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Document of The World Bank

Report No: ICR00004157

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-50060IDA-H3410)

ON A

GRANT

IN THE AMOUNT OF SDR 1.30 MILLION (US$2 MILLION EQUIVALENT)

AND A LOAN

IN THE AMOUNT OF SDR 4.30 MILLION (US$6.85 MILLION EQUIVALENT)

TO THE

REPUBLIC OF KOSOVO

FOR

FINANCIAL SECTOR STRENGTHENING AND MARKET INFRASTRUCTURE PROJECT

(FORMERLY TITLED FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT)

June 16, 2017

Finance and Markets Global Practice Western Balkans Country Management Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 16, 2017)

Currency Unit = Euro EUR 1.00 = US$ 1.12 US$ 1.00 = EUR 0.90

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

AF Additional Financing AMIK Association of Microfinance Institutions in Kosovo ATS Automatic Transfer System ACH Automated Clearing House BDs Bidding Documents BCC Business Continuity Center BIS Bank for International Settlements CA Credit Agreement CBK Central Bank of Kosovo, CBAK Central Bank Authority of Kosovo (now Central Bank of Kosovo) CMU Country Management Unit CPMI Committee on Payment and Market Infrastructures CSD Central Securities Depository DIFK Deposit Insurance Fund of Kosovo DvP Delivery versus Payment EAR European Agency for Reconstruction EICS Electronic Interbank Clearing System EU European Union FIRST Financial Sector Reform and Strengthening Initiative FSSMIP Financial Sector Strengthening and Market Infrastructure Project FSFA Financial Sector Fiduciary Assessment FSTA Financial Sector Technical Assistance Project GoK Government of Kosovo HR Human Resources IADI International Association of Deposit Insurers IAK Insurance Association of Kosovo IBRD International Bank for Reconstruction and Development IDA International Development Association IMF International Monetary Fund ISN Interim Strategy Note ISR Implementation Status and Results Report KBA Kosovo Bankers’ Association KTA Kosovo Trust Agency

KfW Kreditanstalt fur Wiederaufbau / German Development Bank MoF Ministry of Finance MFIs Microfinance Institutions MSMEs Micro, Small and Medium Enterprises MTPL Motor Third Party Liability NBFIs Non-Banking Financial Institutions NPLs Non-performing loans NPS National Payment System ORRS Off-site Regulatory Reporting System PDO Project Development Objective PISG Provisional Institutions of Self-Government PIU Project Implementation Unit P-RAMS Procurement Risk Assessment Management System PMT Project Management Team ROA Return on Assets ROE Return on Equity RTGS Real Time Gross Settlement SDR Special Drawing Rights ToRs Terms of Reference TPL Third Party Liability UNMIK United Nations’ Interim Administration Mission in Kosovo USAID United States Agency for International Development WBG World Bank Group

Regional Vice President: Cyril E. Muller

Country Director: Ellen A. Goldstein

Senior Global Practice Director: Ceyla Pazarbasioglu

Practice Manager: Mario Guadamillas

Project Team Leader: Johanna Jaeger

ICR Team Leader: Cevdet Cagdas Unal

ICR Main Author: Keler Gjika

COUNTRY Kosovo Financial Sector Strengthening & Market Infrastructure Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes ............................................ 16 3. Assessment of Outcomes .......................................................................................... 21 4. Assessment of Risk to Development Outcome ......................................................... 32 5. Assessment of Bank and Borrower Performance ..................................................... 33 6. Lessons Learned ....................................................................................................... 37 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 39 Annex 1. Project Costs and Financing .......................................................................... 41 Annex 2. Outputs by Component ................................................................................. 42 Annex 3. Economic and Financial Analysis ................................................................. 47 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 48 Annex 5. Beneficiary Survey Results ........................................................................... 49 Annex 6. Stakeholder Workshop Report and Results ................................................... 50 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 51 Annex 8. Borrower’s Project Completion Report ........................................................ 52 Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 57 Annex 10. List of Supporting Documents .................................................................... 57

MAP

The World Bank (P108080)

i

A. BASIC INFORMATION

Country: Kosovo Project Name: Kosovo Financial Sector Strengthening&Market Infrastructure Project

Project ID: P108080 L/C/TF Number(s): IDA‐50060,IDA‐H3410

ICR Date: 06/24/2017 ICR Type: Core ICR

Financing Instrument: TAL Borrower: UNMIK

Original Total Commitment:

XDR 1.30M Disbursed Amount: XDR 5.57M

Revised Amount: XDR 5.57M

Environmental Category: C

Implementing Agencies: Central Banking Authorities of Kosovo Kosovo Banking Association Association of Microfinance Institutions of Kosovo (AMIK) Deposit Insurance Fund of Kosovo

Cofinanciers and Other External Partners:

B. KEY DATES

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 08/02/2007 Effectiveness: 01/03/2008 01/03/2008

Appraisal: 10/31/2007 Restructuring(s): 03/28/2010

06/15/201405/21/2016Approval: 12/13/2007 Mid‐term Review: 03/04/2015 03/04/2015

Closing: 06/30/2010 12/31/2016

C. RATINGS SUMMARY C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Moderately Satisfactory

Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory


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Overall Bank Performance:

Moderately Satisfactory Overall Borrower Performance:

Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA): None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. SECTOR AND THEME CODES

Original Actual

Major Sector/Sector

Public Administration

Central Government (Central Agencies) 76 76

Financial Sector

Other Non‐bank Financial Institutions 3 3

Banking Institutions 21 21

Major Theme/Theme/Sub Theme

Finance

Financial Stability 40 40

Financial Sector Integrity 20 20

Financial Sector oversight and policy/banking regulation&restructuring

40 40

Private Sector Development

Business Enabling Environment 40 40

Regulation and Competition Policy 40 40

E. BANK STAFF

Positions At ICR At Approval

Regional Vice President: Cyril E Muller Shigeo Katsu

Country Director: Ellen A. Goldstein Orsalia Kalantzopoulos


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Practice Manager: Mario Guadamillas Fernando Montes‐Negret

Task Team Leader(s): Johanna Jaeger Sophie Sirtaine

ICR Team Leader: Cevdet Cagdas Unal

ICR Primary Author: Keler Gjika

F. RESULTS FRAMEWORK ANALYSIS Project Development Objectives (from Project Appraisal Document)

The main objective of the project is to enhance CBAK's capacity to oversee the financial system's stability and its development in Kosovo. The project will focus on strengthening the capacity of CBAK to supervise banks and non bank financial institutions (in particular insurance companies and pension funds).

Revised Project Development Objectives (as approved by original approving authority)

The objective of the project is to (i) enhance the stability and development of the financial sector; and (ii) strengthen the financial sector's underlying market infrastructure.

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from approval

documents)

Formally Revised Target Values

Actual Value Achieved at Completion or Target

Years

Indicator 1 : Status of updated legal and regulatory framework for banks and NBFIs and capacity buildingfinanc

Value quantitative or Qualitative)

Non‐existent

Achieved

Achieved

Date achieved 01/03/2008 06/10/2010 11/30/2016

Comments (incl. % achievement)

Indicator 2 : Status of operationalization of RTGS‐


Non‐existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 07/31/2016


Indicator 3 : Status of establishment of a fully operational BCC


Non‐existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 07/11/2016


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Indicator 4 : Status of establishment of the DIFK


Non‐existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 12/31/2012


(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from approval

documents)

Formally Revised Target Values

Actual Value Achieved at Completion or Target Years

Indicator 1 : Number of missing and/or outdated regulations and directives drafted for banks and NBFIs new laws, which have been passed recently or to be passed over the life of the Project


N/A

Key regulations to be adopted

Achieved

Date achieved 01/03/2008 06/10/2010 12/01/2016


4 laws and 73 by‐laws approved

Indicator 2 : Automated database for offsite supervision acquired and implemented


Off‐site supervision database is non existent

Off‐site database for monitoring and analysis used in day to day work

Achieved

Date achieved 01/03/2008 06/10/2010 06/30/2016


Off‐site database for monitoring and analysis is operational and used in day to day work

Indicator 3 : Number of the CBK staff trained in using analytical tool and regarding new regulations


N/A

100% of supervisors trained

Achieved

Date achieved 01/03/2008 06/10/2010 06/30/2016


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Indicator 4 : Number of training sessions to MFIs in transforming into deposit‐taking institutions and to other MFIs


n/a

n/a

achieved

Date achieved 01/03/2008 06/10/2010 06/30/2011


Before the restructuring the indicator was at least one TA provided to each MFI. The target was achieved before the restructuring with 14 training sessions carried for member MFIs.

Indicator 5 : Number of training sessions to bank officers and KBA staff on banking sector topics


n/a

n/a

Achieved. 23 training sessions for KBA members.

Date achieved 01/03/2008 06/10/2010 06/30/2011


The original indicator was "Provision of training sessions to bank officers on training assessment need methodologies focusing on small banks and to the KBAÃƒÂ¢ s trainers on advanced banking sector topics based on bank training need assessmen

Indicator 6 : Status of operational integration of the RTGS system with the existing Electronic Interbank Clearing Sys


Non existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 07/31/2016


achieved through implementing the EICS functionality in the ATS system.

Indicator 7 : Status of operational integration of the RTGS system with the Central Securities Depository (CSD


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Non existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 07/31/2016


ATS successfully integrated with CSD

Indicator 8 : Percentage of transactions in GoK and CBK securities settled in the RTGS system in conformity with the principles of Delivery versus Payment (DvP)


0

100

100

Date achieved 03/28/2010 06/10/2014 07/31/2016


All transactions settled accordingly through ATS

Indicator 9 : Percent of payments settled immediately or with a short delay (< 15 minutes)


0

95

100

Date achieved 03/28/2010 06/10/2014 07/31/2016


Indicator 10 : Status of completion of refurbishment of the BCC facility


Non existent

Achieved

Achieved

Date achieved 03/28/2010 06/10/2014 12/30/2016


Indicator 11 : Percent failover from the CBKÃƒÂ¢ s primary processing site to the BCC, and restoration back to the primary site, successfully demonstrated for all CBKÃƒÂ¢ s critical systems


0

100

100

Date achieved 03/28/2010 06/10/2014 12/30/2016


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End target has been corrected from '0' to '100'. There was an editorial error in the PAD. The number should be 100%

Indicator 12 : Number of regular failover exercises conducted on a quarterly basis per year


0

4

4

Date achieved 03/28/2010 06/10/2014 12/30/2016


Two test exercises held for two consecutive quarters, the last one being in March 2017. CBK confirmed plans to conduct quarterly exercises going forward. All transactions settled accordingly through ATS

Indicator 13 : Contributed amount from GoK


0

EUR 3.3 million

EUR 3.3 million

Date achieved 03/28/2010 06/10/2014 12/30/2016


Indicator 14 : Premiums received from member banks


no

yes

yes

Date achieved 03/28/2010 06/10/2014 12/30/2016


G. RATINGS OF PROJECT PERFORMANCE IN ISRs

No. Date ISR Archived

DO IP Actual Disbursements

(USD millions)

1 06/09/2008 Satisfactory Satisfactory 0.00


3 12/08/2009 Moderately Satisfactory Moderately Satisfactory

0.23



0.61


1.01


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7 06/24/2012 Moderately

Unsatisfactory Moderately

Unsatisfactory 1.12


4.97

9 10/29/2013 Moderately

Unsatisfactory Moderately

Unsatisfactory 5.11


5.21


5.21

12 04/06/2015 Moderately Satisfactory Moderately

Unsatisfactory 5.77


5.77

14 02/22/2016 Moderately Satisfactory Moderately

Unsatisfactory 6.47


6.65

16 12/29/2016 Satisfactory Moderately Satisfactory

8.10

H. RESTRUCTURING (IF ANY)

I. DISBURSEMENT PROFILE

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

A. Country and Project Background Country economy status. When the project preparation started in 2007, Kosovo was under the administration of the United Nations’ Interim Administration Mission in Kosovo (UNMIK). In the years following the conflict, a surge in donor support contributed to rapid economic rebound. However, as the post-conflict boom of 2000-04 subsided, Kosovo’s GDP growth stagnated, with the scaling back of the donor and UN presence serving to counteract the positive effects of increasing domestic investment. Poverty was persistent with 15 percent of population estimated to be extremely poor and 45 percent with a consumption level below the poverty line. Against this backdrop, addressing weaknesses in the financial sector was crucial to ensure long term macroeconomic stability to support economic growth. A Financial Sector Fiduciary Assessment (FSFA) conducted in 2006 by the Bank highlighted substantial institutional weaknesses at the level of the Central Banking Authority of Kosovo (now the Central Bank of Kosovo, CBK) responsible for the regulation and supervision of banks and other financial institutions. Weaknesses pertained to its institutional and financial sustainability; the banking and non-bank financial institutions (NBFIs) prudential regulation, supervision, and resolution framework; and the financial sector infrastructure. The FSFA also underlined significant weaknesses at the level of financial institutions. In this context, CBK had proposed a comprehensive donor-coordinated technical assistance strategy aimed to achieve a long lasting beneficial impact on the sector’s stability and development. It incorporated a detailed comprehensive plan to upgrade the regulation and supervision of banks and NBFIs, as well as an effort to address the institutional and financial sustainability issues faced by CBK itself. The Kosovo Bankers’ Association (KBA) and the Association of Microfinance Institutions in Kosovo (AMIK) had also taken initiatives to address each sector’s capacity constraints. Most notably, KBA had self-financed a study to identify bank training needs, while AMIK had reviewed its training agenda to account for new challenges under a new legislation allowing Microfinance Institutions (MFIs) to take deposits. Rationale for Bank assistance. The Financial Sector Technical Assistance Project (FSTAP) aimed to address several challenges in Kosovo’s financial sector; thereby contributing to stability and economic growth. In coordination with other donors, the project would focus on areas not addressed by the donor community and identified as issues for the sector’s stability and development. Several donor coordination meetings were held to coordinate assistance in the financial sector. The European Agency for Reconstruction (EAR) in Kosovo had approved a grant for private sector development; the IMF and USAID had been providing ongoing TA to the CBK specially to strengthen its on-site

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banking sector supervision; and KfW was providing TA to develop a deposit insurance fund. Through an ongoing Business Environment Technical Assistance (TA) project, the World Bank was providing TA to upgrade the business registry and cadastral records, while through post FSFA non-lending TA, it has provided targeted financial sector assistance. While donor assistance to CBK had mostly focused on strengthening its onsite supervision of banks with a particular attention on credit risks, it was necessary to strengthen CBK’s capacity to monitor other banking sector risks and also other financial institutions. The project aimed to contribute to the goal set out in the Transitional Support Strategy for Kosovo (2004) to create a sustainable foundation for growth. The Interim Strategy Note (ISN) of late 2007 was founded on two main pillars: (i) developing new sources and a high quality of economic growth; and (ii) ensuring macroeconomic stability. More specifically, the project would enhance Kosovo’s financial system’s stability and development. The project would contribute towards greater financial sector stability and development by supporting (i) stronger prudential regulation and supervision by the CBK for banks and non-bank financial institutions, (ii) the institutional strengthening of the CBK, and (iii) the strengthening of the banking and microfinance industry through capacity building. In addition to the FSSMIP, the Bank was supporting the development of the banking and insurance sectors via two FIRST grants focusing on the legal and regulatory framework of the sectors and the capacity of the regulator. Moreover, the Bank had supported the CBK through the Western Balkans Technical Assistance Facility, which had financed development of the payment system and Business Continuity strategy and supported a crisis management preparedness assessment. FSSIMP was in line with the Country Partnership Strategy of the World Bank for the period 2012 – 2016. Specifically, the project supported outcome 9 of the CPS: stronger financial system through support of the regulatory and institutional reform of Kosovo's financial system; and CPS Outcome 10: strengthen the sustainability of the CBK and its capacity to supervise banks and non-bank financial institutions

B. Financial Sector As of end 2010, Kosovo’s financial sector was composed of 8 private commercial banks, 11 insurance companies, 2 pension funds, 17 microfinance institutions and 29 financial auxiliaries. Banking sector assets represented 76.5 percent of the total assets of the financial sector. The banking sector was dominated by foreign banks both in terms of number (six out of eight) and in terms of assets (89.8 percent). The sector was highly concentrated, with the three largest banks (foreign) holding about 78.9 percent of total banking sector assets as of June 2010 (down from 82.8 percent in June 2009). Pension funds had a market share of about 16 percent while insurance companies and microfinance institutions represented a mere 3.2 percent and 4.1 percent respectively of the total financial sector assets (Table 1).

