FINAN CIAL SE C TOR IN BH

1. FINANCIAL SECTOR IN BH byKEMAL KOZARIĆ Sarajevo, November 3, 2006

2. Financial sector in BH • Banking sector; • Micro credit sector; • Leasing companies; • Insurance companies; • Capital markets; • Other financial services

3. Development of the Banking Sector • Reform of the banking sector • Banks’ privatization; • Increase of the minimal capital requirement; • Development of the banking network in the whole area of BH and expanding the range of banking services; • Deposits’ insurance; • Sound competition and transparency in operations • Taking over of the payments systems; • On 31 December, 2005, the number of employees was 8.392, and on 30 June, 2006 this number is 8.716 employees; • Performed profit in 2005 was KM 73 million, a on 30 June, 2006 it was KM 55,4 million.

4. Situation in the banking sector – 30 June, 2006 • Increase of the banking assets - KM 12,8 billion; • Confidence and savings’ increase - KM 3,8 billion; • Out of total number of banks, 23 are in the deposit insurance scheme; • Share capital – KM 1,1 billion, out of that private capital is KM 962 million KM or 87 %; • Out of total banking potential, KM 7,7 billion were allocated or 70 %; • Increase in volume of payments transactions – in 2005 KM 36,2 billion was performed in BH, and for ten months of 2006, KM 38,3 billion. On 2005, 22,9 million of payments transactions were performed, and for 10 months of 2006 20,4 million; • Down ward trend of interest rates*. * - Access to loans

5. Banking sector: Interest rates

6. Banking Sector:Capital structure * - Separate data are not available

7. Banking sector: Loans (end of period – in KM million)

8. New Model of Banking Supervision in BH • It is necessary to strengthen the function of supervision over the banking sector, that shall operate on decentralized basis and establish it on unified regulations in the whole area of BH; • The prevailing opinion is that the most effective model of establishment of banking supervision is the one on unified basis at BH level; • Suggested models: • Unified banking supervision under the CBBH auspices; • Independent authority for supervision of banking sector at BH level; • Independent authority for supervision of entire financial sector at BH level.

9. Advantages of establishment of the banking supervision in the CBBH • Efficiency, that shall imply the issuing of the operation license by one supervisory authority, that shall perform the activities through the network of banking supervision branches; • Unified approach to the supervision in the entire area of BH; • Independence, since the CBBH is independent institution and the supervision in the CBBH shall have the high degree of independence – the political influences, so far present, shall be avoided; • Financing of the supervision can be supported by the CBBH, if the reimbursements from the banks are not enough; • Supervision becomes increasingly complex and supervisory policies are changed and Standards of Basle II and consolidated supervision should be adopted. This shall be more simple to implement if the unified supervision is established with small but expert department for analyses of the supervision policies.

10. Advantages of establishment of the banking supervision in the CBBH (2) • Work with the problematic banks will be more simple, since the CBBH is independent and has stronger position to work with them; • Reporting on banking supervision will be in one place as a special part of the CBBH report, while the financial statements, which are related to the activity of banking supervision, shall make the consolidated financial report of the Central Bank of BH, which is included in balance sheet and the profit and loss account; • The unified supervision within Central Bank shall provide also more comprehensive prudential analyses at the macroeconomic level.

11. Remarks • If we look upon the model of supervision in the Region , it is interesting to mention that around 80% of European Union countries, as well as, all countries of former Yugoslavia, have the supervision performed within the own central banks; • Establishment of adequate banking supervision on unified foundations in BH is one of priority tasks, which is established also in documents, made in cooperation with the European Commission, and they are related to the process of negotiations on Stabilization and Association Agreement with the EU; • The IMF mission supported the organization model of banking supervision under the auspices of the CBBH.

12. Micro credit organizations • Activity of crediting categories that do not have access to the banking sector; • They also provide consulting services in running and improvement of their clients business; • During 2005, 155,261 loans were allocated, totaling to KM 441 million, and on 30 June, 2006, 79,991 loans were allocated in the total amount of KM 240 million; • Active portfolio in 2005 was KM 315 million, and on 30 June, 2006 it was KM 364 million, • Number of active clients in 2005 was 145.881, and on 30 June, 2006 it was 160.285; • Average amount of credit in 2005 was KM 2.336, and on 30 June, 2006 it was KM 2.169 • One active loan “employees” in average 2,1 workers; • According to this indicator it is to assume that this Sector in 2005 could provide the employments for 306.350 persons, which should ensure the transfer of the employed from informal into formal sector, but almost 90% of employed stayed in the “grey economy” sector.

13. Improvement of the micro credit sector • According to the new solutions, the body responsible for the banking supervision is in charge also of supervision of micro credit organizations. New Law provides also the transformation of micro credit organizations in commercial legal entities (micro credit foundations – as non-profit form and micro credit companies – as profit form); • Arranged system and adequate supervision shall provide stability in operations of this sector and it is to expect that in this sector positive operations trends will happen as those from the banking sector (merging, competition, transparency).

