FICADEX ALBANIA Ltd INDEPENDENT AUDITORS' REPORT with audited financial statements for the year ended 31 December 2015 "Kosovo Financial Sector Strengthening & Market Infrastructure" Project (IDA Grant No. H3410 - KOS and IDA Credit No. 5006 - XK) Project "Kosovo Financial Sector Strengthening & Market Infrastructure" Project (IDA Grant No. H3410 - KOS and IDA Credit No. 5006 - XK) ProjectID P108080 Status Active Approval date December 13, 2007 Effective date January3, 2008 Closing date June 30, 2014, it has extended to December 31, 2016 Country Kosovo Audited by "FICADEX ALBANIA" Ltd Jacques COLIBERT Maria DUSHI www.ficadex.com "SARACEVE -stree; Building no.6, No. 1: MunicipalUhi no. 8, Tirana-Albania -Algini"streel, 147 Q, 4, Lirres - Alhania; Telfar 355 52 37 859 Mission Audit of special purpose Financial Statements For the year ended December 31, 2015 Report Date: June 28, 2016 Version: Final report Declaration of responsibility The entire documentation was provided by the management of the Project and MEF of Kosovo. Content Page Independent Auditors' Report With Audited financial statements of the project * Statement of Sources and Uses of Funds for the year ended 31 December 1 2015 2-3 * Statement of expenditures for the year ended 31 December 2015 Notes to the 4-11 Financial Statements as at 31 December 2015 Supplementary schedule to the FinancialStatements: Accumulated statement of expenditures for the period January 03, 2008 i-i (inception date) up to 31 December 2015 "FICADEX ALBANIA" Ltd Mobile: + 355 69 40 52 787 "SARACEVE" street; Building no. 6, No. Tel/fax: + 355 52 2 37 859 1; Municipal Unit no. 8, Tirana-Albania E-mail alficadexAgmail.com; alficadex@hotmai1.com; "Migeni" street,147 Q. 4, Durres - Albania Web site: www,ficadex.com INDEPENDENT AUDITORS' REPORT To the Minister of Finance, Republic of Kosovo We have audited the accompanying financial statements of "Kosovo Financial Sector Strengthening & Market Infrastructure" Project, financed under World Bank (Grant No. H3410 - KOS and Credit No. 5006 - XK)/IDA, which comprise the statement of cash receipts and payments and the statement of expenditures for the year ended December 31, 2015 and the related notes to the financial statements. Management's Responsibilityfor the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the cash basis of accounting described in note 2 to the financial statements; this includes determining that the cash basis of -accounting is an acceptable bases for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above, presents fairly in all material respects, the funds received and expenses paid by the "Kosovo Financial Sector Strengthening & Market Infrastructure" Project, financed under World Bank (Grant No. H3410 - KOS and Credit No. 5006 - XK)/ IDA for the year ended December 31, 2015 in accordance with the cash receipts and disbursements basis as described in note 2 to the financial statements. 11v "FICADEX ALBANIA" Ltd Mobile: + 355 69 40 52 787 " SARACEVE" street; Building no. 6, No. Tel/fax: + 355 52 2 37 859 1; Municipal Unit no. 8, Tirana-Albania E-mail : alficadex@gmail.com; afficadexA@hotmail.com; " Migieni" street,147 Q. 4, Durres - Albania Web site: wwwficadexxorn Basis ofAccounting We draw attention to note 2 of the financial statements, which describe the basis of accounting. The financial statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the Republic of Kosovo. Our opinion is not modified with respect to this matter. The financial statements are prepared to assist the Project to meet the requirements of World Bank and the Government of Republic of Kosovo. As a result, the financial statements may not be suitable for another purpose. Restriction on Use Our report is intended solely for the information and use of Government of Kosovo, Project's donors and Project's management and is not intended to be and should not be used by anyone other than these specified parties. Kosovo June 28, 2016 FICADEX d Jacques C Eff 0 Marije DUSHI O Kosovo Financial Sector Strengthening & Market Infrastructure (IDA Grant no, H341- KOS and IDA Credit No. 5006-XK) Statement of Sources and Uses of Funds for the year ended 31 December 2015 (in EUR unless otherwise stated) Year ended Up to Cumulative Notes January 3, from 2008 (inception January 3, 2008 Sources and uses date) to (inception date) to: December 31, December December December 31, 2015 31, 2014 31, 2013 2015 Sources of Funds: IDA Grant no. H3410 - KOS funding 4 102,428.04 139,607.65 981,560.84 