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Table 1: Basic Indicators of the Banking System

2006 2007 2008 2009 2010

Number of Banks 6 9 8 8 8

Number of Foreign Banks 2 7 6 6 6

% of total Financial Sector Assets 88.9% 87.9% 79.9% 78.1% 76.5%

Number of Insurance companies 9 9 12 11 11

Number of Pension Funds 3 2 2 2 2 Number of Microfinance Institutions

23 16 16 19 17

Bank Asset/GDP 49% 58.5% 46.3% 55.3% 56.7%

Assets Growth y/y 23.5% 26.9% 21.5% 11.2% Deposit Growth y/y 23.5% 27.9% 21.4% 10.2% Credit Growth y/y 42% 32.7% 8.9% 13.2% Source: CBK

The global financial crisis had only a modest impact on Kosovo’s financial sector and was limited to a slowdown in credit growth and a deterioration of the quality of the credit portfolio. In 2009, loans grew by 8.9 percent, compared to a 33 percent increase in 2008. Credit growth started picking up again in 2010 (13.2 percent annual increase). The Non-performing loans (NPLs) ratio had almost doubled from 4.7 percent in 2008, to 8.0 percent at end 2010 (Table 2). As a result, profitability of the banking system has declined in 2010 with a Return on Assets (ROA) of 1.7 percent and a Return on Equity (ROE) of 16.5 percent compared to 2.4 percent and 20.2 percent respectively in 2008. Furthermore, net interest margins decreased to 6.4 percent in 2010 (from 8.9 percent in 2008) due to increasing competition. Although the quality of the loan portfolio deteriorated and profits decreased, capital adequacy for the system remained above the required 12 percent level.

Table 2: Key Prudential Indicators of the Banking System 2006 2007 2008 2009 2010

Liquidity

Liquid assets to total assets 41.7% 33.1% 30.0% 39.4% 37.3%

Capital Adequacy

Regulatory capital to risk-weighted assets

16.4% 17.5% 16.7% 17.9% 18.9%

Capital to Assets 9.4% 11.5% 11.7% 9.8% 10.1% Asset Quality

NPLs / loans 3.7% 4.1% 4.7% 6.6% 8.0%

Provisions/ NPLs 137.4% 118.7% 97.0% 92.1% 81.4%

Earnings and Profitability

ROA* 1.9% 2.6% 2.4% 1.4% 1.7%

ROE* 25.1% 28.7% 20.2% 12.8% 16.5% Source: CBK * ROA - Return on Assets; ROE - Return on Equity

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As of December 2010, the number of insurance companies operating in Kosovo was 11, including eight foreign-owned, representing almost 80 percent of the total assets of the insurance industry. The insurance sector had been expanding its activities since 2007 reaching EUR 90 million of assets representing an annual growth of 20.1 percent. The number of policies sold by insurance companies had been increasing on average by 8 percent on annual growth in the past two years. The amount of premiums received by insurance companies had also grown by almost 5 percent annually. The main business of insurance companies was Motor Third Party Liability Insurance (MTPL), whose premiums represented roughly 2/3 of the total premiums received, and 74 percent of total claims paid. The ratio of premiums received to claims paid had increased from 24.2 percent to 38 percent between June 2009 and June 2010.

The largest NBFI in Kosovo is the Kosovo Pension Savings Trust (mandatory second pillar), whose assets amounted to more than EUR 254 million in mid-2007. The assets of the only voluntary individual pension fund assets were close to EUR 4 million.

Microfinance institutions (MFIs) in Kosovo operated throughout the country including isolated rural regions. In 2010, a total of 17 MFIs (from 16 in 2007) offered a variety of financial products including group solidarity loans, business loans, agricultural loans, start up lending for women and housing loans. AMIK had played an important role in building the capacity of MFIs in Kosovo, including the smallest non-members. AMIK had three focus areas: (i) to promote awareness and commitment to best practices among donors, government bodies and MFIs, while providing a unique voice for members; (ii) to facilitates the exchange of best practices with emphasis on financial transparency; (iii) to coordinate activities such as joint trainings and regional exchange visits. Legislation approved in 2007 allowed MFIs to take deposits. Non-deposit taking MFIs were allowed to register with the CBK, but not licensed. While this law provided opportunities for Kosovo’s largest MFIs to become self-sustainable and independent of donor-funding, it also introduced new capacity building challenges for those MFIs that would apply for a license and stronger needs to adapt to the new competition for the others. Such changes in the industry created new needs for training and capacity building.

1.2 Original Project Development Objectives (PDO) and Key Indicators According to the Loan Agreement, the objective of the Project (FSTAP) was to enhance the stability and development of Kosovo’s financial system by supporting stronger prudential regulation and supervision by CBK for banks and non-bank financial institutions, supporting the institutional strengthening of CBK, and strengthening the banking and microfinance industry through capacity building.

The Project consisted of the following parts with the results indicators in Table 3:

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Part I Strengthening CBK’s long term institutional and financial capacity and sustainability,

through the provision of goods, technical assistance and training, including the preparation of a medium-term development strategy for CBK; and

Improving banking sector regulation and supervision, especially off-site supervision,

and developing or improving the regulatory and supervisory framework for insurance activities and intermediaries and for other nonbank financial institutions under the purview of CBK, through technical assistance and training.

Part II Strengthening the microfinance industry of Kosovo to achieve sustainability and expand outreach through the provision of technical assistance and training, primarily through training of microfinance institutions with an emphasis on the smaller ones and those transforming into deposit-taking institutions. Part III Enhancing the capacity of the Kosovo Bankers’ Association to provide adequate training to local banks through the provision of technical assistance and training.

Table 3: Results Framework as in the PAD PDO Project Outcome Indicators

The main objective of the project is to enhance CBK’s capacity to oversee the financial system’s stability and its development in Kosovo. The project will focus mostly on strengthening the capacity of CBK to (i) conduct adequate off-site supervision of banks; and (ii) adequately supervise insurance companies and pension funds.

The following project indicators will be used to monitor the project: (i) development by CBK of a supervision plan for each of Kosovo’s main banks and the implementation of such plans; and (ii) development by CBK of an ongoing supervision plan for insurance companies and for pension funds and the implementation of such plans.

Intermediate Outcomes Intermediate Outcome Indicators PART I – Sub-component I.I Strengthen CBK’s institutional framework and sustainability

Preparation of a development strategy for CBK including options to ensure access by CBK to long term resources and including incentives to limit staff attrition.

PART I – Sub-component I.II Strengthen the regulatory and supervisory framework

Establishment and use by CBK of a regulatory reporting data base for banks and insurance companies;

Improved regulatory reporting by banks and non-banks to CBK;

Production of improved stability reports and bank analyses by CBK.

Banking Sector Preparation and execution of supervisory strategies for key banks.

Insurance Sector

On-going supervision and claims management strategy prepared.

Detailed assessment of the TPL tariff liberalization carried out.

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Actuarial assessment of life insurance carried out. Insurance market report published, covering

quantitative and qualitative information on each insurance company and the market.

On-site and off-site supervision manuals finalized and in use

Pension Funds and other NBFIs

Review and preparation of necessary draft amendments to regulations and rules for the licensing and risk-based supervision of private pension funds (Pillar II and Pillar III).

PART II: Strengthening of microfinance industry

Provision of at least one training session each to: MFIs transforming into deposit-taking

institutions; and Other MFIs based on a needs assessment by

AMIK. Preparation of an MFI impact assessment.

PART III: Capacity building among banks Provision of training to: bank training officers on training assessment

need methodologies focusing on small banks); KBA’s trainers on at last two advanced banking sector topics based on bank training need assessment.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification In 2011, the project was restructured to provide additional financing that would both help to scale up activities under the Original Project and support new activities. The Original Project had achieved important results as of the restructuring date, especially when considering the nascent stage of development of the legal and regulatory framework for the financial sector in Kosovo, the overall weak capacity, and challenges of dealing with a relatively new Central Bank. Most notably, the CBK’s institutional capacity had substantially been strengthened thanks to the preparation and implementation of a medium-term development strategy. The Original Project also enhanced the legal and regulatory framework. Specifically, it helped to create conditions for a viable insurance sector by assisting the Government of Kosovo to establish the legal framework for third part liability and for compulsory insurance. In addition, a detailed actuarial assessment of life insurance activities and products was carried out and the sector adopted the recommendations made there under. During the original project implementation additional financial sector related priorities were identified: Since the Original Project was approved in 2007, Kosovo declared its independence

and subsequently became a member of the WBG and the IMF in June 2009. As an independent country, Kosovo needed a basic infrastructure to support its financial sector, including a National Payments System. Under United Nations’ Interim Administration Mission in Kosovo, the CBK operated an electronic interbank clearing

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system, which was effective in clearing payments, but settlements did not occur in real time. Considering increasing volume and value of transactions this was not in line with international best practices as it gave rise to settlement risk.

Additionally, as a fully-fledged central bank, the CBK needed to have a back-up IT system to ensure that it could continue to perform its functions in case of a disaster.

The Kosovo banking sector weathered the 2008 crisis better than peers in other countries in the region as evidenced by relatively more limited impact on NPLs and credit growth. Yet, the crisis highlighted the importance of deposit insurance schemes in ensuring orderly bank resolution and maintaining public confidence in the sector. Against this backdrop, Kosovo introduced a deposit insurance scheme through the law of 2011. The existence of a deposit insurance scheme is also a requirement for EU accession.

The new proposed activities were consistent with the Kosovo Interim Strategy Note for FY10 and FY11. The additional financing for the Project was specifically mentioned in the ISN as part of the first pillar that aimed to improve macroeconomic stability. In particular, strengthening the capacity of the CBK to supervise financial institutions and modernizing the payments system were identified as key priorities. The additional financing was considered at that time by the WBG as the most appropriate way to scale up the Original Project’s impact and development effectiveness and support Kosovo in introducing a real-time settlement system, a business continuity center for its Central Bank and a deposit insurance scheme.

The changes to the Project as part of the additional financing and restructuring included: (i) expanding the project development objective (PDO) and title of the Project to reflect the broadened scope– title changed to Financial Sector Strengthening and Market Infrastructure Project (FSSIMP); (ii) adding three new components that build on the technical capacity that was developed as part of the Original Project (FSTAP); and (iii) modernizing the results matrix to reflect the revised scope. For the purpose of this evaluation, the ICR uses the revised PDO in the assessment of the outcomes (Section 3). The report will use the original project name FSTAP when referring to activities carried out before the 2011 restructuring and the restructured project name (FSSMIP) when referring to activities carried out post the 2011 restructuring.

The revised objectives of the Project are to: (i) enhance the stability and development of the financial sector; and (ii) strengthen the financial sector’s underlying market infrastructure.

The additional financing was provided for the Part I of the Original Project (Part II and III were considered as achieved) and the following additional Parts IV, V and VI, with the revised results indicators in Table 4:

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Part I: Strengthening CBK’s long term institutional and financial capacity and sustainability,

through the provision of goods, technical assistance and training, including the preparation of a medium-term development strategy for CBK.

Improving banking sector regulation and supervision, especially off-site supervision, and developing or improving the regulatory and supervisory framework for insurance activities and intermediaries and for other non-bank financial institutions under the purview of CBK.

Part IV: Establishment of a Real Time Gross Settlement (RTGS) Payment System, to be operated and maintained by the CBK, aimed at minimizing settlement risks and increasing confidence and reliability of commercial banks.

Part V: Establishment of a Business Continuity Center for (BCC) the CBK outside Pristina designed to serve as a backup system in case of primary system failure.

Part VI: Financing the Recipient’s initial contribution to the DIFK for the purpose of enabling the DIFK to commence operation of the Deposit Insurance Scheme.

Table 4: Results Matrix Revisions to the Results Framework Comments/

Rationale for Change PDO

Original Project Revised PDO The objective of the Project is to enhance the stability and development of Kosovo’s financial system by supporting stronger prudential regulation and supervision by CBK for banks and non-bank financial institutions, supporting the institutional strengthening of CBK, and strengthening the banking and microfinance industry through capacity building.

To enhance the stability and development of the financial sector; and strengthen the financial sector’s underlying market infrastructure.

Revised to reflect the outcomes of the new activities added under the additional financing including establishment of the RTGS for delivery of financial services, establishment of a BCC to reduce the impact on the financial sector in the event of a disaster, and establishment of the DIFK to increase confidence in and stability of the financial sector.

PDO indicators Original Project Revised PDO indicators Component 1 (i) Development by the CBK of a supervision plan for each of Kosovo’s main banks and the implementation of such plans;

Revised: Status of updated legal and regulatory framework for banks and NBFIs and capacity building in the financial sector.

The two original indicators were merged into one to better monitor progress towards revised PDO.

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Revisions to the Results Framework Comments/ Rationale for Change

(ii) Development by the CBK of an ongoing supervision plan for insurance companies and for pension funds and the implementation of such plans. Added: Component 4 Component 5 Component 6

Status of operationalization of RTGS. Status of establishment of a fully operational BCC. Status of establishment of the DIFK.

Additional indicators to reflect the new activities added under the additional financing including strengthening the national payment systems, establishing the BCC and operationalization of the DIFK to increase confidence in and stability of the financial sector.

