Masaryk University Faculty of Economics and Administration
DIPLOMA WORK
2011 Emina Dţubur
Masaryk University Faculty of Economics and Administration Field of study: Financial Management
FINANCIAL MARKET AND INSTRUMENTS IN BOSNIA AND HERZEGOVINA, DEVELOPMENT, PERSPECTIVES AND LIMITATIONS
Diploma work
Thesis Supervisor: Author:
Ing. Dagmar Linnertová Emina Dţubur
Brno, 2011
Masaryk University Faculty of Economics and Administration
Department of Finance
Academic year 2010/2011
ASSIGNMENT OF DIPLOMA THESIS
For: Bc. Emina Džubur, B.Sc.
Field: Financial Management
Title: Financial market and instruments in Bosnia and Herzegovina, development, perspectives and limitations
P r i n c i p l e s o f t h e s i s w r i t i n g:
Objective of the thesis: The aim of the thesis is the analysis of financial market trends in Bosnia and Herzegovina with intention of financial instruments.
Approach and methods used: Procedure of work: 1. Introduction and setting of the main aim 2. Introduction of Bosnia and Herzegovina financial system 3. Analysis of financial instrument scale in Bosnia and Herzegovina 4. Analysis of trends in Bosnia and Herzegovina financial market 5. Comparison of situation in Bosnia and Herzegovina with intention of selected characteristics of financial products 6.Conclusion
Methods: Analysis, comparison, deduction
The extent of graphical works: according to the supervisor's guidelines, the assumption is about 10 charts and graphs
The thesis length without appendices: 60 – 70 pages
List of specialist literature:
Mishkin, Frederic S. - Eakins, Stanley G. Financial markets and institutions. 6th ed. Boston: Pearson Prentice Hall, 2009. xxxix, 675. ISBN 978-0-321-37421.
Mishkin, Frederic S. The economics of money, banking and financial markets. 7th ed. Boston: Addison-Wesley, 2004. xxxix, 679. ISBN 0-321-12235-6.
Diploma thesis supervisor: Ing. Dagmar Linnertová
Date of diploma thesis assignment: 20/3/2011
Submission deadline for Diploma thesis and its entry in the IS MU is provided in the valid Academic Calendar.
Department Head Dean
In Brno on 20/3/2011
Table of Contents
1. Introduction ...... 1 2. Financial markets ...... 3 2.1. Generally about financial markets ...... 3 2.2. Banks or capital markets ...... 3 3. Financial market of Bosnia and Herzegovina...... 4 3.1. Macroeconomic indicators ...... 4 3.2. Financial Market Structure ...... 6 4. Banking sector of Bosnia and Herzegovina ...... 7 4.1. Institutional frame ...... 8 4.2. Overview of banking sector ...... 9 4.2.1. The year 2007 ...... 10 4.2.2. The year 2008 ...... 12 4.2.3. The year 2009 ...... 14 4.2.4. The year 2010 ...... 16 5. Insurance Market in Bosnia and Herzegovina ...... 18 5.1. Institutional frame of Insurance market of BiH ...... 19 5.2. Sector structure ...... 21 5.2.3. Premiums ...... 22 5.2.3. Investment structure ...... 23 5.3. Comparison of banking sector and insurance sector in BiH ...... 26 6. Leasing companies ...... 27 6.1. Institutional frame of leasing market ...... 28 6.2. Review of leasing market ...... 28 7. Microcredit Organizations ...... 32 7.1. Institutional Frame ...... 32 7.2. Sector structure ...... 33 7.3. Lending activities and competition ...... 34 7.4. Fall of microcredit activities ...... 35 8. Investment Funds ...... 37
8.1. From Privatization Investment Funds to Investment Funds ...... 37 8.2. Mutual funds ...... 39 9. Capital markets in Bosnia and Herzegovina ...... 41 9.1. Regulatory frame of capital markets ...... 41 9.2. How the Stock Exchanges Are Organized ...... 43 9.3. The Sarajevo stock exchange and Banja Luka Stock Exchange Indices ...... 46 9.4. Sarajevo Stock Exchange (SASE) ...... 48 9.5. Banja Luka Stock Exchange (BLSE) ...... 52 9.6. BLSE and SASE in 2011 ...... 56 10. Financial Instruments in BiH ...... 58 10.1. Stocks (Initial Public Offers) ...... 58 10.2. Bonds ...... 60 10.3. Commercial bills ...... 61 10.4. Treasury bills ...... 61 11. Perspectives of Bosnia and Herzegovina financial market ...... 63 12. Conclusion ...... 68 13. Literature ...... 69 14. Abbreviations ...... 72 15. List of charts, graphs, pictures and diagrams ...... 73 16. Appendix ...... 75
1. Introduction
The objective of the present work is to describe financial market of Bosnia and Herzegovina and existing financial instruments. At the same time, it addresses challenges of individual segments of market, providing short overview of limitation and enabling factors of its development, working in broad range of subject areas including banking system, microcredit, leasing sector, capital markets, as well as supervision bodies, legislation, investors’ opportunities, etc.
Paperwork starts by reviewing overall stability of financial system. As financial stability is closely related to macroeconomic stability, brief overview of macroeconomic situation in Bosnia and Herzegovina is given in first section.
According to the most important role of banking system in financial market of Bosnia and Herzegovina, commercial banks are analyzed further by using method of financial analyses of banks’ statements. Banking system is also compared to insurance market, as insurance market is considered to be emerging market and future strongest institutional investor in Bosnia and Herzegovina.
Next chapters provide overviews of microcredit and leasing market, analyzing in particular development from 2007 to 2010, then moving to highlight specific role of investment funds on BiH financial market.
As for the capital market in Bosnia and Herzegovina is concerned, two stock exchanges are described, their main indices and trading trends during the past period.
Market is segmented not only geographically on two entities Federation BiH and Republic of Srpska, but also in terms of legislative and supervisory bodies, which are divided accordingly between entities.1 This reflects the overall segmentation of financial market and institutions in Bosnia and Herzegovina. Consolidated data for BiH in often cases cannot be found. Data collection is very scarce in Bosnia and Herzegovina. Therefore, writing of thesis presented a challenge, since it was mainly based on compiling of dispersed economic literature related to the scope of assigned theme. The analysis has been conducted using annual statements of financial institutions, retrieved from appropriate regulatory bodies and presenting standard indicators of size and activity of banks, non-banking institutions and capital market.
Results show that Bosnia and Herzegovina banking system presents the strongest segment of financial system, while other mediators and capital market show significant underdevelopment.
1 Financial reports are obtained by summing financial reports of sectors in FBiH and RS.
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There is lack of financial instruments, with only shares and bonds trading, with none of the derivative instruments.
Benchmarking studies from diverse international organizations are used to present an overall assessment of financial system of Bosnia and Herzegovina compared to neighboring countries.
At the end there are presented possible measures aiming at increased stabilization of financial sector and possible future development.
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2. Financial markets
2.1. Generally about financial markets
A financial market is a part of the financial system where financial instruments are traded and supply and demand for financial instruments are met. This involves a set of financial institutions and instruments that intermediate between two interested parties, the one with financial surplus and the other one in deficit. Generally, on world financial markets, the first group includes the public or savers, who stand ready to invest their surplus in financial institutions and/or instruments.2 The latter group or deficit actors wish to acquire the financial resources they need for financing their operations.
The financial market consists of capital markets and money markets. Capital markets are where long-term financial instruments whose maturity is indefinite or at least one year, are traded. Short-term securities with a maturity of less than one year are traded on money markets.
Other classification of financial market can be on debt and equity market, by two most common ways of obtaining funds by companies or individuals. The most common way of financing activities of governments and corporations is through debt market, by issuing debt-market instrument, such as bond. On the other hand, stock market is used for trading with claims on earnings and assets of corporations-stocks. Debt market is important because it is where interest rates are determined. Interest rates have an impact on overall health of the economy because they affect not only consumers’ willingness to spend or save but also businesses’ investment decisions. Stock market is also very important factor of business investment decisions, because the price of stocks determines the amount of the funds possible to be raised by issuing new stocks.
Over time, financial markets have become a major source of financing for developing economic sectors. Companies can access fresh capital and improve their stability and credit rating. Financial markets such as bond and stock markets are a key factor in producing high economic growth, and poorly performing financial markets are one of the main reasons that many countries’ economies stay poor.
2.2. Banks or capital markets Financial intermediation is mostly done by banks and financial markets. New global trends of deregulation and internationalization have stimulated the development of financial markets, institutions, and instruments, and particularly capital markets. Non-bank financial institutions
2 Mishkin, Frederic S.- Eakins, Stanley G. Financial Markets and institutions, 6th ed. Boston: Pearson Prentice Hall, 2009. Xxxxix, 675. ISBN 978-0-321-37421, p.43
3 and financial markets are becoming increasingly important, and the global financial system has divided along these lines. Accordingly, the global financial system is presently viewed in terms of two financial system models: the "Anglo-Saxon" and the "Continental."3
The Anglo-Saxon financial system emphasizes financial markets and non-bank financial institutions, over banks. During the past twenty years, there has been significant development of financial markets and instruments within this system in developed economies around the world.
The Continental model gives less importance to financial markets and financial instruments, emphasizing the greater role of banks, which are the crucial financial institutions of the system. In the Continental system, banks are of the universal type - financial institutions offering a range of services, including financial market services (issuing and selling securities, financing, and financial management).4
The BiH financial system generally follows the continental model, with banks taking the lead and financial markets and instruments less developed. However, banking system is still not at the level of systems in developed economies following continental model, with modest range of services, beyond basic banking operations.
The BiH financial market has a capital market, but not a developed money market. The financial market instruments are relatively underdeveloped with none of the new innovative instruments.5
3. Financial market of Bosnia and Herzegovina
3.1. Macroeconomic indicators
Since 1995 Bosnia and Herzegovina has achieved high economic growth rates, on average 25 percent annually. As a result, GDP per capita has increased by more than three times, from about 900 KM in late 1995, to an estimated 2900 KM in 2003. Since 2003, GDP per capita continued its steady growth reaching average values of 6000 KM in last five years. BiH is characterized as transition country with stable growth rate of GDP, around 5% during the period until 2009, when real GDP growth fell at nearly -3%. GDP rose for a modest 0,72% in 2010, and it is expected to continue its growth trend, however at a slower pace, compared to period before recession. However, the main concern remains very high rate of unemployment, which had worsened from 13% in 2007 to 27% in 2010. Foreign investments have decreased also, from nearly 30% in 2007 to 0,1% in 2010. That gives a picture about trust of investors toward BiH market, where BiH was
3 Velimir Šonje ,VEZA KOJA NEDOSTAJE: KAKO POVEZATI RAZVOJ TRŢIŠTA KAPITALA I GOSPODARSKI RAST, (ur.), 2005, Arhivanalitika, Zagreb 4 http://cbbh.ba/index.php?id=673&lang=en 5 http://cbbh.ba/index.php?id=673&lang=en
4 unable to attract foreign direct investments. With high unemployment and limited investment, incomes per capita are showing declining trend. Inflation and exchange rate stability has been under control thanks to Central Bank BiH, established in 1997. Central Bank of Bosnia and Herzegovina maintains monetary stability by issuing domestic currency according to the Currency Board arrangement with full coverage in freely convertible foreign exchange funds under fixed exchange rate 1 KM: 0,51129 EURO. Central Bank defines and controls the implementation of monetary policy of Bosnia and Herzegovina.6
Table 3.1.: Financial Sector Overview
Year 2007 2008 2009 2010 Nominal GDP (in milions BAM) 21,836 24,759 24,051 24,584 GDP per capita (in BAM) 5,683 6,444 6,258 6,397 Real GDP (growth rate in %) 6.12 5.58 -2.91 0.72 Population (in thousands) 3,842 3,842 3,843 3,843 Inflation, average CPI (in annual % change) 1.50% 7.43% -0.38% 2.37% Unemployment rate (as % of total labor force) 29.01% 23.41% 24.07% 27.20% Net Foreign Investment (as %of GDP) 12.94% 4.99% 1.50% 0.10% Deposits (as % of GDP) 46.76% 36.39% 44.91% 46.22% Credits (as % of GDP) 57.04% 52.10% 58.76% 58.85% Stock Market Capitalization (as % of GDP) 113.40% 39.50% 47.40% 44.46% Insurance Premiums (as % of GDP) 1.79% 1.63% 1.92% 1.91% Financial Services (as % of GDP) 4.31% 4.02% 4.13% 4.16% Source: Central Bank BiH, Partners for Financial Stability
Primary drivers of financial stability of BiH are banking system’s health and the public trust in banks. Banking system is dominated by foreign-owned banks, which account for 90% of the total financial system’s assets and 83% of the total capital. Bank lending activities grew slightly in 2010 after decrease at the end of 2008 and in 2009. Deposit growth also experienced growth in 2010 after stagnation in 2009. Higher deposit and/or loan correlation is associated with higher economic and financial development as measured by GDP per capita.7 At the same time, other parts of financial system and especially capital markets remain underdeveloped, serving only for trading shares from privatization process and not for raising capital.
6 http://cbbh.ba/index.php?id=13&lang=en 7Oya Pinar Ardic, Maximilien Heimann, Nataliya Mylenko, The World Bank Financial and Private Sector Development ; Consultative Group to Assist the Poor January 2011 WPS5537 Public Access to Financial Services and the Financial Inclusion Agenda around the World, retrieved from http://www.cgap.org/gm/document- 1.9.49435/Access_to_Financial_Services_and_the_Financial_Inclusion_Agenda_Around_the_World.pdf
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3.2. Financial Market Structure
Total assets of financial sector in Bosnia and Herzegovina in 2010 were 24,25 billion KM. Share of banking sector in total assets of financial sector was 84,34%, leasing companies had a share of 4,57%, insurance and reinsurance 3,86%, investment funds with 3,70% and microcredit organizations with 3,53%. (table 3.2.) In financial sector of BiH is still dominant banking sector with 84,34% of share in total assets of financial sector. Banking sector managed to preserve its stability in an unstable environment caused by world economic and financial crises, which had an effect on financial sector of BiH.
Table 3.2.: Structure of financial services sector for 2008, 2009 and 2010
Asset Asset 2008 2009 2010 growth growth Financial institutions Index Index Assets Assets Assets 09/08 (%) 10/09 (%) Share % Share % Share % (mil. KM) (mil. KM) (mil. KM) Banks 20,821 80.82 20,605 82.07 20,452 84.34 98.96 99.26
Investment funds 1,242 4.82 885 3.52 898 3.7 71.26 101.47
Insurance and reinsurance 889 3.45 933 3.72 936 3.86 104.95 100.32
Microcredit organizations 1,210 4.70 1,087 4.33 856 3.53 89.83 78.75
Leasing companies 1,600 6.21 1,598 6.36 1,108 4.57 99.88 69.34 Sector total 25,762 100.00 25,108 100 24,250 100 97.46 96.58 Source: Banking Agency FBiH, Banking Agency RS, Securities Commission FBiH, Securities Commission RS, Insurance Supervisory Agency RS, Association of Leasing Companies BiH, Association of Microfinance Organizations BiH According to financial data for 2010 banking sector held its primate on BiH regarding the assets with 20,45 billion KM, leaving behind leasing companies, microcredit organizations, insurance companies and investment funds with 1,1 billion KM, 856 million KM, 936 million KM and 898 million KM, respectively. (table 3.2.)
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Graph 3.1.: Share of financial institutions on financial market for 2008, 2009 and 2010
2010
Banks Investment funds 2009 Insurance and reinsurance Microcredit organizations Leasing companies 2008
0% 20% 40% 60% 80% 100%
Source: Table 3.2.
Share of the other institutions is almost negligible. With an aim of development of financial market, significant role belongs to strengthening of institutional investors, especially insurance companies and investment funds, which should reflect on overall economic development.
Assets growth in financial services sector in BiH in 2010, compared to the year 2009 registered insurance and reinsurance companies with increase of 0,32% and investment funds with increase of 1,47%. Banks market recorded mild drop in assets of 0,74%, while microcredit organizations and leasing funds recorded significant decrease of assets with 21,25% and 30,66%, respectively.(table 3.2.)
4. Banking sector of Bosnia and Herzegovina
Like in other countries in transition, in Bosnia and Herzegovina in 1998 two laws were passed to set up bank privatization: the “Law on the Privatization of Banks” and the “Law on Opening Balance Sheets for Enterprises and Banks”. During the process of privatization, banks could not be privatized by certificates or vouchers, but only by cash investment selected via international tenders. This enabled fast privatization of banks. By 2004, most of the banks in BiH were privatized, with the share of foreign private capital in total capital of 67%.8 New banks inherited 4 billion KM of negative equity in banks, along with inappropriate legislation, non-existence of market and other inadequacies. Five years after, net capital in banks was
8 Dominant role of Austrian banks The Banking Sector of Bosnia and Herzegovina: and CBBH (data for 2004), Banking Agency of RS (2004), Banking Agency of the FbiH (2004)
7 positive, reaching 697 million KM9, the banking system was stabilized, and banks were enforced. Successful transformation of banking sector from transition to market economy was completed. Presence of foreign bank provided a number of benefits in terms of new products, skills and technology transfer, and the most importantly increased access to credit. The market entry of foreign banks was considered drivers of reform process of the banking system.
4.1. Institutional frame
Institutional frame of banking sector in Bosnia and Herzegovina has been updated several times during the longer period of time and has enabled the efficient functioning of banks, along with adequate supervision and quality protection of depositors. The regulation and supervising authority of banking system in BiH is assigned to the Banking Agency of the Federation of BIH (FBA BIH), the Banking Agency of the Republic of Srpska (BARS) and partly, the Deposit Insurance Agency of BIH (DIA) with the supervision of Central Bank of Bosnia and Herzegovina (CBBiH). According to law on Central Banks of Bosnia and Herzegovina (CBBiH), Central bank holds coordination role in banking supervision which is realized through cooperation with banking agencies, regular exchange of information and data and meetings. Supervisory agencies are each governed by individual entity-level legislation. Both are authorized to grant and revoke licenses of banks and other tasks related to supervision of banks. Entity laws on banks are harmonized to a large degree.
Banking Agency of the FBiH, as an independent, sovereign and non-profit authority for bank supervision and licensing, was established in late 1996.10 Its work, since the beginning, has been directed towards a strong and stable banking system which is market-oriented and based on the international standards of performance and supervision of banks. Same competences belong to Banking Agency of Republic of Srpska.