1,223,596.53 IDA Credit no. 5006 - XK funding 5 374,920.66 311,261.26 2,989,349.69 3,675,531.61 Temporary advances by Government of Kosovo 6 23.00 10,737.00 24,342.50 35,102.50 Total courses 477,371.70 461,605.91 3,995,253.03 4,934,230.64 Uses of Funds: Goods' 7 (374,920.66) (311,261.26) - (686,181.92) Consulting services 8 (102,091.04) (147,534.65) (626,381.72) (876,007.41) Training 9 (360.00) (2,810.00) (411,202.62) (414,372.62) Incremental Costs 10 - - (157.10) (157.10) Outflow of cash through Treasury to the Banks Deposit Insurance Fund 5 - - (2,957,511.59) (2,957,511.59) Total uses 11 (477,371.70) (461,605,91) (3,995,253.03) (4,934,230.64) Exchange rate differences Cash on hand and at banks at the end of the year The Statement of Sources and Uses of Funds is to be read in conjunction with the notes set out on pages 4 toll and forming an integral part of the financial statements. The financial statements of the Kosovo Financial Sector Strengthening & Market Infrastructure Project were authorised for issue by the management of the Project on June 16, 2016 and signed on its behalf by: hkdndije HI Zylfij TI Project Coordinator Financial management See note 7 & 8 44 o 4> 9a 2u ~CCG 4 r4> o ~El IGn~ f4~e C 4 ff 0 0 e r-i ci4 enr ;z '4- 1 oc o= oc e V N N o c[ oN o ee kk E 1 J4a t-r- 00-r 6. 000 V N ~ te 00 r- n I oo r- r 4 00 '3 0 0> e- - 0> ©, © .0o 3 r. 6 '3 Qe Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS; IDA Credit 5006 -XK) Notes to the financial statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 1. General The Financial Agreements ("the agreements") for the "Financial Sector Technical Assistance Project" ("FSTA") - IDA Grant no. H 3410-KOS - (the "Project'), was signed between the International Development Association ("IDA") and the United Nations Interim Administration Mission in Kosovo ("UNMIK" or the "Recipient") on December 13, 2007 and be effective on date January 3, 2008. IDA agreed to extend a grant to the Recipient, in an amount equal to SDR 1,300,000 (equivalent to approximately US$ 2 million, as translated on the contract date). Upon Kosovo becoming a member of the World Bank on June 29, 2009, the Government of Kosovo assumed all responsibilities and rights related to this project from UNMIK. On August 3, 2011 an additional Financing for activities related to the Original project was signed between the International Development Association ("IDA") and the Republic of Kosovo. As a result of this additional financing, the original project called "Financial Sector Technical Assistance" was combined with the additional financing and renamed "Financial Sector Strengthening and Market Infrastructure" (FSSMIP). The Association agrees to extend to the Recipient, a Credit in an amount equivalent to four million three hundred thousand Special Drawing Rights (SDR 4,300,000) equivalent to approximately US$ 6.85 million, as translated on the contract date) (Variously, "Credit" and "Financing"). As at 31 December 2015 the Project had 3 Employees. (One is paid by the project and two by CBK) The objectives of the Project are to: i. Enhance the stability and development of Kosovo's financial system by supporting stronger prudential regulation and supervision by the CBAK for banks and non banks financial institutions, supporting the institutional strengthening of CBAK; and ii. Strengthening the banking and microfinance industry through capacity building. The Project consists of Part I (A - C) of the Original Project and the following additional Parts IV, V and VI: The original project consists of the Following three components: PartA: * 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 of 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. The total funds allocated to this component are SDR 955,000 (equivalent USD 1,470,000) Part B * 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. The total funds allocated to this component are SDR 156,000 (equivalent USD 240,000) 4 Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS ; IDA Credit 5006 -XK) Notes to the financial statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 1. General (continued) Part C Enhance the capacity of the Kosovo Bankers' Association to provide adequate training to local banks through the provision of technical assistance and training. The total funds allocated to this component are SDR 188,500 (equivalent USD 290,000) The additional Parts IV, V and VI Part IV Establishment of a Real Time Gross Settlement Payment System, to be controlled 