Intermediate Results indicators

Original Project Revised Intermediary Indicators Banking Sector

Preparation of a development strategy for the CBK including options to ensure access by the CBK to long term resources and including incentives to limit staff attrition.

Revised: Number of missing and/or outdated regulations and directives drafted for banks and NBFIs, which have been passed recently or to be passed over the life of the Project. Automated tool for offsite supervision acquired and implemented. Number of the CBK staff trained in using analytical tool and regarding new regulations.

The formulation of these indicators has been modified to reflect the restructuring of the original Project.

Establishment and use by the CBK of a regulatory reporting data base for banks and insurance companies. Improved regulatory reporting by banks and non-banks to the CBK. Production of improved stability reports and bank analyses by the CBK. Preparation and execution of supervisory strategies for key banks.

Insurance Sector

On-going supervision and claims

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management strategy prepared.

Detailed assessment of the TPL tariff liberalization carried out.

Actuarial assessment of life insurance carried out.

Insurance market report publication covering quantitative and qualitative information on each insurance company and the market.

On-site and off-site manuals finalized and in use.

Pension Funds and other NBFI

Review and preparation of necessary draft amendments to regulations and rules for the licensing and risk-based supervision of private pension funds (Pillar II and Pillar III).

Micro-finance Sector

Provision of at least one training session to each MFIs transforming into deposit-taking institutions and to other MFIs. Preparation of a MFI impact assessment.

Revised: Number of training sessions to MFIs in transforming into deposit-taking institutions and to other MFIs

The formulation of this indicator has been refined.

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KBA

Provision of training sessions to bank officers on training assessment need methodologies focusing on small banks and to the KBA’s trainers on advanced banking sector topics based on bank training need assessment.

Revised and modified: Number of training sessions to bank officers and KBA staff on banking sector topics

The formulation of this indicator has been refined and simplified.

Payment Systems

New Status of operational integration of the RTGS system with the existing Electronic Interbank Clearing System (EICS). Status of operational integration of the RTGS system with the Central Securities Depository (CSD). Percentage of transactions in GoK and CBK securities settled in the RTGS system in conformity with the principles of Delivery versus Payment (DvP). Percentage of payments settled immediately or with a short delay (<15 minutes).

Additional indicator reflecting a new activity added under the additional financing. There is a critical need to develop a modern and low cost payment infrastructure in Kosovo by establishing the RTGS in line with EU standards and BIS/CPMI and IOSCO Principles and Recommendations.

Business Continuity Center

New Status of completion of refurbishment of the BCC facility. Percent failover from the CBK’s primary processing site to the BCC, and restoration back to the primary site, successfully demonstrated for all the CBK’s critical systems. Number of regular failover exercises conducted on a quarterly basis per year

Additional indicators reflecting a new activity added under the additional financing. There is a critical need to establish a BCC which will protect the data of the CBK in the event of a disaster and align Kosovo with EU standards. .

Deposit Insurance Fund

New Contributed amount from GoK

Premiums received from member banks

Additional indicators reflecting a new activity added under the additional financing. There is a critical and urgent need to establish the DIFK, which will ensure payout of insured depositors in the event of a bank failure. The

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creation of the fund is also a requirement for EU accession.

1.4 Main Beneficiaries, The Original Project (FSTAP) identified three main beneficiary targets, the Central Bank of Kosovo, as well as memberships of both Kosovo Banks Association, and Association of Microfinance Institutions of Kosovo. The project included three components benefiting each beneficiary respectively. The Restructured Project approved in 2011, maintained the CBK as a main beneficiary by enhancing the support through provision of additional financing for establishing the RTGS, and the BCC. No additional financing or change of scope were effected for the support to the KBA and AMIK, but they remained as beneficiaries, with a few other trainings to be completed during the life-time of the restructured project. The Deposit Insurance Fund of Kosovo was added as the new beneficiary. Additional funding for the project (USD 4 million from USD 6.85 million) would be contributed as partial seed capital for the DIFK. This would enable DIFK to start providing insurance coverage for the banks’ deposits, therefore increasing the trust of the depositors in the banking system.

1.5 Original Components FSTAP had three components benefiting respectively CBK, KBA and AMIK. Financing of activities was covered by IDA grant of USD 2 million. Component I: assistance to CBK The component included two main sub-components which aimed respectively to (i) strengthen CBK’s long term institutional and financial capacity and sustainability; and (ii) further strengthen banking sector supervision, especially off-site supervision; and strengthen and upgrade the regulatory and supervisory framework for insurance activities and intermediaries (mainly on ongoing supervision), and for other NBFIs under the purview of CBK.

Sub-component I.I aimed to strengthen CBK’s institutional capacity and ensure its long-term sustainability. Activities planned: Preparation of a medium-term development strategy for the CBK based on market

development trends, as well as a detailed functional/capacity/skills assessment of the CBK. On the basis of these medium-term strategy and capacity assessment, a phased medium term staffing plan would be developed for the CBK.

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Benchmarking of CBK’s salary scale to private banks’ and insurance companies’, utilities’ and ministries’ in Kosovo and its other (non-salary based) staff incentives reviewed. Subsequently, proposals would be made to CBK’s management team.

Medium-term financial projections prepared for CBK under various scenarios and a review conducted of CBK’s sources of funding, benchmarking fees to other European financial sector authorities. This would lead to the submission of proposals (if and as needed) to ensure CBK’s long-term financial sustainability.

Depending on the availability of project resources, fund a financial literacy campaign to raise population awareness on financial products, returns and risks, as well as on campaign on the role and importance of the credit registry, the use of non-cash payments instruments and other relevant topics.

Sub-component I.II aimed to strengthen CBK’s regulatory and supervisory capacities. Activities planned: Banking Review of current regulatory forms and processes for banks and non-banks and provide

recommendations to ensure they provide adequate information to CBK (in scope and nature) for its financial and off-site supervision, without creating excessive cost on individual institutions.

If needed, as per the conclusions of the review, and if there were enough project resources left, the component would also support the development of a regulatory data base aimed to receive regulatory reporting and help generate individual bank analysis reports, peer review analyses, and financial sector/stability analysis reports. The data base could be further extended to provide an Early Warning System. CBK staff would be trained in using the new database and in producing improved stability reports and bank analyses.

In coordination with other donors involved in strengthening banking supervision in Kosovo, the component would support training programs for bank (onsite and offsite) supervisors focused on whole bank financial analysis and systemic analysis. It would also train supervisors in preparing supervisory strategies for each banking institution and in establishing a supervisory documentation process. If sufficient funding was available, the grant would support opportunities for both offsite and onsite supervisors to “apprentice” with other European supervisory agencies in the offsite function. Such opportunities would also be offered to staff in the corporate and licensing departments of CBK.

Insurance support as a priority a review of the insurance legal framework for effective on-going

supervision and claims management and assist CBK in defining on that basis an ongoing supervision strategy for life and non-life insurance companies.

Assistance to build CBK’s capacity to conduct effective supervision of insurance intermediaries, through the provision of training and peripatetic assistance to insurance

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supervisors, the finalization of insurance supervision manuals, and the development of an insurance market report.

In anticipation of the planned liberalization of Third Party Liability (TPL) premiums and of the launch of life insurance activities by various companies, the component would also give priority to financing (i) a functional, supervision and technical assessment of the proposed TPL tariff liberalization; and (ii) a detailed actuarial assessment of life insurance activities and products.

Support review and completion of the legal framework for TPL insurance, life insurance, actuaries, reinsurance, and insurance intermediaries – depending on the availability of project resources left.

Other non-bank financial institutions support a review of the regulations and rules for the licensing and risk-based

supervision of private pension funds (Pillar II and Pillar III) and of investment funds (UCITSs and venture capital funds). This could be extended to other professional securities market participants (in line with a capital market development plan that would be prepared under the grant too if funding was available).

Component II: assistance to AMIK Through AMIK, training would be provided to Micro Finance Institutions, especially

small ones, based on a need assessment carried out by AMIK. The training would aim to strengthen smaller MFIs, focusing on helping them become financially self-sustainable and less donor-dependent and managing risks adequately.

Specific assistance would be provided to MFIs transforming into deposit-taking institutions, in areas of particular importance in the transformation process (such as on deposit taking activities, asset and liability management, etc.).

In addition, a simplified assessment of the impact of microfinance in Kosovo would be conducted in order to provide AMIK with an advocacy tool in support of the microfinance industry. The grant would also support the participation of AMIK to other advocacy events.

Component III: assistance to KBA

On the basis of an ongoing training needs assessment carried out by an international consultant for KBA, the grant would provide training to KBA’s trainers (and relevant bank staff) on advanced banking sector topics which the training need assessment will have identified as being required by the banks. It was anticipated that training would be needed on risk management issues for banks, as well as on Anti Money Laundering (AML) issues.

Training would also be provided to bank training officers to help them better assess training needs in their own institutions, again with the objective to ensure the sustainability of identifying and providing training to the banks.

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Priority areas Given the limited size of the grant, implementation of the project would focus on priority areas first, namely the institutional strengthening of CBK (Sub-component I.I), the review of reporting processes and reporting information by banks and non-banks (included in Sub-component I.II), the strengthening of CBK’s capacity to supervise insurance companies and pension funds, the TPL premium liberalization feasibility study and the life insurance actuarial study (included in Sub-component I.III). Other project activities would be implemented to the extent that project resources were still available.

1.6 Revised Components The Restructured Project (FSSIMP), approved by the WBG board in 2011, scaled up the first component from the Original Project, and added three new ones. Additional funding provided through an IDA loan amounted to USD 6.85 million. No additional financing was planned for the AMIK and KBA components 2 and 3 respectively in the Original Program. For component 1, support to the CBK, additional financing for technical assistance was provided for supporting the implementation of the CBK’s training as identified in the training needs analysis that CBK conducts regularly.

Three new components were added as part of the project restructuring and additional financing:

Component IV - Establishment of a Real Time Gross Settlement System. In September 2009, the CBK approved a strategy document and an action plan for implementation of the National Payment System. Component IV was to enable implementation of the action plan by establishing a RTGS. The introduction of the RTGS system provided safe and efficient settlement of all systemically important payments including: (i) priority payments; (ii) net interbank positions arising from EICS (electronic interbank clearing system) clearing operations, and potentially other payment circuits as they emerge (e.g. national card switch); (iii) transactions in government securities; and (iv) interbank money market transactions. Component V – Establishment of a Business Continuity Center: In 2007, the World Bank provided the CBK with technical assistance for the development of its Business Continuity Strategy in line with the Bank for International Settlements (BIS) Core principle VII. The Strategy identified the business processes supporting the key operational functions within the CBK in the event of a disaster, established a Business Continuity Management Team, developed and documented an IT disaster recovery plan to facilitate the proper and timely recovery of IT operations, and established a recovery location to be used based on the disaster classification. The Strategy recommended establishing a Business Continuity Center outside Pristina. Such a backup site for the CBK would ensure stability of the financial sector in the event of a disaster. The additional financing assisted in establishing such a center and would include the renovation of the identified building site in the city of Prizren.

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Component 6 - Provision of seed funding to the DIFK. The Law on Deposit Insurance was approved by the Parliament in October 2010. Through the additional financing the Bank would partly provide seed funding to the DIFK. The DIFK was expected to build reserves of approximately €15 million over time. The DIFK funding included premiums from financial institutions, GoK contribution, and additional grant capital of €4.5 million from KfW.

Table 5: Project Funding Original

Project Additional Financing

Project Total

Component 1: Assistance to CBK 1,540,000 130,000 1,670,000 Component 2: Assistance to AMIK 240,000 - 240,000

Component 3: Assistance to KBA 220,000 - 220,000

Component 4: Establishment of a RTGS -- 1,870,000 1,870,000

Component 5: Establishment of a BCC -- 850,000 850,000

Component 6: Provision of seed funding to the DIFK -- 4,000,000 4,000,000 Total 2,000,000 6,850,000 8,850,000

1.7 Other significant changes The project closing date was extended three times to accommodate completion of planned activities: Extension of the closing date for the Original Project (FSTAP) with one year, from

6/30/ 2010 to 6/30/2011. Extension of the closing date of the restructured project (FSSIMP) with two years, from

6/30/2014 to end 6/30/2016. Extension of the closing date of the FSSIMP with 6 months, from 6/30/2016 to

12/31/2016. An adjustment of the project was made in 2009 resulting in Kosovo assuming formal responsibility for implementation, reporting and fiduciary obligations associated with the grants involved, from the Provisional Institutions of Self-Government (PISG).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry The FSFA conducted in May 2006 by the WBG highlighted substantial institutional weaknesses at the level of the CBK, pertaining to its: (i) institutional and financial sustainability, (ii) the banking and NBFIs prudential regulation, supervision, and resolution framework, and (iii) the financial sector infrastructure. The FSFA also underlined significant weaknesses at the level of financial institutions.

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The additional financing for the Original Project was specifically mentioned in the Interim Strategy Note of 2010-2011 as part of the first pillar that aimed to improve macroeconomic stability. In particular, further strengthening the capacity of the CBK to supervise financial institutions and modernizing the payment systems were identified as key priorities. Commitment to the project by the stakeholders remained high throughout the project life despite implementation challenges. The CBK, which was the main counterparty did show substantial commitment to cooperate and benefit from the project. The areas of intervention remained relevant and addressed issues that were of high priority for the CBK. The project ran considerable delays during its implementation which forced the recipient to request three extensions of the closing date, for a total of 3.5 years. However, the delays were mostly related to the complexity of the procurement processes and lack of experience of dealing with such cases, as well as lack of a dedicated Project Implementation Unit. The activities proposed under FSTAP were well coordinated with other donor support for the financial sector. CBK had proposed a comprehensive donor-coordinated technical assistance strategy aimed to achieve a long lasting beneficial impact on the sector’s stability and development. CBK’s matrix of assistance served as the focal point of donor coordination for assistance to the financial sector. With regard to FSSIMP’s new activities (additional financing), the Bank worked with the US Treasury to ensure that the RTGS platform funded under this Project was fully integrated with the Central Securities Depository (CSD) system being supported by the US treasury. In addition, the Bank under the Western Balkans Technical Assistance Facility had planned, together with the IMF and KfW, to provide technical assistance to the DIFK to support preparation of, annual updates to and implementation of an institutional building plan to ensure compliance with Basel/IADI principles. KfW would also provide seed funding to the DIFK. Appropriate risks were identified at the time of project design, and at the restructuring stage where additional financing was agreed. Given the scope of the project, the team in general correctly identified the following risks: Political and constitutional uncertainties surrounding the future of Kosovo. The

unfolding of detrimental events could have implications for the macroeconomic and business environment and therefore project implementation and impact. Risk was rated as HIGH. Project had resulted from extensive consultations with and strong commitment from local counterparts.