Some of the Agencies’ basic tasks11 are:
Issuing licenses for establishment and operation of banks, licenses for each change in organizational status, and type of business activities performed; On-Site and Off-Site bank supervision - examination of bank’s accounts and other documentation, undertaking appropriate measures in accordance with the law Revoking bank operation licenses Managing and supervising bank rehabilitation and liquidation process Issuing rules based on law to regulate banks’ operation
9 http://www.fba.ba/old/novostibin/publikacije_7_1.pdf, Banking Agency of the Federation of BIH 10 http://www.fba.ba/old/novostibin/publikacije_71_3.pdf, Banking Agency of the Federation of BIH 11 http://www.abrs.ba/agencija/agencija_eng.htm, Banking Agency of the Republic of Srpska
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Making assessment of requirements met and giving approvals for the new share issuance;
State law on deposit insurance dates from the year 2002 forming Deposit Insurance Agency of Bosnia and Herzegovina and it has enabled creation of reliable scheme for protection of depositors.12 Deposit Insurance Agency of Bosnia and Herzegovina (DIA) is established in 2002. DIA is an independent, non-profit, legal entity with full authority under the Law of the State.13 Head Office of the DIA is located in Banja Luka, and there is one Branch Office in Sarajevo and Banja Luka. The last change on the amount of insured deposit was acted on April, 2010 and prescribed insured deposit in the level of 35.000 KM. In 2010 there were 26 banks which signed the Contract on Deposit Insurance.14
Functioning of Central Registry of Credits, under jurisdiction of Central Bank BiH enabled banks to acquire more reliable estimation of potential clients. Registry of credits collects data about legal and physical entities indebted with commercial banks and with leasing companies, microcredit organizations and insurance companies.15
4.2. Overview of banking sector
The five largest banks in BiH accounted for more than 64% of total banking assets at end of 2003. Therefore, banking sector can be characterized as highly concentrated. Three of these five banks were direct subsidiaries of Austrian banks.
Table 4.1: Banking system assets, 2006-2010
Banking system assets 2006 2007 2008 2009 2010 By size share in total assets Top 3 43.5% 40.7% 46.4% 46.2% 43.3% Top 5 59.3% 56.7% 60.8% 59.2% 56.8% Top 10 79.6% 78.7% 80.2% 79.4% 77.5% By ownership Foreign 90.3% 91.2% 91.3% 90.8% 89.9% Domestic-state and private 9.7% 8.8% 4.8% 9.2% 10.1%
Source: Central Bank of BiH16
12 The Law on Deposit Insurance of Bosnia and Herzegovina is intended to provide, within the constraints and limitations of this Law, for the protection of deposits of Natural Persons in banks licensed either by the Banking Agency of the Federation of Bosnia and Herzegovina or the Banking Agency of the Republic of Srpska. 13 http://www.aod.ba/en/index.html 14 http://www.aod.ba/index.php?option=com_content&view=article&id=3&Itemid=7&lang=en on Dec 24, 2008. 15 http://www.cbbh.ba/files/centralni_registar_kredita/odluka_CRK_en.pdf, Article 1, Decision on Central Registry of Credits of Legal Entities and Physical Entities in Bosnia and Herzegovina 16 Annual Report for 2010, Central Bank of BiH, retrieved from http://cbbh.ba/files/godisnji_izvjestaji/2010/GI_2010_bs.pdf
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Graph 4.1.: Structure of non-resident’s equity in commercial banks by countries
16.2%
Austria 2.9% Croatia 4.2% Slovenia 6.4% Germany
63.2% Turkey 7.0% Others
Source: Central Bank of BiH
4.2.1. The year 2007 The regulations on minimum capital required in the amount of 15 million KM (7,669 million EUR) did not change since 2002, when the law was set up. This regulation had influence in consolidation of sector and reducing number of banks from 55 at the end of the year 2000 to 32 until the end of 2006. Total number of banks included in deposit protection program had increased from 10 banks in 2002 to 24 at the end of 2006. The limit for deposit protection was 7500 KM in year 2006.17
Establishment of Central Registry (CRK) in 2007 gave additional contribution to strengthening of stability of financial, but especially banking sector. The credit registry of legal and physical persons includes data from banks and on voluntary basis data from leasing companies, microcredit organizations, insurance companies and others.
Number of banks with license to operate on the territory of BiH remained the same as in previous year, with 32 banks in 2007, where majority of banks remained foreign-owned (21).18
Assets of commercial banks in BiH at the end of 2007, were 19,52 billion KM,19 which represents big increase of 4,82 billion KM (32,8%), compared to previous year. In comparison to previous year, domestic liabilities grew faster than domestic assets, since the increase of deposits outweighed the growth of banks’ claims from domestic sector. However, there was evident the maturity imbalance between claims and deposits. As a result of accelerated credit growth in
17 Annual report CBBH 2006, retrieved from http://www.cbbh.ba/files/godisnji_izvjestaji/2006/cbbh_annual_report%202006_en.pdf 18 See Table 4.1. 19 See Table 1, appendix
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2007, long-term claims marked significantly greater growth compared to term and savings deposits.
Table 4.2.: Main indicators of banking system
Source: Annual Reports of FBiH and RS Banking Agencies, GDP taken from Agency for Statistics BiH20
Assets of commercial banks in BiH at the end of 2007, were 19,52 billion KM21, which represents big increase of 4,82 billion KM (32,8%), compared to previous year. In comparison to previous year, domestic liabilities grew faster than domestic assets, since the increase of deposits outweighed the growth of banks’ claims from domestic sector. However, there was evident the maturity imbalance between claims and deposits. As a result of accelerated credit growth in 2007, long-term claims marked significantly greater growth compared to term and savings deposits.
Similar to previous years, the trend of credit growth represented one of the main characteristics of financial sector of BiH. Further restructuring and consolidation of banks resulted in better capitalized banks with greater credit potential, at the same time trying to increase its capital shares in BiH. Banks continued with development and introducing new banking products. On the other side, clients were in the need for financing its activities and mostly relied on credits obtained from banks. Having this in minds, the year 2007 was characterized as a year of accelerated credit expansion. Total amount of credits at the end of 2007, reached the number of 11,96 billion KM22, which is a number greater for 2,65 billion KM, compared to previous year. An increase in claims from non-governmental sector, the indicator representing one of the most adequate measures of credit expansion, showed fast pace of growth. Households and privately owned companies increased their share in credit portfolios of commercial banks for 95%.23 At the end of 2007, net capital was 2,53 billion KM.24 Compared to 2006, it represents an increase
20http://www.bhas.ba/index.php?option=com_publikacija&view=publikacija_pregled&ids=2&id=11&n=National% 20accounts 21 See Table 1, appendix 22 See Graph 4.1. 23 Ibid. 24 See Table 1, appendix
11 of 458 million KM, which resulted partly from entrance of new banks on financial market. Capital adequacy rate on the level of BiH at the end of 2007, was 17,1%25 and was lower than the same rate in 2006 for 0,54%.
Total profit after taxes at the end of 2007, was 148,7 billion KM26, which is an increase for 32,4% compared to the year 2006. Increased profit meant further stabilization and growth of banks’ profitability.
Return on average equity (ROAE) was 8,9%27, which is an increase of 0,53% compared to previous year. The highest values of this indicator were registered with foreign-owned banks, and the lowest with domestically owned banks, which registered drop of ROAE compared to the value it had previous year.
Return of average assets (ROAA) recorded smaller increase compared to previous years, but still showing the tendency of simultaneously growth of earnings and volume of banking operations.
4.2.2. The year 2008 During the year 2008, there was a number of 30 banks licensed to performed activities in BiH, decreased by two banks compared to the year 2007. Ownership over banks in 2008 belonged to Austrian investors, whose share in 2008, was increased with 2,9%28 compared to 2007.
Concentration of banking sector continued in 2008, considering the fact that the biggest three, more accurately biggest five banks were controlling greater share of assets in 2008 than in 2007.29
As a response to upcoming negative influences of financial crises, on December 2008, there had been changes by Deposit Insurance Agency, which increased the amount of insured deposit for physical persons to 20,000 KM30. DIA together with other financial institutions made public acknowledgments about stability of banking system of Bosnia and Herzegovina. After that, there was recorded increase and inflow of deposits in banks.
In addition, in the light of negative effects of world financial crises, which reflected on BiH, CBBiH during last quarter of 2008 undertook series of measures that had in goal maintaining stabile and liquid banking system. First measure included intervene transfer of 200 million EUR in cash from foreign to domestic banks, in order to help banks respond to increased demand for EUR. Second measure was decrease of prescribed reserve requirement rate demanded from CBBiH from 18% to 14%, insuring banks with additional 727 million of liquid assets. Also,
25 See Table 4.2. 26 Annual report CBBiH for 2007, available at http://www.cbbh.ba/files/godisnji_izvjestaji/2010/GI_2010_en.pdf 27 See Table 4.2. 28 See Table 4.2. 29 See Table 4.1. 30 http://www.aod.ba/en/index.html, Deposit Insurance Agency of BiH
12 commercial banks were not obliged to calculate reserves for all credit lines withdrawn by banks from foreign countries. Final measure included differentiated required reserve rate, where all assets of maturity over one year decreased for 4% (from 14% to 10%), while reserve rate for short-term assets remained 14%. This ensured another 370 million KM of additional liquid funds for commercial banks.31
Graph 4.1.: Total loans - sector structure (in billion KM)
16.0
14.0 1.12 1.13 1.33 12.0 0.99 10.0 6.7 6.3 6.31 0.86 Other 8.0 5.69 Households 4.37 6.0 Private enterprises 4.0 6.74 6.66 6.94 5.27 2.0 4.08
0.0 2006 2007 2008 2009 2010
Source: Annual Reports of FBiH and RS Banking Agencies
In year 2008, banks were still holding the dominant share (91,35%) in total assets of financial sector. Assets of commercial banks at the end of 2008 were 21,04 billion KM32, which represented an increase of 1,52 billion KM (7,79%) compared to 2007. Net foreign assets were 3,1 billion KM, equaling 15,3% of total assets of banking sector. In structure of assets there was dominant share of domestic assets holding 69,2%33, while foreign held 14,7%.34 There was evident decrease of 450,4 billion KM compared to 2007, mostly due to decrease of long-term assets. On liabilities side the biggest share held domestic liabilities (residents’ deposits), around 57,2%, while foreign liabilities were at 30%. Domestic liabilities slightly decreased in 2008, compared to 2007.35 Increase of banks’ claims held its trend in 2008, as one of the main characteristics of BiH banking sector. However, during the end of the year claims experienced slower growth. Total claims of sector at the end of 2008 were 14 billion KM and increased for
31 Report on financial stability for 2008 CBBiH, available at http://www.cbbh.ba/files/financial_stability_report/fsr_2008_en.pdf 32 See table 1, Appendix 33Ibid. 34 Report on financial stablity for 2008, CBBiH, available at http://www.cbbh.ba/files/financial_stability_report/fsr_2008_en.pdf 35 Ibid.
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2,60 billion KM compared to 200736. The biggest share of claims was towards private domestic companies (46,30%) for the first time in history of banking sector, followed by slightly smaller percentage of claims towards households (46,02%), while government sector was financed with less than 1% of total banks’ claims.37
Share of bad quality assets of banks slightly increased from 1,84% in 2007, to 2,16% in 200838. The most favorable quality of assets was noticed at banks with majority foreign ownership. Bad quality assets are mainly formed out of non-performing credits, i.e. credits with past due payments.
Net capital of banks, at the end of 2008 was 2,97 billion KM39, increasing by 447 million KM or 12,6 percentage points compared to 2007. Rate of capital adequacy at the end of 2008 was 16,26% and lower for 0,86% compared to previous year, but still above prescribed minimum.
Total profit after taxes of banks in 2008 was 82,9 billion KM, which represents a decrease of 60,5 billion compared to 2007.
ROAE in 2008 was 4,35%, which is decrease for 3,82% related to the end of previous year. Higher values of this ratio were registered with domestically owned banks. Significant drop in value of ROAE was registered in foreign owned banks, from 10,0% in 2007, to 4,08% in 2008.
ROAA in 2008 reached value of 0,46%, which is significantly lower compared to 2007 with 0,84%, mostly in banks of foreign ownership, which was the result of shrinking profits after taxes of banks.
4.2.3. The year 2009 In 2009, there were 30 licensed banks40 operating in BiH. Concentration of banking sector remained at the same level as in year 2008, where five biggest banks controlled more than half of total assets of banking sector, reducing its share for 1,6%41 in 2009, compared to 2008. Foreign- owned commercial banks were dominating banking system in 2009, with share of 90,8% of total assets of banking sector. In 2009, banking sector in BiH succeeded to maintain its stability. Banking agencies reached decision of temporary character, which enabled banks to reprogram credit liabilities of clients; in order to provide the debtors’ with means to overcome their liquidity problems.42
36 See Graph 4.1. 37 Report on financial stablity for 2008, CBBiH, available at http://www.cbbh.ba/files/financial_stability_report/fsr_2008_en.pdf 38 See Table 4.2. 39 Annual Report 2010, CBBiH, available at http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf 40 See Table 4.2. 41 See Table 4.1. 42 Annual Report 2010, CBBiH, available at http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf
14
Again, in order to mitigate negative influences of world crises and enable banks to greater credit potential, CBBiH reduced obligatory rate on deposits of long-term maturity to 7%, from previous year’s rate of 7%, which had a s a result 262 million KM of free funds of banks.43
Trend of growth of banking sector, characteristic for previous years was stopped in 2009, due to uncertainties on financial markets in region.
Continuing the trend that started in year 2008, slow down of credit activities of commercial banks in BiH resulted in decrease of its assets in 2009. Total assets of all banks at the end of 2009, were 20,91 billion44 KM, which is lower for 1,62% compared to 2008. Dominant part of asset structure remained domestic assets with 68,1%45, while share of foreign assets was 14,3%. However, the maturity mismatch between claims and deposits remained.
On the liability side the biggest share remained in deposit of BiH residents with 58,9%.46
Total capital of banks was bigger for 174,2 million KM47 or 5,8% compared to 2008.
In 2009 the level of lending activities of banks decreased caused by the decrease in domestic consumption along with lower activities of domestic private companies, which led to decline in demand for new credits. At the same time, credit conditions worsened and interest rates rose.48 Total loans at the end of 2009 were 14,10 billion KM49, which is lower for 455,7 or 3,1% compared to 2008.
In structure of claims, the greatest share of claims was towards private domestic companies (47,25%), that marked increase in 2009, followed by households with 44,7%. Total claims of banks towards non-government sector were decreased by 3,8% in 2009 compared to 2008.50
Quality of assets has significantly worsened as a result of weakening credit ability of borrowers. Share of bad assets rose from 2,16% in 2008 to 3,92% in 2009.51 Bad assets mainly (98.1 %) comprised bad loans, which are the loans with delayed repayment, which negatively affect banks’ loan portfolios.
Net capital of banks was 2,64 billion KM at the end of 2009, which represents decrease of 1,7 million KM or 0,1% compared to the end of 2008. Capital adequacy rate was 16,1% in 2009, being lower for 0,21 percent, but still above the minimum prescribed by law (12%). The trend of
43 Ibid. 44 See Table 1, Appendix 45 See Table 4.2. 46 See Table 1, Appendix 47 See Table 1, Appendix 48 Annual report CBBiH for 2009, retrieved from http://cbbh.ba/files/godisnji_izvjestaji/2009/GI_2009_bs.pdf, p. 82 49 See Graph 4.1. 50 See Graph 4.1. 51 See Table 4.2.
15 lower capital adequacy on the side of banks in major foreign owned banks was 15,4% than it is the case with domestically owned companies continued in 2009.
Total profit after taxes in banking sector of BiH in the year 2009 was 17,4 million KM and exercised significant drop compared to 2008, in the total amount of 65,5 million KM. The number of banks that recorded losses (9 banks) increased relative to 2008.
ROAE of banks in 2009 was 0,81%, lower for 3,54% related to 2008. Lower value of this ratio is caused by decreased profits.
ROAA was 0,08% in the 2009, recording drop of 0,33% compared to 2008. Decreased net profit after taxes caused decrease of this ratio of all banks.
4.2.4. The year 2010 In 2010, in spite of growing negative impact of global financial crises, banking sector maintained to keep its stability, but marked a stagnation regarding its growth rate. The greatest impact crises had on credit activity and quality of credit portfolio in 2010. Deposits, as the most significant source of financing for commercial banks continued its growth during 2010.52
Registering the rise of deposit category, more precisely domestic savings growth of 7,5% resulted in decision that starting from April, 2010 amount of coverage of insured eligible deposits of natural persons is changed. Instead of previous 20.000 KM, it was determined in the level of 35.000 KM and number of banks included in insurance program also increased to 25.53
Banking sector continued to be strongest and the most significant part of financial system in Bosnia and Herzegovina in the year 2010. In the same year, number of commercial banks decreased and concluding with the final day of 2010, there was total of 29 licensed commercial banks, with 19 commercial banks based in FBiH and 10 in RS.
Regarding ownership structure of banks, at the end of 2010, 21 banks were foreign-owned, seven banks were domestically owned and one majority state owned.54 From table 4.1., it is notable that share of foreign owned banks is decreased by 0,9 percent and totaled 89,9 percent of total assets of banking sector. Domestically owned banks had percentage of 10,1 at the end of 2010.
52 See Graph 4.2. 53 http://www.aod.ba/en/index.html, Deposit Insurance Agency 54 See Table 4.1.
16
Graph 4.2.: Deposits- sector structure in billion KM
14.0
12.0 2.0 2.4 2.3 2.5 10.0 1.7 3.1 2.3 2.0 Other 8.0 1.7 Government 1.5 6.0 Households 6.5 5.2 5.2 5.7 4.0 Private enterprises 4.1
2.0 1.6 1.9 2.1 1.9 1.9 0.0 2006 2007 2008 2009 2010
Source: Banking Agencies of FBiH and RS
Total assets of all banks in BiH at the end of 2010, were 21,07 billion KM55, which represents an increase of 157,7 million KM or 0,8%. Banking sectors trend of growth recorded in previous years was stopped in 2009 and from then on continued at a very constant pace.
Assets structure hadn’t experienced significant changes with domestic assets dominating at 69,2%.56 On the liability side the biggest share represents domestic liabilities, with the percentage of 59,5 in the year 2010.
Total capital increased by 569,8 million KM57 or 18,1%, mainly as a result of increased reservations for loans. Compared to previous year, domestic assets were increased for 478,8 million KM58, while domestic liabilities experienced growth to total 12,54 billion KM, mostly on the side of nongovernment sector.
