percentage of the loan guaranteed by KCGF (80% versus 50%). As expected, firms under the ERP reported lower turnover to financial institutions at the moment of the loan application. Consequently, these firms are on average less productive (proxied by turnover/number of employees). New clients and purpose of the loans Figure 11 shows the percentage of firms that are new clients to the banks where their loan application was approved. The percentage of new clients under the ERP is slightly higher than in the Regular Window (47% versus 44%). According to data from 2016 to 2022 from all KCGF windows, about 70% of the covered firms used the credit as working capital or to invest either in new equipment or in inventory (Figure 12). This is consistent with the fact that the KCGF. target population was severely hit by the demand shock caused by the COVID-19 pandemic crisis and most needed access to working capital to remain in business. Page 45 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Page 46 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Impact Evaluation Data The methodology consists of comparing the change in the average outcome variables of participating firms against nonparticipating ones before and after the program. The method uses this group of non-participating firms to estimate what would have happened to the benefited ones in the absence of KCGF (contrafactual). The benefited firms are the ‘treatment group’, and the nonparticipating ones are the ‘comparison group’: 1. Treatment group: firms included in KCGF between 2017 and 2021. 2. Comparison group: firms whose first loan covered by KCGF was in 2022. Since our outcomes of interest are only available until 2021, firms in this group are considered as ‘never treated’ in the analysis. The benefit of using not-yet-treated firms as the comparison group is that they might be similar enough to the ones whose participation occurred earlier - between 2016 to 2021. To mitigate biases due to self-selection, our estimates control for location (i.e., the municipality in which a firm is located), sector of economic activity, size, and non-observable characteristics that are time- invariant (fixed effects). We observe a significant increase in the firms’ turnover in the year their loan covered by KCGF is approved (except in 2020, due to Covid). For example, the turnover of micro-firms whose first participation was in 2019 increased by 17% versus only 2.5% in the group of non-participating firms. Also, interesting to see that while the turnover of firms included in KCGF in 2020 fell by 2.5%, the decrease reached 20% among the comparison group (Figure 13). Several factors might be behind the increase in firms’ turnover. The impact evaluation allows us to disentangle the effects of having a loan covered by the fund from other factors that also play an important role in firms’ outcomes. Impact Evaluation Results Figure 14 suggests that participating firms had an increase in turnover almost 10% higher than the comparison group. The results also indicate that firms that benefited from KCGF became more productive (5.8%) and expanded employment (2.8%). Notice though that the impact on firms’ growth is small in absolute terms as the median firm size in the sample is only three employees. Also, firms included in KCGF were nearly 5% less likely to stop their operations. Page 47 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The data indicate that the estimates shown in Figure 14 are likely to be a lower bound of the true impact of the fund, that is, the effect of KCGF might have been even higher. This is due mainly to two reasons: 1. Firms included in the KCGF before 2022 tend to underestimate the turnover reported to the Tax Authorities more than the comparison group of firms. ▪ The outcome of interest is firms’ turnover, and as it can be observed in Table 2 that firms tend to significantly underestimate the turnover reported to Tax Authorities. ▪ While treated firms underestimate an average of 65% of their sales, the comparison group of firms underestimates 57%. 2. The median amount of loans not covered by KCGF is significantly higher among the comparison group. ▪ On average, 54% of treated firms also have a loan not-covered by KCGF approved at the same year that loan covered by the fund was approved. The percentage is 56% in the comparison group. ▪ Although these percentages are not statistically significant, the median amount of loans not covered by KCGF is 15 thousand euros, while it is less than 11 thousand among the treatment group (except in 2021 due to the economic recovery package). Page 48 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS KOSOVO CREDIT GUARANTEE FUND BORROWER’S IMPLEMENTATION COMPLETION AND RESULTS REPORT ON A LOAN IN THE AMOUNT OF 22,100,000 MILLION (US$25 MILLION EQUIVALENT) TO THE KOSOVO CREDIT GUARANTEE FUND (KCGF) WITH THE GUARANTEE OF THE REPUBLIC OF KOSOVO FOR THE FINANCIAL SECTOR STRENGTHENING PROJECT MAY 23, 2024 Page 49 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Contents FOR OFFICIAL USE ONLY...................................................... ERROR! BOOKMARK NOT DEFINED. I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ............................................................ 50 A. Country Context ................................................................................................................... 50 II. OUTCOME.......................................................................................................................... 56 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ........................................ 60 IV. KCGF PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME ........... 61 V. LESSONS AND RECOMMENDATIONS ..................................................................................... 65 1. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. Country Context 1. Kosovo has unique set of challenges and opportunities as one of Europe’s poorest countries in terms of its GDP per capita and as the youngest country in the continent. Kosovo is landlocked with a population of around 1.8 million. According to the Kosovo Statistics Agency, poverty is high with 17.6 percent of the population living below the national poverty line in 2015. At the sa12me time, with its new statehood and majority of its population under the age of 30, Kosovo is the youngest country in Europe. Since independence in 2008, the country has made considerable socioeconomic progress, benefiting from the support of the international community and its diaspora. 2. Averaging over 3.5% over the past decade, the economy of Kosovo has grown more than other countries in the region. However, due to its low base it continues to remain small, dependent on public investment, remittances, and donor funding, and is characterized by very high unemployment. According to the Kosovo Agency of Statistics the unemployment rate, though with significant improvement during the last two years, continued to remain at a high level especially among the young population (around 38% according to country reports). As such, limited job opportunities and low perspective jobs, especially for the younger generations which in Kosovo happened to represent a significant share among the active population, is a source of major social problems in the country, such as migration. 