Weak institutional capacity of counterparts, especially on handling the fiduciary part.

The procurement risk under FSTAP was rated as HIGH, while the financial management risk was estimated as MODERATE after mitigation measures. Under the FSSIMP (additional financing) the procurement risk was rated as SUBSTANTIAL after the mitigation measures, considering the more complex components added, and the financial management risk was rated as MODERATE after the mitigation measures.

Lack of counterpart commitment. Risk that counterparties (CBK, AMIK, KBA) would

show lack of willingness to implement the activities as agreed and planned. The risk

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was rated as NEGIBLE. Counterparts had been proactive in seeking to strengthen the financial sector, collaborate with WB and other donors, and proactively seek assistance.

Donor coordination issues. Risk that donors might initiate overlapping activities, or

WB planned activities depend on another donor completing certain preliminary activity. This risk was rated as NEGIBLE. Early discussions with the IMF and other donors ensured agreement on the scope and timing of activities, and regular discussions further minimized this risk.

To mitigate the core risk of the weak institutional capacity, the project aimed precisely to improve counterparts’ institutional capacity, especially through the TA for preparation of a medium-term development strategy for the CBK, implementation of which in fact led to the recruitment and retention of high quality staff. In addition, the team thought that project would benefit from close supervision, combined with a strong field presence. The original project suffered some delays in implementation, attributed mostly to the lack of familiarity with bank procurement procedures and little experience with similar project implementation. The restructured project introduced components that were more complex, including from the fiduciary point of view. The WB project team planned for increased supervision and capacity building support to the recipient’s staff involved with project management, procurement and financial management.

2.2 Implementation Table 5. Project Milestones Milestone Date Board Approval of original project (FSTAP) December 13, 2007 Effectiveness (FSTAP) January 3, 2008 One-year extension of closing date (FSTAP) March 2010 Original Project closing date FSTAP 30 June 2010 Revised closing date FSTAP 30 June, 2011 Board Approval of Project Restructuring (FSSIMP) and Additional Financing (USD 6.85 million)

June 14, 2011

Effectiveness (FSSIMP) January 25, 2012 Two years extension of closing date (FSSIMP) June, 2014 6 months extension of closing date (FSSIMP) June, 2016 Original Project Closing Date FSSIMP June 30, 2014 First revised Project Closing Date FSSIMP June 30, 2016 Second revised Closing Date FSSIMP December 31, 2016 Midterm review March 4, 2015

In spite of considerable delays and challenges in implementation, the project had achieved all its objectives by the revised closing date of December 31, 2016. The Original Project’s closing date was extended with one year, from June 30, 2010 to June 30, 2011. The project

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was substantially restructured on June 14, 2011 (WB board approval date), with additional financing provided and three new components added. The restructured project (FSSIMP) closing date was extended twice, from June 30, 2014 to June 30 2016, and then for an additional 6 months, to December 31, 2016. The original project target results for components 2 and 3 (support to AMIK and KBA respectively) were considered as substantially achieved at the time the project was restructured in 2011 and additional financing provided. Not all the funds under FSTAP were exhausted, especially as several activities under component 1 (support for CBK) were not yet implemented, despite the one-year extension of the original project by one year. The delays were related to numerous WB procurement process, vis-à-vis lack of familiarity and experience of the CBK staff with WB procedures, as well as changes of the CBK staff in the PMT covering project coordination. Under FSSIMP, considerable delays were experienced mostly on the RTGS component, and the BCC component, but also on the CBK component (off-site supervision software). These were larger and complex procurement packages, subject to a two-stage bidding process. The BCC component included refurbishment of the hosting premises, which implementation was further delayed due to issues with the CBK ownership of the premises and related construction work permit. The mid-term review (under additional financing) was carried during 4 - 6 March 2015. The objectives of the midterm review mission were to: (i) discuss the efficacy and effectiveness of the project design and implementation approach; (ii) review of implementation progress up to date; (iii) evaluate the overall performance of the project and make recommendations to guide the implementation of ongoing project activities, with a view to ensuring that the project will be able to meet its development objectives in the remaining timeframe. Special attention was paid to the procurements for the real-time gross settlement system (RTGS) and the Business Continuity Center (BCC).

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E at design. The result framework and its monitoring were used for project management and supervision by the World Bank. Because of its technical assistance nature, the WB task team did not include numeric indicators in the original project (FSTAP) to monitor progress for each component. Instead, the result indicators (itemized deliverables) presented in the matrix of the result framework were used to monitor project implementation. The restructured project (FSSIM) included a few numerical indicators for the three new added components (respectively for RTGS, BCC, and DIFK), as well as for the scaled-up Component 1 (assistance to CBK). Monitoring of project results was carried out during supervision missions. None of the indicators used were from the WB core indicators. The M&E framework in the ISRs deviated from the PAD (original and restructured project) by including some intermediate indicators related to microfinance sector performance that

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were not part of the PAD. These indicators were added to meet the Bank's reporting requirements for MSMEs and were not used to monitor and evaluate the project's performance. M&E at implementation. The Project Management Team (PMT) coordinated with each participating agency the implementation and monitoring of the planned activities. PMT comprised representatives of CBK, AMIK, and KBA for the original project. The PMT under the restructured project included only CBK and DIFK representatives due to the inclusion of the Deposit Insurance component, and achievement of objectives related to AMIK and KBA capacity building. M&E at utilization. The M&E system fulfilled its role of providing accurate and timely information to decision makers for strategic and operational decisions. The M&E framework was used throughout the project to assess overall progress. The team also monitored key indicators in order to inform about decision-making, and make specific recommendations on actions to support implementation. The objectives of components 2 and 3 of the FSTAP (assistance to AMIK, and KBA, respectively) were considered as achieved since before the additional financing was provided in 2011. At the close of the project in 2016, all the PDO indicators were achieved or surpassed, a significant achievement considering the challenges and delays occurred during project implementation. The consistency and quality of data received for the ICR was satisfactory.

2.4 Safeguard and Fiduciary Compliance There were no safeguard policy issues with the original project (FSTAP) and with the additional financing (FSSMIP). The delays during the project life were attributed to a great extent to issues with procurement. Significant delays occurred during the procurement of the RTGS system under component 4 due to two issues: (i) low recipient capacity in handling the complexities of the two stage procurement process, where the non-priced technical proposals are submitted and evaluated first, and then selected first-stage bidders submit a second-stage technical proposal and the corresponding financial proposal; (ii) security concerns raised on one of the bidders (IT provider)1, handling of which further delayed the procurement process. Procurement of off-site reporting also were subject to some delays as the task was retendered to include certain items that CBK felt were critical to the overall cost-effectiveness of the software package. Delays were also noted during the procurement of the BCC component, however most of the delays under this component related to the ownership issue.

1 In addition to low capacity in handling the procurement process, CBK has also been struggling to balance security concerns with one of the bidders – a Swedish company with alleged Russian ties - with applicable procurement rules.

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Under the project, staff dealing with coordination, procurement and financial management were not working full time for the project, but dealing also with other matters, outside the Project. The closing ISR noted that a dedicated PIU, fully equipped and working full time for the project and paid from the project might have facilitated speedier project implementation given the multiple and complex procurement packages under the project. In the closing ISR, procurement performance by the Borrower was rated moderately satisfactory, while the Financial management performance was rated as satisfactory. The PMT provided financial reporting on a timely basis in a form and format satisfactory to the World Bank Financial Management Specialist. All annual audits were conducted by acceptable audit firms and all audit opinions on the Project’s financial statements were unqualified. Accounting records were consistently found to be accurate and with adequate controls to ensure accuracy of accounting records and reports.

2.5 Post-completion Operation/Next Phase At the time of the drafting of this ICR, The World Bank team was in discussions with the local stakeholders for a new lending operation. The Bank plans include support for the deepening of financial integration through strengthening of the financial sector intermediation and financial sector infrastructure. Key potential activities include: (i) supporting the newly established Kosovo Credit Guarantee Fund, and (ii) advancing further the payment system infrastructure through establishment of an interbank card processing center. The latter will complement the achievement and FSSIMP of establishing the Automated Transfer System (RTGS component)2. Other activities may include support for developing legislation for microfinance institutions, an important sector for access to finance supported under the original project. The strong collaboration of the WB team with the CBK and other stakeholders paved the way for the dialogue on the potential new operation. It gave the Bank a better and deeper understanding of the political, economic and financial sector context. The new operation is expected to cover among others topics which complement or extend achievements under the FSSIMP.

2 The scope of the system was broadened during the bidding process to an Automated Transfer System (ATS), which incorporates both RTGS and Automated Clearing House (ACH) components.

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3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Overall relevance of objectives, design and implementation is rated as SUBSTANTIAL. Dimension Rating Relevance of Objectives High Relevance of Design Substantial Relevance of Implementation Moderate Overall Relevance Rating Substantial

Sub-Rating for Relevance of Objectives: High The objectives of the Project remain of high relevance to the CBK and other stakeholders’ priorities as when it was approved. The financial sector in Kosovo is stable and liquid, with low level of NPLs (4.9% as of end 2016) and strong provisioning requirements, to a large degree thanks to a stronger CBK. However, the sector is rather new, with unsophisticated products offered to the market and it is exposed to a number of potential vulnerabilities. Main banks are subsidiaries of international banks with ongoing deleveraging activities. Deposits of very short maturity are the main source of financing and long-term financing is scarce. Access to finance in Kosovo remains low, as outstanding credit is estimated at only 36 percent of GDP. The project achieved a major success with the establishment of the Automatic Transfer System (RTGS component under FSSIMP), and there is a need to advance further the payment system infrastructure through establishment of an interbank card processing center which would contribute to the reduction of the transactions cost for citizens and reduction of cash payments in the system. The original project (FSTAP) provided a substantial contribution in achieving the goals set out in Transitional Support Strategy for Kosovo (2004), to create a sustainable foundation for growth; and of the Interim Strategy Note of late 2007 which was founded on two main pillars: (i) developing new sources and a high quality of economic growth; and (ii) ensuring macroeconomic stability. Addressing weaknesses in the financial sector was crucial to ensure long term stability and growth. To develop the long-term growth potential of Kosovo, addressing existing financial sector regulatory and supervisory weaknesses was crucial, as a malfunctioning financial sector hinders growth, presents a potential fiscal burden, and can be a source of major instability in cases of bank failures or crises. The restructured project, which provided additional financing was consistent with the Kosovo Interim Strategy Note (ISN) for FY10 and FY11. The additional financing was specifically mentioned in the ISN as part of the first pillar that aimed to improve macroeconomic stability. In particular, strengthening the capacity of the CBK to supervise financial institutions and modernizing the payment systems were identified as key priorities. The restructured project was also in line with the CPS for the period 2012 – 2016, as it supported the second main element of the growth pillar aimed at helping Kosovo to increase its attractiveness to both domestic and foreign business investors. Specifically,

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the project supported outcome 9 of the CPS: Stronger financial system through support of the regulatory and institutional reform of Kosovo's financial system; and CPS Outcome 10: Strengthen the sustainability of the CBK and its capacity to supervise banks and non-bank financial institutions. Sub-Rating for Relevance of Design: Substantial The Project’s design correctly placed emphasis on institutional strengthening, stability and development of the financial sector, capacity building, and strengthening market infrastructure. Kosovo’s financial system has been strengthened and has demonstrated greater financial stability. CBK’s institutional strength and sustainability to supervise banks and non-bank financial institutions has improved. The project (i) supported the preparation of a development strategy and a review of the CBK’s funding options, (ii) developed laws and regulations, (iii) developed an off-site reporting system/database, and (iv) enabled capacity developing activities for the CBK staff. The Automatic Transfer System, financed by FSSIMP, was introduced in July 2016 and is expected to reduce operating costs for banks, increase the speed and shorten execution times for high value payments, and, above all, minimize the payment risk and increase confidence in the banking sector. In addition, the project has supported the KBA and AMIK in strengthening their capacity as well as the capacity of the banking and microfinance industry as a whole. Seed capital in the amount of US$4 million was provided to the creation of DIFK, which is now fully operational. Project design could have more carefully considered the merits of including the refurbishment of the Business Continuity Center in the project. This was an activity that did not require advanced financial sector skills where this specific project could be much better positioned to add value. In 2007, the Bank provided the CBK with technical assistance for the development of its Business Continuity Strategy in line with the Bank for International Settlements (BIS) Core principle VII. The Strategy identified the business processes supporting the key operational functions within the CBK in the event of a disaster, and provided recommendations with regard to the establishment of a Business Continuity Management Team, development of an IT disaster recovery plan to facilitate the proper and timely recovery of IT operations, and establishment of a BCC outside Pristina. Continuing support to the CBK through FSSIMP by actually establishing the BCC, was an easy and tempting target to embrace. However, CBK most likely would have been able to cover the refurbishment of the BCC on its own, and the project resources could have been used more effectively on other activities. Sub-Rating for Relevance of Implementation: Moderate Throughout project implementation, the CBK, but also AMIK, KBA, and DIFK remained committed to meeting project objectives and in spite of a challenges and significant delays during implementation, all objectives were met within budget. The Kosovo’s financial sector institutions are new and operate in a difficult environment. While they have been on

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a steep learning curve, benefiting from substantial donor support and hand-holding, they have shown commitment to progress, enhance their capacities and fulfill their mandate. The project implementation was subject to important delays, mostly attributed to the lack of familiarity with WB procurement procedures, as well as having to deal with complex procurement packages. Also, lack of experience was reflected in the absence of swift and decisive action to address concerns with security (RTGS bidder), and work permit issue related to dispute about ownership of BCC premise. A project design where implementation would have been supported by a strong Project Implementation Unit might have avoided some unnecessary significant delays. Implementation issues at one point created a disbursement lag of 30 months, and the WB pondered the merits of canceling the RTGS component. However, intensified level of supervision by the WB task team and continued commitment and cooperation by the CBK ensured the continuity of the component and its successful implementation.