Loan activities in 2010 remained rather slow, which can be concluded from the level of new loans to private companies and households, which experienced growth in 17,6%, compared to 2009, but were lower by 16,2% compared to 16,2%.59 Banks in the 2010 have had more restrictive policies regarding its loaning activities. Total loans to all sectors at the end of 2010 were 14,58 billion KM60, which is more than in 2009 for 478,8 million km compared to 2009.
55 See Table 1, Appendix 56 See Table 1, Appendix 57 See Table 1, Appendix 58 See Table 1, Appendix 59 See Graph 4.1. 60 See Graph 4.1.
17
Annual growth rate was 2,4%, which is higher for 5,5% in relation to annual growth rate of - 3,1% in 2009.61
Quality of assets continued to deteriorate due to the growth of non-performing claims of banks. Bad quality assets reached the number of 1,66 billion KM and increased to 8,1%62 in 2010, significantly higher than 3,9% at the end of 2009.
Net capital of banks was 2,73 billion63 KM at the end of 2010, therefore recording increase of 87,2 million KM or 3,3% compared to 2009.
Capital adequacy rate was 16,2%64, which is slightly higher than value in 2009.
Negative financial result was recorded in 2010 in the amount of 124,3 million KM65, with 6 banks having negative result.
Return on average equity (ROAE) was -5,5%66, recording decrease of 6,3 percent, compared to 2009. The reduced value of this ratio was caused by shrinking profits or losses incurred in the BiH banking system operations. Again, in 2010, lower values of ratio were recorded in the operations of foreign banks.
Return on average assets (ROAA) was -0,6%67 at the end of 2010, marking a decrease of 0,7% compared to the end of previous year. Surely, asset quality had severely influenced the profitability of banks.
5. Insurance Market in Bosnia and Herzegovina
Insurance stimulates economic growth through deepening and improving economic efficiency of the financial sector. Many evidences suggest that efficient insurance markets improve an economy’s ability to organize and allocate its resources. Insurance adds financial sector depth and efficiency, leveraging its strong role as an institutional investor and offering important services for which it has a comparative advantage, such as managing and pooling risks not diversifiable through capital markets, providing information and price signals to the market
61 See Table 4.2. 62 See Table 4.2. 63 See Table 1, Appendix 64 See Table 4.2. 65 Annual report CBBiH for 2010, retrieved from http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf 66 See Table 4.2. 67 See Table 4.2.
18 regarding such risks, and generating long-term funds for investment in infrastructure and other capital improvement projects.68
Table 5.1.: Insurance market in BiH and other countries (in USD)
Source: Swiss Re69
Bosnian and Herzegovinian insurance market lags behind other sectors in the financial industry, and significantly behind insurance markets in other transition countries. The most important reason is primarily an unfavorable economic environment. While the market has grown quickly, internal controls, audit and risk management systems and specialist expertise have all remained inadequate. The other reason has been the fragmentation of the insurance market into two parts, the Federation of Bosnia and Herzegovina and the Republic of Srpska. Because of this constitutional constraint, BiH has a very complex legal and institutional framework for such a small insurance market.
5.1. Institutional frame of Insurance market of BiH Through their own constitutions, the Entities hold responsibility for supervision of the insurance sector as well as the other parts of the financial sector. Bosnia and Herzegovina has at the Entity level two supervisory agencies: FBiH Agency and RS Agency. At the State level a regulatory and coordinating BiH Agency has the challenge of coexisting with sub-national insurance supervisory entities. Other institutions in the insurance market also reflect its fragmentation.
68USAID Final Report (2006), Assessment on how strengthening the insurance industry in developing countries contributes to economic growth; available at http://www.iifdc.org/pubs/Insurance%20Assessment%20Report.pdf 69 Hess, T., Karl, K. & Wong, C. (2008). Global insurance review 2008 and outlook 2009: Weathering the storm. Special Report, Swiss Re, Zurich; available at http://www.genevaassociation.org/Portals/0/SwissRe_Global%20insurance%20review.pdf
19
The main institutions are:
three associations of insurers and reinsurers (on the State and Entities level),
two protection funds for MTPL70 insurance on the Entity level,
Green Card Bureau in BiH (for MTPL insurance),
BiH Actuarial Association.71
Insurance Agency of BiH was established in 2006. The Agency's tasks and responsibilities are defined by the Law on Insurance Agency of BiH. The State agency is tasked with harmonizing Entity legislation, supervises the work of the Entity agencies, collects and publishes statistics at the State level, and represents the country in international relations.72
There is a clear requirement for the BiH Agency and its Entity counterpart agencies to develop transparent and efficient communication73, in order to resolve problems in insurance market of BiH. For example, market displays significant elements of unfair competition shown by dumping in premiums on market and violation of tariffs by market competitors. Some companies have inadequate reserves and the structure of investments of technical provision is not transparent at all.
Through numerous initiatives, mainly from the side of European Union, there have been taken measures to ensure a single economic space in Bosnia and Herzegovina. In order to put functioning regulated financial market in place during the last few years, the legal framework for insurance in BiH has changed. Previously, the two Entity insurance laws were totally different. It was not possible for a company from one Entity to conduct insurance in the other Entity. New, mostly harmonized and in accordance to EU Directives, laws and secondary legislation in each Entity allow “inter-Entity” business so that a company from one Entity can have branch operating in the other Entity after getting permission from each Entity supervision agency. The BiH insurance market has very good prospects because it is expected to expand after new
70 MTPL- Motor Third Party Liability 71 Kozarić, Safet, The European Union Integration Process and Insurance Market Development: The Case of the Former Yugoslav Countries, retrieved from http://www.iifdc.org/pubs/occ7.pdf 72 The BiH Agency is authorized: To conduct important tasks in order to ensure the uniform development and implementation of the Entity legislation in the field of insurance with the purpose to further deepening the process of integration of the insurance markets in the country, to ensure: o The protection of consumers of insurance services. o Integration of BiH insurance market into European and world financial markets. To represent BiH on the international level in the field of insurance supervision (including representation of BiH in international bodies and organisations in this area). To prepare the aggregated insurance statistics of BiH. 73 http://ec.europa.eu/enlargement/pdf/bosnia_and_herzegovina/ipa/2007/ipa_2007_26_insurance_agencies_en.pdf
20 legislation is completely implemented. Foreign companies mostly enter the market by buying small private companies.
It is expected that after complete implementation of new laws, the BiH insurance market becomes even more interesting to the foreign companies because the foreign insurers will be much more interested in a well-supervised market. Acquisitions and entrance of foreign companies to the market are inevitable. Due to fact that the reform of the pension system still has not been done there are no pension insurance companies. Future reform of pension and healthcare systems will have huge influence on life and health insurance.
5.2. Sector structure 25 insurance companies and 1 re-insurance company operated in Bosnia and Herzegovina in the year 2010. The majority of companies that have established offices in Bosnia and Herzegovina have majority domestic capital ownership. From the total of 25 companies registered for performance of insurance operations, 15 have majority owners from BiH, while 10 have majority foreign owners.
Table 5.2.: Ownership structure and Types of Insurance Operations of the BiH insurance companies
Ownership Non-life Life Life and non-life Reinsurance Total
Domestic 13 1 1 1 16 Foreign 1 1 8 0 10 Total 14 2 9 1 26 Source: Insurance Agency BiH74
Non-life insurance is the predominant class of insurance mainly because the majority of companies specialize in non-life insurance. Out of 14 companies with the main business focus on non-life insurance, 13 are in majority domestic ownership, while in one company there is majority of foreign ownership.
There are only two companies whose main line of business is life insurance, one in domestic and one in foreign ownership.
Out of 9 companies operating both in the area of life and non-life insurance (composite companies), one is in majority domestic ownership, while eight have foreign majority owners.
There is one re-insurance company registered in BiH and it is in majority domestic ownership.
74 Statistics of Insurance Market in Bosnia and Herzegovina, Annual Report of Insurance Agency BiH for 2010, retrieved from http://www.azobih.gov.ba/cms/index.php?option=com_content&task=view&id=16&Itemid=41
21
The insurance companies where majority of the capital is ownership of foreign entities increased their share to 52,75% of the total premium in 2010, comparing to 52,28% in 2009.
The insurance companies where majority of the capital is ownership of foreign entities increased their share on life insurance market to 104,59% in 2010, comparing to 94,24% in 2009.
5.2.3. Premiums Insurance companies in 2007 collected total premium in the amount of 403 million KM, registering an increase by 43 million compared to 2006. In 2008, two new companies were registered and the number of insurance companies operating was 27. Insurance companies performed the total premium of 452 million KM, with an increase of 12% (49 million KM), compared to 2007. Premiums increased to 458,8 million KM in 2009. Total insurance premiums collected in Federation BiH in 2010 were 349,2 million, of which non-life insurance had a share of 283,6 million KM or 81,2% and life insurance with share of 65,6 million or 18,8%. At the same year, insurance companies in Republic of Srpska collected total premium in the amount 122,6 million KM, with non-life insurance premium 113,6 million KM or 92,7%, and life premium with 8,9 million KM or 7,3%. Total premium collected in 2010 was 471,28 increasing for 2,92% related to 2009.75
Graph 5.1.: Total premium in BiH
480,000,000
460,000,000
440,000,000
420,000,000 BH 400,000,000
380,000,000
360,000,000 2007 2008 2009 2010
Source: Insurance Agency BiH
Despite the fact that a continued growth of gross written premiums was recorded in the period 2004-2008, the insurance industry in Bosnia and Herzegovina is still undeveloped. The facts that support this thesis are the low share of life insurance premiums in gross written premiums and
75 Statistics of Insurance Market in Bosnia and Herzegovina, Annual Report of Insurance Agency BiH for 2006- 2010, retrieved from http://www.azobih.gov.ba/cms/index.php?option=com_content&task=view&id=16&Itemid=41
22 low insurance density76 and penetration77. Main part of the insurance business is still concentrated on those services that are necessary to meet legislative, while life insurance still remains with lower share.
Graph 5.2.: Total premium of life and non-life insurance in BiH
500,000,000 450,000,000 400,000,000 350,000,000 300,000,000 Non-life 250,000,000 Life 200,000,000 Total 150,000,000 100,000,000 50,000,000 0 2007 2008 2009 2010
Source: Insurance Agency BiH
This underdevelopment explains the relatively insignificant impact of the crisis on the insurance industry in Bosnia and Herzegovina.78 In contrast to the insurance industry’s development in other regional countries, the condition of the insurance industry in Bosnia and Herzegovina has not been significantly impaired despite the economic recession. Although the pace of growth has decelerated, gross premiums written have increased in both federal units, according to results for the year of 2010. Positive developments have been recorded for both life and non-life insurance. Life insurance premiums increased by 7.3%, while non-life insurance premiums increased by 2.1 %. However, growth of premiums is by far smaller than in previous years, especially in life insurance, where it has sharply decreased by 15%, compared to the growth of premiums in period 2008/2007.
5.2.3. Investment structure Data for the investment structure of insurance companies in Bosnia and Herzegovina are not available. The companies currently invest in state and federal securities, up to bank deposits, real estate and short-term loans. However, as predominant financial instruments traded at the
76 gross premiums written per capita in EUR 77 gross premiums written / GDP 78 Njegomir V.,Marović B., Maksimović R., “The economic crisis and the insurance industry: The evidence from the ex-Yugoslavia region” retrieved from http://www.doiserbia.nb.rs/img/doi/0013-3264/2010/0013-32641085129N.pdf
23 country’s stock exchanges are bonds and shares, we can draw some estimates based on previous years’ results. Additionally, we can draw these estimates on the basis of investment restrictions determined by insurance laws of federal entities.
Article 57 of FBIH Law on Insurance Companies in Private Insurance (2005) and Article 56 of RS Law on Insurance Companies (2006) determine that insurance companies can invest in Bosnia and Herzegovina and countries of the European Union but for investments outside of Bosnia and Herzegovina, they must obtain prior approval of the entity’s insurance supervision agency. Insurance companies are recommended to invest the technical reserves, including mathematical reserve life insurance funds into securities of state and federations, in the amount of maximum 50 percent of the total amount of the reserve. As it is the case with other countries of the region, insurance companies in Bosnia and Herzegovina are directed to invest the most of their available resources in the safest securities. The fact that domestic capital and, especially money markets, are underdeveloped does not give many opportunities for insurance company to realize more profitable investments in country. Due to the fact that investments on foreign markets are not the core business of insurance companies and that hiring external investment advisor is expensive, insurance companies prefer to invest into banking long and short-term deposits, according to its liquidity and solvency regulations. Insurance companies in foreign ownership follow their group investment policies. Some of them prescribe insurance companies to invest in domestic securities issued by country or smaller public institution as municipality bonds. The companies also invest in real estate. Investments of funds in real estate, equipment and arrangement of the business premises and owners’ investments can be up to 10 percent of the funds. Investments such as these are, by their very nature, not liquid and can be subject to widely varying estimates of value. Real estate investments are being made with no oversight; and, these investments may be significantly overvalued or undervalued. Determining the proper valuation is not within the technical expertise of the Supervisory Office personnel nor do they feel they have the authority to challenge the valuations.79
Compared to other countries in region and EU countries, according to indicators there is notable significant lag of BiH insurance market. Realized premiums of insurance companies expressed as percentage of GDP is still one of the lowest in region, and much lower than the one of EU countries. In 2009 countries of EU27 realized life insurance premiums are 1393 EUR per capita, while non-life premium is 889 EUR per capita. In the same year in BiH realized premium per capita were 9 EUR per capita for life insurance, and 52 EUR per capita for non-life insurance.80
79 Law on Insurance Companies Investments, Official Gazette BiH, retrieved from http://www.podaci.net/_gBiH/propis/Pravilnik_o_visini/P-vnusdo03v06B6.html 80 Report on financial stability for 2010, CBBiH, retrieved from http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf
24
Graph 5.3.: Premiums per capita for some European countries and BiH for 2008, 2009 and 2010
2010 BiH Serbia
2009 Croatia Slovenia Czech Republic 2008 Austria
0 500 1,000 1,500 2,000 2,500 3,000
Source: Table 5.1. Reasons for underdevelopment of insurance sector are multiple. Growth and types of premiums are limited by products that insurance companies offer. In first line, development of insurance sector is constrained by lack of institutional investors, which is a consequence of constant postponement of pension and health system reform. Besides that, growth of premiums is slowed down by unfavorable economic environment in country that reduce citizens’ disposable income and make legal persons’ able to avoid insurance considering it as unnecessary cost for their business. Low standard of life present with the majority of citizens, as well as insufficiently developed awareness on significance of insurance industry influence low development of insurance industry. One of the main obstacles to development of insurance industry in BiH is legislation which is not completely harmonized with EU legislations. Although starting from 2008, insurance companies registered in one entity are able to perform its operations in other entity, there is still present division of market on entities, presenting an obstacle for future development. Role of insurance companies as institutional investors is almost negligible, which is primarily consequence of underdevelopment and low liquidity of domestic capital markets, as well as conservative investment politics of insurance companies. On developed capital markets insurance companies present one of the main investors. However, in BiH that is not the case, since insurance companies are dealing with very modest possibilities of placement of temporary available funds. Besides shares and lately bonds and very small number of treasury bills, other financial instruments available for investing and trading practically don’t exist. Also, dominance of non-life premiums in structure of premiums represents one of limiting factors for a more important role of insurance companies. In countries with development insurance markets, around 60% of total premiums81 accounts for life and pension insurances, enabling insurance companies to dispose of more qualitative long-term funds and act as important institutional investors. In BiH it is not the case, so investment politics are short-term orientated and mainly focused on
81 Report on financial stability for 2010, CBBiH, retrieved from http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf
25 funds liquidity. According to data of CBBiH for 2009, 39,1% of the total assets of insurance companies held as different types of deposits in banks, while total of 7,2% of assets were invested in shares and other equity, and 2,1% in other securities.
5.3. Comparison of banking sector and insurance sector in BiH In order to highlight role and significance of insurance sector and its growth in the sector of financial services during past years, there can be shown the comparison between these two sectors in certain countries and Bosnia and Herzegovina. Data for assets and capital had been used.
Table 5.3.: Comparative review of the banking sector and insurance sector in BiH and with certain number of European states in 2009 (in million EUR)
Banking sector Insurance sector Country Assets Capital Assets Capital Croatia 51,793 7,196 3,943 746 BiH 10,535 1,128 477 158 Slovenia 51,610 4,320 5,661 1,029 Serbia 24,246 4,771 1,030 303 Bulgaria 36,140 4,810 1,979 675 Czech Republic 157,870 17,300 14,980 2,796 Slovakia 53,010 4,190 5,661 1,029
Romania 78,090 6,690 4,122 1,328 Source: European Insurance and Occupational Pensions Authority (EIOPA), European Banking Federation (EBF), Banking Agency FBiH, Banking Agency RS, HANFA, HUB, Central Bank of Serbia In 2010, assets of banking sector in BiH decreased for 153 million KM (0,74%) compared to assets in 2009, while capital in the same period increased for 196 million KM (8,86%). On the other side, in insurance sector there had been growth of assets in amount of 3 million KM (0,36%) in 2010 related to 2009. Capital of insurance sector in the same period had decreased for 0,81% or 3 million KM.
26
Graph 5.4.: Assets and capital in banking and insurance sectors in BiH in 2008, 2009 and 2010 (in 000 KM)
25000000
20000000
15000000 Capital 10000000 Assets 5000000
0 Banks Insurance Banks Insurance Banks Insurance comp. comp. comp. 2008 2009 2010
Source: Agencija za nadzor osiguranja FBiH, Agencija za osiguranje RS-a, Agencija za bankarstvo FBiH, Agencija za bankarstvo RS-a Insurance sector in total assets of banking and insurance sector in 2009 had a share of 4,33%, and in total capital of these two sectors share of 12,30%. In the year 2010 share of insurance sector in total assets of banking and insurance sectors was 4,38%, and according to that data there had been increase of insurance sector in total assets of these two sectors. Completely different situation was with share of insurance sector in total capital of both sectors, considering the fact that insurance sector’s share in total capital decreased for 0,97%.