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 the CBK outside Pristine designed to serve as a backup system in case of primary system failure. PartVI Financing the Recipient's initial contribution to the DIFK for the purpose of enabling the DIFK to commence operation of the Deposit Insurance Scheme. The maximum Commitment Charge Rate payable by the "Recipient" on the unwithdrawn Financing Balance shall be 0, 5% per annum The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three- fourths of one percent (3/4 of 1%) per annum. The Government of Kosovo will repay the principal amount of the Credit in semi-annual instalments payable as of describe in following: Date Payment Due Principal Amount of the Credit repayable (expressed as a percentage) On each April 15, and October 15 commencing October 5% 15, 2021 to and including April 15, 2031 The Project was expected to be completed by June 30, 2015. It has been extended to December 31, 2016 IDA Grant H3410-KOS In accordance with the Financing Agreement dated December 13, 2007, with the effective date on January 3, 2008 between the International Development Association (the "IDA" or the "Association"), and United Nations Interim Administration Mission in Kosovo ("UNMIK") the Project received a grant of Special Drawing Rights ("SDR") 1,300,000. 5 Kosovo Financial Sector Strengthening & Market Infrastructure Project Notes to the financial statements (IDA Grant H 3410 - KOS; IDA Credit 5006 -XK) for the year ended 31 December 2015 (in EUR, unless otherwise stated) 1. General (continued) IDA Grant H3410-KOS (continued The following table specifies the categories of Eligible Expenditures that may be financed, the allocations of the amount of the grant to each category and the percentage of expenditures to be financed for Eligible Expenditures in each category: Category Amount of grant % of expenditures Amount of grant allocated allocated (in SDR) to be financed (in USD) Goods, consultants services 955,000 100% 1,469,000 and training under Part A Consultants services and 155,000 100% 238,462 training under Part B Consultants services and 145,000 100% 223,077 training under Part C Project administration 340,000 100% 538,628 An allocated 45,000 100% 69,230 Total 1,300,000 2,000,000 * Amounts translated using exchange rates on inception date of the project. As at December 31, 2015, EUR 1,223,596.49 (2014: EUR 1,121,168.49) were disbursed from the Grant. IDA Credit No. 5006-XK In accordance with the Financing Agreement dated August 3, 2011, between the International Development Association (the "IDA" or the "Association"), and Republic of Kosovo the Project received an additional Financing of Special Drawing Rights ("SDR") 4,300,000. The following table specifies the categories of Eligible Expenditures that may be financed, the allocations of the amount of the grant to each category and the percentage of expenditures to be financed for Eligible Expenditures in each category: Category Amount of grant % of expenditures Amount of grant allocated (in SDR) to be financed allocated (in USD)* Goods, consultants services and 80,000 100% 127,443 training under Part I of the project Goods, consultants services under 1,200,000 100% 1,911,628 Part IV of the project Goods, works and consultants 540,000 100% 860,232 services under Part V of the project Initial contribution to the DIFK 2,480,000 100% 3,950,697 under part VI of the project Total 4,300,000 6,850,000 * Amounts translated using exchange rates on inception date of the project. As at December 31, 2015, EUR 3,675,531.61 (2014: EUR 3,300,610.95) were disbursed from the Credit. 6 Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS ; IDA Credit 5006 -XK) Notes to the financial statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 2. Basis of preparation The financial statements of the project for the year ended December 31, 2015 have been prepared for the purpose of complying with the provisions of the Project's objectives, the World Bank guidelines and terms and conditions of the IDA Grant no. H3410-KOS and IDA Credit no. 5006-XK. The financial statements comprise the statement of sources (Cash Receipts) and uses (Payments); the statement of expenditure used as the basis for the submission of withdrawal applications for the year ended December 31, 2015, and a summary of significant accounting policies and other explanatory notes. The cumulative statements of expenditure used as the basis for the submission of withdrawal applications for the period