3.2 Achievement of Project Development Objectives Overall Achievement of PDOs Rating: HIGH The Project contributed to the overall development objectives, with gains made in all areas. Project contribution is broadly recognized and well appreciated by the CBK, DIFK, KBA and AMIK and significant advances in PDO outcomes were achieved despite the challenges. Responsible Institution

PDO Indicator Baseline End Target (Approved)

Actual Result

(closing ISR)

Level of Achievement

(ICR’s Assessment)

Rating

PDO: To enhance the stability and development of the financial sector; and strengthen the financial sector’s underlying market infrastructure. CBK KBA AMIK

Status of updated legal and regulatory framework for banks and NBFIs and capacity building in the financial sector

Non-existent Achieved Achieved Achieved High

CBK Status of operationalization of RTGS

Non-existent Achieved

Achieved Achieved High

CBK Status of establishment of a fully operational BCC

Non-existent Achieved

Achieved Achieved High

DIFK Status of establishment of the DIFK

Non-existent Operational Operational Operational High

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PDO of the project is to: (i) enhance the stability and development of the financial sector; and (ii) strengthen the financial sector’s underlying market infrastructure. PDO Indicator one: Status of updated legal and regulatory framework for banks and NBFIs and capacity building in the financial sector. The project supported the completion of important reforms with regard to the upgrade of the legal and supervisory framework for banks and NBFIs. Under component1 the project supported preparation of four new important laws, namely: Law on Payment Systems, Law on Pensions, Law on Insurance Supervision, and Law on Banks and MFI’s. Also, more than 70 related regulations and directives on insurance, pension and banking supervision were prepared. The project was essential in substantially upgrading the legal framework supporting the CBK for financial sector supervision. A feasibility study for a CBK operated training center was carried, and staff of CBK received individual trainings during 2016. The CBK built and successfully started operating the off-site supervision software, and all supervision staff was trained to use the software. The CBK continues to use the off-site supervision software during its normal supervision activity. As result, capacity of the CBK to supervise the markets under its oversight has increased. 23 training sessions were held for commercial bank officers, and a total of 14 training sessions were held for microfinance institutions. PDO Indicator two: Status of operationalization of RTGS. The RTGS component was completed successfully in July 2016, marking a major reform for the payment system in Kosovo. The scope of the system was broadened during the bidding process to an Automated Transfer System (ATS), which incorporates both the RTGS and the Automated Clearing House (ACH). Successful launch of the ATS in July 2016 marked a major reform of the payment system in Kosovo. It directly reduced operating costs for banks, increased the speed, and shortened execution times for high value payments, minimizing the payment risk and increasing the confidence in the banking sector. PDO Indicator three: Status of establishment of a fully operational BCC. The works for the Business Continuity Centre were finalized and the Centre was officially inaugurated on 7 November 2016. The BCC is a stand-by site that contains continuously-updated live data from all the CBK's critical systems, including the newly installed ATS and the off-site reporting software. Before the BCC was finalized and put to operation, the CBK did not have any IT back up arrangements out of the CBK building. Therefore, the completion of the new backup site for the CBK, well-equipped and located in a different city, is an important achievement as it ensures stability of the financial sector in the event of a disaster.

PDO Indicator four: Status of establishment of the DIFK. The DIFK has become fully operational and the seed capital in the amount of US$ 4m by the World Bank has been satisfactorily disbursed, in addition to the funding contribution by KfW and the Government of Kosovo. The DIFK funds base is increasing as banks regularly pay the risk based premiums. The deposit coverage level currently is at EUR 4,000. The existence of the DIFK and its scheme sustainability is critical to maintaining public confidence in the banking sector.

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Intermediate Results Indicators Intermediate Result 1: Number of activities completed related to improvement of banks and NBFIs’ legal and regulatory framework and trainings held.

Responsible Institution

Intermediate Indicator End Target (Approved)



Rating

CBK 1. Number of missing and/or outdated regulations and directives drafted for banks and NBFIs new laws, which have been passed recently or to be passed over the life of the Project

key regulations to be adopted (un-specified number)

Achieved 4 laws and 73 by-laws approved

High

CBK

2. Automated database for offsite supervision acquired and implemented

Off-site database for monitoring and analysis used in day to day work

Achieved Off-site database for monitoring and analysis is operational and used in day to day work

High

CBK

3. Number of the CBK staff trained in using analytical tool and regarding new regulations

100% of supervisors trained

Achieved All supervision staff trained

High

AMIK

4. Number of training sessions to MFIs in transforming into deposit-taking institutions and to other MFIs

0 The target was already considered as achieved when the project was restructured in 2011

Achieved 14 training sessions carried for member MFIs

High

KBA

5. Number of training sessions to bank officers and KBA staff on banking sector topics

0 The target was already considered as achieved when the project was restructured in 2011

Achieved 23 training sessions for KBA members.

High

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During the project life, CBK procured consultancy services to draft/review the Law on Payment Systems, Law on Pensions, Law on Insurance Supervision, and Law on Banks and MFIs. In addition, despite no specific number of regulations or laws were targeted in contrast to the good practice, numerous new by-laws were drafted, specifically, 21 regulations on non-life insurance, 24 regulations on pension/life insurance, and 28 regulations on banking supervision. CBK’s institutional strengthening and sustainability have been substantially improved thanks to the preparation of a development strategy and the review of CBK’s sources of funding options including (i) the assistance for functional assessment, and (ii) the development of medium-term staffing plan and the revision of staff incentives Assistance was provided with regard to the detailed functional supervision and technical assessment of Compulsory TPL tariff liberalization, and by developing a roadmap for the Insurance Association of Kosovo (IAK). Despite some early delays during procurement, the CBK successfully installed and started operating the Off-site Regulatory Reporting System (ORRS). It was developed to serve the requirements of CBK’s supervisory units which cover all financial institutions in Kosovo, plus CBK’s Statistics Department. It replaced an existing system used by the Statistics Department, as well as a number of Excel applications used by the supervisory units. There were some delays in implementation due to the need for the implementation team to acquire a thorough understanding of the complexities of CBK’s situation as well as in replacing the Statistics Department’s existing system. However, these issues were resolved and the activity was successfully completed on May 15, 2016, including training of all supervision staff on its use. The system is in use and the supervised entities are obliged to report through the ORSS. During the life of the project CBK staff received support to participate in training programs and international conferences. Using the savings from the project, a number of individual trainings for CBK staff took place in the period February – December 2016. A feasibility study for the establishment of a training institute was prepared. This study designed the institutional, organizational and financial set-up of a forthcoming training institute. CBK has decided that the BCC facility will serve as the training center for its staff. AMIK provided 14 trainings to the members and non-members of AMIK, specifically preparing larger MFIs for transforming into deposit taking institutions while other trainings were focused on other general microfinance related topics addressing the needs of smaller institutions. Overall, about 100 participants representing MFIs in Kosovo have attended the trainings. Moreover, 17 potential trainers were identified and 8 were hired by AMIK to conduct microfinance related training for AMIK Members. Participation of 9 AMIK staff in different international microfinance conferences and trainings was enabled. A Poverty Outreach and Impact Assessment of Microfinance in Kosovo was planned and the project contributed funding towards the completion of the assessment. Since the project started, the Kosovo Bankers’ Association (KBA) implemented 23 trainings sessions to bank officers on training assessment need methodologies focusing on small banks and to the KBA’s trainers on advanced banking sector topics based on bank

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training need assessment. Participation of selected KBA staff in three training programs abroad was also covered by the project funds. Intermediate Result 2: Operationalization of RTGS

The scope of the RTGS system under component 4 was broadened during the bidding process to an Automated Transfer System (ATS), which incorporates both RTGS and Automated Clearing House (ACH) parts. The Automated Transfer System (ATS) was launched on July 4, 2016 and is fully operational. It contributed to the effectiveness of the payment financial services in line with National Payment Strategy (NPS), approved by the CBK in September 2009. The ATS reduces operating costs for banks, increasing the speed, and shortening execution times for high value payments, minimizing the payment risk and increasing the confidence in the banking sector. All three intermediate indicators were met: (i) operational integration of the system with the existing Electronic Interbank Clearing System (EICS) has been achieved through incorporation of the EICS functionality in the RTGS system, (ii) operational integration of the ATS system with the Central Securities





Rating

CBK 6. Status of operational integration of the RTGS system with the existing Electronic Interbank Clearing System (EICS)

Achieved

Achieved achieved through implementing the EICS functionality in the ATS system.

High

CBK

7. Status of operational integration of the RTGS system with the Central Securities Depository (CSD)

Achieved

Achieved ATS successfully integrated with CSD

High

CBK 8. Percentage of transactions in GoK and CBK securities settled in the RTGS system in conformity with the principles of Delivery versus Payment (DvP)

100

Achieved

All transactions settled accordingly

through ATS

High

CBK

9. Percent of payments settled immediately or with a short delay (< 15 minutes)

95

Achieved

100% of payments settled within the

designed time frame

High

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Depository (CSD) has been fully achieved, and (iii) all RTGS payments are being settled immediately. Intermediate Result 3: Establishment of a fully operational BCC

A fully operational Business Continuity Center was launched on November 7, 2016, playing a crucial role in safeguarding the stability of the financial sector and more broadly the economy as a whole in the event of a disaster. The premises chosen for such destination are located in the city of Prizren. The renovation work faced significant delays, due to issues with the clarity of ownership and therefore validity of the construction permit. Renovation of the building included refurbishment of the premises with proper designed areas for the Vaults, Server Room, Security and Monitoring and including appropriate premises for the Training Centre. The premises are equipped with generators, UPS, central heating and ventilation facilities and monitoring room. IT Equipment were purchased for the server room, fully equipped in line with international standards for the back-up system. Under the savings from the project it was made possible to add to the IT equipment additional server storage space in order to secure proper and secure operations and interconnectedness for the proper functioning of the BCC. The first failover and restauration tests were conducted in December 2016. Another set of tests took place in



Level of Achievement (ICR’s Assessment)

Rating

CBK 10. Status of completion of refurbishment of the BCC facility

Achieved Achieved

High

CBK

11. Percent failover from the CBK’s primary processing site to the BCC, and restoration back to the primary site, successfully demonstrated for all CBK’s critical systems

100%

End target has been corrected from '0' to '100'. This was an editorial error in the PAD. The number should be 100%

Achieved

High

CBK 12. Number of regular failover exercises conducted on a quarterly basis per year

4

Achieved

Two test exercises held for two consecutive quarters, first in December 2016, and the last one being in March 2017. CBK confirmed plans to conduct quarterly exercises going forward. All transactions settled accordingly through ATS

High

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March 2017. The overall failover and restoration tests resulted successful. Indicator 12 foresees 4 regular failover exercises per year. Given that, (i) the BCC was only made operational in November 2016, (ii) the first two tests were held accordingly and resulted successful, and (iii) CBK confirmed its plans to conduct quarterly regular failover exercise going forward, this indicator can be considered as met. Intermediate Result 4: Establishment of the DIFK

The DIFK has become fully operational and seed capital in the amount of US$4m has been satisfactorily disbursed since December 2012. Deposit Insurance scheme in Kosovo was initiated by the CBK in 2007 with technical assistance from KfW. The Law on Deposit Insurance was approved by the Parliament in October 2010, and DIFK became operational in 2011. This project provided seed funding to the DIFK, along with contribution from the GoK and grant capital from KfW. The indicator 13 was completed in 2012 with the second contribution of EUR 3.3 million by the GoK. DIFK started collecting premiums in 2011, applying risk based premiums for the member banks. The closing assessment for the DIFK (a project requirement as per PAD) was completed by the WB in March 2014. Based on the assessment, it resulted that: (i) the governance arrangements of the DIFK are satisfactory, (ii) DIFK is operating in line with the financial management procedures and standards that were found to be acceptable, (iii) DIFK and the Deposit Insurance Scheme's operations are consistent with the key elements of the law, (iv) DIFK has sufficient resources for the continued operation of the DIFK, and (v) the DIFK's audit reports are unqualified and are in line with the financing agreement.

3.3 Efficiency Rating for Efficiency: MODERATE The project achieved important results given the multitude of complex deliverables completed within budget. However, the project required a substantial aggregate extension of the closing date of 3.5 years due to significant delays occurred during the original and the restructured project. The project was completed within a period of 9 years in total. If the project was implemented within the expected timeframe (about 5.5 years), the CBK and the financial sector could have benefited earlier from the project results, and attention and resources could have been dedicated earlier rather than latter to addressing other needs. The original project (FSTAP) was extended with one year. Disbursement delays were encountered mostly due to limited capacity and unfamiliarity with Bank procedures at the early stage of project life. The PMT head, and the procurement staff at the CBK, as well



Level of Achievement (ICR’s Assessment)

Rating

DIFK 13. Contributed amount from GoK

EUR 3.3 million Achieved High

DIFK 14. Premiums received from member banks

yes Achieved

High

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as other PMT members from AMIK and KBA were simultaneously covering other tasks at their respective institutions. This was compounded by departure of the CBK governor and the PMT head in 2010, which further slowed down disbursement. Moreover, the training programs, but also other activities, were procured mostly each individually. This created further delays since each TOR, out of many, had to be endorsed by the PMT, comprised by CBK, AMIK, and KBA representatives, and then requests for expression of interest by consultants were issued. It could have been more efficient, from a procurement stand-point, if trainings were grouped into a few larger packages, or even in three larger ones (for each recipient). It is not unusual for the bank projects that a specialist consultancy firm is hired, under a single contract, to carry the assessment of training needs and deliver several training sessions in various topics. The restructured project, which introduced three new components, was subject to two extensions of the closing date, two years and then another six months, postponing the closing date from June 30, 2014 to December 31, 2016. The extensions almost doubled the expected implementation timeframe of the project. The mid-term review held in March 2015 (under the additional financing) noted that the overall project implementation had been facing significant delays. According to the review, disbursements under the project (67.2% at that time) reflected a thirty-month lag owing to significant delays in procurement of the three remaining activities under the project: i) establishment of a Real Time Gross Settlement System (RTGS); ii) refurbishment of the BCC; and (iii) purchase of software for off-site supervision. These delays emphasized: (i) the complexity of the deliverables of the project, especially of the BCC refurbishment which was affected by factors out of CBK’s control, and (ii) that the project would have benefited by the presence of dedicated fully staffed Project Implementation Unit. Thanks to energetic intervention and supervision by the World Bank task team, and commitment by the CBK, the issues were handled decisively and the project was back on track to successful completion in December 2016. The delays in component 1 (assistance to the CBK) related to the implementation of the off-site supervision software. As the initial bidding documents did not contain two items that the CBK felt were critical to the overall cost-effectiveness of the software package: (i) the source code; and (ii) a maintenance contract, it was agreed by the WB to retender in fall 2014. On the RTGS (component 4): In addition to the complex two-stage bidding procurement procedures and low capacity in handling the process, CBK struggled to balance security concerns with one of the bidders - a Swedish company with alleged Russian ties - with applicable procurement rules. In addition, in December 2014, CBK insisted in rejecting the first ranked company on the basis of an alleged undisclosed conflict of interest (COI) between the company and the individual consultant hired by the CBK under the project to support procurement and implementation of the RTGS. While the Bank team could not find any evidence of such a conflict of interest the respective documentation was sent to INT for further investigation on authenticity of the documentation provided. The Bank provided its comments and further reinstated its position on the COI issue in February, 2015. It was agreed that the CBK would submit the revised Evaluation Report in due course to avoid further complications on this package.

