MONETARY POLICY AND BANKING SECTOR IN BOSNIA AND HERZEGOVINA Presentation by: Vice Governor of the CBBiH Ljubiša Vladušić Vienna, 24 April 2003

2 Monetary policy in Bosnia and Herzegovina: Currency Board arrangement: Irreversible fixed exchange rate against EURO: 1 KM = 0,51129 euro Full coverage of monetary liabilities by foreign exchange reserves Unlimited convertibility of BAM towards EURO and vice versa

3 1.Very high currency substitution in the country 2. Variety of official currencies in the country (depending on the region in the country) 3. Extensive foreign aid (transfers) 4. Recent changeover to Euro The result is that the CBBH balance sheet almost doubled in a year. Positive shocks and their contribution to the rapid growth of reserve money:

4 Currency board has had a positive impact on: Stabilization of prices Elimination of high inflation Stabilization of public finance Currency Board arrangement and inflation:

In% BiHFBiHRS Inflation in BiH

6 RR is the only instrument of monetary policy available to the Central Bank of BiH, under the currency board arrangement Required Reserves (RR): Efficiency and flexibility Harmonization Financial stability Goals

7 Deposits The total deposits in the end of 2002 amounted to KM million and were higher by 25 % compared to the deposit balance at 2001 year end.The total deposits in the end of 2002 amounted to KM million and were higher by 25 % compared to the deposit balance at 2001 year end. Given the structure of deposits by sectors, the share of citizens’ deposits is the largest -39 %, followed by that of private companies and associations 20 %, that of government institutions 13 %, public enterprises 10 %, and other deposits 18 %.Given the structure of deposits by sectors, the share of citizens’ deposits is the largest -39 %, followed by that of private companies and associations 20 %, that of government institutions 13 %, public enterprises 10 %, and other deposits 18 %. Given the structure of deposits by currencies, the share of KM deposits is growing, deposits in foreign currency still being significantly higher, taking 58% of the total deposits.Given the structure of deposits by currencies, the share of KM deposits is growing, deposits in foreign currency still being significantly higher, taking 58% of the total deposits. Citizens’ savings At the end of 2002, citizens’ savings amounted to KM million, an increase of 10 % compared to the previous year. 86% of savings is concentrated in 8 banks. In 2002, Deposit Insurance Agency admitted ten banks in its membership.

8 : Structure of deposits by currencies is shown in the following survey: AmountShareAmountShareAmountShare TOTAL DEPOSITS % % % Out of it: Deposits in KM89543%121436%174942% Deposits in foreign currency119957%211063%240958% In millions of KM Structure of deposits by maturities is the following:Structure of deposits by maturities is the following: 76 % short-term deposits,76 % short-term deposits, 24 % long-term deposits.24 % long-term deposits.

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10 Basic features of banking sector operations in Bosnia and Herzegovina in 2002 are the following: 1.Rapid process of banks privatization 1.Rapid process of banks privatization; 2.Meeting the set minimal banks’capital requirement (KM 15 million); 3.Merger of banks; 4.Considerable increase of assets and capital 5.Increase of credit potential 6.Stabilization and consolidation of banking sector; 7.Supply of new products and services; 8.Amendments and supplements of regulations; 9.Deposit insurance; 10.Increased volume of payment transactions.

11 At the end of 2002, stock capital amounted to KM 745 million and was higher by 19 % compared to 2001 Given the capital structure, the upward trend of private capital is evident. The share of private capital in the total capital was 81% at 2001 year end, whereas this share amounted to 90% at 2002 year end. The share of foreign capital in the total stock capital is 66 %, whereas the share of foreign capital in the total private capital is 74 %.

12 The structure of stock capital is presented in the following table: AmountShareAmountShareAmountShare TOTAL STOCK CAPITAL658100%627100%745100% STATE CAPITAL30747%11919%7210% PRIVATE CAPITAL35153%50581%67190% Out of it: Foreign capital Local capital In millions of KM

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14 Basic features of banking sector operations in Bosnia and Herzegovina in 2002 are the following: 1.Rapid process of banks privatization 1.Rapid process of banks privatization; 2.Meeting the set minimal banks’capital requirement ( KM 15 million); 1.Merger of banks; 2.Considerable increase of assets and capital 3.Increase of credit potential 4.Stabilization and consolidation of banking sector ; 5.Supply of new products and services; 6.Amendments and supplements of regulations; 7.Deposit insurance ; 8.Increased volume of payment transactions

15 Commercial Banks’ Capital On 31 December 2002, the total capital of commercial banks in BiH amounted to KM 993 million and was higher by KM 138 million or 16 % compared to the positions at 2001 year end. In the total capital structure, basic capital takes 88 %, and the additional capital takes 12 %. in millions of KM AmountShareAmountShareAmountShare Total824100%855100%993100% Basic capital74891%76289%87188% Additional capital779%9311%12212%

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17 Basic features of banking sector operations in Bosnia and Herzegovina in 2002 are the following: 1.Rapid process of banks privatization 1.Rapid process of banks privatization; 2.Meeting the set minimal banks’capital requirement (KM 15 million); 3.Merger of banks; 4.Considerable increase of assets and capital 5.Increase of credit potential 6.Stabilization and consolidation of banking sector ; 7.Supply of new products and services; 8.Amendments and supplements of regulations; 9.Deposit insurance ; 10.Increased volume of payment transactions.

