Transcript Strengthening of the Financial Sector

REALISING BOSNIA AND HERZEGOVINA’S EUROPEAN POTENTIAL:
FROM WAR ECONOMY TO CREDITWORTHINESS AND SUSTAINABILITY
STRENGTHENING OF THE FINANCIAL SECTOR
Mr. Peter Nicholl, Governor of Central Bank of Bosnia and Herzegovina
International conference on development of Bosnia and Herzegovina
CG Meeting on Bosnia and Herzegovina
Sarajevo, September 22 and 23, 2004
THE FINANCIAL SECTOR IN BIH IN 1997
 Four currencies were being used. The only currency used
everywhere in the country was the DEM.
 There were 76 registered commercial banks
 Most were very small
 None operated over the whole country
 They were mainly state owned
 Citizens held very little of their savings in the banks
 The non-cash payment system was a monopoly of the stateowned payment bureaus
 In summary, the financial sector was small, fragmented, and
played little economic role
THE CENTRAL BANK OF BIH (CBBH)
 Commenced its operations on 11 August, 1997
 A state-level institution
 Operates under its own Law
 An independent institution
 Its strategic direction is set by a Governing Board
 It has five offices:
 Three Main Units – Banja Luka, Mostar and Sarajevo
 Two branch offices – Brčko and Pale
MONETARY POLICY
 The most important function of CBBH
 The CBBH operates monetary policy through a Currency
Board arrangement
 Choice of a Currency Board:
 It Provides a firm nominal anchor in the form of a fixed
exchange rate.
 It removed discretion in a situation where there was
considerable difficulty in establishing institutions and
making political decisions.
 Works well in some other Eastern European
THE CURRENCY BOARD
 The fixed exchange rate is specified in the CBBH Law
 Full foreign exchange backing for all the KM liabilities of the
Central Bank
 Full convertibility of the CBBH’s KM liabilities into the anchor
currency
THE FIXED EXCHANGE RATE
 The fixed exchange rate is 1KM = 0.51129 euro.
 Initial exchange rate was 1 KM = 1 DEM
 The KM exchange rate has been unchanged since the
CBBH commenced its operations in 1997
 Transition from the DEM to the euro as the anchor currency
went smoothly
CBBH FOREIGN RESERVES
DATE
NET FOREIGN
RESERVES
DEC 1997
144,1
160,3
- 16,2
DEC 1998
283,3
253,9
29,4
DEC 1999
865,7
836,7
29,0
DEC 2000
1021,2
973,2
48,0
DEC 2001
2666,6
2591,6
75,0
DEC 2002
2463,2
2345,1
118,1
DEC 2003
2.779,6
2.626,3
153,3
JUN 2004
3.167,7
3.007,0
160,8
(end of period – in KM million)
MONETARY
LIABILITIES
FREE RESERVES
FULL CONVERTIBILITY
 The fixed exchange rate is specified in the CBBH Law
 Full foreign exchange backing for all the KM liabilities of the
Central Bank
 Full convertibility of the CBBH’s KM liabilities into the anchor
currency
KM ISSUED FROM AUGUST 11, 1997 UNTIL SEPTEMBER 10, 2004
KM ISSUED TO BH BANKS
KM PURCHASED FROM
BH BANKS
NET KM ISSUED
15,905
13,016
2,889
(in KM billion)
SUCCESS OF THE CURRENCY BOARD
 The Currency Board has been a very successful type of
monetary policy for BH
 The KM has been a stable currency against the DEM and
the euro since it was introduced.
 Inflation in BH is low and stable.
 KM use has risen steadily and the KM is the dominant
transactions currency in all parts of the country.