6. Leasing companies
There can be said that leasing is relatively new business form in Bosnia and Herzegovina. The first leasing company on BiH market was established at the beginning of 2001, followed by another one in the same year and another two in the year 2003. In 2010, nine leasing companies were operating in BiH. Out of 9 leasing companies, there are 3 companies that have a 100% nonresident ownership of parent companies, while 4 are in majority ownership of their non- resident parent companies and/or local banks established with foreign capital. One company has a majority resident ownership.82 Similarly to banking sector, owner’s countries are Austria and Italy. Majority of leasing companies are seated in Sarajevo with their organizational units and
82Annual Report CBBiH for 2010, http://www.cbbh.ba/files/godisnji_izvjestaji/2010/cbbh_annual_report_2010_bs.pdf
27 branch offices present in all bigger towns in BiH: Banja Luka, Mostar, Tuzla, Bihać, Zenica, etc.83
6.1. Institutional frame of leasing market Leasing is regulated by two laws, the Law on Leasing of the Federation of Bosnia and Herzegovina and The Law on Leasing on the Republic of Srpska. The minimum amount of basic equity required to establish a leasing company is 250,000 KM.84 There are by Law defined conditions for establishment, performance and cease of operations, managing risks, financial reporting and supervision of the leasing company performance. As the institution performing the supervision of the leasing company, are assigned Banking Agency of FBiH and Banking Agency of Republic of Srpska, for FBiH and RS, respectively. The off-site supervision is based on collection, review and analyses of the regulatory financial reports, which the leasing companies submit to the Agency on the monthly and quarterly basis. The on-site examination of the leasing companies is performed by authorized individuals from the Agency through examinations – through examination in the leasing companies.85
6.2. Review of leasing market Financial leasing experienced sudden growth since its beginnings as an important and useful part of financial system. Advantages of leasing, such as cost-efficiency and quick access to funds, short application procedures, flexibility and no need for ensuring additional collateral are recognized very quickly. Despite this fact, leasing companies were not regulated until the new law was enforced86 in 2009. Until then companies were facing numerous problems, mainly related to inadequate legislation. A key constraint on leasing companies' business is double taxation, because of the VAT on interest and the costs of the transfer of ownership, making lease more expensive than loan. Therefore, the choice between a loan and a lease depends on interest rates. Another problem, after those discussed above, is regarding permits for the transportation business. The current traffic law runs contrary to the fundamental premises of leasing. All licenses related to road traffic must be applied for by the vehicle owner, which means the leasing companies and not the lessee, greatly complicating the financing of trucks and vans.87
During the year 2006, leasing companies carried out contracts with total value of 467 million KM, 29% more than in previous year.88 In 2007, leasing sector continued its activities representing one of the most dynamic sectors of financial market in BiH. Growth of leasing
83 Retrieved from http://www.leasing.org.ba/bs/content/leasing-bosnia-and-herzegovina 84 Ibid. 85 Official Gazette of the Federation of Bosnia and Herzegovina, number 85, as of 26.12.2008., Law on Leasing, Retrieved from http://www.fba.ba/images/Leasing_Documents/Zakon%20o%20lizingu%20FBiH%20_Bos2_.pdf 86 Except for self-regulatory agency of leasing companies in BiH, which is established on 2005, due to lack of inadequate regulatory bodies. 87 Development of a Leasing Market in Bosnia and Herzegovina, CBBH, retrieved April 2nd, 2012 from http://www.cbbh.ba/index.php?id=689&lang=en 88 See Graph 6.1.
28 operations in 2007 was mostly based on demand for acquiring fixed assets, such as real-estate, vehicles and machinery. During 2007 leasing contracts in the amount of 757 million KM89 were concluded, which is 62% more compared to 2006. Regarding the structure of contracts, 35% belonged to vehicles, 23% equipment and 41% to real estate90. Leasing sector profited from its activities in the amount of nearly 920 million KM91.
Graph 6.1.: Assets of Leasing Companies (in million KM)
800
700
600 Vehicles 500 Equipment 400 Real estate 300 Other 200 Total
100
0 2005 2006 2007 2008 2009 2010
Source: Association of Leasing Companies in BiH92 As leasing companies are mostly organized as subsidiary companies of foreign-owned banks, by instructions of mother-banks, and in the conditions of global crisis, leasing companies established more severe criteria for estimation of clients’ ability to repay obligations on leasing, therefore resulting in decreased number of concluded contracts in 2008. Leasing sector continued its growth during 2008, but at a slower pace. The value of contracts was around 690 million KM93, less for 10% compared to 2007, but still representing high amount considering the value of contracts in 2006 (467 million KM). At the end of 2008 the negative effects of the global economic and financial crises stopped the expansion of the growth of leasing companies, which had its peak in the period from 2006 to 2008. Leasing companies ended 2008 with loss in financial result in the amount of 16,65 million KM94. In 2010, there was noted a slight growth of
89 See Graph 6.1 90 See Graph 6.2. 91 See Graph 6.2 92 Annual reports of Association of Leasing Companies in BiH for 2005, 2006, 2007, 2008, 2009 and 2010, retrieved on April 2nd, 2012 from http://www.leasing.org.ba/en/content/godi%C5%A1nji-izvje%C5%A1taji 93 Annual Report CBBiH for 2008, http://www.cbbh.ba/files/godisnji_izvjestaji/2008/cbbh_annual_report_2008_bs.pdf 94 Annual Report CBBiH for 2010, http://www.cbbh.ba/files/godisnji_izvjestaji/2010/cbbh_annual_report_2010_bs.pdf
29 the business activities in relation to 2009; however the financing level is far below the value from the period of maximum expansion of the leasing industry in the BiH (2006-2008). There had been 4,409 contracts95 executed in 2009 in the value of 216,5 million KM96, less for 471,5 million KM (68,5%) than the value of contracts in 2008. Despite the difficult situation in BiH leasing market, leasing companies realized net profit in the amount of KM 12.6 million97 at the end of 2009. At the end of 2009, top three leasing companies had 50.6% share of the total value of concluded leasing contracts, according to the value of assets, and concentration of 77% of the total assets of the leasing sector.98
Graph 6.2.: Structure of leasing contracts (in percentage)
2010 59.11% 18.69% 22.20% 2009 59.89% 25.29% 14.81% 0.24% 2008 38.99% 22.32% 38.45% 2007 34.62% 23.11% 40.57% 1.69% 2006 36.79% 24.38% 37.99% 0.84% 2005 44.13% 42.27% 12.47% 1.12%
0% 20% 40% 60% 80% 100%
Vehicles Equipment Real estate Other
Source: Association of Leasing Companies99 The performance of the leasing companies in 2010 recorded a slight growth of the financial volume in the performance in comparison to 2009. The total amount of financing (financial and operating leasing) on the level of BiH, in 2010, was 244,87 million KM100, which presents an increase of 13,2% in relation to 2009. The number of active contracts in 2010 was 5,566101, which presents an increase of 25,7% in relation to 2009. The trend of increase of contracts and financing amounts presents an increase of the demand for financing through leasing as well as a more active performance of the leasing companies. In the structure of placements, during 2010,
95 Annual Report CBBiH for 2008, http://www.cbbh.ba/files/godisnji_izvjestaji/2008/cbbh_annual_report_2008_bs.pdf 96 See Graph 6.1. 97Annual Report CBBiH for 2009, http://www.cbbh.ba/files/godisnji_izvjestaji/2010/cbbh_annual_report_2009_bs.pdf 98 Annual Report CBBiH for 2009, http://www.cbbh.ba/files/godisnji_izvjestaji/2010/cbbh_annual_report_2009_bs.pdf 99 Annual reports of Association of Leasing Companies in BiH for 2005, 2006, 2007, 2008, 2009 and 2010 retrieved from http://www.leasing.org.ba/en/content/godi%C5%A1nji-izvje%C5%A1taji 100 Annual Report CBBiH for 2010, http://www.cbbh.ba/files/godisnji_izvjestaji/2010/cbbh_annual_report_2010_bs.pdf 101 Ibid.
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49% of the total financing amount refers to placements through financial leasing, 7% refers to operating leasing, 33% to loans and the rest on the placements of other assets. In the previous year the structure of the placements was 52,4% for the financial leasing and 76,6% for operative leasing.102
Graph 6.3.: Structure of leasing contracts in 2010, in %
11%
49% Financial leasing 33% Operating leasing Debt 7% Other assets
Source: Information on Leasing Sector, annual report of Banking Agencies of FBiH and RS103 The largest amount of 144,8 million KM (59,11%) refers to financing of vehicles, 45,7 million KM (18,69%) was used for financing of equipment and 54,3 million KM (22,2%) for financing real estate104. Asset quality recorded significant deterioration in 2010, and aggregate balance sheet decreased for 30,7%105, although value of executed contracts increased. Leasing sector concluded the year 2010 with losses that were consequence of inadequate business politics from previous years, when this segment was not supervised and because of worsening overall business ambience. Reduction of total assets of leasing company in 2010 was attributed to new Decision on the minimum amount and manner for establishing, managing and maintaining the provisions for loan losses and risk management of leasing companies, which significantly increased reserves for loan losses and write-offs of disputed and doubtful claims. According to this decision, leasing companies are required to classify monthly the claims arising from financial leasing contracts to other persons into groups on the basis of the criterion of days of arrears, and to make provisions for covering losses at the expense of costs.106 The increase of costs in 2010 was mostly caused by the requirement to make provisions in line with the above mentioned decision. The structure of provisioning for financial leasing is dominated by the level of claims in the over-180 days category, and a significant spillover of this claims category into write-offs,
102 Report on Financial Stability, 2010, CBBiH, retrieved from http://www.cbbh.ba/files/financial_stability_report/fsr_2010_hr.pdf 103 Retrieved from http://www.fba.ba/images/Leasing_Documents/Informacija_Liz_31122010_bos.pdf and http://www.abrs.ba/publikacije/Izvjestaj_o_stanju_bankarskog_sistema_RS_31122010.pdf 104 Ibid. 105 See Graph 6.1. 106 See Graph 6.1.
31 or off- balance sheet items, is expected. The impact of the implementation of the Leasing law and the agency by-laws were evident in 2010, and the situation on the BiH leasing market became clearer. Profitability of the leasing sector recorded a significant drop in 2010. Losses were 37,3 million KM107 by the end of the year the actual losses exceeded the level of capital.
Sources of financing of the BiH leasing companies were mostly borrowing from founders or persons connected with founders, with only a fraction borrowed from the European and domestic development banks and foreign and domestic commercial banks. Stronger supervisory activities introduced more order in leasing sector, having in mind that processes of internal control and self regulation in sector in previous years accumulated risk due to inadequate business policies in certain number of leasing companies. If the effects of the new law on business of leasing companies are to be disregarded, there can be said that there is still unused potential in the market in Bosnia and Herzegovina as can be seen from growth rate in leasing arrangements between 2006 and 2007. Banks and leasing companies will no doubt continue to search for ways to be more competitive, and the client's final choice will be determined by transaction costs, guarantees, the length of approval procedures, and flexibility.108
7. Microcredit Organizations
7.1. Institutional Frame In post-war Bosnia, the microfinance sector initially consisted primarily of organizations registered as Non Government Organization (NGOs). As the sector grew, a new legal form called a microcredit organization (MCO) developed. MCOs were established non-profit legal entities set up exclusively for the purpose of microlending. This new type of entity would form the basis for a strong microfinance sector.
The existence of the MCO was formalized in the first Law on Microcredit Organizations, which passed in the Federation BiH in 2000 and in the Republic of Srpska in 2001. The law took a relatively similar form in both entities; however, there were a few notable differences, especially in terms of oversight. In order to strengthen MCO regulation and minimize disharmonies between the two entities’ MCO laws, a second Law on Microcredit Organizations was passed in both entities in 2006. The regulation of microfinance sector is still in the scope of these laws.
The laws in both entities are quite similar. The principal difference of note is that MCOs in the Federation must first register as foundations before becoming for-profit microcredit companies,
107 See Graph 6.1 108 Financial Stability Report for 2010, CBBiH, retrieved from http://www.cbbh.ba/files/financial_stability_report/fsr_2010_en.pdf
32 whereas in the RS they may register directly as for-profit microcredit companies.109 Some of the key provisions of the MCO laws include:
Both the RS and Federation MCO laws distinguish between non-profit microcredit foundations (MCFs) and for-profit microcredit companies (MCCs). First are legally authorized to disperse individual microcredits up to 10,000 KM in value, while second ones are legally authorized to disperse individual microcredits up to 50,000 KM in value.
MCOs registered in one entity can operate and open its offices in the other entity provided they receive the appropriate permit from the other entity’s Banking Agency.
Neither entity permits MCOs to accept cash deposits.
MCOs in both the RS and Federation are required to hold obligatory reserves for the coverage of possible credit losses. Laws in each entity prescribe calculations for establishing the appropriate reserve amount.110
In general, the FBiH and RS’s laws on microcredit organizations are concise, enumerating specific regulations and oversight provisions for registration and operation of different types of MCOs. The mere existence of two separate laws from two separate Banking Agencies, however, creates an unnecessarily burdensome bureaucracy. In order to improve efficiency of the microcredit sector, and the financial sector as a whole, a unified regulatory body for BiH must be established.
7.2. Sector structure The microcredit sector in Bosnia and Herzegovina has grown substantially since its inception and holds a very promising future as a driver of continued economic growth. There are total of 26 registered microcredit organizations (19 in Federation and 7 in RS). Out of that number, 4 (3 in RS, and one in FBiH) are registered as microcredit companies and 22 as microcredit foundations.111
Most of today’s institutions began operating in 1997. The success it had from the beginning and its continual growth has today proven to be an important factor in the postwar economic transition for Bosnia and Herzegovina and key driver for economic growth.
Microfinance has been a key part of the economic revival of BiH. It has rapidly created jobs and improved the country’s financial infrastructure, especially for smaller borrowers. Microcredit sector, together with banking sector, in international and domestic public, was often perceived as
109 http://www.centerforfinancialinclusion.org/Page.aspx?pid=1417 110 Law on Microcredit Organizations “Official Gazette of the Federation of BiH”, No. 59/06, retrieved from http://www.fba.ba/images/documents_archive/zakoni_4_3.pdf 111 Banking Agency of FBiH and Banking Agency of RS, annual reports for 2010, retrieved from http://www.abrs.ba/publikacije/Izvjestaj_o_stanju_bankarskog_sistema_RS_31122010.pdf and http://www.abrs.ba/publikacije/Izvjestaj_o_stanju_bankarskog_sistema_RS_31122010.pdf
33 an example of positive business development experience in the financial sector. Organizations were supported by a number of international organizations, which have significantly influenced the fact that the most microcredit organizations in a short time became self-sustaining and very profitable.112 MCO from Bosnia and Herzegovina have frequently won the world awards, such as award by business magazine Forbes. Among one hundred of the most successful microfinance institutions around the world in 2007 five organizations113 from Bosnia and Herzegovina were included.
Since 1997 microcredit sector has recorded steady growth. Number of active clients and loan portfolio consistently grew at annual rates that often exceeded 40%, while at same time the quality of loan portfolio was exceptional with portfolio at risk over 30 days less than 1%.114
7.3. Lending activities and competition High growth rates in the period from 2003 to 2008 were caused by great flow of the funds into the microcredit sector. MCOs were focused on expansion of their portfolios and operations, which prompted competition among them. Therefore, in many locations, clients had more than one institution to choose from for financial services and products, and MCOs often competed over the same client. Competition from commercial banks influenced on MCO in a way that MCO generally targeted clients who are unable to attain credit from the banks. According to Report conducted in the scope of LPI project on Microfinance clients in BiH, 115 clients of MCOs mainly belonged to the poor social classes, usually not knowledgeable enough for rational management with loan funds. These customers were usually without previous experience in the use of loans (before the loan in MCO) and usually not aware of the obligations that comes with the loan116.
Rough competition among MCOs led to loosening standards in borrowing. MCOs did not bother much to evaluate creditworthiness of clients and their ability to repay the loan. The decision on approving loan was based mainly on previous credit history of the particular client in a given MCO. Another important element was non-existence of central loan register through which client indebtedness could be checked. Central Credit Registry (CRK) was established in 2007, but participation of MCOs was not obligatory at the beginning, so significant number of MCOs did not deliver information about clients’ indebtedness. Therefore, information from CRK
112 Association of Microfinance Institutions in BiH, http://www.amfi.ba/en/about-us 113 FORBES-On the list of top 50 MFIs is EKI (14), PARTNER (18), MIKROFIN (24), MI-BOSPO (32 )and SUNRISE (39) Retrieved from http://www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz-cz_ms_1220microfinance_table.html 114 Bosnia Microfinance Analysis and Benchmarking Report 2008, retrieved from http://www.amfi.ba/en/publications 115 The Second Local Initiatives Project (LIP II) was launched in March 2002. UNHCR and other international institutions, such as ICMC, CARE, World Vision, CRS Women for Women International and others, also participated in the implementation of the microfinance project in BiH. 116 Local Initiatives (Microfinance) Project II, Microfinance clients in BiH, report on baseline survey, Impact Assessment Component, retrieved from http://webs.odraz.ba/OdRazold/Documents/LIPII_Report_on_BaselineFindings.pdf
34 database was not complete. Despite that fact, MCOs continued with credit activities. According to research on Indebtedness of MCO’s clients in BiH, conducted by European Funds for Southeast Europe117, majority of borrowers had multiple loans, borrowers were financed by MCOs and banks at the same time and substantial percentage of clients were overdue on their loan repayment. This all led to the creation of crisis and client indebtedness.
7.4. Fall of microcredit activities In 2008, credit portfolio reached value of 1,17 billion KM118, and the number of clients rose to 390 thousands, there happened an amazing turnaround. In circumstances of customers that became unable to repay their loans portfolio quality, thanks to inadequate loaning politics conducted by MCOs in previous years, began to decline rapidly.
As can be seen from Graph 1, in comparison to 2008, there has been a sharp decrease of credit disbursement by 40% in 2009,119 which caused fall in sectors’ gross credit portfolio by 18%120, i.e. dropping to 910 million KM. Only three microcredit organizations concluded 2009 with positive financial results, while sector made total loss in amount of 40 million KM.121
Graph 7.1.: Loan portfolio of MCO (in thousands KM)
1,200,000 1,117,132
1,000,000 910,232 829,471 800,000
600,000 Portfolio
400,000
200,000
0 2008 2009 2010
Source: Author’s calculations based on data from CBBiH and Banking Agencies122
117 Maurer, K., Pytkowska, J., Indebtedness of Microcredit Clients in BiH study, EFSE 2009, retrieved from http://www.mfc.org.pl/sites/mfc.org.pl/files/Indebtedness%20BiH_Summary%20Paper%20ENG.pdf 118 Report on financial stability 2008, CBBiH, retrieved fromhttp://www.cbbh.ba/files/financial_stability_report/fsr_2008_bs.pdf 119 Erceg, B.“Stanje i perspektive sektora mikrokreditnih organizacija u BiH” Sarajevo, 02.07.2010., available at: http://www.poreskisavjetnik.ba/dokumenti/pdf%20doc/BracoErceg.pdf 120 Ibid. 121 Ibid. 122 Reports from Banking Agencies of FBiH and RS, retrieved from http://www.fba.ba and http://www.abrs.ba/
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Credit Portfolio at Risk, 30 days plus, grew at the sector level in 2009 from 1.95% to 6.58%, i.e. from 23,5 million KM to 62 million KM.123 Such strong growth of credit portfolio with past due credit payments had as a consequence a very high growth of expenses related to loan loss reserves, which as a consequence had negative business results for most of the microcredit organizations.