3. Kosovo economy faces large trade balance deficits. According to CBK (Financial Stability report 2023) the current account deficit of the balance of payments increased by 35.4 percent, reaching EUR 940.3 million, corresponding to 10.5 percent of GDP in the country. The increase in the goods account deficit by 20.2 percent and the decrease in the positive balance of the primary income account by 40.5 percent were the main factors that contributed to the increase. However, the positive balance of the secondary income account, which increased by 11.6 percent and of services by 32.9 percent, helped mitigate the negative impact from the dynamics of trade in goods. Page 50 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) 4. Kosovo’s private sector is dominated by MSMEs and their role in the economic and social development of the country is very important. Like other economies, the sector of MSMEs in Kosovo is the most dynamic and innovative part of the market. It accounts for approximately 40 percent of the contribution to GDP, and MSMEs provide around 80 percent of employment in private sector. MSME are defined as business which employ less than 250 employees. The definition of MSMEs is regulated by the Law No. 03/L-031, which defines the enterprises according to number of employees. Base on this definition the MSMEs are categorized in three categories, as follows: • micro-enterprise should employ up to nine (9) workers; • a small enterprise should employ from ten (10) up to forty-nine (49) workers; • a medium enterprise should employ from fifty (50) up to two-hundred-forty-nine (249) workers; • A large enterprise should employ from two-hundred-fifty (250) workers and above. 5. The category of MSMEs represents the vast majority of private enterprises in Kosovo. In view of the number of MSMEs in the private sector and particularly the number of micro enterprises, Kosovo could be considered as an economy of micro enterprises. As of year-end 2013, only 47 enterprises in the country had more than 250 employees, representing just 0.1% of the country’s 46,032 enterprises based on national tax administration data compiled by the Kosovo SME Promotion Program (KOSME). Table 1. Structure of private enterprises in Kosovo, according to the size Enterprises (2013) Enterprises (2019) Number Share Number Share Micro ( up to 9 employees) 43,735 95.0% 41,949 92.1% Small (from 10-49 employees) 1,940 4.2% 3,139 6.9% Medium ( from 50-249 employees 310 0.7% 449 1.0% Large ( above 250 employees) 47 0.1% n/a Total 46,032 45,537 Source: Report on SMEs in Kosovo - KOSME 2014 and ATK 6. One of the key constraints to growth for MSMEs is access to finance. IFC MSME Financing Gap Estimates, according to 2017 report indicate that more that 30 percent of MSMEs are financially constrained. Whereas EIB on the report for estimating the financing gap, dated November 2023, has estimated the financing gap for MSMEs in Kosovo over EUR 500 million, or 6.5 percent of GDP. According to the WB Enterprise Survey (2013), 45 percent of firms identified access to finance as a major constraint compared to 17.2 percent in the ECA region. Micro enterprises are significantly underserved as banks loan portfolios are concentrated in financing SMEs and the corporate sector. 7. Banks represent the main, if not the only, source of finance for MSMEs. The lending practices from banks in Kosovo are considered relatively conservative, followed by high collateral requirements which together contribute to access to finance challenges. Despite sufficient liquidity, lenders in Kosovo Page 51 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) are somewhat risk-averse thanks to stable non-interest income and high interest rate margins. At around 4.5 percent, the interest rate spread is the highest in the region giving rise to competition and efficiency concerns. Although discussions with lenders suggest that the level of collateral is closer to 200 percent of the loan value, the CBK Credit Registry data suggests that the ratio exceeds 300 percent for non- guaranteed. Among others, lack of financial reporting, problems with property and land registration and shallow secondary markets are the main reasons behind the high level of collateral requirements. 8. The Kosovo Credit Guarantee Fund (KCGF) was established in 2016, to tackle access to finance for MSMEs, through providing credit guarantees to partner banks in Kosovo. The KCGF’s target businesses are MSMEs that are viable but do not have enough collateral and/or credit history; MSMEs needing long- term financing; MSMEs that can increase local production and reduce imports and/or increase exports; women-owned MSMEs; start-ups and MSMEs that will create new jobs. Loans to certain sectors which are in the exclusion list of the institution are not permitted to be guaranteed. The KCGF has experienced a solid growth of the capital base for its relatively short history, due to the contribution and continues support from the GOK and international donors. The capital contribution from USAID, KfW, GOK – WB, GOK-EIB has enabled the capitalization of the institution, exceeding the capital base over 91 mil EUR (see table below). Since its establishment the KCGF has intermediated the loan portfolio (in cumulative terms) of almost 700 mil, whereas the value of outstanding guarantee portfolio reached 120 mil. Donors Capital USAID € 5,790,921 Government of Kosovo € 57,041,590 Ministry of Trade and Industry € 3,000,000 World Bank – Project for Strengthening of Financial Sector in Kosovo € 21,410,000 European Investment Bank € 32,631,590 KfW € 24,100,000 Regular Window € 2,000,000 Agro Window € 11,500,000 Economy Recovery Package € 5,000,000 Green Recovery Package € 5,600,000 Retained Earnings € 3,434,390 Total Capital € 90,366,901 9. The KCGF recently has made significant progress on increasing the size and percentage of the guarantee coverage, for specific segments of the market. Last year KCGF has launched two new guarantee windows for supporting start-ups, and women led businesses. In order to compensate for the risk profile of these segments of the market the KCGF has increased the guarantee coverage to 80% for start-up, respectively to 70% for women led businesses. Other active windows such as Standard Window, Export Window, GROW and Agro, tend to follow the pari-passu principle in terms of the risk sharing with the Page 52 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) partner banks, at the level of 50%, however the amount of the guarantee coverage in absolute terms increase significantly from 250k to 500k, whereas for Export Companies even to 1.0 mil. For eight year of the operations the scheme has not experienced significant amount of losses, however the NPL ratio reached the level of the market at around 2.80%, with noticeable increase of the quality indicators during the last year. 10. The guarantee framework of the KCGF is structured as portfolio based with lenders making the credit decision and the KCGF being responsible for the oversight. Whereas the specific needs of specific segments of the market which are in the need having access to finance, are addresses through tailor made guarantee scheme – guarantee windows. In this line the institutions in its portfolio services has the following guarantee windows; Standard Window, Export Window, Agro Window, Green Window – GROW, Women in Business Window and