14. Leasing companies • Financial leasing proved to be very efficient and suitable form of financing and has big number of advantages for a lessor and lessee; • As advantages to the leasing we can point out the financial reasons, cost effectiveness and benefits, then, the collateral security is not needed, there is quick processing of applications and flexibility; • At BH market, these companies have been present since 2001, when the first leasing company was established, and today we have six leasing companies which operates at the area of entire BH with their branches and subsidiaries.

15. Leasing companies (2) • Value of the contracted Agreements on leasing in 2004 was EUR 106 million, and in 2005 it was EUR 185 million, which is an increase by 74%. On 30 September, 2006 the value of Agreements was EUR 180, 3 million; • During 2005, the sale of cars through leasing had share of 43%, machines and equipments also the one of 43%, real property of 13% and other items of 1%; • In the first nine months of 2006, the sale of real properties through leasing had share of 38%, cars of 34%, equipment of 27% and other items 1%.

16. Improvement in leasing operations • Given the Region of Central and Southeast Europe, which BH belongs to, statistics show that this area records the biggest increase in leasing business; • It is expected that the number of leasing companies and the volume and value of leasing operations in BH continue to have the upward trend, and it is necessary to provide adequate regulations of this activity and its supervision; • The functioning of these companies is established on the Law on Obligations Relations, and it is necessary to pass as soon as possible the adequate Law that shall regulate their work and the supervision.

17. Improvement of leasing operations (2) • Considering the value of contracted agreements out of the leasing business in BH, it is necessary to have this area insured against risk, too, and it is necessary to apply the international standards that are implemented in this area, • The experience of the neighboring countries can be useful , specially, because the leasing companies operating on BH area are also operating in the area of neighboring countries.

18. Leasing in BH and in the Region

19. Insurance companies • Insurance as a part of total financial system has important share in the BH financial market; • There are 31 (22+9) insurance companies operating at the area of BH. • As in other segments of the financial institutions and in the area of insurance we can expect that there will happen the merging and decreasing in total number of insurance companies, which shall bring to concentration of capital in insurance sector and efficiency in work; • Insurance premium in 2005 in BH reached the amount of KM 357 million.

20. Current regulations for the insurance • Laws on the Insurance are brought at the entity levels and they are quite harmonized; • New Laws on the Insurance have done the classification of risks according to the types of insurance of European Union legislation and new height of the foundation capital is established; defined obligation of maintenance of the solvency margins of the guaranteeing fund; there is follow up of solvency standards, regulation rates, regulation of investments, licensing of agents, regulation of proceedings in law implementation etc. • The Insurance market is divided as well as supervision.

21. Necessary changes • Applications for spreading of branches network in the whole area of BH are increasing, but there are obstacles of administrative nature, when in question is issuing of the license and performance of supervision in operations of these companies; • Those obstacles should be over passed and the unified criteria in operations and supervision should be applied.

22. Capital Market (1) • Issuing of good quality state securities; • To make the capital market attractive for foreign investors; • Regional connection of stock exchanges of South East Europe; • Enhancing of other instruments of capital market: corporative securities, entities securities, treasury notes, deposits certificates, securities of low levels of authorities...., • Market participants: Commissions for Securities, Stock Exchanges (Sarajevo and Banja Luka one); Securities Registries, Brokerage houses and commercial banks; • Law on Indebtedness, Debt and Guarantees of BH is adopted on 29 June, 2005, and the Law on Settlements of Obligations arising from the account of old foreign savings was adopted on 13 April, 2006.

23. Capital Market (2) • CBBH is ready for the role of fiscal agent – it possesses the infrastructure and the qualified staff; • Also, Securities Commission from both entities, Registries of Securities from both entities, stock exchanges from both entities and commercials banks are ready for the start of issuance; • We are waiting for the decision of the state authorities and issuance of securities by the state; • It is important that in the first moment we issue high quality securities, by which the market will have its credibility; • SEM - The Stock Exchange Monitor is information platform of South East Europe Stock Exchanges. In this moment there are 8 participants - stock exchanges, with the markets including over 2.190 securities and over 170 brokerage houses.

24. Capital Market: Stock Exchanges in BH (2) Total turn over in the Stock Exchanges in BH in the first nine months of 2006 was € 305.216.915,89 Sarajevo stock exchange Banja Luka stock exchange €187.252.557,48 € 117.964.358,41

25. Role of BH commercial banks - possibilities for investing of excess liquidity

26. New financial jobs • The mere process of globalization influences also the financial sector, so in this segment too, there are trends of introduction of new financial jobs which are present in international market, such as: factoring jobs, futures, insurance of exporting jobs, repo transaction etc; • By the above mentioned financial jobs we can achieve the significant volume of operations in financial market, and this segment should be given the importance, too, as far as the regulations and adjustment with the international standards are concerned.

27. Conclusion • The importance of all above mentioned segments of the financial sector is very relevant for establishment and maintenance of financial stability; • Financial stability to the high degree depends on arrangement of system solutions (harmonization of regulations and bringing of necessary regulations at state level). • It is necessary to have the adjustment of regulations with the European Union standards; • As for the supervision of financial sector we can consider two models – individual supervision per certain segments, or supervision of total financial sector, which is long term process.