Role of the Central B ank of Bosnia and Herzegovina in S ocially R esponsible F inancing

1. Role of the Central Bank of Bosnia and Herzegovina in Socially Responsible Financing Panel discussion: “Socially Responsible Financing in BH” Kemal Kozarić, Ph.D., Governor of the Central Bank of BH Sarajevo, 8 December 2009

2. CBBH and Responsible Financing • The Central Bank, together with financial intermediaries and clients, is a pillar of the financial system, so the maximum engagement of all them is necessary to maintain the financial stability • There are four basic parameters which regulate the role of a central bank: • Independence • Credibility • Responsibility • Confidence in the central bank

3. Credibility and Responsibility of the Central Bank • Credibility: • Central bank has credibility if the public believes that it will actually do what it has announced • Responsibility: • The responsibility of the central bank is reflected in the conduct of monetary policy in a manner that will provide monetary stability and financial stability, low inflation, confidence in the local currency • An important factor is also confidence in the institution • “Trust is hard to acquire, and easy to lose.”

4. The System of Control in the CBBH Governing Board, Governor, Audit Committee, Management Controlling Audit in accordance with the degree of risk Office of the Main Internal Auditor Internal control system Management, All employees

5. Risk Management in the CBBH • Risk management in the function of socially responsible financing in the CBBH • The CBBH is especially exposed to the following risks: • System risk • Financial risk • Operational risk • Decision-making information risk (ISO 27001) • Internal and external reporting risk

6. Risk Management in the CBBH • System risks: • Required reserve policy • Control and maintaining the liquidity of commercial banks • Foreseeing and preventing the possibility of domino effect • Financial risks: • Efficient management of foreign exchange reserves • Credit risk – foreign exchange reserve investment risk • Market risk – the possibility of external market influences on the value and the structure of the CBBH balance sheet (interest rates risk and currency risk) • Liquidity risk – the possibility to smoothly convert the invested portfolio into liquid assets • Operational risks: • Culture - organisation management risk (encouraging of management and other employees to show real performance) • Reputation loss process – improper conducting of the process can result in the loss of reputation and undermining the bank’s basic activities

7. Impact of Crisis on the Banking Business • The global financial crisis has proved that the responsible financing principle was not developed enough by banks and clients • Business conditions deterioration, and overall decline of citizens standard, as a consequence of the economic crisis, led to a significant increase of non-performing loans, which caused the deterioration of the assets quality (NPL 2,8% in the total assets)

8. Behavior of Commercial Banks • Before the crisis: • Large expansion – high competition, a limited number of good quality clients and projects • Agressive marketing approach • A large number of instant products without the adequate education of clients • Significant credit growth • During the crisis: • Insufficient partnership with the client – a lack of flexibility to the client • PR and marketing services were not able to stop the negative perception • Change of business behavior: • Shifting the focus from lending to deposits • Conservative and restrictive business approach • Extensive risk evaluation for new investments

9. The Structure of the Financial Sector in BH • The banking sector dominates the financial system in BH. The share of this sector’s assets in the total financial system assets at the end of 2008 amounted to 80.9%. At the end of 2008 , 95% of the total assets and 88.4% of average equity was concentrated in banks with majority foreign ownership. Just like the banking sector, the other parts of the financial sector have also felt the effects of financial crisis. • Table: Assets of financial intermediaries

10. Liquidity Risk is Low, the Main Problem is the Quality of Loans

11. The Ratio of Loans and Deposits

12. Clients’ Behavior • Before the crisis: • Large expansion in the use of services of commercial banks • Lack of knowledge on every aspect of the service and wrong perceptions from the past regarding commitments • Frequent thoughtless entry in debtor-creditor relations • During the crisis: • “Meeting the reality” • Unjustified and justified anger at banks • Acceptance of the media as the best advisor.

13. What has the Crisis Revealed? • There is a question whether the clients were left alone? • Consumers protection law proved to be incomplete • The necessity of strengthening the other segments in order to protect clients (deposit insurance scheme) • Clients needs education on financial services

14. The Media as a Partner in the Responsible Financing • Minimized role in responsible financing promotion • Negative media campaign • Lawsuits as a result • Have we contributed to the current situation, by our actions? • In the future we must work to develop partnership relations with the media

15. Conclusion • All elements of financial sector must work on responsible financing promotion • Banks must work on educating the public and clients, and adopt the concept of individual approach to the client • Financial crisis has resulted in positive effects also: • Risk management is improving • Priority is the safety of return • The most important approach in the future is an active approach to every client • BH Commitee for Financial Stability is established, by the decision of the Fiscal Council • CBBH will continue to work on raising awareness of responsible financing