Start up Window. Each window differs to the other based on the guarantee coverage, eligibility criteria of the beneficiaries, guarantee fee, and qualification criteria of the loan services. Reasonable due diligence is performed by the KCGF on lenders that apply to use the scheme. This includes an analysis of the SME lending portfolio currently at the bank and a determination that the bank has adequate experience to process and service SME guaranteed loans. Furthermore, the agreement must be renewed every two years. This is a good practice as it gives the KCGF a chance to review the lender performance and ensure the staff is adequately trained. Once accepted, the lenders submit loans on an individual basis to be added to their portfolio for a guarantee. In addition to randomized checks on individual loans, lenders must report on their portfolio performance monthly to KCGF. KCGF can suspend the ability of a lender to approve loans if there is concern regarding the quality of the portfolio. The final opportunity to ensure compliance with scheme requirements comes when a lender requests the payment on a guarantee. At that time, KCGF has the opportunity to completely review the file to ensure that all requirements were met in 30 days and is able to refuse the payment if the requirements were not met. Rationale for Bank Support: The rationale behind the Financing Sector Strengthening Project (FSSP) was to strengthen the capital base and support consolidation of internal capacities (staff, risk management, finance management, E&S risk management framework, PR and monitoring and evaluation) of the Kosovo Credit Guarantee Fund, in order to have a stronger role in addressing access to finance for MSMEs in Kosovo. Increasing access to finance for MSMEs is essential for poverty reduction and shared prosperity. As MSMEs dominate the real economy and the labor market, improving their access to finance through enhanced financial intermediation will support job creation and economic growth. With a focus on the underserved and productive segments of the economy, the Project had the potential to directly impact poverty reduction, promote gender equality, increase the chance for the success of the newly established enterprises. There are creditworthy MSMEs that currently do not have access to finance due to Page 53 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) information asymmetries and market failure for credit. The Project will focus on these firms along with improving financial terms for firms who already have access to finance. In addition the project came on the right moment when the institution needed most the capital base for supporting the Economic Recovery Program (ERP). The ERP was a multipurpose program designed by the GOK as an response to the pandemic crisis. One of the main components of the program was to support the revitalization of the private sector /private enterprises, hence revive the economic development of the country, through bringing confidence in the banking sector for resuming the lending activity, in times when the credit crunch was more than evident. The capital from the FSSP – WB, in the amount of EUR 21.4 million, was used to capitalize the credit guarantee windows, under this program, destined to credit the existing as well as newly established enterprises in; agro sector, trade, manufacturing, HORECA, startups and women in business. As a results, during the one-year period, as the ERP lasted, the KCGF has managed to guarantee the amount of around 105 mil euro, in the times when the credit guarantee as a risk sharing facility needed most. Theory of change The FSSP aimed to crowd in private sector funds to financing MSMEs by providing support to the partial guarantee scheme. A traditional credit line approach would provide EUR 22.3 million of additional financing to MSMEs. By using the same amount as a partial credit guarantee the Project has the potential to provide around EUR 220 million (EUR 200 million of which is through the private sector) to the MSMEs with the current coverage limit of 50 percent and a maximum leverage ratio of 5:1. Moreover, the project, besides direct contribution in the economy, it had an indirect impact in the society and promoting the market economy, where the market forces drive the economic development. And this because of the fact that the MSME sector is important because of its role on balancing different forms of the market anomalies, such as monopolies and oligopolies, which in transition economies (Kosovo belongs to the category of transition economies), happen to be a fertile ground for development, due to the clientelism culture and political connection, on doing business. The neutral role and independence of the business owners of the MSMEs, which have created everything from the scratch, due to their entrepreneurial spirit and family capital, indirectly ensures fairer distributions of the incomes on the national level. Therefore, the role of the MSMEs in Kosovo, like in other economies, is much wider than providing the market with their services and contributing to the economic development of the country. The Project is also expected to contribute to the WB Climate Change Action Plan. Kosovo is vulnerable to natural hazards some of which will increase in frequency and severity due to a changing climate. It has emissions per unit GDP almost double in comparison to those of the EU average (0.4kg/EUR). Hence, the Project intends to contribute to the country’s efforts to address and mitigate climate change challenges. Finally, Project implementation and institutional strengthening component aims to help the KCGF to Page 54 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) design products for sectors with potential climate co-benefits and monitor their impacts. Gender. Female labor force participation remains very low at 28 percent in Kosovo coupled with high unemployment rates. Based on Kosovo Business Registration Agency (KBRA) data, the number of women owned businesses in Kosovo is also low at 11 percent. In line with this background, women-owned firms are facing more challenges to access finance. According to the Enterprise Survey, 63 percent of firms with female top managers have a bank loan compared to 67 percent for firms with male top managers. The Project team’s consultations suggest that lack of property ownership for women could be a factor undermining access to finance considering high collateral requirements. The Project will support KCGF to develop a special product targeted to women owned businesses and develop monitoring and evaluation framework in order to track financial and economic impact of beneficiaries of KCGF. Additional outreach activities will be specifically designed to target women owned businesses including through the Business Associations. In the results framework, the share of guaranteed women owned businesses will be tracked and will also disaggregate the number of financial institutions (members of KCGF) staff trained by gender. Project Development Objectives (PDOs) The objective of the Project is to improve access to finance for Micro, Small and Medium Size Enterprises by strengthening the financial and technical capacity of the Kosovo Credit Guarantee Fund. Key Expected Outcomes and Outcome Indicators The PDO- level indicators are: (i) number of guaranteed loans; (ii) total amount of