When we add to all this consequences of global economic crisis, which had full impact on BiH economy and especially on real sector in the course of the year 2009, then it is clear that business results, having in mind microcredit organizations’ client range, could not have been much better.
There can be concluded that microcredit institutions were unable to respond in new circumstances of recession and client’s inability to repay it loans. High growth in past period, based on inappropriate lending procedures of microcredit organizations, influenced increased bad quality assets. This overall trend in MCO sector, as well as banking sector, influenced the activities of microcredit organizations, which now apply more severe policies as for lending is concerned, which further influences slower pace of growth.
As it can be seen from Table 7.2., year 2009 was the year when microcredit organizations had to sacrifice part of its credit portfolio and write-off share of loans. Declining trend in lending activities of MCOs in Bosnia and Herzegovina continued during 2010. As a consequence of significant drop in credit activities, in 2010 total assets of microcredit sector were decreased by 21,25% compared to 2009 to the level of 829,5 million KM.
However, in comparison to the year 2009, there is a gradual decrease of the negative result of the performance measured by the realized net result. The indicators of the loan portfolio quality record a relative improvement. The ratio of the reserves for loan losses in relation to the portfolio is improving, decreasing from 7,9% to 5,7%124
123 Reports from Banking Agencies of FBiH and RS, retrieved from http://www.fba.ba and http://www.abrs.ba/ 124 Annual report for 2010, Banking Agencies of FBiH and RS, retrieved from http://www.fba.ba and http://www.abrs.ba/
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Graph 7.2.: Financial result of MCOs (in thousands KM)
60,000 50,000 40,000 30,000 20,000 10,000 0 Financial result -10,000 2008 2009 2010 -20,000 -30,000 -40,000 -50,000
Source: Author’s calculations based on data from CBBiH and Banking Agencies125 Microcredit organizations, faced with more strict lending possibilities will have to find ways to expand their activities, by introducing new products that are in accordance to market research, or making an effort to change regulations that are representing an obstacle to its further development.126
8. Investment Funds
8.1. From Privatization Investment Funds to Investment Funds In the Federation of BiH (FBiH), the main laws applicable on Investment Funds are the Law on Securities and the Law on Funds, Management Companies and Investment Funds. The main regulatory body is the Federation of BiH Securities Commission. In the entity or Republic of Srpska (RS), the Law on Securities and the Law on Privatization Investment Funds and Privatization Fund Management Companies apply. The RS Securities Commission is the regulatory body. There are prescribed for management companies to manage all of the funds in BiH, and currently there are in 27 investment funds management companies (DUFs).
Just as the other republics of the former Yugoslavia, the process of ownership transformation in FBiH started by apportioning internal shares to workers within the framework of Markovic
125 Reports from Banking Agencies of FBiH and RS, retrieved from http://www.fba.ba and http://www.abrs.ba/ 126 Legal framework prescribes that microcredit organizations’ reserve obligations that are higher than those of the banks’, even though microcredit organizations are not depository institutions and cannot hold citizens’ savings accounts, “Microcredit sector in BiH- How to proceed?”, Association of Microcredit Financial Institutions AMFI page 1, retrieved from http://www.amfi.ba/images/stories/publikacije/mikrofinansije_2010.pdf
37 privatization.127 Accordingly, privatization investment funds (PIFs) were established with the purpose of collecting certificates in the “mass privatization process” and their investment in shares or holdings of enterprises. So-called “coupon or voucher privatization” was intended to directly confront the problem of the lack of internal saving, and the solution adopted in the Czech republic128 was once considered to be the most successful example of this method in that time.129 Privatization investment funds in countries in transition are founded with the aim of accelerating the process of transition from economic efficiency point of view. It is also assumed to be fair, because citizens receive equal parts of national wealth. Also, they led to the adoption of fresh capital.130 Investment funds are now considered to be the example of unsuccessful privatization, because it is not known that any of them had increased production or employment in companies which shares they own, which was its original purpose. The failure of voucher privatization was not only caused by passive ownership role of the PIFs, it was also the fault of the large ownership dispersion of newly privatized companies and the limited possibilities for securing fresh capital.131
A PIF is established as a close-end fund. It is highly unlikely that more will be established as privatization by certificates has been completed and the equity to found a new PIF is prohibitively large, at 200 million KM. In FBiH, eleven PIFs have been registered and have collected 4.5 billion KM in certificates. By the end of the public offering of shares, these eleven PIFs had bought 1.9 billion KM of state capital. In the RS, there are 13 PIFs that have collected 1.6 billion KM in vouchers. The shares of these investment funds are listed on Sarajevo and Banja Luka stock exchanges, creating the conditions for trade in the shares of these funds.132
Privatization investment funds since their establishments are registering negative financial results. The main reason behind this fact is that funds in the process of privatization bought shares of companies at fair prices, not at its intrinsic value. Market prices of these shares were far below book value prices. Investing policies of investment funds, showed inefficient to make funds’ investment profitable. Funds were limited to investing in securities on domestic exchanges. Thanks to very conservative policy of fund management companies (DUFs) and
127 A process of ownership transformation in BiH started in 1990. and was performed through a model of internal shares of employees employed in companies (“Marković privatization”) and stopped with a beginning of the war. A revision of the same privatization process determined cca 1,4 billion KM of shareholders capital, or cca 8% of total capital of FBiH. 128 Czech Republic and Russia were the first to implement mass-privatization programs. 129 BiH privatization and workers participation, Case study of "Agrokomerc" company, author: Dr. Dragoljub Stojanov (Faculty of Economics Sarajevo), retrieved from http://ocean.st.usm.edu/~w300388/brussels/stoj.pdf 130 The role of Investment Privatization Funds in Mass Privatization programs, authors: Simona Aurelia Bodog, Alexandru Constangioara,Florian Gyula Laszlo, Dana Petrica, retrieved from http://electroinf.uoradea.ro/reviste%20CSCS/documente/JEEE_2009/Articole_pdf_JEEE_ME_nr_2/JEEE_2009_Nr _2_ME_Bodog_The_Role.pdf 131 Bosnia and Herzegovina: Poverty Reduction Strategy Paper Mid-Term Development Strategy, Council of Ministers BiH, March 2004 132 Bosnia and Herzegovina: Poverty Reduction Strategy Paper Mid-Term Development Strategy, Council of Ministers BiH, March 2004, Page 81
38 small percentage of ownership of PIFs in state companies, PIFs were not able to continue investing in those companies, therefore experiencing further deterioration of its value. Compared to year 2001, when first funds appeared on BiH market, its capital was 4 billion KM worth. Now this value is 1 million KM. Drop in price of all IF’s stocks can be expressed in double digits, varying from 51 to 79 percent.133 Faced with bad situation on stock markets, former PIFs as biggest investors on stock markets were experiencing constant drop of value of its assets. Considering the conditions on stock markets, there is also a problem of high illiquidity of every specific security held by IF, which puts in question liquidity of PIFs’ total assets.
In the year 2008 total trading of PIF stocks on Sarajevo Stock Exchange was 40,3 million KM, showing significant drop compared to year 2007, when total trading of PIF stocks was 250 million KM. This cannot be consequence of global crises, explicitly.
The only source of revenue for investment funds are dividends paid by companies in funds’ portfolios. Unfortunately, in BiH in general, there is very small number of companies that pay off dividends.
8.2. Mutual funds Law on Funds in FBiH and RS, dated from 2005, also prescribed the possibility of establishment of mutual and investment funds and legal entities allowed to manage them. Under the Law, only management companies of investment funds DUFs are allowed to own funds.
Still, no fund or management company existed in BiH. It was impractical to establish funds domestically for several reasons134. Firstly, the funds were only allowed to invest in assets traded on Sarajevo Stock Exchange, and Banja Luka Stock Exchange, which ruled out the ability to invest in non-liquid assets, such as property and private equity. It also ruled out the possibility of investing in securities traded in the world’s main markets. This limited the fund’s ability to invest more securely, for example, in bonds with high credit ratings, which did not exist in BiH market.
Secondly, the domestic market itself was dominated by PIFs, financial institutions and state- owned companies. PIFs accounted for most transactions and owned a predominance of the privatization economy. Access to those companies was dictated by PIFs, which meant that there it was little value to be added by mutual funds.
133 www.sase.ba 134 International Financial Law Review, “Bosnia’s missing investment funds”, Jack Evans, Renuka Kukansen, 2005 http://www.iflr.com/Article/1978156/Bosnias-missing-mutual-funds.html
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Thirdly, the start-up capital is daunting in an initial market. The minimum registered capital of a management company that manages a single fund is 1 million KM.135 A fund management company must increase the registered capital for each additional fund that will manage.
However, first mutual fund MF Global managed to obtain initial capital and started business activities in year 2007, followed by more new funds established in relatively short period of time, until 2010. In FBiH there are currently 6 mutual funds and in the RS there are 2 mutual funds.
According to CBBiH, establishment of this kind of funds was represented as very significant, marking a crossroad on capital markets in FBiH. Although these funds were genuinely pretty small, they are first participants on capital markets that emerged as a result of collected money payments of its founders. Also, they enabled investing in existing shares on stock exchanges, bonds and other securities, therefore reducing investment risks.
Number of mutual funds is in constant increase in BiH. According to statistics, there is 1 EUR per capita invested in mutual funds. In Croatia that number is 400 EUR per capita136, and in Slovenia that number is 1100 EUR.137 Invested amount of money in mutual funds will increase, but it is also expected for mutual funds market to concentrate by reducing the number of funds to few strongest ones.
Mutual funds have very good perspectives in Bosnia and Herzegovina, especially because most of them established in period of crises, when almost all big world funds are experiencing negative business results. Mutual funds are beginning to work with very low prices of securities; they are developing accordingly with development of new capital market instruments- newly issued entity bonds. Mutual funds are acting in very good moment to buy securities for its investors and to offer a huge advantage because of professionally managed assets in the name of investors, which had not been the case in Bosnia and Herzegovina so far. Before establishment of mutual funds, there were only two kinds of specialized mediators- brokerage firms to execute clients’ orders and PIFs and closed funds with shares on stock markets whose value is determined by market, not by qualitative management of assets. Oppositely, mutual funds are delivering returns that have to be greater than return that an investor would gain in banks.
Mutual funds have very good prospects, provided that positive changes in BiH markets happen in future, such as pension reform and new financial instruments, which would enable mutual funds that cooperatively with banks and insurance companies offer qualitative financial instruments for investors.
135 Law On Funds Management Companies and Investment Funds Official Gazette of the Federation of Bosnia and Herzegovina No. 41/98 and 36/99, retrieved from http://www.komvp.gov.ba/bih/index.php?option=com_remository&Itemid=36&func=fileinfo&id=2849 136 Annual report 2010, Investment funds, page 33, retrieved from http://www.ripe.hanfa.hr/en/publiciranje/reports/ 137 Jagrica Timotej, Podobnik Boris, Sebastjan Strasek, Jagrica Vita “Risk-adjusted Performance Of Mutual Funds South-Eastern Europe Journal of Economics 2 (2007) 233-244 http://www.asecu.gr/Seeje/issue09/jagric.pdf
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In year 2008, legislation on investment funds had been amended. This new law enabled investment funds to invest not only in domestic securities, which was the case until this year, but also on foreign markets and in real estate138. This should enable further development of capital market and stronger connections with markets of other countries.
It is estimated that eight mutual funds in BiH have raised the capital in value of 10 million KM.139 This information shows potential and interest of BiH citizens for this kind of investments.
The speed of development of investment funds in BiH is hard to predict, but it is considered that the initial capsule may be the transfer of a part of household savings from banks to mutual funds. Further development of funds in countries in the region will depend crucially on the speed of spreading the culture of investment, because most people do not know the difference between such investment and pension funds.
9. Capital markets in Bosnia and Herzegovina
9.1. Regulatory frame of capital markets Regarding legislative frame of capital markets in Bosnia and Herzegovina, there is a unique situation where capital market in BiH is not regulated on the state level, but by two separate entity levels. Thus, regulations of capital market in FBiH is under the authority of FBiH that has a regulatory framework and correspondent institutions of its own, and the same applies to RS capital market. However, harmonization of regulations between the two entities exists, so participants on both stock exchanges are treated in the same way.
The legal framework for capital markets is prescribed by the FBiH and RS Securities Market Acts. These Acts regulate core issues related to definitions of terms, participants, institutions, and their authorities, rights, and obligations with regard to the capital markets in BiH.140 These legal frameworks also define the ownership rights over a security, acquired by registering it with the Register in the name of the security holder.
138 Law on Investment Funds, Official Gazette (85/08), retrieved from http://www.komvp.gov.ba/bih/index.php?option=com_remository&Itemid=36&func=fileinfo&id=2849 139 http://www.bh-news.com/en/vijest/2965/mutual_funds_in_bosnia_and_herzegovina.html 140 http://www.cbbh.ba/index.php?id=693&lang=en
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The Law defines the following securities-related tasks:
Brokering tasks include buying and selling securities in one's own name for a client, for a fee.
Dealing includes buying and selling securities on one's own behalf to benefit from a price differential.
Market-making tasks include simultaneously stressing the continuous supply and sale of securities on one's own behalf, in order to establish a continuous supply and demand for specific securities.
Securities portfolio management involves tasks where a professional intermediary undertakes to invest a client's money in securities with maximum benefit, in his own name, but on the client's behalf, i.e. to hold and manage the client's securities, for which the client pays a fee.
The issuing agent's tasks include organizing, preparing and conducting a securities issue for the issuer, without obligation to buy unsold securities, thus introducing the securities to an organized public market.
The investment advisor's tasks include offering advice to clients on handling securities.
The custodian's tasks include opening and managing an account with the register on behalf and in the name of a shareholding client (named custodial account), executing orders to transfer ownership, inscribe third parties' rights on the security, or transfer the rights under the security, collecting claims against the issuer based on mature securities, providing services by lending
The depositary's tasks include securities issuance and monetary transactions related to trade in securities on the stock exchange or other organized public market.
As institutions that allow normal functioning of the capital market are stated the securities commission and securities register.
Securities Commission is responsible for the supervision and regulation of financial markets under these laws, and has the following authority:141
Regulating how securities are issued and traded;
Supervising standards for reporting to investors and the public on securities traders' operations and the protection of investors' interests
Approving issues of shares and other securities by enterprises and banks;
141 http://www.cbbh.ba/pdf.php?id=693&lang=en
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Approving securities issues by fund management companies, investment funds, mutual funds, and other legal entities involved in issuing securities;
Regulating the requirements for and ways to issue cantonal and municipal bonds;
Prescribing rules and supervising trading in securities on the securities exchange, using the electronic quotation system;
Prescribing and supervising the application of reporting standards vis-à-vis investors and the public on securities traders' operations;
Granting approval for the operations of and supervising professional intermediaries (e.g. brokers and dealers) and other participants in the securities trade.
The Securities Register142 performs the asks related to registering and safekeeping securities, as well as safekeeping data on securities and all transactions related to transfer of ownership or change in their status.
Security is a document or an electronic record, which contains rights that may not be realized or transferred without this document or electronic record, such being:143 company shares, bonds, certificates (issued for a period longer than one year), other securities of long-term character. Derivative security is a security whose value depends on the value of other securities or securities related to it.
Securities are issued by public offer, private placement, or special issue.
A public offer is conducted on the basis of a public invitation to underwrite and pay for securities. This is done through a stock exchange, as and when prescribed by the Commissions. The issuer must prepare a prospectus with sufficient information for investors to assess the issuer's assets, obligations, loss and profit, financial position and prospects, as well as what rights will be contained in the securities being issued.144
A private placement is a sale of securities to a prior determined purchaser or a group of not more than 40 purchasers.145
9.2. How the Stock Exchanges Are Organized Trade in securities in BiH is conducted through two stock exchanges, Sarajevo Stock Exchange and Banja Luka Stock Exchange. These two stock exchanges are characterized by the same regulatory principles. According to the legislation policies regarding the capital markets in BiH, the stock exchanges are "places for bringing together supply and demand for securities and
142 http://www.cbbh.ba/pdf.php?id=693&lang=en 143 ZAKON O TRŢIŠTU VRIJEDNOSNIH PAPIRA („Sluţbene novine Federacije BiH“ broj 85/08), article 2 144 ZAKON O TRŢIŠTU VRIJEDNOSNIH PAPIRA („Sluţbene novine Federacije BiH“ broj 85/08), article 13 145 ZAKON O TRŢIŠTU VRIJEDNOSNIH PAPIRA („Sluţbene novine Federacije BiH“ broj 85/08), article 13
43 trading with securities, pursuant to previously defined rules."146 That means that they are linking supply and demand for securities. During this process, prices for the securities being traded are formed. Another function of stock exchanges is to constantly and consistently provide information on supply and demand and timely information on market value of the securities traded.
The Sarajevo Stock Exchange (SASE) was founded 2001. Trading officially started with the first auction in April 2002.
SASE has three segments147, with trading conducted on separate rules:
The Official Quotation,
The Fund Quotation (as a sub-segment of official quotation),
The Free Market.
The Official Quotation is the market sector where “blue chips”, the highest-quality domestic companies, are traded. In order for company to be accepted into quotation, it must meet certain general and special requirements.
Listing requirements refer to operations of the issuer in past few years, size of the capital, and some other requirements. An issuer included in the Official Quotation must regularly inform the public and the stock exchange of all and any events affecting their business. They are also obliged to submit semi-annual and annual financial statements to the stock exchange. Their operations should be as transparent as possible, so a potential investor can assess the likely return on investment in this issuer. If security is listed on the Official market trading the price differs cannot differ more than 10% in regards to the last trading day's official price.
The Fund Quotation or Official Market of Funds is that part of the Official Quotation reserved for investment funds (IF). IF shares are included in much the same way as those of regular issuers, but the process is governed by the Law and Regulations of the Securities Commission.
