STRENGTHENING OF THE FINANCIAL SECTOR

Mr. Peter Nicholl, Governor of Central Bank of Bosnia and Herzegovina

REALISING BOSNIA AND HERZEGOVINA’S EUROPEAN POTENTIAL: FROM WAR ECONOMY TO CREDITWORTHINESS AND SUSTAINABILITY

International conference on development of Bosnia and HerzegovinaCG Meeting on Bosnia and Herzegovina

Sarajevo, September 22 and 23, 2004

Four currencies were being used. The only currency used everywhere in the country was the DEM.

There were 76 registered commercial banks

Most were very small

None operated over the whole country

They were mainly state owned

Citizens held very little of their savings in the banks

The non-cash payment system was a monopoly of the state-owned payment bureaus

In summary, the financial sector was small, fragmented, and played little economic role

THE FINANCIAL SECTOR IN BIH IN 1997

Commenced its operations on 11 August, 1997

A state-level institution

Operates under its own Law

An independent institution

Its strategic direction is set by a Governing Board

It has five offices:

Three Main Units – Banja Luka, Mostar and Sarajevo

Two branch offices – Brčko and Pale

THE CENTRAL BANK OF BIH (CBBH)

The most important function of CBBH

The CBBH operates monetary policy through a Currency Board arrangement

Choice of a Currency Board:

It Provides a firm nominal anchor in the form of a fixed exchange rate.

It removed discretion in a situation where there was considerable difficulty in establishing institutions and making political decisions.

Works well in some other Eastern European

MONETARY POLICY

The fixed exchange rate is specified in the CBBH Law

Full foreign exchange backing for all the KM liabilities of the Central Bank

Full convertibility of the CBBH’s KM liabilities into the anchor currency

THE CURRENCY BOARD

The fixed exchange rate is 1KM = 0.51129 euro.

Initial exchange rate was 1 KM = 1 DEM

The KM exchange rate has been unchanged since the CBBH commenced its operations in 1997

Transition from the DEM to the euro as the anchor currency went smoothly

THE FIXED EXCHANGE RATE

CBBH FOREIGN RESERVES

DATE NET FOREIGN RESERVES

MONETARY LIABILITIES FREE RESERVES

DEC 1997 144,1 160,3 - 16,2

DEC 1998 283,3 253,9 29,4

DEC 1999 865,7 836,7 29,0

DEC 2000 1021,2 973,2 48,0

DEC 2001 2666,6 2591,6 75,0

DEC 2002 2463,2 2345,1 118,1

DEC 2003 2.779,6 2.626,3 153,3

JUN 2004 3.167,7 3.007,0 160,8

(end of period – in KM million)

FULL CONVERTIBILITY

(in KM billion)

The fixed exchange rate is specified in the CBBH Law

Full foreign exchange backing for all the KM liabilities of the Central Bank

Full convertibility of the CBBH’s KM liabilities into the anchor currency

KM ISSUED FROM AUGUST 11, 1997 UNTIL SEPTEMBER 10, 2004

KM ISSUED TO BH BANKS KM PURCHASED FROM BH BANKS NET KM ISSUED

15,905 13,016 2,889

The Currency Board has been a very successful type of monetary policy for BH

The KM has been a stable currency against the DEM and the euro since it was introduced.

Inflation in BH is low and stable.

KM use has risen steadily and the KM is the dominant transactions currency in all parts of the country.