18 In the end of 2002, 40 banks operated in BiH, 8 banks less than in Number of banks, given the ownership structure, is tabled below Total number of banks Out of it: Private banks36 34 State-owned banks19126 In 1999, there were 61 banks operating in BiH.

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20 Basic features of banking sector operations in Bosnia and Herzegovina in 2002 are the following: 1.Rapid process of banks privatization 1.Rapid process of banks privatization; 2.Meeting the set minimal banks’capital requirement (KM 15 million); 3.Merger of banks; 4.Considerable increase of assets and capital 5.Increase of credit potential 6.Stabilization and consolidation of banking sector ; 7.Supply of new products and services; 8.Amendments and supplements of regulations; 9.Deposit insurance ; 10.Increased volume of payment transactions.

21 Banks’ assets: Balance sheet assets in the end of 2002 amounted to KM millon, and were higher by 22 % or KM 995 million compared to 2001 year end. In the structure of assets, the share of loans amounting to 55% is the largest one. Funds take 33 %, fixed assets take 7%, other assets take 3 % and securities 1 %. Balance structure of assets is presented in the following table :

22 Banks’ assets: AmountShareAmountShareAmountShare TOTAL ASSETS % % % Out of it: Funds115336%199444%182333% Funds extended to other banks241%301%441% Loans148747%194943%302755% Fixed assets and office premises40213%3969%4117% Securities % Other1203%1183%1523% In millions of KM

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24 Banks’ liabilities In the total banks’ liabilities, commitments take 86 %, and capital takes 14 %. In the total liabilities, deposits take 75 %, and capital takes 14 %. Given the nominal amounts, deposits increased by 25 %, and capital increased by 17 %. The structure of liabilities is presented in the following survey:

25 Banks’ liabilities AmountShareAmountShareAmountShare TOTAL LIABILITIES % % % Out of it: Deposits209466%332473%415875% Liabilities under the taken loans2357%2771%3481% Funds borrowed from other banks72%5 3 Capital68121%70315%82014% Other liabilities1735%23151%2064% In millions of KM

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27 Basic features of banking sector operations in Bosnia and Herzegovina in 2002 are the following: 1.Rapid process of banks privatization 1.Rapid process of banks privatization; 2.Meeting the set minimal banks’capital requirement (KM 15 million); 3.Merger of banks; 4.Considerable increase of assets and capital 5.Increase of credit potential 6.Stabilization and consolidation of banking sector ; 7.Supply of new products and services; 8.Amendments and supplements of regulations; 9.Deposit insurance ; 10.Increased volume of payment transactions.

28 Loans The total loans extended in 2002 amounted to KM million and were higher by 53 % compared to 2001 year end.The total loans extended in 2002 amounted to KM million and were higher by 53 % compared to 2001 year end. Given the structure of loans by sectors, 41 % is taken by loans to private companies, 44 % by loans to citizens, 11 % by loans to public enterprises and 4 % by loans to other sectors.Given the structure of loans by sectors, 41 % is taken by loans to private companies, 44 % by loans to citizens, 11 % by loans to public enterprises and 4 % by loans to other sectors. Loans to citizens recorded a significant increase of 118 %, those to private companies increased by 32 %, and those to public enterprises by 3 %.Loans to citizens recorded a significant increase of 118 %, those to private companies increased by 32 %, and those to public enterprises by 3 %.

29 The structure of loans is tabled below: AmountShareAmountShareAmountShare TOTAL LOANS % % % Private companies83350%98847%130441% Public enterprises32220%35016%36111% Citizens37523%64731%141544% Other sectors1227%1166%1334%

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31 ESTIMATION Banking sector in BiH is much healthierBanking sector in BiH is much healthier Banking Agencies (one in each entity) observe the practice set up by the Basle Committee and EU standardsBanking Agencies (one in each entity) observe the practice set up by the Basle Committee and EU standards Deposit Insurance Agency (one for BiH) strengthens the stability of the banking systemDeposit Insurance Agency (one for BiH) strengthens the stability of the banking system Up-to-dated payment systemsUp-to-dated payment systems As a final result of banking system reform, it is expected that receivable interest rates will continue to decreaseAs a final result of banking system reform, it is expected that receivable interest rates will continue to decrease

32 CONCLUSION The goal of BiH is full membership in EU and adoption of EuroThe goal of BiH is full membership in EU and adoption of Euro Currency board could be an acceptable solution. Estonia and Lithuania – excellent examples of such convergenceCurrency board could be an acceptable solution. Estonia and Lithuania – excellent examples of such convergence Direct foreign investments as help in direct structural convergence of BiH to EU.Direct foreign investments as help in direct structural convergence of BiH to EU. Exit policy from currency board is euro.Exit policy from currency board is euro. The basic problem in BiH is a negative image which has not been overcome yet.The basic problem in BiH is a negative image which has not been overcome yet.

33 Thank you for your attention! for your attention!