The Free Market is the segment of the SASE with the least strict requirements. For a security to be traded on the Free Market, it is sufficient for a brokering house or issuer to submit a request for inclusion. Due to a simple admission procedure, most issuers are listed on this market.
Free market consists of three sub-segments, which differ in sense of price fluctuations and transparency requirements:
146 http://www.cbbh.ba/index.php?id=694&lang=en 147http://195.222.43.81/sase-final/language/hr- HR/Tr%C5%BEi%C5%A1te/Segmenti_tr%C5%BEi%C5%A1ta_SASE/Kotacija_obveznica.aspx
44
a) Primary free market consists of 30 most traded shares. Price of the securities traded in Primary Free market cannot differ more than 20% from the last trading day’s official price. b) The Secondary Free market consists of securities that appear on the Exchange market for the first time automatically. In general, price of the securities traded here cannot differ more than 50% from the last trading day’s official price. c) The market for the issuers in the bankruptcy proceedings
The Banjaluka Stock Exchange (BLSE) was founded in 2001 to trade in securities.
It has two stock-exchange markets: the Official Stock Market (Quotation), and the Free Market. The Official Market has the following elements:
Shares - list A,
Shares - list B,
Closed and open investment funds,
Open investment funds,
Bonds and other debt securities,
Short-term securities
Securities can be included in the Official stock-exchange market if they meet the general conditions.148Shares included in list A are at least 3 years in business and must have at least 10 million KM of equity and some other special criteria. The shares are included in list B must meet certain special criteria: two years in business, 3 million KM capital, etc149. The shares of both closed and open investment funds can be included in the official stock-exchange market, if they meet the general conditions for inclusion and the same rule applies for bonds.
The Free Market includes securities that meet the general conditions only. Listing in the Free Stock Market is made on request by the issuer, an individual shareholder, or in the normal course of business.
The Free Market has the following segments:
Shares,
Closed and open investment funds,
Bonds and other debt securities,
148 They can be traded in an organized way, they are paid in full, they are negotiable without restriction and they are issued in non-material form. 149 http://www.blberza.com/v2/Pages/docview.aspx?page=sp6
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Short-term securities
9.3. The Sarajevo stock exchange and Banja Luka Stock Exchange Indices
Bosnian Investment Fund Index (BIFX)150
The Bosnian Investment Fund Index (BIFX) is established by the Sarajevo Stock Exchange as the first index. It is calculated on the shares of the 11 investment funds, formerly Privatization Investment Funds (PIFs), registered in the Federation of Bosnia and Herzegovina.
BIFX is a price index, meaning that it reflects only the price development of the included shares because cash dividends are not reinvested in the index. Its purpose is to represent a benchmark index, with main goal of providing investors a tool for evaluation of the current and future market trends in the segment of investment funds quoted at the Sarajevo Stock Exchange. BIFX is formed as market capitalization index.
Graph 9.1.: Indices on SASE
7,000.00
6,000.00
5,000.00
4,000.00 BIFX
3,000.00 SASX SASX-30 2,000.00
1,000.00
0.00 2005 2006 2007 2008 2009 2010
Source: Annual Reports of SASE and BLSE
SArajevo Stock EXchange Index 10 (SASX-10)151
The Sarajevo Stock Exchange Index 10 is the main index on the Sarajevo Stock Exchange. It is introduced in year 2005, with base date of the index set at December 31st, 2004, and the corresponding base value set to 1.000 index points.
150 www.sase.ba 151 www.sase.ba
46
It is used for measuring movement of the prices of shares of the top 10 issuers on the Sarajevo Stock Exchange. Ten issuers are ranked by market capitalization and frequency of trading.
SASX-10 is a price index, meaning that no cash dividends are reinvested in the index. It main goal is to serve as a general benchmark index. SASX-10 is a (full) market capitalization weighted index, where the maximum influence of an individual issuer is capped at 20%.
SArajevo Stock EXchange Index 30 (SASX-30)152
The Sarajevo Stock Exchange Index 30 is the index of the Primary Free Market of the Sarajevo Stock Exchange. It depicts the price movement of the issuers on the Primary Free market, which is reserved for the most liquid issuers on Sarajevo stock exchange. The base date of the index is March 31st, 2009, and the corresponding base-value was set to 1.000,00 index points.
SASX-30 is a price index, meaning that no cash dividends are reinvested in the index. Its main goal is to serve as a general benchmark index. SASX-30 is an equally weighted index, where all the participants have the same influence on the index movement.
Index Investicionih Fondova Republike Srpske (FIRS Index)153
The FIRS Index is a share index of the 13 privatization-investment funds (PIFs) listed on the Banja Luka Stock Exchange, established on 29 July 2004. The number of investment funds whose shares are included in the FIRS depends on the number of investment funds whose shares are listed on the Official Market and that fulfill selection criteria to be included in the FIRS. FIRS is a price index and it is not adjusted for dividend payments. FIRS is a weighted index, meaning that representation of particular stock in the index is determined with market capitalization of the investment fund.
Berzanski Indeks Republike Srpske (BIRS Index)154
The BIRS Index is a share index of the 12 largest companies listed on the Banja Luka Stock Exchange, which fulfill general and special selection criteria stated by rules of BLSE. It is established on May 1st 2004 with a goal to represents general price movements of stocks listed on the Banja Luka Stock Exchange. It excludes stocks of investment funds. The BIRS is weighted price index, which does not include dividends and is determined by market capitalization of the issuer. Only ordinary shares can be included, and the maximum representation of a particular issuer is limited on 20%. The constituents of the index are revised two times annually.
152 www.sase.ba 153 www.blberza.com 154 www.blberza.com
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Graph 9.2.: Indices on BLSE
7,000.00
6,000.00
5,000.00
4,000.00 BIRS 3,000.00 FIRS 2,000.00
1,000.00
0.00 2005 2006 2007 2008 2009 2010
Source: Annual Reports of SASE and BLSE
Elektroprivrede Republike Srpske (ERS10 Index)155
The ERS10 Index is a share index of the 10 companies from the power utility sector which are listed on the Banja Luka Stock Exchange, established on 29 December 2005. In the ERS10 are included 10 companies; 5 electricity distribution companies, 3 hydro-power plants and 2 thermo power plants. ERS10 is a weighted index, determined by the market capitalization and as price index is not adjusted for dividend payments.
BATX156
Beginning of December 2009, the Vienna Stock Exchange (Wiener Boerse AG) started calculating and publishing the first index of BiH Capital Markets - BATX. BATX observes price movements of the six largest and most liquid companies from Sarajevo and Banja Luka Stock Exchange, which allows this index to serve as the basis for the issuance of structured products and standardized derivatives.
9.4. Sarajevo Stock Exchange (SASE) In the year 2001, eight brokerage houses are establishing Sarajevo Stock Exchange (SASE). First auction in the amount of 3,099 KM is held157, marking the beginning of official trading on SASE. Shortly after, SASE presented first stock market index by the name Bosnian Investment
155 www.blberza.com 156 http://en.wienerborse.at/indices/ 157 The Sarajevo Stock Exchange, Annual Report 2006, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx
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Funds Index (BIFX). During next few years, SASE organized Official Market trading and Free Market trading, and introduced continuous trading under the name “Multi Fixing Trading Schedule” (MFTS). All of the activities were in the effort of developing and promoting capital market, by upgrading technological trading and integrating SASE into regional and international processes.
A great number of foreign investors attracted in initial years and newly educated domestic ones, boosted capital market development in Federation of Bosnia and Herzegovina and outlooks for future years were very optimistic, picturing SASE as a very attractive investment market.
Domestic companies were encouraged to list on SASE, and the first company to become listed on SASE Official market in 2006158, was “Bosnalijek d.d. Sarajevo”. Shortly afterwards, two more companies joined the Official Market.
SASE entered a joint project with other exchange markets in region of Eastern and Southeastern Europe, in order to harmonize technical aspects regarding proper market segmentation and develop new products.
First SASE international conference held in October 2006 attracted foreign and domestic investors and aimed at further educating of public on ways of trading through stock market.
During the years 2005 and 2006, trading on SASE reached its peak, by exercising total turnover of 555,353,931 KM and 654,717,252 KM respectively159, marking the strong growth of trading on Free Market segment which rose to 76% in 2006160, compared to previous year. Trading was followed by similar percentage of growth regarding market capitalization, and two main indices BIFX and SASX-10.
The year 2007, can be marked as the most successful year in the history of Sarajevo Stock Exchange. Turnover of more than 1,2 billion KM161, increased number of foreign investors and more than average return on majority of shares, witnessed the fact that capital market in Federation BiH was very interesting for investors. Compared to year 2006, turnover on SASE in 2007 had almost doubled, marking an outstanding increase of 94,64%.162 Share prices registered recorded increases, too. Again, free market dominated with the percent of 71,76%163 of the total turnover. This was the most successful period for Investment funds, whose index BIFX almost
158 The Sarajevo Stock Exchange, Annual Report 2006, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 159 See Graph 9.1. 160The Sarajevo Stock Exchange, Annual Report 2007, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 161 Ibid. 162 The Sarajevo Stock Exchange, Annual Report 2007, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 163 The Sarajevo Stock Exchange, Annual Report 2007, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx
49 reached the limit of 10,000 index points164. A similar situation was registered with index SASX- 10, that had an increase of 111,54%165 in the month of April, compared to the beginning of the year. In this year also, state offered capital through SASE, which exceeded all expectations, marking an increase of share prices of more than 200%. Total capitalization in 2007 experienced remarkable growth, however conditioned more by increase in share prices than by listing shares of new issuers.
In November 2007, SASE became member of Federation of European Stock Exchanges (FESE), encouraging the integration of the BiH capital market in the European trends.
Graph 9.3: Total and average turnover on SASE
1,400,000,000
1,200,000,000
1,000,000,000
800,000,000 Total turnover (KM) 600,000,000 Monthly average (KM)
400,000,000
200,000,000
0 2005 2006 2007 2008 2009 2010
Source: Annual Reports of SASE
However, the growth period was stopped when global and regional crises began to reflect on capital market in BiH in the year 2008. This accompanied by an unfavorable political environment in region, non-enforcement of economic reforms needed for capital market development, full stop in the process of privatization made an impact on overall activity of SASE.
The year 2008 was characterized by fall of total turnover on SASE, together with sharp drop in value of most shares on SASE market. The total turnover equaled to 477,079,379 KM166, which represents significant drop of 62.56%167, compared to year 2007.
164 See Graph 9.1., indices of stock exchange SASE 165 See Graph 9.1., indices of stock exchange SASE 166 The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 167 See Graph 9.3., The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase- final/language/hr-HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx
50
The biggest turnover was registered in September 2008, due to issuing of bonds of one bank. First public offer was performed by the issuing bonds of one more bank. Market capitalization has suffered a drop of 49,68%168 compared to previous year.
Drop in prices reflected on indices, BIFX recorded fall of 67,34%.169 SASX-10 marked similar drop in value of 66,52%.170
From September 1st, 2008, SASE launched over the counter trade, for the issuers on Free Market, which resulted in transaction of this kind in total value of 327,594 KM.171 On the bond trading segment, two new banks issued its bonds, but no significant turnover was registered.
Graph 9.4.: Market capitalization of SASE
2010 2009 2008 2007 2006 2005
0 5,000,000,000 10,000,000,000 15,000,000,000 20,000,000,000
Market capitalization
Source: Annual Reports of SASE The situation in 2009 was quite similar to 2008. All unfavorable conditions maintained to inhibit capital markets in BiH. Although SASE undertook activities aimed at increasing the offer of securities, companies and local communities did not dare to seek the source of its future development in capital markets. Few projects on popularizing financing local projects by issuing of municipal bonds were undertaken. By adopting new legislative, there was enabled public issuing of securities in BiH, which resulted in primary issuing of the first short-term securities- commercial notes, bonds and shares.
Most significant change of the trade system and organization occurred in 2009, when free market is segmented on three sub segments, each of which with its own prescribed listing conditions. Other result of new market organization, there has been introduced new index SASX-30 for
168 See Graph 9.4. 169 See Graph 9.1., SASE Indices 170 See Graph 9.1., SASE Indices 171 The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx
51
Primary Market. In this index every issuer has the same influence on price movements, not taking into account market capitalization. On that way, every investor has a clear picture of how big of return it would have, if investing in every share equal amount of money.
In November 2009 bonds issued by the Federation of Bosnia and Herzegovina based on war claims were listed on SASE. Total turnover with these bonds was 195,385 KM172 out of total turnover in value of 219,085,458 KM.173 Market capitalization decreased by 8,35%,174 compared to previous year.
As far as the indices are concerned, BIFX registered fall in value of 13,95%175, compared to the year 2008. The value of SASX decreased in similar percentage, while new index SASX-30 recorded an increase of 9,72%.176
The negative trend continued in 2010, where turnover on SASE registered the lowest values in history of SASE. Government of the Federation of BiH continued issuing bonds with another six series of citizen frozen savings’ bonds worth 42 million KM.177 Another initial public offer of Commercial notes happened in 2010. New market segment, primary free market noted the biggest turnover which amounted 31,02% of the total turnover of 108,554,379, while market capitalization showed very small increase, compared to previous year, with the percentage of 0,73.
In year 2010, all of the three indices saw depreciation of value ranging between 10% and 17%, compared to previous year.
9.5. Banja Luka Stock Exchange (BLSE) Banja Luka Stock Exchange was established in the year 2001 by eight banks and one company trading in securities. Next year first BLSE trading session took place where 20 of listed securities were traded178. In 2003, stocks of 13 privatization investment funds were admitted to the Official market of the BLSE. Soon, first transaction with shares of PIF was concluded. In the same year first auction for state owned capital took a place in BLSE, followed by another 60 the same year.179 State capital was sold in 71 enterprises. Official market got its first members, “Rafinerija ulje a.d.” and “VB Bank a.d.” The total number of listed securities on 31 December 2003 was 686 including shares of two issuers on Official market mentioned above and shares of
172 The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 173 See Graph 9.3. 174 See Graph 9.4. 175 See Graph 9.1. SASE Indices 176 See Graph 9.1., SASE Indices 177 The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 178 http://www.blberza.com 179 http://www.blberza.com
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13 Privatisation Investment Funds which are listed on the official market of Banjaluka Stock Exchange.180
In 2004, two market indices were formed on BLSE, BIRS-The Stock Exchange Index of the Republic of Srpska, which includes 10 companies with the largest market capitalization, and FIRS- index of investment funds in Repubika Srpska.
From its beginning BLSE was aiming at forming relationships with other regional stock exchanges in order to gain more knowledge on current trends on European stock exchanges. Therefore, in 2004, BLSE became a full member of The Federation of Euro-Asian Stock Exchanges (FESE). In order to form its technical platform, BLSE introduces continuous trading of securities on the Official market. In first years from its establishment, there was significant improvement of the BLSE market performances. BLSE gained an important role in forming capital market, which was of extreme importance to transition processes in Republic of Srpska and Bosnia and Herzegovina. The most important results were in the area of turnover and regard to the structure of turnover, especially on the Official Market, which enlisted mostly Privatization Investment Funds (PIFs).
Growth in these early years indicated investors’ increasing interest and confidence in the BLSE, which is largely due to promoting and educational activities of BLSE. Very impressive results achieved were reflection of the increased interest for investments, primarily among foreign investors, whose participation in trading reached a figure of 40%.181 There was also increasing number of domestic small investors.
Further activities were dedicated to public promotion of stock exchange through multiple educational programs with aim of presenting the general public with operations of BLSE and capital markets with companies and funds whose shares are quoted on BLSE.
In year 2006, turnover on all market segments of the BLSE totaled 388,464,941 KM182, which was 39,68% more than in 2005. Turnover consisted of ordinary turnover having the majority of transactions conducted with shares of Companies listed on Free Market, followed by PIF on the Official Market and other companies on Official Market. Stock exchange indices also noted increase BIRS with 2884,61183 points of increase, and FIRS with increase of 158,33%184, compared to the year 2005. Shares of all PIFs had increase in price. Newly formed index ERS10,
180 The Banja Luka Stock Exchange annual statistical report, 2003, http://www.blberza.com/v2/Pages/DocView.aspx?Id=6707 181 The Banja Luka Stock Exchange annual statistical report, 2006, http://www.blberza.com/v2/Pages/DocView.aspx?Id=6707 182 See Graph 9.5., Total and average turnover on BLSE 183 See Graph9.2., BLSE Indices 184 See Graph 9.2., BLSE Indices
53 established in 2006, consisted out of ten companies from the utility sector listed on BLSE, increased by almost 300%185.
Graph 9.5.: Total and average turnover on BLSE
800,000,000
700,000,000
600,000,000
500,000,000 Total turnover (KM) 400,000,000 Monthly average (KM) 300,000,000
200,000,000
100,000,000
0 2005 2006 2007 2008 2009 2010
Source: Annual Reports of BLSE In the year 2007, six years after the capital market has been established, there was not noted the growth of stock market indices. After strong growth of most of the shares in first half of the year, next period was marked with significant drop of value. Total turnover was around 740 million KM186, almost doubled compared to previous year. BIRS noted drop of 11,1%187. Total market capitalization reached 8 million KM188, with an increase of 3,86% compared to 2006. However, number of companies and funds whose shares are traded on Official market BLSE was increased to 40189. For the first time, on Official stock market segment, two bonds issued by banks were enlisted. This was also the year when first Mutual Investment fund showed.
185 The Banja Luka Stock Exchange annual statistical report, 2006, http://www.blberza.com/v2/Pages/DocView.aspx?Id=6707 186 See Graph 9.5., Average and total turnovers on BLSE 187 See Graph9.2., BLSE Indices 188 See Graph 9.4., Market Capitalization of BLSE, The Banja Luka Stock Exchange annual statistical report, 2008, http://www.blberza.com/v2/Pages/DocView.aspx?Id=10124 189 The Banja Luka Stock Exchange annual statistical report, 2008, http://www.blberza.com/v2/Pages/DocView.aspx?Id=10124
54
Graph 9.6: Market capitalization of BLSE
2010
2009
2008
2007
2006
2005
0 2,000,000,000 4,000,000,000 6,000,000,000 8,000,000,000
Market capitalization
Source: Annual Reports of BLSE The year 2007 was an indicator of impact of global financial crises on capital market of Bosnia and Herzegovina. Significant drop of trading activities marked the year 2008. The negative trend was partially due to fast growing trend of indices and turnover from previous years, and partially due to financial crises that especially affected developing capital markets. Additional causes for negative trends on capital markets can be looked upon in political tensions characteristic for BiH and region, and slow implementation of valid corporative practices in majority of companies. In the year 2008, total turnover amounted 275,090,237 KM.190 Compared to previous year, it was lower for 62,9%. Main index of BLSE (BIRS) lost 59,9%191 of its value, fitting in the scope of average movements of indices on regional capital markets. However, there were some positive movements on capital markets. For the first time in BiH, bonds of Republic of Srpska for settlement of liabilities based on frozen savings accounts were issued. Also, city of Banja Luka and municipality of Laktaši were first municipalities to issue its bonds on capital markets. Crises on financial markets at the same time opened new possibilities for capital markets development, because companies are now in situation to look for a fresh capital on stock markets.
