Banking Reforms in Republika Srpska

AIM Banja Luka, April 4, 2001

At its latest session held in mid March the Republika Srpska People's Assembly passed, among others, bills on amendments and supplements to the Law on Banks and the Law on the RS Banking Agency. The bills increase the amount of capital necessary to found a new bank from the current five to 10 million convertible marks, which will go up to 15 million marks by the end of the year. This means that all new banks in Republika Srpska have to have a minimum deposit of 15 million marks. As far as the Banking Agency is concerned, its manager will no longer be appointed by the RS government, but by the Assembly, which should provide the manager with more power than he used to have. The passage of these bills, privatization of banks that is already under way, the arrival of foreign banks, and the opening of branch offices of banks headquartered in the Muslim-Croat Federation should radically change the entire banking system in this Bosnian entity.

This process was stepped up following a warning from Peter Nicol, governor of the Bosnian central bank, that Republika Srpska will end up without any banking system whatsoever if the privatization of its banks does not begin. Although the Bosnia-Herzegovina banking system has as of recently begun changing rather swiftly and for the better, things are proceeding at a much slower pace in RS.

"I believe this was caused by two reasons," Nicol explains. "The first one is due to a lack of deposit insurance for state-run banks in RS. Banks from the Federation, however, have that insurance and they will apply for opening branch offices in Republika Srpska. Another problem is that in RS there are many more state-run banks than in the Federation, and this is why privatization in RS is the key problem." Nicole also warns that Republika Srpska will end up without a banking system if it fails to take this problem seriously.

Just how much Nicole is right is confirmed by several facts related to bank privatization that recently surfaced. The deadline for privatizing banks in RS will expire in several months. If state-run banks are not privatized before the deadline, they will be liquidated. Of a total of 18 banks registered in Republika Srpska, the state holds a majority stake in 10. Of the 10, only two -- Agroprom Banka and, possibly, Razvojna Banka -- are likely to be taken over by private investors. No one has shown any interest in the remaining eight. This is why a temporary solution will have to be sought, probably resulting in the Assembly extending the privatization deadline. This, however, will not solve the problem, because additional capitalization and verifying that a bank has enough working capital cannot be carried out before the privatization of banks is finished. It remains to be seen whether banks will be sold for less than their actual value, or whether some other, better solution will be found.

After Zepter Komerc Banka, Balkan Investment, and BSEI Banka, registered in Republika Srpska as banks with foreign capital, a branch office of Raiffeisen Bank, which is registered as having its central office for Bosnia and Herzegovina in Sarajevo, opened in Banjaluka. The latter, accompanied by the announced opening of an office of Zagrebacka Banka, owned by Italians, in the near future, is a sign that radical changes in banking in Republika Srpska can be expected.

Raiffeisen Bank Bosnia-Herzegovina is a member of the largest Austrian private banking group, which currently has 10 branches in Bosnia and Herzegovina and 170 in 10 other countries. It is currently considered one of the leading banks in southeastern Europe. In addition to being the strongest bank in Croatia, Zagrebacka Banka is ranked number one in Bosnia-Herzegovina as well, and has serious plans for Republika Srpska. Although RS Premier Mladen Ivanic claims he has stressed that these banks should not only syphon funds out of Republika Srpska, it is uncertain whether these banks will be interested in investing in the entity at all, unless the granting of loans, their main activity, is not considered investment.

>From their point of view, the people are pleased with the presence of foreign banks. First of all, they help them feel more secure, they provide for all banking transactions, such as money transfers, more secure savings than in domestic banks, and the possibility of obtaining a variety of loans -- consumer credits, mortgages, and loans for starting private businesses. Their attitude towards their clients is no less important, because it is much better than in domestic banks. All this will, of course, attract clients and boost the number of people opening savings accounts with these banks.

This is also confirmed by the fact that according to the most recent data made available by the RS Banking Agency (Sept. 30, 2000), RS residents have a total of 45 billion marks in savings accounts in all of Republika Srpska's banks.

The impact of these trends on the RS economy and on the RS banking system was explained very well by Peter Nicole. It is not clear whether RS officials failed to take this seriously, or are at least unwilling to admit this in the media. Thus, for instance, the director of the RS Banking Agency, Slavica Injac, was very terse when asked for any information on the RS banking system. She believes that the opening of offices of foreign banks will serve to make domestic banks more competitive, and is optimistic in regard to the future of domestic banks, including those run by the state. "These banks have already changed much and continue to do so. I believe they will privatize and provide the minimum deposit required of them," she said. Asked if there were too many banks in Bosnia-Herzegovina and Republika Srpska given the state of affairs in the economy and whether foreign banks will become dominant in the Serb entity, Injac responded that she was expecting domestic banks to consolidate their position following privatization, the introduction of competition and increasing the minimum deposit to 15 million convertible marks. "I don't know how many banks the RS banking system actually needs; the market will have the final say in this matter," she said, avoiding to give a straightforward answer.

Speaking of the same issue, Peter Nicole however, was quite frank: "I would like to quote the example of New Zealand, where I come from and which has the same population as Bosnia and Herzegovina. We have five big banks operating across the country and 10 small banks which operate either in certain regions or are tied to certain businesses. That is enough."

Mladen Mirosavljevic

(AIM)