SUCCESS OF THE CURRENCY BOARD

INFLATION IN BH

(Retail price index, Annual % growth)

YEAR ENDED FEDERATION OF BH

REPUBLIKA SRPSKA BH AVERAGE

DEC 2000 4,0 16,1 8,0

DEC 2001 0,3 2,2 0,9

DEC 2002 - 0,7 2,4 0,3

DEC 2003 0,3 1,3 0,6

JUN 2004 -0,6 2,0 0,2

Decision of the BH Presidency that the Currency Board will continue, which was stated in the PRSP, which has been endorsed by all levels of government

The Currency Board produced major economic and social benefits

It achieved the main objective – the financial stability through a consistent application of monetary policy

Country is undergoing through very difficult and important political and economic reforms and still required stability

Long term deal – take BH economy closer and into Europe (The exit strategy for BH from Currency Board should be eventual adoption of the euro as in case of some recent members of EU)

THE CURRENCY BOARD IN THE FUTURE

A rapidly improving banking sector

Return of confidence

Return of depositors

Lending on more reasonable terms

Real competition

High level of foreign investments

THE BANKING SECTOR

Reform of the payment system

Significant increases in a banks’ minimum capital requirements

Inter-entity banking

Deposit insurance

Arrival of foreign banks

Privatization of government owned banks

CHANGES IN THE BANKING SECTOR

CAPITAL STRUCTURE IN BH BANKING SECTOR

* (1) In 1999, there were 61 banks operating in BH. * Breakup not available

In the end of 2002, 40 banks operated in BH, 8 banks less than in 2001 and 36 less than in 1997. By May 31, 2003, this number has reduced further to 37

Number of banks, given the ownership structure, is tabled below.

  31.12.2000 31.12.2002 30.06.2004

TOTAL NUMBER OF BANKS 55 40 37

OWNERSHIP:    

PRIVATE BANKS 36 34 30

STATE-OWNED BANKS 19 6 7

CAPITAL STRUCTURE (%):

STATE CAPITAL: 47 10 16

DOMESTIC PRIVATE CAPITAL53*

24 19

FOREIGN PRIVATE CAPITAL 67 65

BANK LOANS

  31.12.200 31.12.2001 31.12.2002 31.12.2003 30.06.2004

  Amount Share Amount Share Amount Share Amount Share Amount Share

TOTALLOANS 1652 100% 2101 100% 3213 100% 5122 100% 5318 100%

PRIVATE COMPANIES 833 50% 988 47% 1304 41% 1860 36% 2156 40%

PUBLIC ENTERPRISES 322 20% 350 16% 361 11% 1167 23% 706 13%

CITIZENS 375 23% 647 31% 1415 44% 1966 38% 2318 44%

OTHER SECTORS 122 7% 116 6% 133 4% 129 3% 138 3%

BANK DEPOSITS

  31.12.200 31.12.2001 31.12.2002 31.12.2003 30.06.2004

  Amount Share Amount Share Amount Share Amount Share Amount Share

TOTAL DEPOSITS 2094 100% 3324 100% 4158 100% 4366 100% 4938 100%

OUT OF IT:

DEPOSITSIN KM 895 43% 1214 36% 1749 42% 2274 52% 2671 54%

DEPOSITSIN FOREIGN CURRENCY

1199 57% 2110 63% 2409 58% 2092 48% 2266 46%

INTEREST RATES

PRIVATE ENTERPRISES HOUSEHOLDS

 

SHORT-TERMLENDING RATES

LONG-TERMLENDING RATES

DEMANDDEPOSITS

RATES

TIME ANDSAVINGS

DEPOSITSRATES

DEC 2002 12,07% 10,59% 1,44% 4,38%

DEC 2003 10,54% 9,18% 0,96% 3,40%

JUN 2004 10,15% 8,57% 0,84% 3,63%

BiH received its first formal sovereign credit rating in early 2004: B3 with a positive outlook (Moody’s)

National Capital Markets Council formed in 2003

Two stock exchanges established

Private investment funds established

Registry of transaction accounts established

Preparations for putting of entity-based banking agencies under the CBBH umbrella almost completed

CBBH started to collect and publish the data on government finances

OTHER CHANGES IN FINANCIAL MARKETS IN LAST TWO YEARS

Government securities market will be established soon

Leasing Law has to be passed soon

Banking supervision will shift under the CBBH in 2005

Money market instruments will be developed

Harmonization with EU standards and regulations

FUTURE INITIATIVES IN THE BIH FINANCIAL SECTOR