outstanding guaranteed loans through the Project; (iii)Number of MSMEs receiving guaranteed loans through project (number), (iv) share of guaranteed issued to firms with no credit history, (v) share of guarantees issued to women owned or managed MSMEs. The project also included a number of key intermediate indicators (e.g., The ratio of outstanding guarantees to equity, Proportion of guarantees paid-out, percentage of beneficiaries that feel project activities reflected their needs (Citizen Engagement Indicator), number of loan officers trained. Components The Project has two main components: (i) Enhancing the Credit Guarantee Framework and (ii) Project implementation and institutional strengthening. Component 1: Enhancing the Credit Guarantee Framework (EUR21.4 million). Under this Component the Project will provide funds to KCGF to issue partial credit guarantees to support access to finance to eligible MSMEs, including specific segments and sectors that have strategic importance for supporting the sustainable growth of the Kosovo’s economy. The Project will increase the KCGF capital. Significant part of the Project funds will be channeled to the existing guarantee window (general window) of the KCGF. In Page 55 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) addition, the KCGF will establish a new window (strategic window) focusing on businesses led by women and start-up businesses. Component 2: Project implementation and institutional strengthening of the KCGF (EUR0.8 million). Under this Component approximately EUR0.8 million will be provided to the KCGF through MoF for Project implementation and institutional strengthening which will be essential to efficiently use the proposed additional capital. Under this Component technical assistance will be provided to KCGF to (i) strengthen its capacity to implement the Project; (ii) improve its information technology; (iii) enhance its risk assessment policies and procedures; (iv) enhance its internal control framework and financial reporting process; (v) strengthen the Project monitoring and evaluation framework, including environment and social safeguards; (vi) design and develop new products tailored for MSMEs in segments and sectors that have strategic importance for supporting the sustainable growth of the economy; and (vii) design and implement a marketing and public awareness campaign and a communications. Under Component 2 training will be provided for financial institutions loan officers to raise their awareness and knowledge of KCGF products. B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) The main change during the implementation of the project was adjustment of the disbursement plan of the capital, due to emergency from the pandemic crisis. Though the initial plan for the implementation of the project was to disburse the capital on trenches and different stages, whereas part of the capital was intended to be dedicated for piloting strategic guarantee windows, as a result of new circumstances created in the country from the pandemic crisis, the disbursement schedule was adjusted toward supporting the implementation of the ERP. The change had impacted only component 1, hence the entire capital in amount of EUR 21.4 mil due to the start of the implementation of the ERP, was disbursed in one trench, whereas no major change happened for the second component. II. OUTCOME RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating Consistency between World Bank and Government Strategy: The Project is in line with the WB’s Country Partnership Framework (CPF) and contributes to the Government objective of increasing access to finance. In recognition of the country’s pressing development issues and government priorities, the CPF for FY17-F21 is structured around three focus areas: (i) Enhancing Conditions for Accelerated Private Sector Growth and Employment, (ii) Strengthening Public Service Delivery and Macro-Fiscal Management, and (iii) Promoting Reliable Energy and Stewardship of the Environment. The Project is expected to directly contribute to the CPF objective 6 “Improve business environment and deepen financial integration”, which is part of the first focus area, Page 56 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) while it has the potential to contribute to the CPF objective 8 “Enhance employment opportunities for youth, women and vulnerable groups”. Finally, as per the Government strategy, the Project is in line with the objectives underlined in the Economic Reform Program (2018-2020) in increasing access to finance through increase of capital for KCGF. Relevance Rating High B. ACHIEVEMENT OF PDOs (EFFICACY) 1. The main goal of the Project was to improve access to finance for Micro, Small and Medium Size Enterprises by strengthening the financial and technical capacity of the Kosovo Credit Guarantee Fund. In this line were set the PDO – indicator levels such; number of guaranteed loans, total amount of outstanding guaranteed loans through the Project, Number of MSMEs receiving guaranteed loans through project (number), share of guaranteed issued to firms with no credit history, share of guarantees issued to women owned or managed MSMEs. The following table shows the level of achievement of the PDO indicators, by Dec 2023 and April 2024. Thought the period between the time when the indicators were set and time when project started to be implemented, was relatively long, due to delay on ratification of the agreement in the Parliament of Kosovo, nevertheless most of the objectives were realized, either by the time when the Project finished, or be end of the April 2024. Moreover, the adjustment of the project due to the ERP had a significant impact on the reachability and prioritizing the goals and objectives of the project. Indicator Name Dec-23 Apr-24 Target Project Development Indicators Improved Access to Finance for MSMEs Total amount of loans through Project 130,000,000.00 (Volume) 121,317,930 141,564,731 Number of Guaranteed Loans (Number) 3,700.00 2,279 2,632 Intermediate Result Indicators Enhancing the Credit Guarantee Framework Number of MSMEs receiving guaranteed 2,000.00 loans through project (Number) 1,953 2,220 Share of guarantees issued to firms with no 25% 25% 30.00 credit history (Percentage) Share of guarantees issued to women- 18% (in number) while 16% (in 19% (in number) while 5% owned or managed MSMEs (Percentage) volume) 16% (in volume) The ratio of outstanding guarantees to 1.71 1.9 below 2.5 equity (Text) Proportion of claims paid out to approved 0.44% 0.28% below 5 percent guarantee amount Percentage of beneficiaries that feel project 71% 71% 75% activities reflected their needs (Citizen Page 57 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Indicator Name Dec-23 Apr-24 Target Engagement Indicator) (Percentage) Project Implementation and Institutional Strengthening Procurement, financial Hiring of procurement, Procurement, Financial Management and management, and financial management, Environmental Monitoring capacity of the environmental and M&E environmental and M&E KCGF is improved (Text) specialists are hired. specialists. Number of loan officers trained (Number) 1,538 1,538 600 2. One of the reasons that some of the indicators deviated slightly from the initial objectives was because of two main factors: adjusting the destination of the project for fighting the impact of the pandemic crisis under the ERP, and the fact that during the second year of the project we could have react more effectively on reutilizing the released capital. 