from inception on January 03, 2008 till December 31, 2015 are presented as supplementary schedules. Cumulative information on receipts and disbursements from the Project's inception date to January 31, 2015 is presented in the Statement of Sources and Uses of Funds for information purposes only. The financial statements have been prepared in accordance with cash basis IPSAS - Financial Reporting under the Cash Basis of Accounting, which differs from Kosovo and International Financial Reporting Standards. On this basis, income is recognised when received rather than when earned and expenses are recognised when paid rather than when incurred. Accordingly, direct and indirect payments of the Project's expenses, which are made from the proceeds of the grants, are recognised as sources and uses of funds at the time the payment is made. The financial statements prepared for the special purpose are presented in Euros ("EUR"), unless otherwise stated. 3. Summary of significant accounting policies A summary of significant accounting policies underlying the preparation of the Project's financial statements is presented below. 3.1 Foreign currency transactions The project accounts are maintained in Euros ("EUR") the legal currency of Kosovo. The Project deals predominantly in EUR, while the foreign currencies the Project deals with are predominantly in Special Drawing Rights ("SDR") and United State Dollars ("USD"). Transactions in foreign currencies are translated to the functional currency at exchange rates on the dates of the transactions. Initial grant amount are maintained at the historical exchange rates. The project translates the undrawn grant balance at the rates in effect on the year end. The exchange rates in effect as at 31 December 2015 and 2014 were as follows: Currency 2015 2014 USD/ XDR 0.72 0.69 XDR/USD 1.39 1.45 EUR /XDR 0.79 0.84 XDR /EUR 1.27 1.19 EUR/ USD 1.09 1.22 7 Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS ; IDA Credit 5006 -XK) Notes to the financial statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 3.2 Recognition of income and expenses Income is recognised when received rather than when earned, and expenses are recognised when paid rather than when incurred. 3.3 Taxation The Project is exempt from income Tax, Value Added Tax (VAT) and Custom Duties for the grants part, but is subject to both VAT and Customs for the Credit part. The local employees of the project are liable for personal tax and social security contributions. 4. IDA Grant no H3410-KOS funding IDA funding for the years ended 31 December 2015 is composed as follows: Year ended Year ended Grant 31 December 31 December 2015 2014 Reimbursements 63,975.00 - Direct payments 38,453.04 139,607.65 Total 102,428.04 139,607.65 Reimbursements represent the IDA funds for cover the payments already made by Government of Kosovo for this project using withdrawal applications prepared by the Project. Direct payments represent amounts paid directly by IDA based on contracts between the Project and contractors. 5. IDA Credit no. 5006 - XK funding IDA Credit funding for the years ended 31 December 2015 is composed as follows Year ended Year ended Credit 31 December 31 December 2015 2014 Reimbursements Direct payments 374,920.66 311,261.26 Total 374,920.66 311,261.26 In 2012, a direct payment from IDA Loan 50060 was made with the amount of 2,470,770.00 XDR, equivalent to 2,957,511.59 Euro, Withdrawal Application IDA 5006 - XK/01, dated 02 October 2012. This was an inflow and outflow of cash through Treasury to the Banks Deposit Insurance Fund. 8 Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS; IDA Credit 5006 -XK) Notes to the Financial Statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 6. Temporary advances received by government of Kosovo The temporary advances received by Government of Kosovo for the year ended 31 December 2014 and cumulative is composed as follows: From January 3, Cumulative Year ended Year ended from January 3, Financed by: 31 December 31 December 2008 (inception 2008 (inception 2015 2014 date) up to date) up to December 2013 Dembr21 December 2015 Temporary advances received by GOK 23.00 8,377.00 24,342.50 32,702.50 Temporary advances received by GOK - 2,400.00 - 2,400.00 Total 23.00 10,737.00 24,342.50 35,102.50 The cumulative temporary advances received by GOK represent Withdrawal Application reimbursed on 2016. 