Kosovo’s governance operates on two levels: central and local. Municipalities serve as decentralized administrative units, crucial for managing public finances effectively. This research explores Kosovo’s local government financing, emphasizing the Fiscal Compact. Drawing from domestic and international sources—scholarly articles, reports, and legislation—it examines the current financial landscape. Although Kosovo has not signed the European Charter of Local Self-Government, its laws align with its principles. Local financing relies on municipal income and grants linked to performance indicators, encouraging efficiency. Notably, municipal revenues from government grants have increased in recent years, reflecting improved performance. The study highlights the importance of sustainable financing for effective governance, ensuring municipalities can meet public sector demands efficiently.