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On the BCC (component 5): Significant delays occurred due to issues with the ownership of the premises where the BCC would be located. In 2013, CBK received a construction permit from the Municipality of Prizren to carry out renovations of the BCC designated site. The permit was granted to the Former Social Payment System of Kosovo (SDK) on 20 September 2013, with the understanding that the former SDK had become the Banking and Payment Authority of Kosovo (succeeded by the Central Banking Authority of Kosovo and finally the CBK). At the end of 2015, the Municipality of Prizren notified the CBK that the permits had been temporarily revoked due to the fact that it was granted to an entity which legally does not exist anymore. In order to re-issue a permit to the CBK (as the investor), the Municipality asked to receive a confirmation from the Privatization Agency (KTA) that KTA has no claims towards the building and the building is not undergoing a privatization process. Once the KTA decision dated February 10, 2016 was submitted, the Committee in Charge of Property Ownership and Evaluation of the Municipality recommended to the mayor and the assembly to transfer the property to CBK for usage. As a consequence, the Municipality of Prizren approved the transfer in its assembly meeting on March 31, 2016. The Municipality of Prizren issued the usage permit on April 28, 2016, and the construction permit on June 13, 2016. Refurbishment works restarted only on June 14, 2016.

3.4 Justification of Overall Outcome Rating Rating: MODERATELY SATISFACTORY Overall Outcome is rated as Moderately Satisfactory. Dimension Rating Relevance Substantial Achievement of Objectives High Efficiency Moderate Overall Outcome Rating Moderately Satisfactory

The overall outcome rating for the project is MODERATELY SATISFACTORY. This is based on its Substantial rating for Relevance, High rating for Achievement of Objectives, and Moderate rating for Efficiency. The project’s objective of enhancing the stability and development of the financial sector, and strengthening the financial sector’s underlying market infrastructure continues to be highly relevant for the country and World Bank’s development priorities, and the project objectives were fully achieved. Revisions to the project completion dates were needed and reflect the Bank’s responsiveness to the project and implementing institutions. There were moderate shortcomings primarily in the project’s efficiency evidenced by the 3.5 years extension. The project experienced significant delays during the implementation. In a challenging global and local environment, where the financial sector regulation and supervision has to be subject to continued changes, CBK would have benefited from a quicker implementation of this project in order to be able to focus on further upgrade of its capacities, legislation and supervision framework.

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3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The microfinance sector and the segments it serves benefited from the project support. The project supported the CBK to review and upgrade the regulatory framework for the NBFIs sector, including microfinance entities. The MFI members of AMIK received trainings on various topics. The level of lending of MFIs, increased from EUR 77.7 million in 2012 to EUR 108.9 in end 2016. The sector provides small loans to the underserved segments of the population. Women comprise 40% of the active borrowers. (b) Institutional Change/Strengthening N/A (c) Other Unintended Outcomes and Impacts (positive or negative) N/A

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops No Stakeholder workshop was conducted.

4. Assessment of Risk to Development Outcome Rating: MODERATE The overall risk to the project outcomes is rated as MODERATE, influenced mostly by the political and economic uncertainties in the post-conflict environment. The project outcome indicators were the output targets (or closely related to), and since all outcomes were completed successfully, there is no further risk to their implementation. Successful installation of the major investments such as the RTGS, BCC and the offsite reporting database as well as capitalization of the DIFK are important developments for the financial sector. They will remain in place and continue to perform their roles since both the CBK and the DIFK are now stable and sustainable institutions. This project contributed to strengthening capacities of both institutions. The overall domestic environment though remains challenging posing risks to the outcomes of the project: Macro-fiscal situation is stable but vulnerable to various risks. Kosovo is exposed to

external shocks. It must rely on foreign markets and its fortunes are fundamentally linked to a favorable external environment. The authorities have limited tools to cope with external economic uncertainties.

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Kosovo is a new country and political and social risks are still high. Kosovo’s

unresolved status remains a key obstacle to attaining the objectives of political & ethnical integration and socioeconomic development.

Several weaknesses remain in the existing financial stability framework. The Authorities have demonstrated ownership and continued drive to improve the financial stability framework. However, some vulnerabilities pose risks for the sector. The use of the euro as domestic currency limits the exchange rate risk, but also flexibility in terms of monetary policy and the lender of last resort function. The deposit insurance system, launched in 2011, despite the progress and donor support has yet to built up sufficient funds. The framework for resolving failed banks needs to be enhanced. The overall financial stability framework is constrained as the government has limited financial means to support the banking system in the event of a crisis. Credit growth is significantly influenced by developments abroad as the three largest banks are foreign owned.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: MODERATELY SATISFACTORY The Bank correctly assessed the relevance of the PDO at the time of initial project design, and at the restructuring stage. The Project’s design correctly placed emphasis on institutional strengthening, stability and development of the financial sector, capacity building, and strengthening market infrastructure. This was a timely and relevant project from inception. The project was well aligned with the Kosovo Interim Strategy Note (2007 - 2011) and the Country Partnership Strategy for 2012 – 2016. The Bank team should have analyzed more carefully the pros and cons of including the refurbishment of the Business Continuity Center in the project. This was a construction and equipment purchase activity that did not require advanced financial sector skills where this specific project could have been much better positioned to add value. The CBK most likely would have been able to cover the cost of the refurbishment of the BCC and its implementation on its own, and the project resources could have been used more effectively to provide the CBK with support, preferably technical assistance, in other relevant areas. A project design where implementation would have been supported by a dedicated Project Implementation Unit might have avoided some of the delays during project life and engaged less WB resources for supervision and implementation support. The project implementation was subject to important delays, mostly attributed to the lack of familiarity with WB procurement procedures, as well as having to deal with complex procurement

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packages. Also, lack of experience was reflected in the prolonged time needed to take decisive actions in addressing concerns with security (RTGS bidder), and work permit issue related to dispute about ownership of BCC premise. (b) Quality of Supervision Rating: SATISFACTORY The Bank team actively supervised project implementation and was responsive to client needs. The project was closely monitored by the Bank. Two ISR missions per year were completed during project implementation period. A review of project documents indicates regular and active communication between the Bank, the PMT, and implementing agencies. The ISRs provided generally straightforward assessments of project progress and highlighted potential issues or areas on concern. A variety of technical staff from the Bank, and consultants joined implementation missions to ensure quality control of the technical aspects of components, provide related technical assistance (for instance assessment of the DIFK), and push for implementation, as described in ISRs and AMs. Procurement and Financial Management specialists were present frequently during supervision missions, especially later in project life during the implementation of the RTGS and BCC components. Project implementation incurred several challenges related mostly to procurement issues, and the Bank team provided adequate support, expertise, and decision making capacity to bring the project to a satisfactory completion. Fiduciary aspects of the project were managed in a timely manner and all audits were clean. Financial reports were submitted to the World Bank Financial Management Specialist generally on a timely basis and in the proper form and format. All annual audits were conducted by reputable firms and all audit opinions on the Project’s financial statements were unqualified. Accounting records were consistently found to be accurate and with adequate controls to ensure accuracy of accounting records and reports. A review of project – related documents and correspondence indicate a close working relationship between the Bank’s relevant staff and the PMT. The project was led by four TTLs, supervising the project from Washington DC. Despite the fact that there were multiple TTLs (1 TTL during preparation of original project, 1 during restructuring, and 2 other TTLs during supervision of the restructured project), the borrower noted the cooperation from the WB was satisfactory throughout this project. This is also a result of the hands-on involvement of the responsible local officer in the Pristina office, in identifying issues and raising them with the TTLs. Local co-TTL-ship might have been an effective way to address the arising issues quickly and more efficiently. A project midterm review for the restructured project was undertaken in March 2015. The review was well timed and undertaken after a change of the TTL in September 2014. The midterm review was helpful to (i) review of implementation progress up to date; (iii) evaluate the overall performance of the project and make recommendations to guide the implementation of ongoing project activities. Special attention was paid to the

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procurements for the real-time gross settlement system (RTGS) and the Business Continuity Center (BCC). To note, the Bank spent substantial amount of budget on project supervision. In total, about USD 1.1 million was spent to supervise a project with a total financing of only USD 8.85 million. The annual WB supervision expenses surpassed the planned budget in most of the years during project life. The high project expenses emphasize the need for closer supervision of the project by the WB team, due to issues and delays occurred during implementation. It is likely that if the project had a dedicated Project Implementation Unit the WB project supervision expenses would have been substantially lower.

Chart 1: Annual Supervision Budget

planned budget for 2015 missing

(c) Justification of Rating for Overall Bank Performance Rating: MODERATELY SATISFACTORY The Bank’s overall performance is assessed to be MODERATELY SATISFACTORY based on the ratings for quality at entry and quality of supervision (see table below). The project was relevant at the time of its inception, and at the restructuring, and had the solid backing the CBK and other implementing agencies. Delays were experienced during the project life. The project team requested a one-year extension of the closing date of the original project to allow for the completion of planned activities. Two further extensions were requested for the restructured project, respectively of two years and 6 months. The extensions were necessary given the challenges with procurement and implementation mostly of the RTGS and BCC refurbishment. Substantially all outcomes were achieved in spite of the delays. The Bank team could have more conservative and taken preliminary measures (ie dedicated PIU) during the design phase of the original and restructured project components.

‐

40,000

80,000

120,000

160,000

200,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Supervision Budget in USD

plan actual

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Dimension Rating Quality at Entry Moderately Satisfactory Quality at Supervision Satisfactory Overall Bank Performance Moderately Satisfactory

5.2 Borrower Performance (a) Government Performance Rating: SATISFACTORY The Government’s performance is rated as SATISFACTORY. The Ministry of Finance (formerly Ministry of Economy and Finance at the initiation of the original project) had limited role in the project, as the Central Bank of Kosovo was the main counterpart. Still, the Ministry showed commitment and ownership with regard to their specific role during the whole project implementation. The issuance of effectiveness for the restructured project took about 6.5 months, which is acceptable considering the procedural steps to be followed by the authorities, including an interagency agreement for the loan between the MF (on behalf of the government) and the CBK. The interagency agreement set out the roles and responsibilities of the respective entities. The Grant Unit of the Ministry of Economy and Finance was responsible for the accounting, disbursement and financial reporting of the project. The MF’s financial management system was capable of supporting the implementation of the project in accordance with the requirements of the Bank. The ISRs continuously rated financial management of the project as “satisfactory”. (b) Implementing Agency or Agencies Performance Rating: SATISFACTORY The Central Bank of Kosovo was the primary implementing agency for the project. In the original project, AMIK and KBA were also implementing agencies and the PMT was established within the CBK. The team was responsible for overall project management, coordination and procurement. Under the Original Project the PMT included representatives from the CBK, KBA and AMIK. In the restructured project, reflecting the design of the additional financing, the PMT was changed to comprise only two members from the CBK (Head of the Payment Systems, and the existing coordinator from the CBK), and the Director of the DIFK. While the components benefiting AMIK and KBA were implemented without significant delays, the components benefiting CBK faced delays. This was due to: (i) the more complex nature of the activities under the three CBK components (1, 4 and 5) and lack of proper procurement experience by the CBK, (ii) the fact that the CBK coordinator and CBK staff dealing with procurement were also covering other duties at the CBK as part of their daily job; (iii) arising concerns which were very specific and unexpected, such as security issues with the bidder for the RTGS software, and dispute on the ownership of the designated BCC premises.

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Despite the delays CBK was at all times fully committed to the project, showed strong ownership, and achieved all the targets. The first component contributed to expanding and enhancing the regulatory base, enhance staff capacities, and establishing the off-site reporting regulatory system, thus achieving an important upgrade to CBK’s capacity to supervise the financial market. The RTGS was another important milestone which contributes directly in reducing operating costs of payments for banks, increasing the speed, and shortening execution times for high value payments, minimizing the payment risk and increasing the confidence in the banking sector. The fully operational BCC, plays a crucial role in safeguarding the stability of the financial sector and more broadly the economy as a whole in the event of a disaster. (c) Justification of Rating for Overall Borrower Performance Rating: SATISFACTORY Overall Borrower performance is assessed to be SATISFACTORY (see table below). With a high level of commitment, the borrower undertook and implemented complex reforms in a challenging environment. Despite delays experienced during the project, significant achievements were realized and internal capacity ultimately improved. Procurements under the project were completed successfully with no violation of the World Bank procurement rules. Disbursement of the loan funds was 99.53% (in SDR), as of April 2017.

Dimension Rating Government Performance Rating Satisfactory Implementing Agency Rating Satisfactory Overall Borrower Performance Rating Satisfactory

6. Lessons Learned A number of lessons can be drawn from the project design and implementation that would be useful for the Bank and other donors for the design of financial sector operations, other projects in the country, as well as with broader application. It is important to fully assess all required actions during the preparation stage of a project and identify and assess the implementing agency’s internal capacity to execute or manage all required functions. The project experienced delays largely due to the procurement process, which proved to be challenging in the early stage as the PMT team lacked the experience with WB projects and took time to become familiar with requirements and standards. Tendering and contracting also proved to be more involving than initially anticipated. Internal developments and staff movements at CBK towards the end of the original project did not help. The new components (RTGS and BCC) introduced with the additional financing, added considerably to the complexities of the procurement process, and also forced the CBK and the WB to deal with unexpected challenges such as security concerns and property ownership issues. As a result, the project occurred extended delays,

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and despite efforts to catch up, required in total 3.5 years of extension. The scale and scope, as well as the timeline of a project should be well aligned with the implementing agency’s capacity for coordination, procurement, contract management, and financial management. Coming up with arrangements to address this particular bottleneck early in the project cycle is an important lesson. Establishing a dedicated PIU (see below) is an important consideration. Another option could be to provide more training to the designated institutions and commit as WB for a more hands-on implementation support at the early stage of implementation. These are particularly relevant for a fragile and post-conflict environment given the capacity constraints and institutional uncertainties. The importance of establishing a dedicated and fully equipped PIU should not be neglected, especially in countries where implementing institutions have little track record with managing WB projects. The project coordinator, and the procurement specialist both were employees of the CBK and had to deal with other tasks during their daily work, especially the project coordinator who holds an important position in the CBK. Civil servants working part-time in project implementation, are not only constrained in terms of time but they also often find themselves challenged by institutional and political uncertainties of the post-conflict environment. Had a PIU, comprised of a full time coordinator, procurement specialist, and financial management specialist been present, the project activities might have been completed earlier and more efficiently, and WB would have spent less time and money on supervision. It is worth having a proper PIU established at the outset of the project and incurring some additional administrative costs, rather than risking to suffer implementation issues and extra costs due to the inadequate project management capacities. The financial sector projects should try to select and deliver those types of activities that are most important for the regulator or the financial sector, and for which the Finance & Markets GP at the bank can add most value. The refurbishment of the BCC premises was an activity that CBK needed to undertake, but the WB could add little value, beyond the financing. The implementation of this activity ran into challenges that were difficult to handle, and were even out of the CBK control including the ownership issue between local and central governments in the country. Waiting for the issue to resolve took extra time and efforts. The WB task team lead, who is a financial sector expert, had to include an infrastructure expert and a safeguards expert in the supervision team, in order to make sure that the construction work was completed according to specification and within the right standards. Selecting activities which are closer to the core expertise of the relevant WB unit, would add most value to the client and ensure satisfactory outcomes and efficient implementation of the project. It is advisable that small scale activities are grouped into larger procurement packages. The activities under components 1, 2 and 3 included many training sessions, and preparation of reviews, and drafting of legal acts. Therefore, the PMT had to deal with numerous small procurement packages, which included preparation and endorsement of TORs and then execution of the bidding processes and consultants’ selection. It was noted during the meetings with the project stakeholders, that some delays occurred for straightforward training activities, especially at the initial stage, because each of the TORs had to get the review of all PMT members. For instance, AMIK had to endorse the TORs for a specific

