1. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i THE BANKING SYSTEM AND THE ECONOMIC DEVELOPMENT OF THE REPUBLIC OF MACEDONIA Petar Goshev M.Sc. Petar Goshev M.Sc. Governor Governor

2. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Role and importance of the Banking System in the Republic of Macedonia The Banking System is the main financial intermediary in the Republic of Macedonia, and hence it plays the key role in financing the economic growth of the country. The Banking System is the main financial intermediary in the Republic of Macedonia, and hence it plays the key role in financing the economic growth of the country. There is no prosperous market economy without stable and efficient financial intermediation. There is no prosperous market economy without stable and efficient financial intermediation. There is no doubt that in circumstances when banking dominates the financial intermediation in the Republic of Macedonia, the Banking System should be a driving force of the growth and development of the country. There is no doubt that in circumstances when banking dominates the financial intermediation in the Republic of Macedonia, the Banking System should be a driving force of the growth and development of the country.

3. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? Main preconditions for the banks to perform their role: Main preconditions for the banks to perform their role: Stability; Stability; Operational efficiency primarily expressed by: Operational efficiency primarily expressed by: Sound internal policies and procedures for efficient allocation of the financial potential; Sound internal policies and procedures for efficient allocation of the financial potential; Optimization of the overhead expenses; Optimization of the overhead expenses;

4. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? Business environment which will enable functioning of the principles of market economy and reasonable level of risks undertaken by the banks when performing financial intermediation. Business environment which will enable functioning of the principles of market economy and reasonable level of risks undertaken by the banks when performing financial intermediation.

5. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? Banking System stability as the main precondition for efficient conducting of its main function in the Republic of Macedonia has been achieved: Banking System stability as the main precondition for efficient conducting of its main function in the Republic of Macedonia has been achieved: Avoided systemic banking crisis which a number of countries in transition faced with (Czech Republic, Croatia, Bulgaria etc.). The Banking System of the Republic of Macedonia passed the stability test in 1999 during the Kosovo crisis and in 2001, during the political and security crisis in the Republic of Macedonia. Avoided systemic banking crisis which a number of countries in transition faced with (Czech Republic, Croatia, Bulgaria etc.). The Banking System of the Republic of Macedonia passed the stability test in 1999 during the Kosovo crisis and in 2001, during the political and security crisis in the Republic of Macedonia.

6. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? The average capital adequacy ratio of the banks is 23.1%, however registering a downward trend, as a result of the growing financial intermediation in the Republic of Macedonia; The average capital adequacy ratio of the banks is 23.1%, however registering a downward trend, as a result of the growing financial intermediation in the Republic of Macedonia; Satisfactory liquidity position of banks. During the first half of 2005, the average liquid assets of banks equaled 43.3%. Satisfactory liquidity position of banks. During the first half of 2005, the average liquid assets of banks equaled 43.3%.

7. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? The level of credit risk retains the downward trend. Banks’ credit exposure classified in risk categories C, D and E was 11.8% at the end of June 2005, which is a decline of 4.1 p.p. relative to end 2002. The level of credit risk retains the downward trend. Banks’ credit exposure classified in risk categories C, D and E was 11.8% at the end of June 2005, which is a decline of 4.1 p.p. relative to end 2002. The process of operational restructuring of banks continues, especially in the banks that are part of larger banking groups (establishing adequate risk management systems, adequate systems for increasing internal efficiency and costs optimization, broadening of the array of banking and financial products etc.) The process of operational restructuring of banks continues, especially in the banks that are part of larger banking groups (establishing adequate risk management systems, adequate systems for increasing internal efficiency and costs optimization, broadening of the array of banking and financial products etc.)

8. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Is stability sufficient? Is stability sufficient? Once stability is established and maintained, the challenge comes from the need this stability to be used as a basis for increasing the banks’ efficiency for the benefit of the economy of the Republic of Macedonia, however, not compromising their stability. On its part, increased efficiency should bring sustainable stability for banks in a medium and in a long run.

9. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? What do indicators of banks’ efficiency in the financial intermediation in the Republic of Macedonia show? What do indicators of banks’ efficiency in the financial intermediation in the Republic of Macedonia show? Total assets/GDP=50% Total assets/GDP=50% Total credits/GDP=23.8% Total credits/GDP=23.8% Total deposits/GDP=35.3% Total deposits/GDP=35.3%

10. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? Trend of improvement of the three indicators of efficiency in the banks’ financial intermediation Trend of improvement of the three indicators of efficiency in the banks’ financial intermediation

11. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Does the Banking System in the Republic of Macedonia perform its role, and to what extent? Sources of this trend Sources of this trend Increase in deposits Increase in deposits Increase in credits Increase in credits Increase in total assets Increase in total assets All three categories are at the historically highest level since the Republic of Macedonia gained its monetary independence.

12. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i According to the credit volume and dynamics, are the banks in the Republic of Macedonia supporting development? Continuous upward trend in the banks’ credit activity: Continuous upward trend in the banks’ credit activity: Growth of credits of 39.4% for the period 31.12.2003 – 30.06.2005; Growth of credits of 39.4% for the period 31.12.2003 – 30.06.2005; In the same period, the total banks’ credit exposure registered an increase of 25.1%; In the same period, the total banks’ credit exposure registered an increase of 25.1%;

13. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i According to the credit volume and dynamics, are the banks in the Republic of Macedonia supporting development? Starting from 31.12.2004, there is a change in the structure of banks’ assets in favor of credits to the non-financial sector, at the expense of the share of the placements to foreign banks. Starting from 31.12.2004, there is a change in the structure of banks’ assets in favor of credits to the non-financial sector, at the expense of the share of the placements to foreign banks. Credits to non-financial entities/Total assets=40.7%; Credits to non-financial entities/Total assets=40.7%; Placements to other banks/Total assets=34.2%; Placements to other banks/Total assets=34.2%;

14. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i According to the credit volume and dynamics, are the banks in the Republic of Macedonia supporting development?

15. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Can be more done? Banks’ financial potential is continuously increasing: Banks’ financial potential is continuously increasing: During the first half of 2005, total banks’ assets registered an increase of 12.1% and reached Denar 132.2 billion, which is historically the highest level since the Republic of Macedonia gained its monetary independence; During the first half of 2005, total banks’ assets registered an increase of 12.1% and reached Denar 132.2 billion, which is historically the highest level since the Republic of Macedonia gained its monetary independence; The process of operational restructuring of banks and improvement of their internal policies and procedures continues, and the array of products offered on the banking market is broadened; The process of operational restructuring of banks and improvement of their internal policies and procedures continues, and the array of products offered on the banking market is broadened;

16. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Can be more done? On the other hand, there are factors which restrict further credit growth : On the other hand, there are factors which restrict further credit growth : Major credit expansion of banks in a short period may cause instability which, in turn, will have an adverse effect on the economy as a whole. In the race for higher profit, the banks must retain their prudential position: Major credit expansion of banks in a short period may cause instability which, in turn, will have an adverse effect on the economy as a whole. In the race for higher profit, the banks must retain their prudential position:

17. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Can be more done? The average capital adequacy ratio of the group of large banks, where the largest potential for increasing the financial intermediation is concentrated, equals 14.9%, which could be a restrictive factor; The average capital adequacy ratio of the group of large banks, where the largest potential for increasing the financial intermediation is concentrated, equals 14.9%, which could be a restrictive factor; Lack of quality demand for credits for financing profitable projects with acceptable level of credit risk; Lack of quality demand for credits for financing profitable projects with acceptable level of credit risk; Despite the downward trend, credit risk in the Republic of Macedonia is still relatively high. Despite the downward trend, credit risk in the Republic of Macedonia is still relatively high.

18. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Is the price of bank credits in the Republic of Macedonia high? It is a fact that interest rates on bank credits are relatively high. It is a fact that interest rates on bank credits are relatively high. Presumptions for lowering the interest rates: Presumptions for lowering the interest rates: Lessening of the political risk and improvement of the overall business climate in the Republic of Macedonia; Lessening of the political risk and improvement of the overall business climate in the Republic of Macedonia; Increased demand for credits by quality borrowers; Increased demand for credits by quality borrowers; Increased competition in the banking sector; Increased competition in the banking sector; Increased internal efficiency of the banks and reduced level of their overhead expenses; Increased internal efficiency of the banks and reduced level of their overhead expenses; Increased efficiency of the judiciary. According to the latest analyses, banks’ claims in the amount of nearly Denar 25 billion are “blocked” in the courts in the Republic of Macedonia. Some of those claims go back as early as 1993. Increased efficiency of the judiciary. According to the latest analyses, banks’ claims in the amount of nearly Denar 25 billion are “blocked” in the courts in the Republic of Macedonia. Some of those claims go back as early as 1993.

19. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Can we be satisfied with the existing conditions in the Banking System and its role in the economy? The answer is positive if one has in mind how long-lasting the development of the banking on market basis in the Republic of Macedonia is, with all risks in its surrounding. The answer is positive if one has in mind how long-lasting the development of the banking on market basis in the Republic of Macedonia is, with all risks in its surrounding. If we have in mind the point at which we should arrive, the answer is negative, and there are still many things to be done in order to strengthen the role of the banking in the economy of the Republic of Macedonia. If we have in mind the point at which we should arrive, the answer is negative, and there are still many things to be done in order to strengthen the role of the banking in the economy of the Republic of Macedonia.

20. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Concept and activities of the National Bank of the Republic of Macedonia for strengthening the role of the Banking System in the economy Further strengthening of the supervisory function; Further strengthening of the supervisory function; Strict implementation of the prudential standards for sound banking operations; Strict implementation of the prudential standards for sound banking operations; Implementation of a strategy for increased presence of financial institutions as shareholders in the banks in the Republic of Macedonia v.s. the shareholders from the corporate sector and the natural persons; Implementation of a strategy for increased presence of financial institutions as shareholders in the banks in the Republic of Macedonia v.s. the shareholders from the corporate sector and the natural persons; Maintaining and development of the Credit Registry as an instrument for reducing the asymmetry of information in the system and increasing the quality of information that the banks use in their credit decision-making process; Maintaining and development of the Credit Registry as an instrument for reducing the asymmetry of information in the system and increasing the quality of information that the banks use in their credit decision-making process;

21. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Concept and activities of the National Bank of the Republic of Macedonia for strengthening the role of the Banking System in the economy Amendments to the Banking Law are proposed, envisaging: Amendments to the Banking Law are proposed, envisaging: Increase of the capital census for establishing and operating a bank; Increase of the capital census for establishing and operating a bank; Strengthened “fit and proper” criteria for eligible shareholding in a bank; Strengthened “fit and proper” criteria for eligible shareholding in a bank; Enhanced legal power of the National Bank with respect to revoking approvals from existing shareholders in the banks if they represent risk for the banks and their creditors, as well as for the system as a whole; Enhanced legal power of the National Bank with respect to revoking approvals from existing shareholders in the banks if they represent risk for the banks and their creditors, as well as for the system as a whole;

22. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Concept and activities of the National Bank of the Republic of Macedonia for strengthening the role of the Banking System in the economy New solutions pertaining to receivership, which should enable its efficiency in the rehabilitation of banks and adequate protection of the assets of their creditors; New solutions pertaining to receivership, which should enable its efficiency in the rehabilitation of banks and adequate protection of the assets of their creditors; Possibility to introduce receivership in case when over 50% of the common shares are without a voting right; Possibility to introduce receivership in case when over 50% of the common shares are without a voting right; Introducing a mechanism for auction sale of shares if the existing shareholders, on the one hand, are not able to rehabilitate the bank, and on the other, they are blocking the sale of the shares to other entities which have the know how and are able to rehabilitate and run a bank; Introducing a mechanism for auction sale of shares if the existing shareholders, on the one hand, are not able to rehabilitate the bank, and on the other, they are blocking the sale of the shares to other entities which have the know how and are able to rehabilitate and run a bank; Other solutions which increase the competences of the receivership towards maximum protection of the position of the creditors of a bank in receivership. Other solutions which increase the competences of the receivership towards maximum protection of the position of the creditors of a bank in receivership.

23. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Concept and activities of the National Bank of the Republic of Macedonia for strengthening the role of the Banking System in the economy Giving initiatives and proposals for amendments to other Laws in the Republic of Macedonia, which directly or indirectly influence banks’ security, stability and efficiency. Giving initiatives and proposals for amendments to other Laws in the Republic of Macedonia, which directly or indirectly influence banks’ security, stability and efficiency.

24. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Summarized in a few words: The Banking System in the Republic of Macedonia is relatively stable. The Banking System in the Republic of Macedonia is relatively stable. The growth dynamics is accelerated. The growth dynamics is accelerated. Its role as the key factor for the growth and development of the economy is increasing. Its role as the key factor for the growth and development of the economy is increasing. From the viewpoint of the initial position, we may be satisfied, but having in mind the point at which we should arrive, a lot of work remains to be done. From the viewpoint of the initial position, we may be satisfied, but having in mind the point at which we should arrive, a lot of work remains to be done.

25. NATIONAL BANK OF THE REPUBLIC OF MACEDONIA 5/24/2015 i Yet, when evaluating the role of the banking system, we must not forget that: Just as it is not possible to have a market economy without sound, stable, and efficient financial intermediation, it is not possible to have a sound financial sector without firmly established system of market economy. Hence, the evaluations of the efficiency of the banking sector must always consider this interaction. Isolated consideration may lead to biased and incorrect evaluations of the banking and its role in the economy.