World Report

Privatisation, mergers and rationalisation lie ahead for the industry, which is starting to open up to foreign players

here is still some way to go before Bosnia and Herzegovina has a banking system that can play a major economic role, according to the governor of the central bank, Peter Nicholl. “Just about everything in the banking sector has to change, and is already changing,” he says.

Nicholl
‘The country has had stable fiscal policies, which are pretty tough’

Rapid improvements have taken place over the past year, resulting in a fully reformed payment system, increased minimum capital and deposit insurance, bringing back confidence.
One step was to align the national currency directly to the Deutsche Mark (DM), then arguably the most important monetary unit in Europe. The other was to agree to, and abide by, the budgetary disciplines imposed under the country’s standby loan accord with the International Monetary Fund (IMF).

Choosing to set up a currency board and peg the Convertible Mark (KM) one-to-one with the German currency was not a difficult decision, says Mr Nicholl, a New Zealander appointed at the behest of the IMF to head the central bank in 1997.
“The DM was the currency that was already being used and trusted,” he explains. “One didn’t have to spend any time convincing people that the DM was actually a good currency – they already knew that.”
The theory behind establishing a direct link with the DM was that the inflation rate in Bosnia and Herzegovina would be similar to that of the anchor currency, he explains.

“I say similar rather than identical because there will be local pressures, so that one would expect the inflation rate to be higher in Bosnia and Herzegovina because it is a country in transition. It is not unusual that the rate here is three-to-four per cent a year when it is two per cent in Europe.”
Inflation has been restricted by tighter budget controls. “The country has had stable fiscal policies in the sense that, under the IMF standby agreement, all levels of government have to run balanced budgets, which means that fiscal policy is pretty tough,” says Mr Nicholl.
A key reform introduced last year was the abolition of the old communist system of payment bureaux, through which all commercial transactions used to be carried out. The decision has far-reaching ramifications for the banking system.

“Bosnia and Herzegovina was the first country in ex-Yugoslavia to abolish the system,” points out Wolfgang Petritsch, the international community’s High Representative and a keen advocate of economic reform. He was largely instrumental in pushing through the change with financial support from the US and technical assistance from Britain and Germany, the World Bank and other international organisations.
“Now, instead of the old system of payment bureaux we have a commercial banking system, and you can see that several international banks have entered the market as a result of that change,” he says. Mr Petritsch emphasises the importance of the role being played by overseas experts in overhauling the financial markets and banking sector. “This is a transition period where we are trying to monitor processes and then finally leave,” he says. “But right now the international community is still very much in control and that is still necessary because it has added value for prospective investors here.

“They can count on us because we are disinterested partners when it comes to party political preferences. We are not here to support any party – we are here to support principles, and those are Western principles.”
The central bank’s main task is to supervise a banking sector that most analysts agree has too many institutions – 56 at the latest count.
“There are far too many banks for a country of this size,” says Mr Nicholl. “Most of them are very small and a lot of them don’t actually do much banking.”
His reckoning is that the top 10 banks carry out 65 per cent of all financial transactions and that perhaps 20 banks in all account for 95 per cent. This, says the central bank governor, “means that there are another 20 banks that are not doing a great deal, and these will have to merge or go into liquidation”.

Travar
‘We want to distribute deposits back into economic development ’

Mr Nicholl believes that Bosnia and Herzegovina will see a number of mergers. This view is endorsed by Ranko Travar, director of the state-owned development bank Razvojna Banka, based in Banja Luka. “I expect a drastic reduction in the number of banks,” says Mr Travar. “The process has already begun and it is going a bit faster in the Bosniak-Croat Federation than in the Serb Republic. In such a small market, only a few banks will be able to survive.”
The next big reform, privatisation in the banking sector as well as the economy as a whole, is under way. Razvojna Bank, the biggest local bank in the Serb Republic, is itself in the process of being sold.
In the meantime, Mr Travar is urging the authorities to press on with further reforms to develop the financial markets. While a banking guarantee agency has been set up in the federation, a similar institution has yet to be created in the Serb Republic.

Mr Travar argues that reforms should be aimed at improving the security of deposits in the banking system and to recirculate those funds through loans to businesses and individuals.
“We want to distribute deposits back into the development of our economy, specifically into small and medium-sized enterprises,” he says.
“Unfortunately, the legal preconditions for protecting this money have not been established. That is the reason why all the banks, and Razvojna is one of them, are very cautious when it comes to giving out credit. We select clients according to their ability to return our credit on time and pay interest rates.”

The biggest problem, he says, is a lack of trust in the banking sector dating back many years. He sees the solution as selling off the old state banks and allowing foreign banks into the market.
“We expect a lot from privatisation in which a foreign partner, preferably a well-known bank, would buy up a controlling package. That would contribute a lot in terms of building up the trust of clients who want to save money,” says Mr Travar.
Mr Petritsch adds that opening up the financial markets to foreign banks is good for them and the country as a whole. “They are doing great business because of the simple fact that the locals do not trust their old banks, which means they go to the Western ones. It is a vital pre-condition for every investor to be able to come
into a country where there is a Western banking system,” he says.