2.The amount of loans guaranteed during the lifetime of the project was over 120 million euro, which is a slight deviation from the set objective in the amount of 130 million euro. If we could have utilized a bit more efficiently the part of the capital which was released, due to the loan portfolio amortization, for the Standard Window, we could easily reach the objective. Nevertheless, by end of April 2024 the objective reached the volume of 140 million euro, hence exceeding the initial objective. 3.The number of loans guaranteed and number of MSMEs that benefited from the scheme as an objective seems to have been calculated on the lower average loan amount compared to the results. This has happened as result that the project was re-destined to support the ERP, hence the importance of existing companies to have access to credit during the pandemic crisis was as important was new enterprises. As a result, this had an impact on the average loan amount guaranteed. The logic goes in line that more experience business higher loan amounts, hence this has increased the average loan amount and slightly deviated this indicator from the initial projections. 4. The participation of women led businesses that benefited from the scheme was much higher than planned. The women in business windows, launched as a pilot during the ERP and later as a well-positioned guarantee window to address financing needs for this segment of the market, seems to have played a crucial role and achieving such an outstanding result. 5. The indicators which show the level of new businesses that benefited from scheme in relations to total portfolio, deviated by 500 basis points from the initial objective. It seems that when we set this indicator, we were a bit too optimistic, as well as the very fact that the during the ERP Page 58 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) the overall objectives changed in importance. In fact, the ERP had the main goal to avoid credit crunch and as a result all businesses, without any diversification, be it those that have experience as well as those recently established, had problem to have access to credit, due to recently created circumstances. This automatically has increased the attractiveness for the existing business at the detriment of the newly established businesses. Nevertheless, the Startup Window which was launched in April 2022 is a good balance for the years to come that the participation of the newly established business will gain ground and increase significantly its participation. 6. As indicator which shows the relation between the equity/capital and outstanding portfolio shows, the institution has operated with lower leverage ratio compare the set indicator. This was a good sign, since it has reflected reliability and confidence in the sector. Lower leverage ratio means higher capitalization level of the institution and as a result more financial buffer in cases losses from the portfolio tend to be higher. 7. The ration of claim paid out to total outstanding guarantee portfolio is much lower compared to initial plan. This shows that the guarantee windows designed under the project had a good balance between the risk tolerance and outreach. Though there is still time to bring a conclusion about this indicator, as there is still outstanding portfolio, the initial indicators show that the scheme functioned at the acceptable level, in terms of claims, even though the biggest part of the portfolio was created during the pandemic crisis. 8. The indicator which shows the number of the trained loan officers has exceeded the projected level almost three times. This fact shows that the institution is cooperating closely with all hierarchical levels of the partner banks. The trainings delivered to the banks staff mainly had as a subject to train them about the ESMF and about the services /guarantee windows offered from the KCGF. Page 59 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION In the aftermath of a challenging economic period, KCGF, the government, the World Bank (WB), came together as key stakeholders to design and implement an Economic Recovery Package (ERP). The design of this recovery package was a collaborative effort, involving consultations with all stakeholders. The government sponsored the ERP law, which included several critical measures to address the economic downturn resulting from the pandemics. One of the significant specifications was the introduction of the 80% higher guarantee rate, the subsidized tariffs by the government and enabled the agribusiness with Farmers Identification Number (FIN) to become eligible for loan approval. These modifications provided substantial support to businesses. Although the ERP law was temporary, it covered all the necessary measures to support the recovery of the economy. Following the initial implementation phase, in January 2021, the program transitioned to regular funding windows. By 2022, an amendment to the KCGF law was introduced, creating greater flexibility in the product design. This amendment allowed for higher guaranteed percentages, prepayments, the introduction of the FIN to all guarantee products, and several modifications to the section of the “related party” implications. These changes were crucial in enhancing the effectiveness of the guarantees. With the amended law in place, KCGF continued to offer new funding windows with specific conditions including targeted products such as Standard Window, Startup Window, Women in Business, and Export, each with varying tariffs and guarantee percentages. Some of these windows utilized only the World Bank’s resources such as the Women in Business and Startup Window. Meanwhile, the Standard window benefited from the combined resources of both the World Bank and the European Investment Bank (EIB). Through these concerted efforts and strategic amendments, KCGF and its partners successfully navigated the economic recovery journey, providing tailored financial support to various sectors and fostering a resilient economic environment. B. KEY FACTORS DURING IMPLEMENTATION AND OUTCOME In the wake of the COVID-19 pandemic, banks significantly reduced lending activities, leading to a pressing need for an intervention. To address this, the Kosovo Credit Guarantee Fund (KCGF), in collaboration with the government and other stakeholders, launched the Economic Recovery Package (ERP). This package included several targeted windows: • Women in Business Window • Agro Window • Manufacturing Window • Service Window • Trade Window • Startup Window Page 60 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) The ERP offered an 80% guarantee coverage on loans, while guarantee fees were covered by the government. This initiative proved highly successful in the post-COVID19 period, with loan uptake more than doubling from the previous year. The positive result was not just in the numbers; the ERP had a significant impact on the banking sector confidence. Banks began to realize that the economic situation was not as dire as they had feared, leading to a resurgence in lending even without guarantees. When the Economic Recovery Package concluded in December 2021, KCGF transitioned to its regular windows, including