During 2009, trading on Banja Luka Stock Exchange was conducted within the limitations imposed by the global economic crisis. Due to low liquidity of the stock market, investor’s attention has been focused on bonds. Total turnover has totaled the amount of 180 million
190 See Graph 9.5., The Banja Luka Stock Exchange annual statistical report, 2008, http://www.blberza.com/v2/Pages/DocView.aspx?Id=10124 191 See Graph 9.2., BLSE Indices
55
KM192, and was lower by 52% compared to previous year. The Stock Exchange index BIRS ended the year with 3,5%193 loss of its value.
Other opportunities for development of capital markets should be looked for in issuing stocks of private companies. First company that went through this procedure was listed on BLSE. 17,7 million of KM was borrowed through issues of municipal bonds and 2,1 million by bonds of micro-credit organization. Also, more series of bonds related to old foreign currency savings and war damage were issued in the value of 109 million KM.
9.6. BLSE and SASE in 2011 Capital markets in B&H were characterized again by descending trend in 2011, reflected in dropping of blue-chip indices and extremely poor liquidity of the secondary market. Although overall turnover was increased in 2011, it was driven mostly by the primary debt instruments (T- bills and long-term bonds) issued by FBiH and RS for the first time in 2011.194 Hence, total turnover on Sarajevo Stock Exchange (SASE) totaled to 244 million KM in 2011195, which is increase by 125.5% compared to previous year, while Banja Luka Stock Exchange (BLSE) reported total turnover of KM 425.5 million196 or 141.5% compared to previous year.
Table 9.1.: Total turnover and average yield on War Claim Bonds of listed on SASE
KM 2010 2011 Jan-12 Maturity FBIHK1A 4,545,303 3,613,740 355 2019 FBIHK1B 4,215,243 1,873,032 995 2020 FBIHK1C 2,667,636 1,998,321 656 2021 FBIHK1D 2,338,335 1,779,887 32,931 2022 FBIHK1E 1,977,223 1,582,757 120,484 2023 Total 15,743,740 10,847,737 155,421 FBIHK1A 19.20% 15.80% 19.60% 2019 FBIHK1B 18.90% 15.10% 16.60% 2020 FBIHK1C 18.60% 15.40% 17.20% 2021 FBIHK1D 18.20% 15.40% 17.00% 2022 FBIHK1E 17.80% 15.40% 16.50% 2023 Source: Raffeisen Research197
192 See Graph 9.5., The Banja Luka Stock Exchange annual statistical report, 2009, http://www.blberza.com/v2/Pages/DocView.aspx?Id=13791 193 See Graph 9.2., BLSE Indices 194 Retrieved from: http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e4892627565dbee0d9.pdf 195 The Sarajevo Stock Exchange, Annual Report 2008, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 196 The Banja Luka Stock Exchange annual statistical report, 2011, http://www.blberza.com/v2/Pages/DocView.aspx?Id=21668 197 Retrieved from: http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e4892627565dbee0d9.pdf
56
As can be seen from reported turnover on both stock exchanges, equity market performed poor in 2011, with SASE seeing only 83.6 million198 KM of total ordinary turnover. On the other hand, BLSE had even lower ordinary turnover with equities of 63.1 million KM.199 As a result of enormously low liquidity, values of main SASE and BLSE blue-chips indices (SASX-10 and BIRS), continued to slip down the bearish slope compared to previous year reporting losses of - 16.2% and -8.3% respectively.200
Table 9.2.: Turnover of war claim bonds and Frozen Currency Savings Bonds on BLSE
KM 2010 2011 Jan-12 Maturity RSRS-O-A 2,025,248 2,556,327 188,098 2023 RSRS-O-B 1,549,910 1,690,361 39,733 2023 RSRS-O-C 7,131,634 5,600,311 173,926 2023 RSRS-O-D 6,290,374 3,957,842 55,624 2024 RSRS-O-E n.a. 7,865,254 267,455 2025 Total 16,997,166 21,670,095 724,836
RSDS-O-A 1,946,685 475,127 0 2013 RSDS-O-B 325,011 187,814 0 2014 RSDS-O-C 3,736,138 6,419,517 55,737 2015 Total 6,007,834 7,082,458 55,737
Source: Raiffeisen Research201
Graph 9.7.: WCB bonds on BLSE (yield %) and FCS bonds on SASE (yield %)
Source: Raiffeisen Research202
198 Annual report, SASE 2011, retrieved from http://195.222.43.81/sase-final/language/hr- HR/SASE/O_nama/Godi%C5%A1nji_izvje%C5%A1taji.aspx 199 Ibid. 200 http://www.rzb.at/eBusiness/services/resources/media/677051657971876801- 677051657971876802_1026067974202_1027874455325_1027874650133-1028324452678-1-10-EN.pdf 201 Raiffeisen Research, Monthly Economic Report, March 2012, available at: http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e4892627565dbee0d9.pdf 202 Raiffeisen Research, Monthly Economic Report, March 2012, available at: http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e4892627565dbee0d9.pdf
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Secondary trading with the frozen currency savings bonds (FCBs) and the war claim bonds (WCB) in both stock exchanges reached almost the third of the total ordinary turnover. The total secondary turnover with bonds in 2011 amounted to 23.1 million KM in SASE (21.7%) and 29.8 million KM in BLSE (29.4%), which makes very low average daily and monthly turnovers.203 Overall average monthly liquidity was higher in both markets with WCBs with KM 1 million on average, while FCBs saw better liquidity in SASE with also close to 1 million KM average monthly turnover, although trading was done mostly with several series up to 1 year maturity (R, F, D, E).204
10. Financial Instruments in BiH
10.1. Stocks (Initial Public Offers) According to Securities Commission of FBiH, stock markets in BiH were established primarily as an extension of privatization infrastructure, and not as a result of actual need for financial intermediation and they have served its purpose for 7-8 years. Concentration of supply and demand on stock exchanges has never been fully accomplished, not even in time of the most intense trading in 2007. Due to lack of supply and demand concentration, pricing mechanisms could not be established as well. One could never claim for prices of securities realized on stock exchanges to be market fair. Even at times when those prices were actually market prices, investors could not rely on this data because it was sufficient to see sudden changes in prices of the most liquid securities for any investor to immediately loose trust in functioning of pricing system and to decide not to rely on market price in its analyses and investment decisions. Dissemination of information is functioning relatively well, in technical sense. Information is published regularly, but those publications are not the result of market participants’ willingness and awareness of significance on publishing information in the sense of generating and acceleration of market turnover of its shares. On contrary, information publication is mainly forced by stock markets or regulatory agencies. Professional mediators are accustomed on waiting on businesses from post-privatization process, not taking enough initiatives to approach to the role of real professional investors on financial markets. Non-transparency, work in own interest, tolerance to market manipulations have turned chronic.
Companies registered as Limited Liability Companies are able to ensure capital through issue of stocks, by turning into Share Holding Company (Joint-stock Company). The most important reason for financing development of companies using public issue of shares is that that capital gained on this way does not have maturity date or interest rate. Besides the benefit of financing, another advantage of transforming a limited liability to joint stock companies is the increase of
203 Ibid. 204 Ibid.
58 discipline in company organization, because it comes to separation of owners and management function. In addition to internal control, company is externally revised, also. Shareholders and financial analysts follow and analyze company’s operation and business on daily basis. In addition, by taking up initial offer of shares, company promotes its business and products.
Graph 10.1.: Stock Trading Volume (as % of GDP)205
Source: Partners for Financial Stability206
In BiH one of the main reasons for banking credits to be basic source of capital used by domestic companies’ development is insufficient education and uninformed owners of private companies. Another reason is fear of losing control.
Taking into account condition on stock exchanges in, it is understandable that companies in Bosnia and Herzegovina rarely use the opportunity of issuing their securities using BiH capital markets.
Company “Fratelo trade ad” Banja Luka was the first company in BiH that offered its shares through initial public stock offer after exercising intensive growth of 30% in 2006 and 35% in 2007. Value of its business plan that needed to be financed was 850,000 EUR, so company wanted to acquire main part of these resources by initial public offer.
205 Volume is a measure of market liquidity based on the number of shares that are traded over a given period. The trading volume of a stock is simply the number of shares that have been bought and sold within a specific period of time, and doesn't require calculation beyond mere counting. http://smallbusiness.chron.com/stock-turnover-vs- volume-36868.html 206 http://www.pfsprogram.com/benchmarking-database
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10.2. Bonds The most important objectives of establishing market of government securities are taking over of liabilities based on old foreign exchange savings, taking over of liabilities based on war debt, impact of banks’ interest rate policies and providing funds for budget users in periods of unequal inflow of funds from taxes, as well as mobilization of domestic savings and investing in public projects on various levels of authorities.207
First issued bonds in BiH were in Republic of Srpska. Frozen currency bonds of Distrikt Brčko are issued on June 30th 2009 and were traded on Banja Luka Stock Exchange (BLSE) by the price with yield to maturity of 16%. Total amount of these issued bonds is 36,965,894 million KM divided in 7 series with maturity of six years and interest rate of 2,5% per annum. From August 2009, it is also possible to trade with these bonds on Sarajevo Stock Exchange.208
In 2009, the Government of BiH adopted the decision on issuing Bonds for settlement of war claims (WCB) in territory of FBiH, for legal entities and natural persons as well. The value of the issue was estimated to 500,000,000 KM and divided into 5 series. First issue was June 2009, maturity up to 14 years and annual interest rate 2,5% The bonds are available in Sarajevo Stock Exchange (SASE).
After adopting the Law on settlement of the frozen currency savings debt, first issue of the bonds (FCB) of that kind in FBiH happened in 2009 in total value of 346,515,271 KM. Other main characteristics of the bonds are the annual interest rate of 2,5%, while the maturity of the bonds is set to 6 years. Issue is split into 6 series in range of maturity from 1 to 6 years.209
After Republic of Srpska issued the first emission of their own frozen currency savings bonds on February 28th 2008 in total amount of 209, 7 million KM for 15.937 depositors, in June 2008 bonds for internal debts for war damages and suppliers have been also issued.
Five municipalities of Republic of Srpska issued bonds in 2008 and 2009; Laktaši (10 mil KM, 6 years; for building sporting center), Banja Luka (7 mil KM, 3 years; for building bridge on river Vrbas), Bosanska Gradiska (2,7 mil KM, 6 years; for building sport center) in 2009 and Bijeljina (11 mil KM, 10 years; for building heating chain) and Bosanski Šamac (4,58 mil KM, 10 years; for providing social peace and payment of all liabilities) in 2009.
At that time in Sarajevo Stock Exchange (SASE) besides two commercial bonds issued by banks “NLB Tuzlanka Banka dd Tuzla” and “FIMA Banka dd Sarajevo” in 2008 not even one municipality in FBiH issued bonds. This was mostly due to legal obstacles set by the Law on debt and guaranties in FBiH, according to which State Social Funds, Cantons, Cities and
207 http://www.revicon.info/dokumenti/pdf%20doc/RadovanBajic.pdf 208 http://www.rzb.at/eBusiness/services/resources/media/677051657971876801- 677051657971876802_1026067974202_1027874455325_1027874650133-1028324452678-1-10-EN.pdf 209 Ibid.
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Municipalities and public companies were allowed to run debt only as a loan. First municipality in FBiH to issue bonds was Tešanj and use funds for financing business infrastructure municipality in the year 2011. The value of issue was 500,000 KM, with maturity date of 3 years. Bonds have annual yield of 6%.
During 2008, there were issued entity, municipal and corporate bonds and traded on BLSE, while on SASE there were issued corporate bonds only, whose issuers were three banks. Trading of debt securities (bonds) in 2008 on BLSE reached 4,24% from total performed turnover, which was a significant increase of share, compared to 2007 when this ration had value of 0,11%.210
Trend of issuing bonds continued in 2010 in Republic of Srpska where one of the municipalities (Laktaši) issued second series of bonds in the value of 7 million KM followed by many other municipalities in the same year and in 2011.211
Also, with tightening of the banking sectors financing resources and eligibility requirements for loans, the alternative ways of financing via issuing of long or short term debt instrument would definitely be in place in coming years. Therefore, there is expected further expansion of the debt market with new instruments: entity, municipality bonds, as well as corporate bonds and commercial bills what would further boost liquidity of the market.212
10.3. Commercial bills Commercial bills are uninsured debt market securities issued by corporation as a way of short-term financing of project or business operations. That means that company acquires money funds without providing collateral instruments, which significantly makes borrowing cheaper compared to classic obtaining classic banking credit. First commercial bills and short-term securities appeared of Limited Liability Company “FIS doo, Vitez” (whole and retail sale) in 2009, which were successfully subscribed in the value of 1 million KM through SASE. Commercial bills were sold at discount, and brought its investors yield in the amount of 7%.213
10.4. Treasury bills In 2011, FBiH, due to a budget deficit, had two issues of six months treasury bills in the amount of 65 million KM and 25 million KM, which were both successfully 100% subscribed, while the major investors were the local banks with 95% of participation. Due to large excess liquidity in banking sector, the average yields to maturity (YTM) for FBiH were extremely low with average YTMs in both auctions being 2.32 and 2.31%, while the maximum yield achieved was 2.9%. On the other hand, Republic of Srpska due to larger budget deficit had four issues of Treasury bills during 2011, while instruments had maturities of 6, 8 and 9 months. Total amount
210 Annual report SASE and BLSE for 2008 211 www.blberza.com 212 http://www.rzb.at/eBusiness/services/resources/media/677051657971876801- 677051657971876802_1026067974202_1027874455325_1027874650133-1028324452678-1-10-EN.pdf 213 Annual report of SASE for 2008
61 of issued Treasury bills in 2011 was 121.8 million, with average amount of treasury bills issue of 30 million KM. The YTMs in RS on average were higher compared to FBiH during 2011, especially in last two auctions, mostly as a result of high subscription of local banks in the first issue of long-term bonds, after what the exposure to government was quite high in banks’ portfolios, which limited banks from investing further. Therefore, in the first auctions of 6 months Treasury bills average yield was 2.48% and it was 3.36% for the same maturity. RS also in 2011 for the first time issued long-term bonds in November 2011 in total amount of 120 million KM, with 7 years maturity and very low average YTM of 6.83%.214
Both FBiH and RS plan to issue a substantial amount of debt instruments in next period, where is expected lower participation of banks and higher participation of the local public companies, insurance companies and investment funds as well as foreign investors.215
214http://www.rzb.at/eBusiness/services/resources/media/677051657971876801- 677051657971876802_1026067974202_1027874455325_1027874650133-1028324452678-1-10-EN.pdf
215http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e4892627565dbee0d9.pdf
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11. Perspectives of Bosnia and Herzegovina financial market
With the support of World Bank and International Monetary Fund, Balkan countries in the process of transition enabled entrance of foreign banks into its markets, seeing their presence as source of stability for the financial sector. On the other hand, with strengthening of capital markets and broader opportunities for financing of corporations, banks in countries of Central Europe oriented towards investment operations, seeking new profitable markets to expand on.
All countries in region were experiencing high growth credit rates before financial crises in 2007. One of the reasons for this trend was expansion of foreign banks into this region. When financial crisis migrated from US to Europe market and Balkan countries216 fell to recession, there happened increase of share of bad loans, causing the banks to shrink its lending activities.
Foreign banks were motivated by profits, as the entrance on new market eager for loans presented potential for such results.217 Furthermore, evaluation of potential clients in Balkan countries was based, in majority of cases, on statistical data of individual banks. These two facts were likely to lead to credit boom, and in economic environment of recession, further to increase in assets of bad quality.
Graph 11.1.: Credits as a % of GDP
Source: http://www.pfsprogram.org/fsbs-database
216 Bosnia and Herzegovina, Croatia and Serbia were analyzed for the need of the paper 217 http://researchonmoneyandfinance.org/media/papers/RMF-27-Cetkovic.pdf
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Graph 11.2.: Deposits as a % of GDP
Source: http://www.pfsprogram.org/fsbs-database
Loans in the three countries experienced fast growth rates prior to the recent financial and economic crisis, mostly due to an increase in domestic loans. Figures from Graph 11.1. show behavior of this ratio in past years, where can be seen volatile growth rates of credits as a percentage of GDP with stagnation in 2009 for Bosnia and Herzegovina and decrease in trend for Croatia in 2008, while Serbia maintained slower pace of growth of credits from banking sector.
While the capital adequacy ratio in Bosnia and Herzegovina remained the same throughout the years,218 (but still above prescribed minimum), asset quality decreased, due to increase of non- performing loans and new rules on reporting methodology by banks.219 Bank lending grew slightly in 2010 and is expected to continue its growth in next period. However, lending and deposit growth rates remain bellow regional norms.220
In Croatia, negative movements in real economy and deterioration of quality of banking assets have limited growth of banking balance sheet in 2010 to 3,5%. However, as the most of that growth percentage was caused by exchange rate changes, balance sheet effectively rose for 0,8%.221 Increased uncertainty and aversion of households towards other non-banking institutions enforced domestic sources of growth in bank assets. Deposits continued its growth in stabile pace. (graph 11.2.) Lending activities of banks increased, but still at a rather slow pace.
219 http://www.pfsprogram.com/sites/default/files/PFS_Regional-Country_Benchmarking_Report_2011- Feb_23_2012.pdf 220 http://www.pfsprogram.com/sites/default/files/PFS_Regional-Country_Benchmarking_Report_2011- Feb_23_2012.pdf 221 http://www.hnb.hr/publikac/godisnje/2010/h-god-2010.pdf
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Adequacy rate of banking capital was stabile throughput the years and is expected to stay stabile in future.
