Bank loans and citizens’ burdens for their payment

Fitore Rudhani for Vicinity Chronicles, 5 October 2021

Banking institutions provide ongoing and sustainable services to individuals, small businesses and other stakeholders. Being a debt instrument, the loan involves the redistribution of a sum of money, under the terms set out in the loan agreement, thus including the term and interest rate. As long as the loan is given at a cost, that cost continues to be an incentive for the lender. Interest rates have always been determinants of investment in the overall level of the economy, always keeping in mind that an interest rate forecast is quite difficult.

The needs of the citizens and their interest in getting loans in commercial banks operating in Kosovo has been constantly increasing. According to the official data of the Central Bank of the Republic of Kosovo, the level of total loans in Kosovo has already reached over 2 billion euros, or over 6 percent annual growth, but due to the pandemic situation the repayment of loans has become quite difficult for citizens. Burdens related to the payment of credit installments place great budgetary pressure. As a result of the pandemic around the globe we have declining incomes for citizens, also affecting consumer demand for credit. This requirement tends to vary according to general economic conditions.

In order to control and support the public welfare in accordance with the pandemic situation, economic packages have been approved, aiming at the inclusion of all sectors of the economy. Economic policy packages include changes in monetary and fiscal policies. As part of monetary policy during the period of the pandemic crisis, loan payments to citizens were suspended for a certain period of time.

High interest rates directly affect the reduction of the amount of discretionary income that citizens / loaners have for non-essential purchases, tending to reduce the rate of economic growth and inflationary pressures. High interest rates also discourage investment by reducing citizens’ willingness to make large purchases / investments, due to increased risk and reduced trust. The burdens that arise as a result of the weakening of the opportunity for investments, can affect the change of the direction of the expenditures of financial means in new channels, the departure of investors from the country, the cut of the increase of individual and family welfare.

Interest rates also affect other investments and other elements in the portfolio of each of us. Being hostage to high interest rates we are facing a change in our loaning behavior, because with rising prices, demand falls because there is less market to buy goods at expensive prices, on the contrary, when prices fall, consumers gain more purchasing power thus influencing demand growth. Given interest rate fluctuations and increases, it is important to assess and understand how interest rate changes can affect the components of our investment portfolio.

Fitore Rrudhani is the Balkan Forum’s Finance and Admin officer