the Agro Window and the newly introduced GROW Window. These programs were backed by dedicated capital from other donors and the KCGF fund itself, with significant contributions from the German Development Bank (KFW). However, demand for these new windows declined in comparison to ERP, as they were not as attractive compared to the ERP. By 2022, economic conditions of the country had improved markedly, leading to an economic boom and as a result, banks relied less on the guarantee programs. Despite the reduced demand for guarantees the KCGF met 93% of the initial target of €130 million, whereas by end of April 2024 has exceeded the initial target as the revolving nature of the capital ensured its continued utilization. KCGF remains optimistic as the WBs fund revolving capital will continue to support the loan guarantee programs. Through these initiatives, KCGF has shown how strategic financial interventions can revive lending activities, bolster economic recovery, and build a more robust financial ecosystem. IV. KCGF PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design M&E Design for the project Financial Sector Strengthening Project (FSSP) commenced with the implementation becoming effective in January 2021. The framework of indicators was collaboratively developed with World Bank and Kosovo Credit Guarantee Fund (KCGF), and it serves as a foundation in evaluating the attainment of objectives outlined in the Project Development Objectives. This comprehensive framework encompasses a spectrum of performance metrics meticulously tailored to gauge progress across various dimensions of the project, including but not limited to, enhancing financial sector stability, fostering credit access, and promoting economic growth. By aligning M&E design with project objectives, KCGF ensures that monitoring and evaluation efforts are targeted towards tracking meaningful outcomes and facilitating informed decision-making throughout the project lifecycle. Moreover, the iterative nature of M&E design allows for flexibility in adapting strategies and interventions based on real-time feedback, thus enhancing the project’s responsiveness to changing dynamics within the financial landscape of Kosovo. M&E Implementation Page 61 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Detailed information was collected from Kosovo Credit Guarantee Fund through the Management Information System. Registered Financial Institutions report on a monthly basis on the loan-specific attributes, loan balance, asset classification, and other relevant metrics. The system and the process of data collection were established with the foundation of the KCGF, ensuring a robust framework for ongoing monitoring of the performance. KCGF has a control mechanism in place that examines the loans with the Credit Registry of Kosovo (CRK) on monthly bases and assesses additionality from the data obtained from CRK on yearly bases. The collaboration with CRK allows KCGF to cross-reference data and ensure the accuracy and consistency of the information reported by financial institutions. This collaborative approach not only improves data integrity but also fosters a more transparent and accountable reporting. The continuous feedback loop between KCGF and CRK helps in refining our processes and policies, making them more responsive to the financial environment. Additionally, KCGF further analyses the data of KCGF in comparison to the whole sector to assess the additionality of KCGF in the financial landscape. This comparative analysis allows us to estimate the impact and contribution of KCGF products, providing valuable insights into the effectiveness of the guarantee programs in stimulating credit activity and supporting growth. Through the technical assistance provided by World Bank with the Financial Sector Strengthening Project, KCGF has increased capacities in the Monitoring and Evaluation department and developed a platform of reporting and data analysis in Power BI, so that the reports are one click away. This enhancement has significantly increased efficiency and effectiveness in data management and decision-making processes. The integration of Power BI has allowed for real-time data visualization, enabling the KCGF to track portfolio performance and risk exposure dynamically. The system facilitates detailed trend analysis and data modelling, aiding in the proactive management of the credit portfolio. KCGF commitment to continuous improvement is evident in its adoption of advanced analytics and data-driven strategies. The use of sophisticated data analytics tools helped in identifying patterns and trends that were not apparent through traditional analysis methods. Ongoing training and capacity-building initiatives are in place to ensure that staff are proficient in using the new tools and methodologies for portfolio monitoring and credit risk assessment. This includes regular workshops, online courses, and hands-on training sessions designed to enhance the analytical skills of our team members. In summary, the integration of advanced data management systems, continuous capacity building, and close collaboration with the Credit Registry of Kosovo has strengthened KCGF’s ability to monitor and manage the credit portfolio effectively. M&E Utilization M&E plays an important role in guiding strategic decision-making processes and ensuring the effective implementation of its programs. Through robust monitoring mechanisms, KCGF systematically collects, analyses, and interprets data to assess the performance and impact of its products. This includes monitoring the uptake of credit guarantees, evaluating the financial health of supported RFIs, and tracking Page 62 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) key performance indicators related to portfolio quality and risk management. The insights gleaned from the monitoring and evaluation activities inform not only day-to-day operations but also strategic planning initiatives, enabling KCGF to adapt its interventions to the evolving needs of the financial sector. Moreover, M&E findings serve as a foundation for evidence-based decision-making, fostering transparency to stakeholders, accountability, and continuous improvement within the organization. Justification of Overall Rating of Quality of M&E The M&E framework’s comprehensive design, rigorous implementation, effective utilization of results, and emphasis on capacity building collectively justify a high rating for the quality of M&E in the FSSP. M&E Quality Rating: Substantial. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE Environmental and Social Safeguards. Environmental and Social Governance (ESG) have been significantly enhanced through technical assistance provided by the World Bank. This support has augmented the expertise of the Kosovo Credit Guarantee Fund (KCGF) in adhering to ESG standards. The initial engagement involved the development of social and environmental policies in line with Kosovo’s legislation, World Bank regulations, and International Finance Corporation (IFC) performance standards, ensuring that KCGF’s practices are aligned with global best practices. Moreover, the World Bank’s technical support included the preparation of the Environmental and Social Management Framework (ESMF) for KCGF and assisting in its implementation. Additionally, guidelines for Registered Financial Institutions (RFIs) were prepared to be introduced to those lacking such frameworks. An environmental specialist has been recruited to provide ongoing support and guidance to KCGF regarding environmental safeguards. This foundational work has been extended to RFIs, where KCGF assists in the development and implementation of environmental policies and capacity-building initiatives enabling them to integrate robust environmental and social safeguards into their operations. This holistic approach not only strengthens the institutional capacity of KCGF and its partners but also promotes sustainable and responsible banking practices. The ongoing commitment to ESG principles emphasizes KCGF’s dedication to fostering a sustainable financial environment that prioritizes both the well-being of the community and environment. Quality at Entry Rating: Substantial. Page 63 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) C. BANK PERFORMANCE Quality at Entry The World Bank Financial Sector Strengthening Project (FSSP) initially was focused on increasing the capital base of KCGF to increase usage of credit guarantee scheme and allow the KCGF to address a larger portion of the financing gap for SMEs within regular window; establishing a window for underserved and strategic segments that have strategic importance for supporting the sustainable growth of the economy such as young entrepreneurs, women business owners, renewable energy, waste management, agriculture and movable collateral; and project implementation and institutional strengthening of the KCGF. However, the World Bank’s FSSP was expedited in response to the economic repercussions of the Covid- 19 pandemic. This acceleration was organized in conjunction with the Ministry of Finance (MoF) and the Kosovo Credit Guarantee Fund (KCGF). The disbursement of EUR 21.4 million by the World Bank, aimed at providing a timely infusion of capital to the KCGF, was successfully executed in December 2020. This disbursement constituted a pivotal element of the Government’s Economic Recovery Package (ERP), which primarily targeted the private sector. The KCGF utilized the funding to support guarantees issued as part of the Government’s ERP, which encompasses various sectors such as Agriculture, Women in Business, Trade, Manufacturing, Service, and Start-ups. Substantial advancements have also been made within the Technical Assistance (TA) program, including the successful recruitment of experts in legal matters, procurement, environmental and social aspects, monitoring and evaluation, financial management as well as public relations and external communication. Under the support of the ERP, the KCGF’s program operated through specialized windows tailored to assist the most vulnerable segments of society, including micro, small, and medium-sized enterprises (MSMEs) in the manufacturing sector, women entrepreneurs, and startups. The KCGF’s ERP package was meticulously crafted to apportion risk alongside financial institutions, thereby facilitating their lending to MSMEs that, despite being adversely affected by the Covid-19 pandemic and notwithstanding their limited collateral and credit histories. In response to the substantial demand for guaranteed loans, the ERP initiative achieved resounding success following the conclusion at the close of 2022. The cumulative value of approved loans, supported by World Bank funds through this project, surged to EUR 121.3 million, thereby financing 1,953 MSMEs through 2,279 loans, as of December 2023. With conclusion of ERP in December 2021, the government and KCGF agreed to incorporate the lessons learned into the departure strategy by examining and amending the KCGF legislative framework. In August 2022, a new law was approved. Key areas of the law that have been amended include portfolio-based Page 64 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) guarantees, the inclusion of farmers registered with the Ministry of Agriculture, an increase in guaranteed coverage from 50% to up to 80%, clarification of refinancing limits, and clarification of the modalities by which the KCGF can collaborate with the government to implement guarantee programs. Quality of Supervision The Bank team collaborated closely with KCGF to enhance their Environmental and Social Management Framework, M&E, facilitation on Citizen Engagement Survey, and supported KCGF in design for strategic windows. In the initial year of implementation, the Bank team supported the KCGF and RFI in implementing the ESMF as well as to address issues regarding it ensuring compliance with the legal requirements as prescribed. The project implementation progress was supervised by organized missions and periodic data gathering. In this regard the team continuously organized a mission to provide implementation support for the FSSP. The mission consisted of physical meetings, and virtual meetings (during pandemic) for data collection regarding the KCGF operations and providing support on impact evaluation. Regarding impact evaluation, the World Bank team cooperated with KCGF through the ongoing impact evaluation which will both assist the stock taking and designing of new windows as well as building capacity at KCGF on Monitoring and Evaluation (M&E) system. The objective of the impact evaluation is to measure the impact of the KCGF credit guarantee programs on the beneficiaries (private MSMEs) by isolating the effects of the intervention from other changes that may have taken place during the analyzed period. Quality of Supervision Rating: Highly Satisfactory. D. RISK TO DEVELOPMENT OUTCOME Development impact could have been affected because the project was implemented in a volatile environment during post COVID-19. However, due to these challenges, the demand for lending and financing was close to the initial projections. Through the institutional strengthening of the project, knowledge built, and development of the windows the KCGF and RFIs will continue further extending lending to the final beneficiaries and fulfil the initial objective, addressing a larger portion of the financing gap for SMEs and underserved categories. V. LESSONS AND RECOMMENDATIONS 1. Credit guarantee schemes are an important instrument to address access to finance. If designed well with clear objectives it creates additionality and it has the potential to mobilize investments in economy, much more than the capital base, due to the leverage factor. 2. The credit guarantee instrument has the revolving element, hence the capital base can be reallocated Page 65 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) many times. This always gives possibility to reflect on the weaknesses and the next scheme to be improved, as well as it increases the impact in the economy more times than the capital base. 3. For reaching the desired results in the real economy it is important to set a proper monitoring framework. This needs to be set, in order to learn from the weaknesses and malfunctions of the existing schemes, hence improve and reflect on the redesign of the later credit guarantee schemes. 4. Sometimes credit guarantee schemes at the portfolio level, where the partner bank manages relations with the end beneficiary, tend to keep some of the benefits for themselves and not let go to the end beneficiary. This needs to be monitored constantly in the relation to the set objectives and make partner banks legally binding to these objectives. In order for this to function properly the benefit of the scheme needs to be identified and quantified, just then to have a clear picture if the benefits trickled down to the end beneficiary. 