INFLATION IN BH
YEAR ENDED
FEDERATION OF
BH
REPUBLIKA
SRPSKA
BH AVERAGE
DEC 2000
4,0
16,1
8,0
DEC 2001
0,3
2,2
0,9
DEC 2002
- 0,7
2,4
0,3
DEC 2003
0,3
1,3
0,6
JUN 2004
-0,6
2,0
0,2
(Retail price index, Annual % growth)
THE CURRENCY BOARD IN THE FUTURE
 Decision of the BH Presidency that the Currency Board will
continue, which was stated in the PRSP, which has been
endorsed by all levels of government
 The Currency Board produced major economic and social
benefits
 It achieved the main objective – the financial stability through a
consistent application of monetary policy
 Country is undergoing through very difficult and important
political and economic reforms and still required stability
 Long term deal – take BH economy closer and into Europe
(The exit strategy for BH from Currency Board should be
eventual adoption of the euro as in case of some recent
members of EU)
THE BANKING SECTOR
 A rapidly improving banking sector
 Return of confidence
 Return of depositors
 Lending on more reasonable terms
 Real competition
 High level of foreign investments
CHANGES IN THE BANKING SECTOR
 Reform of the payment system
 Significant increases in a banks’ minimum capital
requirements
 Inter-entity banking
 Deposit insurance
 Arrival of foreign banks
 Privatization of government owned banks
CAPITAL STRUCTURE IN BH BANKING
SECTOR
 In the end of 2002, 40 banks operated in BH, 8 banks less
than in 2001 and 36 less than in 1997. By May 31, 2003, this
number has reduced further to 37
 Number of banks, given the ownership structure, is tabled
below.
31.12.2000
31.12.2002
30.06.2004
55
40
37
PRIVATE BANKS
36
34
30
STATE-OWNED BANKS
19
6
7
47
10
16
24
19
67
65
TOTAL NUMBER OF BANKS
OWNERSHIP:
CAPITAL STRUCTURE (%):
STATE CAPITAL:
DOMESTIC PRIVATE CAPITAL
53*
FOREIGN PRIVATE CAPITAL
* (1) In 1999, there were 61 banks operating in BH.
* Breakup not available
BANK LOANS
31.12.200
31.12.2001
31.12.2002
31.12.2003
30.06.2004
Amount
Share
Amount
Share
Amount
Share
Amount
Share
Amount
Share
TOTAL
LOANS
1652
100%
2101
100%
3213
100%
5122
100%
5318
100%
PRIVATE
COMPANIES
833
50%
988
47%
1304
41%
1860
36%
2156
40%
PUBLIC
ENTERPRISES
322
20%
350
16%
361
11%
1167
23%
706
13%
CITIZENS
375
23%
647
31%
1415
44%
1966
38%
2318
44%
OTHER
SECTORS
122
7%
116
6%
133
4%
129
3%
138
3%
BANK DEPOSITS
31.12.200
31.12.2001
31.12.2002
31.12.2003
30.06.2004
Amount
Share
Amount
Share
Amount
Share
Amount
Share
Amount
Share
2094
100%
3324
100%
4158
100%
4366
100%
4938
100%
DEPOSITS
IN KM
895
43%
1214
36%
1749
42%
2274
52%
2671
54%
DEPOSITS
IN FOREIGN
CURRENCY
1199
57%
2110
63%
2409
58%
2092
48%
2266
46%
TOTAL
DEPOSITS
OUT OF IT:
INTEREST RATES
PRIVATE ENTERPRISES
HOUSEHOLDS
TIME AND
SAVINGS
DEPOSITS
RATES
SHORT-TERM
LENDING RATES
LONG-TERM
LENDING RATES
DEMAND
DEPOSITS
RATES
DEC 2002
12,07%
10,59%
1,44%
4,38%
DEC 2003
10,54%
9,18%
0,96%
3,40%
JUN 2004
10,15%
8,57%
0,84%
3,63%
OTHER CHANGES IN FINANCIAL MARKETS
IN LAST TWO YEARS
 BiH received its first formal sovereign credit rating in early
2004: B3 with a positive outlook (Moody’s)
 National Capital Markets Council formed in 2003
 Two stock exchanges established
 Private investment funds established
 Registry of transaction accounts established
 Preparations for putting of entity-based banking agencies
under the CBBH umbrella almost completed
 CBBH started to collect and publish the data on government
finances
FUTURE INITIATIVES IN THE BIH
FINANCIAL SECTOR
 Government securities market will be established soon
 Leasing Law has to be passed soon
 Banking supervision will shift under the CBBH in 2005
 Money market instruments will be developed
 Harmonization with EU standards and regulations