7. Goods Expenditures for Goods are detailed as follows: Year ended Year ended Item 31 December 31 December 2015 2014 Software for Off-Site Supervision for the BBC Centre * - 311,261.26 30% of software cost on Acceptance of full system design specification (taxes included) 185,788.51 - 55% of the Hardware cost on delivery (taxes included) 189,132.15 - Total 374,920.66 311,261.26 *The value of Euro 311,261.26 for "Software for Off-Site Supervision" is restated from category "consulting services" because was incorrectly stated in financial statements 2014 (see note 8). 9 Kosovo Financial Sector Strengthening & Market InfrastructureProject (IDA Grant H 3410 - KOS; IDA Credit 5006 -XK) Notes to the Financial Statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 8. Consulting services Expenditures for Consultant services are detailed as follows: Item Year ended Year ended 31 December 2015 31 December 2014 Software for Off-Site Supervision for the BBC Centre* . Designing and implementation of a regular reporting database for off-site supervision 53,950.00 139,607.65 Review rules for licensing and supervision of pension fund management - Services consultancy 8,000.00 6,240.00 Audit services 1,688.00 1,687.00 Drafting law for regulation and supervision general insurance - Total 102,091.04 147,534.65 *The value of Euro 311,261.26 category "Services" because was incorrectly stated in financial statements 2014. (see note 7) 9. Training Training is detailed as following: Yearended Year ended Item 31 December ear ende 201520531 December 2014 Training for PIU staff Other training 360.00 2,810.00 Total 360.00 2,810.00 10. Incremental operating costs Expenditures for incremental operating costs are detailed as follows Year ended Year ended Item 31 December 31 December 2015 2014 Telecommunication costs Total 10 Kosovo Financial Sector Strengthening & Market Infrastructure Project (IDA Grant H 3410 - KOS; IDA Credit 5006 -XK) Notes to the Financial Statements for the year ended 31 December 2015 (in EUR, unless otherwise stated) 11. Expenditures by sources of funds Expenditures by sources of funds are composed as follows: IDA Grant Temporary Temporary Total 31 Item IDA Credit H3410 advances from advances from December 50060 funding GOK (IDA GOK (IDA r credit 50060) Grant H3410) Goods 374,920.66 - - - 374,920.66 Consultants' services - 102,068.04 23.00 - 102,091.04 Training - 360.00 - 360.00 Total * 374,920.66 102,428.04 23.00 - 477,371.70 12. Expenditures by parts: The expenditures by Project Parts are as follows: Parts Goods Consultant Incremental Total 31 services Training operating December 2015 costs Part A Central Bank of Kosovo (CBK) 374,920.66 374,920.66 Part B Association Micro finance Institutions of Kosovo (AMIK) - - Part C. Kosovo Bankers Association (KBA) Part IV PatW Project Administration (PA) Pe A102,091.04 360.00 - 102,451.04 Total 374,920.66 102,091.04 360.00 - 477,371.70 13. Un-drown grant facilities. 14. The balance of the undrawn grant from IDA -Grant H3410 - KOS as of 31 December 2015 in XDR is 321,817.38 (2014: XDR 664,430.35) 15. The balance of the undrawn grant from IDA - Credit 50060 - KOS as of 31 December 2015 in XDR is 1,781,639.38 (2014: XDR 2,759,563.67) 11 Kosovo Financial Sector Strengthening and Market InfrastructureProject (IDA Grant H3410 - KOS; IDA Credit 50060-XK) Statement of Cumulative Expenditures Withdrawal Schedule (Supplementary schedule to the Annual Financial Statements) From January 3, 2008 (inception date) to December 2015 N0 k- qu - - - - - ~ 0~f~0>- - - e 0 , el l I , , - COD ~~z, N o fls o o s - 0 e 0 0e el -ol el ao - 0se -r pN m 00 0 0 (n Nfl Nf C0 VD CD 0D CD C) 0 r el 0 N el U el 00 w00 NO tO - - 0D N el 9 ONe Cn -O o e er r- - r- <- t l 70-oo 0W t - r- , knON v) N0 tt ý CY v n c-- t- m 00 00 01ý ~ ~ r t t' ý0 è M Nà lf '{ re os oc rs m o el l o n o eI O kr) CD D C e c CD c c < flff cO 6 voý~' 6 r4 0; '0 0; L-In C 0 e t n r - M) cý C> CD -o Lo00 M 0 00 C) 0 CC Cls m kr V) C -Mo s o O o, O C> , e p CO g 00 0 m , 00 -c C2l 00 c, e g r- N pl 0- ml g ;l 0 ' -4 e in o No Oel. n - o o el e o6o r0 N oD N tn 0 W OC o rn 0 C0 4 t- - m 0 a 6 cN oc 00 O o 0- - - O0 r4 N m 00 0 C l l - C l0 0 r 0 D 0 0 N el Crn l~ l 000 N D- 0 'e in0 9 Oý C- r-: en el tO o o O O O C pl 0oN V- V) o C o0 0 o m o o 9 NO r- ,0 .O v) cc 00t 0 0 el©© C5 on 0 -90 >0 0 CA cn 0n V2 0A CA VD 0n rA rAc0n>O 0A Q PT04P>Pý P T -- l-0-0O 0 o C S - -D - Q å I' ° C r- 0 -r 8 i- 0 CD - o W - .l|n en t r C, C> CD C cý - w C) Ien 0 0 CCl 0 cý C> e*C l 0 o 8n 0 0 0d rtu a e0 'd I os t; 0 005 o~ cwx c7 0 0 0 0 0 0 0 oo I 9 I 0 o 4) o - - - - u ii <' 0 0 '0oc . oo . 00e