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KBA training and vice versa. Grouping the trainings into thematic packages might have saved time and allowed potentially more trainings sessions, since the PMT members would have had to approve less TORs, and execute less procurement processes. The same can be observed for activities under component 1 benefiting the CBK. Numerous contracts were signed for review/drafting of legal acts. Grouping the tasks might have provided practical benefits to the PMT and the CBK itself. Similarly, the WB task team would have to provide less prior reviews and had a more efficient supervision process. Another important lesson from the project was related to the importance of the quality of supervision. Despite the aforementioned shortcomings in the quality of entry and project design, the project managed to successfully achieve its results thanks to the satisfactory level of quality of supervision along with the strong borrower ownership and commitment. In this context, it is advisable that the projects, wherever possible, to include a co-TTL from the World Bank’s local office. The FFSIMP benefited from strong involvement of local WB specialist during the lifetime of the project. This emphasizes the point that co-TTLship is important in strengthening day-to-day supervisory activities on the ground, as the local co-TTL will be quicker and naturally better positioned to understand and tackle common issues that arise during project implementation. While the local WB specialist staff, if available in the country office, would be normally part of the supervision team, upgrade to co-TTL may strengthen WB ownership on the project.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

The project development objectives were clear and focused on outputs and short-term outcomes. The PAD was well structured with clear information on implementation arrangements and relationships between various groups. While the Commitment from the CBK on achieving milestones of the project was very high, the project implementation encountered several challenges that were outside of the CBK Control. The main challenge was the process to obtain work and usage permit form the Municipality of Prizren due to legalities of the procedural matter. Obtaining such permit took more than a year to finalize only the administrative work. Another challenge that followed through the implementation project was the complexity of the procurement processes because the project was more complex; highly technical and it involved two stage procurement process.

The CBK has acquired some procurement experience under the Original Project, however the procurement under the additional financing was of a more complex nature involving International Competitive Bidding (ICB), which requires a relatively high degree of technical capacity, particularly with respect to procurement of the IT inputs. Also CBK had limited experience and knowledge for the preparation of the technical requirements and Bidding Documents (BDs) for the components under the project. This in turn lead to delays in bidding process/contracting. World bank supported the CBK in this respect with an IT International Expert who helped with BDs preparation (including technical specifications/functionality) and also during delivery and acceptance of the IT system. But other components of the project had not such expertise provided. World Bank's

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procurement specialists conducted regular and need based training in World Bank's procurement policies and procedures and to a certain extend that facilitated the improvements.

Financial Management was conducted by a Financial Specialist working under the Treasury oversight and provided financial reports and transactions in line with the Banks requirements. The performance of the financial management was satisfactory in most respects. The disbursement rate was low until late in the project implementation due to delays in two major components (RTGS and BCC). The Project leadership took measures to expedite the implementation of these components aiming to boost expenditures and disbursements.

The project did not have a Project Implementation Unit (PIU), but rather a Coordinator and procurement Officer who were a permanent staff of the CBK with other primary role on their positions. This arrangement was cost effective but it did limit the time and efforts of the project implementation.

The Bank team has always provided its close and intensive support to the FSSMIP through monitoring, supervision missions, training courses, and on the job training. The Bank team has demonstrated strong commitment and involvement during the preparation of the Project and its implementation and was supported by a local staff over the period of implementation. However, the frequent changes of the task team leader (TTL) from the Bank contributed to slower process of implementation. There were three Bank TTLs over the implementation period, all of whom were very supportive of the Project and made it a priority, whenever needed, to resolve problems and meet various challenges experienced during implementation. The Bank management supported three extensions of the time period for this project to ensure that all activities would be completed by the project closing date. Overall, the project implementation has encountered few challenges throughout its implementation, mainly due to the reasons outside of the CBK control (i.e. permits for usage, construction, etc), however the stakeholders commitment has enabled implementation of all components fully.

(b) Cofinanciers N/A (c) Other partners and stakeholders N/A

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate

(USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Component 1: Assistance to CBK

1,670,000 1,353,536.8 81.1%

Component 2: Assistance to AMIK

240,000 220,985.6 92.1%

Component 3: Assistance to KBA

220,000 179,550.8 81.6%

Component 4: Establishment of a RTGS

1,870,000 1,643,580.4 87.9%

Component 5: Establishment of a Bcc

850,000 870,130.8 102.4%

Component 6: Provision of seed funding to the DIFK

4,000,000 3,425,276.8 85.6%

Total Baseline Cost 8,850,000 7,693,061.2 86.9%

Physical Contingencies

0.00

0.00

0.00

Price Contingencies

0.00

0.00

0.00 Total Project Costs 0.00 0.00

Front-end fee PPF 0.00 0.00 .00 Front-end fee IBRD 0.00 0.00 .00

Total Financing Required 0.00 0.00

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 0.00 0.00 .00 International Development Association (IDA) – for FSTAP

2.00 1.92 96.11%

International Development Association (IDA) – for FSSIMP

6.85 6.37 92.94%

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Annex 2. Outputs by Component Component 1 - Support to CBK General 1. Preparation of development strategy for CBK based on market development trends

and review of funding options 2. Assistance to CBK for functional assessment and development of medium term

staffing plan and revised staff incentives 3. Assistance to CBK/HR in areas of functional assessment and development of a new

Salary Grade Structure 4. Feasibility Study for Establishment of the Training Institute Regulatory and supervisory framework strengthening In total 4 laws and 73 bylaws were drafted/reviewed (including for the Deposit Insurance law that is listed under component 6). 1. Review of banking sector legal and regulatory framework 2. Drafting Law for Regulation and Supervision of General Insurance 3. Assistance on the insurance sector in regard to supervision, reinsurance and

intermediaries 4. Legal Framework for Compulsory Insurance 5. Assistance on the insurance sector in regard to life insurance on preparing legal

framework, regulations 6. Assistance to the insurance sector in regard to third party liability on preparing legal

framework, detailed functional, supervision and technical assessment of CTFL tariff liberalization

7. Assistance to the insurance sector in regard to life insurance on preparing legal framework, regulations

8. Development of roadmap for Insurance Association of Kosovo (IAK), development information system for TPL

9. Review Rules for Licensing and Supervision of Pension Fund Management Companies, and provide Training on the new Rule

10. Assistance to CBK on reviewing current Law, regulations and rules on pensions and provide technical implementation-assistance

11. Drafting and amending secondary legislation for insurance supervision 12. Law on Payment System

Off-Site Regulatory Reporting System (ORRS)

1. Designing and implementation of a regulatory reporting database for off-site

supervision 2. Off-the-shelf software of designing data base for off-site supervision

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3. Trained on OSSR: 22 staff from banks supervision department on 11 May 2016; 10 staff from the Insurance Supervision Department on 12 May 2016; 6 staff from Pension Supervision Unit on 12 May 2016; and 5 staff from Financial Stability Department on 13 May 2016

Capacity Building

Training of CBK staff (i.e. workshops, study tours, conferences, etc) # of particip.

Date

Seminar on Applied Risk Management Techniques Insurance Sector, held in Beatenberg, Switzerland from 04- 08 October 10

1

Oct 2010

Training for “Life insurance” Malta International Training Centre from 30 August-04 to September 2010 in Malta

1

Aug 2010

Seminar on “Stochastic Methods of Claim Reserving”, organized by the European Actuarial Academy. The Seminar will be held in Zagreb, Croatia from 29-30 Nov 2010

1

Nov 2010

15 people from the Banking Supervision Directorate of CBK in a training with the subject on Basel II, that will be held in Istanbul, Turkey, from 20 to 24 December 2010

15

Dec 2010

participation “World Islamic Finance Conference that will be held on 28 – 29 March 2011 in Park Plaza

1

March 2011

Participation at the “Certified Financial Risk Manager” Scheme organized by Global Association of Risk Professionals

2

Dec 2011

Participation at CRA training course Istanbul Turkey, 31 Oct – 4 Nov 2011 2 Oct 2011 Asset Classification and Provisioning from a Prudential and IFRS Perspective

1 May 2016

Financial Stability, Systemic Risk and Macroprudential Policy 1 April 2016 Bank Recovery, NPL Resolution, and Stress Testing 1 Feb 2016 Banking Supervision the Basel Framework 1 March 2016 IT Auditing 1 April 2016 Banking Supervision within Basel Framework (advanced) 1 April 2016 Financial Markets and New Financial Instruments 1 June 2016 Banking Supervision within Basel Framework (advanced) 1 April 2016 IOPS/COVIP Technical Workshop IOPS Committee Meetings IOPS/COVIP International Seminar on Private Pensions IOPS/COVIP Technical Workshop IOPS Committee Meetings IOPS/COVIP International Seminar on Private Pensions

1

February 2016

IOPS/COVIP Technical Workshop IOPS Committee Meetings IOPS/COVIP International Seminar on Private Pensions

1 February 2016

Central and Eastern Pension Fund Conference 1 March 2016 Central and Eastern Pension Fund Conference 1 March 2016 Corporate Governance for Micro prudential supervisors of insurers and banks

1 April 2016

Prudential On-site Inspections within the Single Supervisory Mechanism 1 May 2016 Seminar on professional liability 1 Aprill 2015 Challenges and practice of Insurance supervision 1 May 2016 Supervision of insurers’ enterprise risk management 1 April 2016 Insurance Supervision- Solvency II 1 April 2016 Solvency and global capital standards for insurers 1 March 2016

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Insurance groups, global systemically important insurers and resolution (Basel)

1 April 2016

Asset Classification and Provisioning from a Prudential and IFRS Perspective

1 May, 2016

IFRS vs. Basel requirements for banks 1 June, 2016 Banking supervision under Basel framework – advanced 1 April, 2016 Financial Consumer Protection 1 April, 2016 Bank Recovery, NPL Resolution, and Stress Testing 1 Feb, 2016 De Nederlandsche Bank, Amsterdam, Nederlands 1 April, 2016 Prevention of Money Laundering 1 Feb 2016 Certificate in Anti Money Launderin-ONLINE 1 March 2016 AML Hot Topics 1 March2016 AML Examination Seminar 1 May 2016 Certified Anti-Money Laundering Specialist - ONLINE 1 May, 2016 Fraud Detective - Identifying Risks and Red Flags of Fraud and Corruption in banking

1 Feb 2016

Cash-related processes at Central Bank - Risk coverage by the internal audit function

1 May 2016

Seminar Internal Audit in a Central Bank 1 April 2016 Risk Management for Central Banks: Implementing a Comprehensive Framework to Deal with Institutional and Investment Challenges

1 June 2016

Introducing International Standards in Internal Audit 1 March 2016 Internal Audit Practices at Central bank 1 April 2016 Operational Risk Management and Internal Audit 1 May 2016 Financial Risk Management in a Central Bank 1 April, 2016 Audit and Assurance - Exam 1 March 2016 Financial Management - Exam 1 June 2016 Human Resources Management 1 March 2016 Human Resources Management 1 June 2016 Financial Consumer Protection 1 April 2016 Integration in Europe Union 1 April 2016 Eurpean Integration for central banks 1 May 2016 Finacial Education Seminar 1 March 2016 Challenge for Candidate potential EU, JVI Vie 1 May 2016 Capital Markets Back office Certified Programme 1 April 2016 Structure of Financial Markets 1 June 2016 Asset Classification and Provisioning from a Prudential and IFRS Perspective

1 May 2016

Foreign Reserve Management 1 March 2016 Market Risk Management in the Central Bank 1 April 2016 Sixth Conference on Credit Infrastructure 1 April 2016 Asset Classification and Provisioning from Prudential and IFRS Perspectives

1 May 2016

Microsoft PKI In-Depth Training 1 June 2016 CCNA/CCENT/CCDA/CCNA-Security – 7 Day Boot Camp 1 May 2016 CISM – Certified Information Security Manager 1 May 2016 Moduli 10 - Non Life Insurance Basics 1 Sep 2016 Moduli 11 - Life Management 1 Oct 2016 Moduli 12 - General Insurance Management 1 Nov 2016 Moduli 13 - Pension Management 1 Jan 2017 Moduli 14 - Professional Practice 1 Feb 2017

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Component 2 – Support to AMIK 1. Strengthening AMIK capacity to conduct and provide training to MFI's based on

needs assessment 2. Conduct assessment on the impact of microfinance in Kosovo 3. Support AMIK staff in participation in study tours/workshops/conferences

Training Sessions Trainers # participants

/ staff # of potential

trainers

Package 1

Train the Trainer Martin Allen 9 6

Package 2

Introduction to transformation Philip Smith 19

Package 3

Microfinance Operation Mng.(advanced) Philip Smith 14

Liquidity Management Philip Smith 6 Market Research / New Product

Development Philip Smith 6 3

Package 4

Treasury Management Philip Smith 4

Risk and Delinquency Management Philip Smith 7

Accounting for non-finance staff Philip Smith 3 2

Package 5

Bussines Planning Philip Smith 5

Security and Change Management Philip Smith

Marketing / Communications Philip Smith 3 2

Audit and Internal Control Philip Smith 15 2

Package 6

Corporte Governance and Leadership Martin Allen 5

Human Resources Management Martin Allen 4 2

Total 100 17

Support AMIK staff in participation in study tours/workshops/conferences

9

Component 3 – Support to KBA

Training Trainer Year Part.