Household deposits withdrawn from Serbian banks in 2008, were returned to bank accounts in 2009. However, as it is the case with other countries in region, banking sector remains reliable of foreign financing. The problem of non-performing, similar to Croatia and BiH registered Serbia with 16,9% of non-performing loans in 2010.222 Annual growth of credit in Serbia has been stable in 2010, after slow down in 2009, while the lowest annual growth of deposits was in 2008 with 8.8%, but reviving in 2009 and 2010, with return of clients’ confidence in sector.
However, general fact for countries in the region is that banking system will retain its stability in future. However, countries should be orientated more towards development of capital markets.
Table 11.1. Value of stock exchange indices in the region
Serbian Traded Index Croatian Traded Index Bosnian Traded Index Dec-09 318 1,290 959 Dec-10 265 1,337 827 -16.9% 3.6% -13.7% Source: Wiener Borse AD223
Wiener Stock Exchange publishes three indices CROAX, SRX and BATX compounded out of best quality shares from Croatia, Serbia and Bosnia and Herzegovina, respectively. By looking at the table 11.1. there is notable an increase in value of Croatian index for 3,6%, while the major decrease experienced Serbian index in the 16,9%in 2010, compared to 2009. BATX had also a significant drop in value of almost 14%. This indicates that capital markets in all of the three countries were hit severely by global crises, but Croatia is the first to show signs of recovery.
Slowdown of economic growth during past two years is a result of not only global economic crises, but also of an unfavorable structure of financial market and insufficient quality of investments in Bosnia and Herzegovina and surrounding countries. General misunderstanding of connection between capital market’s performance and economic growth are contributing further to deepening of unfavorable environment for development of strong capital markets.
It is necessary to create stabile sources of equity in financial sector, especially within the frame of domestic savings. Ensuring sustainability of up to date positive movements in financial sector is of crucial importance for further efficient allocation of domestic savings in productive investments and attracting and retaining of foreign investments.
222 http://www.nbs.rs/export/sites/default/internet/latinica/90/90_4/godisnji_izvestaj_2010.pdf 223 http://en.wienerborse.at
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Securities markets should be enforced by new issues of short-term and long-term securities of public sector. It is necessary to create conditions for strengthening of institutional investors because they mobilize domestic savings and invest it in different types of securities, used for financing real and public sector. In more developed financial markets, bigger percent of savings and total financial flows is directed through these institutions. Completion of pension reform, stabilization of insurance sector, especially affirmation of life insurance, more important role of investment funds represent important preconditions for development of different types of institutional investors.
Domestic investors on stock exchanges majorly trade with shares resulted from privatization, primarily with the goal or take-over and concentrating ownership. When it comes to acquiring additional equity, economy dominantly relies on crediting from banks, and citizens direct its savings in bank deposits. Traditional orientation towards banks' credits and deposits is possible to change by enforcing series of systematic measures during longer period of time.
It is necessary to develop new types of savings by encouraging citizens to invest in securities, life and pension insurance. To realize this, it is needed to deepen financial intermediation, to create conditions for functioning of institutional investors and to increase diversification of financial instruments.
Creating mechanisms to help financially available resources of households, public funds and companies efficiently direct to economic development by offering different types of financial products. Quality, versatility and availability of financial instruments are important elements when it comes to evaluation of sophistication of financial, capital markets.
Development of debt market instruments is of crucial importance for providing wider opportunities of financing of real sector and public institutions through stock market, and quality instrument for investing of institutional investors.
Improvement regulations and supervision standards is aimed at establishment of contemporary, stabile, solvent, liquid, efficient and transparent financial institutions. Expected results are to be yielded in the area of good financial discipline, better consumer protection and enhancement of trust in overall financial sector. Modern regulations in accordance with international practice are aimed at investors' protection, stimulating of private initiative and entrepreneurship in financial sector in the course of efficient and transparent business activities. With this in mind, unification of non-banking financial regulators on the entities level is a priority. It is essential to improve standards and methodology of surveillance over all financial institutions for the purpose of decreasing financial instability risks. Regulatory, institutional and legal frame for functioning of subsidiaries of foreign financial institutions needs to be elaborated by cooperation of domestic authorities on international level.
Forming of joint database and publishing statistics of financial sector, on the entity and state level would definitely prompt efficiency of regulatory bodies and increase the transparency of
66 overall financial market. This is also important for creating more favorable business ambience for investors, which would be able to access information more easily.
It is necessary to reach European standards of corporative management in companies whose securities are listed on stock exchanges, because they present important element of investors' protection.
By promoting standards of financial reporting there can be enabled for investors, buyers, public to access reliable, complete and timely information. This is especially very important for reports of financial institutions and issuers, whose shares are being traded on stock exchanges in order for investors to create confidence in functioning of financial institutions.
Regional cooperation and international connection contributes to wider capacity of domestic financial market and competition. In the area of stock market, trading it is necessary to strengthen regional cooperation with capital markets of other countries of Southeastern Europe, in order to enable access to greater number of investors and stabilize liquidity of stock exchanges. Local securities could be easier and cheaper offered to broader specter of potential investors and on that way bypass limitation of domestic market capacities.
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12. Conclusion
Bosnia and Herzegovina financial market is characterized as bank centric, with commercial banks as strongest financial institutions. Primary drivers of financial stability of BiH are banking system’s health and the public trust in banks.
Non-banking sector is still lagging behind, with micro organizations, insurance companies and leasing companies that have small percentage of share in overall financial assets of country. However, what is positive is that they are showing significant potential of future growth.
Capital market is underdeveloped and in lack of quality financial instruments and investors, serving only for trading shares from privatization process and not for raising capital.
Lack of institutional investors, unfavorable economic environment in country that reduce citizens’ disposable income and a legislation, which is not completely harmonized, with EU legislations and the present division of market on entities are some of the obstacles for future development.
With an aim of development of financial market, significant role belongs to strengthening of institutional investors, especially insurance companies and investment funds, which should reflect on overall economic development.
For further growth of financial sector and increase of its efficiency, it is necessary to ensure conditions for functioning of different types of non-banking financial institutions and an increase of its shares in structure of assets of financial sector.
Enhancement of complexity of financial sector in the sense of number and types of financial institutions (institutional structure) is in the function of attracting new investors (foreign and domestic) into this sector, but also in the function of fulfilling needs for equity financing. At the same time, structural enforcement and stabilization of financial sector would have positive impact on economic development, primarily through diversification of sources of financing and lowering the equity price. Parallel with economic development and deepening of financial intermediation it is expected that financial flows through capital market will be more frequent. Definitive settlement of transitional package, meaning restructuring of companies, improvement of corporate management and improvement of institutional frame and regulatory supervision should complete the picture of future healthy financial system in Bosnia and Herzegovina.
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13. Literature
Mishkin, Frederic S. - Eakins, Stanley G. Financial markets and institutions. 6th ed. Boston: Pearson Prentice Hall, 2009. ISBN 978-0-321-37421.
Mishkin, Frederic S. The economics of money, banking and financial markets. 7th ed. Boston: Addison-Wesley, 2004. ISBN 0-321-12235-6.
Velimir Šonje, Veza koja nedotaje: Kako povezati razvoj trţišta kapitala i gospodarski rast, (ur.), 2005, Arhivanalitika, Zagreb, ISBN 953-998831-4 Central Bank of Bosnia and Herzegovina, annual reports and financial stability reports available at: http://www.cbbih.ba
Banking Agency of the Federation and Banking Agency of Republic of Srpska of BiH and, annual reports available at http://www.fba.ba and http://www.abrs.ba
Insurance Agency of BiH, annual reports available at http://www.azobih.gov.ba
Deposit Insurance Agency BiH, publications available at http://www.aod.ba
Magel, Tamas (2004): “The Banking Sector of Bosnia and Herzegovina: The Dominant Role of Austrian Banks”, available at http://www.oenb.at/de/img/feei_2005_2_special_focus_4_tbanking_tcm14-33490.pdf
USAID Final Report (2006): “Assessment on how strengthening the insurance industry in developing countries contributes to economic growth”, available at http://www.iifdc.org/pubs/Insurance%20Assessment%20Report.pdf
Hess, T., Karl, K. & Wong, C. (2008): “Global insurance review 2008 and outlook 2009: Weathering the storm. Special Report, Swiss Re, Zurich; available at http://www.genevaassociation.org/Portals/0/SwissRe_Global%20insurance%20review.pdf
Njegomir V., Marović B., Maksimović R. (2008): “The Economic Crisis and the Insurance Industry: The Evidence from the Ex-Yugoslavia Region”, available at http://www.doiserbia.nb.rs/img/doi/0013-3264/2010/0013-32641085129N.pdf
Kozarić, S., “The European Union Integration Process and Insurance Market Development: The Case of the Former Yugoslav Countries”, available at http://www.iifdc.org/pubs/occ7.pdf
“Project Fiche – IPA Annual Action Programme 2007 for Bosnia and Herzegovina -Sustainable Capacity Building of the Insurance Agency of Bosnia and Herzegovina and the Federation and Republic of Srpska Insurance Supervisory Agencies”, available at
69 http://ec.europa.eu/enlargement/pdf/bosnia_and_herzegovina/ipa/2007/ipa_2007_26_insurance_ agencies_en.pdf
Association of Leasing Companies in BiH, annual reports of available at http://www.leasing.org.ba/en/content/godi%C5%A1nji-izvje%C5%A1taji
Association of Microfinance Institutions BiH, publications available at http://www.amfi.ba/en/publications
Maurer, K., Pytkowska, J., (2009): „Indebtedness of Microcredit Clients in BiH“, available at http://www.mfc.org.pl/sites/mfc.org.pl/files/Indebtedness%20BiH_Summary%20Paper%20ENG .pdf Erceg, B. (2010): “Stanje i perspektive sektora mikrokreditnih organizacija u BiH” Sarajevo, available at: http://www.poreskisavjetnik.ba/dokumenti/pdf%20doc/BracoErceg.pdf
Stojanov, D., “BiH privatization and workers participation, case study of "Agrokomerc" company”, available at http://ocean.st.usm.edu/~w300388/brussels/stoj.pdf
Bodog, S. A., Constangioara A., Laszlo F. G., Petrica D., “The role of Investment Privatization Funds in Mass Privatization programs”, available at http://electroinf.uoradea.ro/reviste%20CSCS/documente/JEEE_2009/Articole_pdf_JEEE_ME_n r_2/JEEE_2009_Nr_2_ME_Bodog_The_Role.pdf
Council of Ministers BiH, (2004); “Bosnia and Herzegovina: Poverty Reduction Strategy Paper Mid-Term Development Strategy“, available at http://www.imf.org/external/pubs/ft/scr/2004/cr04114.pdf
Evans, J., Kukansen, R., (2005); International Financial Law Review, “Bosnia’s missing investment funds”, available at http://www.iflr.com/Article/1978156/Bosnias-missing-mutual- funds.html
Jagrica T., Podobnik B., Strasek S., Jagrica V., (2007): “Risk-adjusted Performance Of Mutual Funds South-Eastern Europe”, Journal of Economics 2, p. 233-244, available at http://www.asecu.gr/Seeje/issue09/jagric.pdf
Ardic, O.P., Heimann, M., Mylenko, N.(2011): The World Bank Financial and Private Sector Development ; Consultative Group to Assist the Poor January 2011 WPS5537, available at, http://www.cgap.org/gm/document- 1.9.49435/Access_to_Financial_Services_and_the_Financial_Inclusion_Agenda_Around_the_W orld.pdf
Sarajevo Stock Exchange, annual reports available at: http://www.sase.ba
Banja Luka Stock Exchange, annual reports, available at http://www.blberza.com
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Benchmarking reports retrieved from Federation of European Securities Exchanges, Partners for Financial Stability available at http://www.fese.be/en/?id=10&inc=page and http://www.pfsprogram.com/sites/default/files/PFS_Regional- Country_Benchmarking_Report_2011-Feb_23_2012.pdf
Laws on financial market retrieved from Official Gazette of the Bosnia and Herzegovina and Securities Commission of FBiH and Securities Commission of RS, available at http://www.komvp.gov.ba and http://www.secrs.gov.ba
Raiffeisen Research, Monthly Economic Report, (March 2012): available at http://www.rzb.at/eBusiness/services/resources/media/677051657971876801- 677051657971876802_1026067974202_1027874455325_1027874650133-1028324452678-1- 10-EN.pdf http://www.revicon.info/dokumenti/pdf%20doc/RadovanBajic.pdf http://www.centerforfinancialinclusion.org/Page.aspx?pid=1417 http://www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz- cz_ms_1220microfinance_table.html http://www.bh-news.com/en/vijest/2965/mutual_funds_in_bosnia_and_herzegovina.html http://en.wienerborse.at/indices/ http://www.derboersianer.com/uploads/tx_wcresearch/1330498923_4a6fc773c17f04e489262756 5dbee0d9.pdf
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14. Abbreviations
BiH- Bosnia and Herzegovina
FBiH- Federation of Bosnia and Herzegovina
RS- Republic of Srpska
KM- Convertible Mark (Code: BAM)
FBA BIH- Banking Agency of the Federation of BIH
BARS- Banking Agency of the Republic Srpska
CBBiH- Central Bank of Bosnia and Herzegovina
DIA- Deposit Insurance Agency
CRK- Central Registry of Credits
ROAA- Return on Average Assets
ROAE- Return on Average Equity
NGO- Non-Government Organization
MCO- Microcredit Organization
MCC- Microcredit Corporation
MCF- Microcredit Foundations
PIF- Privatization Investment Fund
IF- Investment Fund
DUF- Investment Fund Management Company
SASE- Sarajevo Stock Exchange
BLSE- Banja Luka Stock Exchange
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15. List of charts, graphs, pictures and diagrams
Table 3.1.: Financial Sector Overview
Table 3.2.: Structure of financial services sector for 2008, 2009 and 2010
Graph 3.1.: Share of financial institutions on financial market for 2008, 2009 and 2010
Table 4.1: Banking system assets, 2006-2010
Graph 4.1.: Structure of non-resident’s equity in commercial banks by countries
Table 4.2.: Main indicators of banking system
Graph 4.1.: Total loans - sector structure (in billion KM)
Graph 4.2.: Deposits- sector structure in billion KM
Table 5.1.: Insurance market in BiH and other countries (in USD)
Table 5.2.: Ownership structure and Types of Insurance Operations of the BiH insurance companies
Graph 5.1.: Total premium in BiH
Graph 5.2.: Total premium of life and non-life insurance in BiH
Graph 5.3.: Premiums per capita for some European countries and BiH for 2008, 2009 and 2010
Table 5.3.: Comparative review of the banking sector and insurance sector in BiH and with certain number of European states in 2009 (in million EUR)
Graph 5.4.: Assets and capital in banking and insurance sectors in BiH in 2008, 2009 and 2010 (in 000 KM)
Graph 6.1.: Assets of Leasing Companies (in million KM)
Graph 6.2.: Structure of leasing contracts (in percentage)
Graph 6.3.: Structure of leasing contracts in 2010, in %
Graph 7.1.: Loan portfolio of MCO (in thousands KM)
Graph 7.2.: Financial result of MCOs (in thousands KM)
Graph 9.1.: Indices on SASE
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Graph 9.2.: Indices on BLSE
Graph 9.3: Total and average turnover on SASE
Graph 9.4.: Market capitalization of SASE
Graph 9.5.: Total and average turnover on BLSE
Graph 9.6: Market capitalization of BLSE
Table 9.1.: Total turnover and average yield on War Claim Bonds of listed on SASE
Table 9.2.: Turnover of war claim bonds and Frozen Currency Savings Bonds on BLSE
Graph 9.7.: WCB bonds on BLSE (yield %) and FCS bonds on SASE (yield %)
Graph 10.1.: Stock Trading Volume (as % of GDP)
Graph 11.1.: Credits as a % of GDP
Graph 11.2.: Deposits as a % of GDP
Table 11.1.: Value of stock exchange indices in the region
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16. Appendix
Table 1: Composition of commercial banks' balance sheet (in thousands of KM) Composition of commercial banks' balance sheet (in thousands of KM) Balance sheet 2006 2007 2008 2009 2010 Assets (1)+(2)+(3) 14,698,458 19,519,770 21,048,396 20,918,874 21,076,371 (1) Foreign assets 2,328,570 3,548,357 3,097,765 3,186,047 2,816,559 Short-term 2,282,459 3,446,845 3,004,362 2,989,966 2,562,783 Long-term 46,111 101,512 93,403 196,081 253,776 (2) Domestic assets 9,307,971 11,949,131 14,556,083 14,100,962 14,579,757 Claims on government 68,382 127,553 264,350 350,269 461,552 Claims on non-government 9,239,589 11,821,578 14,291,733 13,750,693 14,118,205 Short-term 2,149,756 2,624,609 3,465,979 3,345,616 3,553,702 Long-term 7,089,833 9,196,969 10,825,754 10,405,077 10,564,503 (3) Reserves 3,061,917 4,022,282 3,394,548 3,631,865 3,680,055 Liabilities (4)+(5)+(6)+(7) 14,698,458 19,519,770 21,048,396 20,918,874 21,076,371 (4) Foreign liabilities 4,032,774 5,159,450 6,309,733 5,747,105 4,782,080 Short-term 408,145 763,575 664,392 576,580 692,322 Long-term 3,624,629 4,395,875 5,645,341 5,170,525 4,089,758 (5) Domestic liabilities 8,798,458 12,100,763 11,889,875 12,102,815 12,541,229 Government 1,465,923 3,069,667 2,303,346 2,005,192 1,664,004 Non-government 7,332,535 9,031,096 9,586,529 10,097,623 10,877,225 Demand deposits 3,846,185 4,664,324 4,612,932 4,630,696 5,086,538 Time and savings deposits 3,486,349 4,366,771 4,960,691 5,448,628 5,774,427 Other 1 1 12,906 18,299 16,260 (6) Capital accounts 2,071,841 2,530,013 2,977,217 3,143,932 3,713,738 (7) Other liabilities -204,615 -270,456 -128,429 -74,978 39,324
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Table 2: Income Statements of commercial banks (in thousands KM)
Income Statement 2007 2008 2009 2010 Interest Income 1,094,632 1,294,897 1,245,261 1,166,940 Interest Expenses 438,438 594,122 537,556 451,655 Net Interest Income 656,194 700,775 707,705 715,285 Operating Income 443,243 455,858 441,242 475,640 Operating and direct expenses 935,413 1,046,225 1,119,731 1,297,661 Income Before Taxes 164,519 112,120 33,535 (61,309) Taxes 20,603 27,453 12,448 17,476
Net Income 143,421 82,955 21,087 (124,290)
Source: FBiH and RS Banking Agencies
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