5. Credit guarantee schemes as a financial component combined with nonfinancial component especially for the newly established business, is very important for addressing access to finance. If the first compensates for the higher risk perception from the creditor the second enable the enterprise to be more prepared for the market. In addition, it helps businesses to consolidate internal process and reporting, as a result this is having a direct impact on the bankability of these enterprises. Page 66 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Annex 1 Results Framework and Key Outputs Results Framework COUNTRY: Kosovo Kosovo Financial Sector Strengthening Project Project Development Objectives(s) The objective of the Project is to improve access to finance for Micro, Small and Medium Size Enterprises by strengthening the financial and technical capacity of the Kosovo Credit Guarantee Fund. Project Development Objective Indicators RESULT_FRAME_TBL_PDO Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Improved access to finance for MSMEs Total amount of guaranteed loans through Amount (Eur) 0.00 130,000,000.00 121,317,929.93 Project (Number) Number of Guaranteed Loans (Number) 0.00 3,700.00 2,279.00 Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Formally Unit of Original Actual Achieved at Indicator Name Baseline Revised Measure Target Completion Target Enhancing the Credit Guarantee Framework Number of MSMEs receiving guaranteed loans 0.00 2,000.00 1,935.00 through project (Number) Share of guarantees issued to firms with no 25.00 30.00 25.00 credit history (Percentage) Share of guarantees issued to women owned or 18% (in number) while 16% 0.00 5.00 managed MSMEs (Percentage) (in volume) The ratio of outstanding guarantees to equity 0.00 Below 2.5 1.71 (Text) Below 5 Proportion of guarantees paid-out (Text) 0.00 0.44% percent Percentage of beneficiaries that feel project activities reflected their needs (Citizen 0.00 75.00 71.00 Engagement Indicator) (Percentage) Project Implementation and Institutional Strengthening Procurement, Financial Management and No distinct functions for Procurement, FM, M&E and Environmental Monitoring capacity of the KCGF procurement, FM and environmental specialists are is improved (Text) environment hired. Number of loan officers trained (Number) 0.00 600 1,538.00 Monitoring & Evaluation Plan: PDO Indicators Page 67 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) Data Methodology for Responsibility for Indicator Name Definition/Description Frequency source Data Collection Data Collection This is the total amount of loans guaranteed by the KCGF during the Total amount of Semi- Project Project to lenders (in Euros). KCGF guaranteed loans annual Report This will be tracked cumulatively and will include outstanding, expired or through Project cancelled loans. This will be calculated as the cumulative number of guaranteed loans Semi- Project Number of approved by the KCGF, a given share of which will be targeted to women. KCGF annual Report Guaranteed Loans The KCGF will track approved guarantees, expired or cancelled guarantees, and the net number of guarantees used. . Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology Responsibility Data Indicator Name Definition/Description Frequency for Data for Data source Collection Collection Number of MSMEs Semi- Project KCGF receiving guaranteed annual Report loans through project Share of guarantees Project KCGF, CBK Annual issued to firms with no Report Credit Registry credit history Share of guarantees Project Annual CGF K KCGF issued to women owned Share of guarantees issued to women owned or managed MSMEs report or managed MSMEs Semi- project The ratio of outstanding the ratio of outstanding guarantees to equity will be used to measure KCGF annual report  guarantees to equity stability. The ratio is aimed to be kept under 2.5 through out the project. Semi- Project Proportion of The ratio of guarantees paid out to total guarantees provided. The target KCGF annual Report guarantees paid-out is to keep this ratio below 5 percent through out the Project. A survey will measure the satisfaction of the Project’s final beneficiaries regarding the activities implemented under the project. During mid-term Percentage of review and every year after that, the KCGF will organize beneficiaries that feel workshops targeting different project stakeholders or beneficiaries. Project project activities Annual KCGF Workshops will be organized taking into account the type of product or Report reflected their needs activity and the type of beneficiary. To measure the level of satisfaction (Citizen Engagement among the beneficiaries, the KCGF will develop a set of questions and Indicator) other tools with the support of the WB team. Field visits and interviews will also be considered. Procurement, Financial Management and Environmental Monitoring capacity of the KCGF is improved Project Number of loan officers Number of loan officers (of financial institutions including banks and Annual KCGF Report  trained MFIs) trained by KCGF. Page 68 of 69 The World Bank Kosovo Financial Sector Strengthening Project (P165147) ANNEX 6. SUPPORTING DOCUMENTS World Bank. 2019. Kosovo - Financial Sector Strengthening Project. Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/760711558144961259/Kosovo-Financial-Sector-Strengthening- Project LEGKL.2019. Official Documents- Financing Agreement for Credit 6416-XK (Closing Package). http://documents.worldbank.org/curated/en/121471570542169673/Official-Documents-Financing-Agreement-for- Credit-6416-XK-Closing-Package World Bank. Sep 17, 2019. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 01. http://documents.worldbank.org/curated/en/430751568737938303/Disclosable-Version-of-the- ISR-Kosovo-Financial-Sector-Strengthening-Project-P165147-Sequence-No-01 World Bank. Mar 25, 2020. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 02. http://documents.worldbank.org/curated/en/674871585128652862/Disclosable-Version-of-the- ISR-Kosovo-Financial-Sector-Strengthening-Project-P165147-Sequence-No-02 World Bank. Dec 21, 2020. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 03. http://documents.worldbank.org/curated/en/474871608547078721/Disclosable-Version-of-the- ISR-Kosovo-Financial-Sector-Strengthening-Project-P165147-Sequence-No-03 World Bank. Jun 30, 2021. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 04. http://documents.worldbank.org/curated/en/700721625044984663/Disclosable-Version-of-the- ISR-Kosovo-Financial-Sector-Strengthening-Project-P165147-Sequence-No-04 World Bank. Feb 9, 2022. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 05. http://documents.worldbank.org/curated/en/099805002092214563/Disclosable0Ve07000Sequence0No00005 World Bank. Jun 30, 2022. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 06. http://documents.worldbank.org/curated/en/099615006302222567/P165147050f36102a0a6060d619cbc10546 World Bank. Apr 18, 2023. Kosovo Financial Sector Strengthening Project - Implementation Status and Results Sequence No: 07. http://documents.worldbank.org/curated/en/099041823150022679/P16514708a1ca502f0981f084f330dba544 Page 69 of 69