1 Training abroad for KBA staff Bled School of Business 2008 1


3 Trade Finance Antonio Cuadra 2008 8

4 Operational Risk Management John Hardy 2009 21

5 Product Development and Pricing Charley Swords 2009 9

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6 Corporate Banking and Corporate Financial Analysis Francois Labonte 2009 11

7 Credit Policy and Credit Process Control Liam Wilson, William Kevin, Natasha Wilson 2009 13

8 IT Audit Didier Casier 2009 10

9 Anti Money-Laundering Didier Casier 2009 14

10 TNA TA I Charley Swords 2009 9

11 TNA TA II Charley Swords 2009 9


13 TNA TA III Charley Swords 2010 9

14 Marketing Research Planning and Communication Charley Swords 2010 8

15 Managing Loan Repayments (Credit Policy and Credit Process Control - package) Liam Wilson, Natalia Pozydayeva 2010 8

16 Train the Trainer Martin Allen 2011 10

17 Trade Finance Warren Wise 2011 8

18 Business Communication and Writing Skills Charley Swords 2011 7

19 Taxes Naser Prapashtica 2011 16

20 Housing Finance Thomas Sermersheim 2011 6

21 IFRS package Elvis Ziu 2012 32

22 Math & MS Excel in Financial Application Fisnik Hoxha 2012 4

23 Operational Risk Ilir Hoti 2014 8

Total: 223 Component 4: Establishment of a RTGS 1. Assistance CBK for tendering process, delivery and take over and component

management 2. Acquisition of IT package including RTGS software, hardware 3. Upgrade/alignment with SWIFT 4. Upgrade of general ledger (connectivity with ATS) Component 5: Establishment of a Business Continuity Center 1. Business Continuity Centre hardware/software 2. Refurbishment of CBK owned building 3. Equipment (vault, security system, etc) Component 6: Provision of seed funding to the DIFK 1. Seed funding to the DIFK 2. Governance, HR, FM and procurement Directives for the deposit insurance Fund 3. Law on deposit insurance Coverage

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Annex 3. Economic and Financial Analysis The original project (prior to the restructuring) consisted only technical assistance and therefore it was not possible to quantify the economic and financial gains. There was no economic and financial analysis provided in the restructuring paper either. The ICR confirms that it is hard to evaluate the economic analysis for three components added through restructuring as a result of lack of data. In particular, the provision of seed capital to DFIK were to increase market confidence by insuring deposits against banking crisis which is hardly quantifiable. Although it was never tested as there was no banking crisis during the project implementation and the deposit growth reached around 8 percent on average annually since 2010, signaling the contribution of the DFIK to the confidence in the banking sector. Similarly, the BCC was established to protect financial sector from adverse impacts of a disaster but such a risk was not materialized yet. Lastly, on the RTGS system, it is evident that the RTGS system significantly reduced the time for settlement of systematically important transactions which contributed to the minimization of risk and increased confidence in the banking sector. Yet, again the overall impact was not quantifiable.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/

Specialty Sophie Sirtaine Director, Strategy and Operations IEGDG Isfandyar Zaman Khan Program Leader ECCEU Rinku Chandra Lead Financial Sector Specialist GFM03 Johanna Jaeger Senior Financial Sector Specialist GFM03 Serap Gonulal Lead Financial Sector Specialist GFM3A Ilias Skamnelos Lead Financial Sector Economist GFM03 Cristina Velazco-Weiss Strategy Analyst SPASP Jonida Myftiu Financial Management Specialist GG021 Artan Guxho Senior Infrastructure Specialist GTI03 Esma Creso Senior Environmental Specialist GEN03 Laura A. Ard Lead Financial Sector Specialist GFM1A Elona Gjika Financial Management Specialist ECADE - His Sarah Zekri Financial Sector Specialist GFM01 Vito Intini E T Consultant ECSF2 - HIS Arben Maho Procurement Specialist GGO03 Ida N. Muhoho Consultant GGODR Michel Noel Head GFM3A Blerta Qerimi Private Sector Specialist GTC03 Antony Randle Consultant GFM3A Sebastian Albert Martin Trenner E T Consultant MNSSP - HIS

b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY08 30.13 140.36

Total: 30.13 140.36

Supervision/ICR FY08 4.25 47.02

FY09 23.42 112.54 FY10 18.50 113.61 FY11 17.70 99.62 FY12 25.37 76.10 FY13 43.51 127.88 FY14 36.81 141.33 FY15 24.86 14.89 FY16 32.04 107.44 FY17 22.14 81.52

Total: 248.6 921.95

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Annex 5. Beneficiary Survey Results No official survey was administered.

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Annex 6. Stakeholder Workshop Report and Results No stakeholder workshop was held.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

Borrower had no comments further to the completion report provided in the Annex 8.

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Annex 8. Borrower’s Project Completion Report The closing report was submitted to the World Bank by the central Bank of Kosovo on April 21, 2016

CBK Project Closing Report – Financial Sector Strengthening and market infrastructure (FSSMIP)

I. Background of the Project: The Financial Sector Strengthening and Market Infrastructure (Project ID: P122084) is restructured project in form of additional financing from the original project of Financial Sector Technical Assistance (Project ID: P108080). The additional funding has enhanced the financial sector market infrastructure and made the financial sector more efficient and resilient as following:

Scaling up the technical assistance provided under the Original Project to support the Central Bank of Kosovo (CBK);

Financing the costs associated with the implementation of the CBK’s Strategy for the Development of a National Payments System (NPS) and establishing a Real Time Gross Settlement (RTGS);

Establishing a Business Continuity Center (BCC) for the CBK; and Providing seed funding to the Deposit Insurance Fund of Kosovo (DIFK). The

restructuring is necessary to make changes the Original Project that reflects the impact of the additional financing.

II. Objectives of the Project: The objectives of the original project were to enhance the stability and development of Kosovo’s financial system by supporting stronger prudential regulation and supervision by the Central Bank of Kosovo (CBK) for banks and non-bank financial institutions, supporting the institutional strengthening of the CBK, and strengthening the banking and microfinance industry through capacity building. These objectives were expanded broadly with the new project in terms of: (i) enhancement of the stability and development of the financial sector; and (ii) strengthening the financial sector’s underlying market infrastructure.

III. Components of the Project: The Project (original and restructured) supported six key components:

The Original Project had three components that focused on technical assistance to the CBK, AMIK and KBA, respectively. The restructured project (FSSIMP) added three new components. From the three original components, only the CBK assistance component received additional financing scaling up activities of the Original Project.

Component 1: Assistance to the CBK. Under this component key reforms were undertaken on Institutional Capacity Building and supervisory Framework of the CBK. The component supported preparation of four important laws, namely: Law on Payment Systems, Law on Pensions, Law on Insurance Supervision, and Law on Banks and MFI’s. Also, more than 70 related regulations and directives were prepared.

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Technical assistance was provided for supporting the implementation of the CBK’s trainings as identified in the training needs analysis that CBK conducts regularly. Close to 80 staff of the CBK received trainings or participated in exchange visits/study tours. About 2/3rd of training costs were covered with funds saved from other activities of the project. The operational and financial framework for establishment of the Training Centre was supported under the project. Additionally, this component supported Implementation of the Off-site Regulatory and Supervision Reporting Software which was launched in June 2016. Web based online platform for unified regulatory reporting of all financial Institutions in Kosovo is major step in strengthening Kosovo’s financial sector infrastructure and supervision.

Components 2 & 3: Assistance to the KBA and AMIK. The project enabled trainings

and capacity building opportunities for the members of the Kosovo Banks Association and Kosovo Microfinance Association. A total of 14 training sessions were held for microfinance institutions, with about 100 persons trained on various topics, including train-the-trainers courses. Moreover, 23 training sessions were held for bank officers and KBA staff on banking sector topics, with a total number of 223 participants.

Component 4: - Establishment of a Real Time Gross Settlement System ( RTGS-ATS)

as an effective financial sector infrastructure contributed to the effectiveness payment financial services in line with National Payment Strategy (NPS). The NPS of a country encompasses everything that is concerned with the movement of money from payer to payee, covering all phases of payment from initial offer of a payment instrument to final settlement. The payment system was still at the developmental stage in Kosovo. This has resulted in a high percentage of payment transactions in cash. In September 2009, the CBK approved a strategy document and an action plan for implementation of NPS. The RTGS system enables implementation of the action plan. The system will contribute to reduction of operating costs for banks, increase the speed, and shorten execution times for the high value payments. Above all, the system will minimize the payment risk and increase confidence in the banking sector. Successful launch of the Automated Transfer System (ATS) in July 2016 supported a major reform of the payment system in Kosovo and directly reduced operating costs for banks, increases the speed, and shortened execution times for high value payments, minimizing the payment risk and increasing the confidence in the banking sector. Under this component CBK had benefitted from the expertise of the International Consultant, who was instrumental in concluding the process starting from the drafting of the RFPs’ for the project, up to the go-live stage.

Component 5: Establishment of a Business Continuity Center resulted in a

component of the project following World bank technical assistance to the CBK for the development of its Business Continuity Strategy in line with the Bank of International Settlements (BIS) Core principle VII. The Strategy identified the business processes supporting the key operational functions within the CBK in the event of a disaster, establishes a Business Continuity Management Team, develops and documents an IT disaster recovery plan to facilitate the proper and timely recovery of IT operations, and establishes recovery locations to be used based on the disaster classification. The

55

Strategy recommended establishing a Business Continuity Center outside Pristina, which will be a 'hot' stand-by site and will contain continuously-updated live data from all the CBK's critical systems. Such a backup site for the CBK would ensure stability of the financial sector in the event of a disaster. The additional financing assisted in establishing such which encompassed the renovation of a building site. The premises chosen for such destination are located in the city of Prizren and CBK had received the City of Prizren endorsement to use the building for such purpose. Fully operational Business Continuity Centre was launched in November 2016, playing a crucial role in safeguarding the stability of the financial sector and more broadly the economy as a whole in the event of a disaster. In this context Business Continuity Strategy in line with the Bank of International Settlements (BIS) Core principle VII has been institutionalized within the CBK, as well. Renovation of the Building included: refurbishment of the premises with proper designed areas for the Vaults, Server Room, Security and Monitoring and appropriate premises for Training Centre. The refurbishment of the building was constructed with eco-friendly materials for the purpose of environmental protection. The premises will be secured 24 hours with surveillance by the Kosovo Police Force. Fences surrounding the building have been constructed in a way that will fit the architectural setting of this residential area and yet provide sufficient security. CBK financed the fences by its own funding since the activity was conducted after the closing of the project. The premises are equipped with generators, UPS, central heating and ventilation facilities and monitoring room.

o Subcomponent 3.1 – High modular vaults were purchased for the purpose of

operationalizing the BCC. The first and most important feature of the BCC is the Vault, its accessibility and Security. Its purpose is to contain sufficient supply of banknotes and coins and fuels the economy with the money in circulation if needed. The installed vaults are Modular one with the very high degree of the security. Its security degree is VIII and is fully in line with European Certification Body Security and EX, which stands for protection against explosion. The certification standards are placed on the interior of the Treasury Room and the vaults. Vault is protected with motion and vibration alarm. It is manufactured in Austria. The size of the external treasury is 7.6 meters in length and 2.65 meters width and 3 meters height. Treasury processing area has an Interlock system with the cash drawer.

o Subcomponents 3.2 – IT Equipment and were purchased for the server room to

be fully equipped in line with international standards for the back-up system. Under the savings from the project it was made possible to add to the IT equipment additional storage space Firewalls, sun switches, blade servers, servers, in order to secure proper and secure operations and interconnectedness for the proper functioning of the BCC. Failover and restauration tests were conducted in December 2016. Another one is scheduled to take place in March 2017.

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Component 6 - Provision of seed funding to the DIFK contributed to the capital base of the newly established Deposit Insurance Fund of Kosovo. Well capitalized Fund was critical to maintaining public confidence in the banking sector, as the financial crisis has illustrated. Deposit Insurance scheme in Kosovo was initiated by the CBK in 2007 with technical assistance from KfW. The Law on Deposit Insurance was approved by the Parliament in October 2010 and is now in force after being made effective in December 2010. Through the additional financing IDA provided seed funding to the DIFK. The KfW and IMF are key partners in this component. The DIFK funding included premiums from financial institutions, GoK contribution, and grant capital of €4.5 million from KfW. Seed funding the Deposit Insurance Fund of Kosovo completed in December 2015 – an important milestone in strengthening the financial sector stability in Kosovo.

IV. Implementation and Lesson learned: The project development objectives were clear and focused on outputs and short-term outcomes. The PAD was well structured with clear information on implementation arrangements and relationships between various groups. While the Commitment from the CBK on achieving milestones of the project was very high, the project implementation encountered several challenges that were outside of the CBK Control. The main challenge was the process to obtain work and usage permit form the Municipality of Prizren due to legalities of the procedural matter. Obtaining such permit took more than a year to finalize only the administrative work. Another challenge that followed through the implementation project was the complexity of the procurement processes because the project was more complex; highly technical and it involved two stage procurement process.

The CBK has acquired some procurement experience under the Original Project, however the procurement under the additional financing was of a more complex nature involving International Competitive Bidding (ICB), which requires a relatively high degree of technical capacity, particularly with respect to procurement of the IT inputs. Also CBK had limited experience and knowledge for the preparation of the technical requirements and Bidding Documents (BDs) for the components under the project. This in turn lead to delays in bidding process/contracting. World bank supported the CBK in this respect with an IT International Expert who helped with BDs preparation (including technical specifications/functionality) and also during delivery and acceptance of the IT system. But other components of the project had not such expertise provided. World Bank's procurement specialists conducted regular and need based training in World Bank's procurement policies and procedures and to a certain extend that facilitated the improvements.

Financial Management was conducted by a Financial Specialist working under the Treasury oversight and provided financial reports and transactions in line with the Banks requirements. The performance of the financial management was satisfactory in most respects. The disbursement rate was low until late in the project implementation due to delays in two major components (RTGS and BCC). The Project leadership took measures to expedite the implementation of these components aiming to boost expenditures and disbursements.

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Finally, the project did not have a Project Implementation Unit (PIU), but rather a Coordinator and procurement Officer who were a permanent staff of the CBK with other primary role on their positions. . This arrangement was cost effective but it did limit the time and efforts of the project implementation.

The Bank team has always provided its close and intensive support to the FSSMIP through monitoring, supervision missions, training courses, and on the job training. The Bank team has demonstrated strong commitment and involvement during the preparation of the Project and its implementation and was supported by a local staff over the period of implementation. However, the frequent changes of the task team leader (TTL) from the Bank contributed to slower process of implementation. There were three Bank TTLs over the implementation period, all of whom were very supportive of the Project and made it a priority, whenever needed, to resolve problems and meet various challenges experienced during implementation. The Bank management supported three extensions of the time period for this project to ensure that all activities would be completed by the project closing date. Overall, the project implementation has encountered few challenges throughout its implementation, mainly due to the reasons outside of the CBK control (i.e. permits for usage, construction, etc), however the stakeholders commitment has enabled implementation of all components fully.

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Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 10. List of Supporting Documents Original Project (FSTAP)

i. Decision meeting comments and note

ii. PAD iii. Loan Agreement, iv. Aide Memoires, ISRs v. Restructuring Paper

2. Restructured Project - Additional Finance (FSSIMP)

i. Authorities request for additional finance ii. Concept & Decision Note

iii. Project restructuring paper iv. Loan Agreement, Project Agreements, Project Implementation Agreements, v. Aide Memoires, ISRs, Midterm review

vi. Restructuring papers 3. Country Partnership Strategy, Systemic Country Diagnostic Report, Country Partnership Framework.