How to Remedy B&H Banking System

Liquidation of Insolvent Banks

AIM Sarajevo, 2 February, 1999

Public announcement of the Banking Agency of the Federation of Bosnia & Herzegovina that jobs are available for a number of advisors in the process of receivership, and several receivership managers and liquidation managers in banks, announced a great turn in operation of these financial institutions. Although this is just an indication of future activities of this Agency, it is clear that the government of B&H Federation has decided to make a radical move in remedying the situation in the banking system through this Agency, by introduction, among other, receivership or liquidation management in banks. Connoisseuers of circumstances in this field say that it was high time for something of the kind. Of course, the federal government is not doing it on its own but in cooperation with the international community and as part of the process of transition and privatisation in B&H. Indeed, in its program for this year, the government of the Federation did plan to (finally) begin work on financial rehabilitation of the banking system.

What is the actual situation in the banks here? The network of the banking system in B&H is not only unwieldy, uneconomical and obsolete in respect to the modern needs of clients, but it cannot by far satisfy the needs of the economy and the population either. In 67 banks of the two entities (13 of which are in Republika Srpska) there are almost 10 thousand workers majority of whom have nothing to do because these banks operate with only about 810 million German marks, which best illustrates the fragmentation of the banking system and dispersion of the capital they operate with. Banks in a state with market economy turn over billions of marks with by far less employees than here.

Detailed analysis of the situation indicates that the backbone of the present banking system in B&H is state capital which participates in the total amount with about 71 per cent, while in the remaining private capital (about 29 per cent) foreign capital participates with only nine per cent. Despite such a ratio, net capital of state banks is negative, and in private ones it is positive. Such encumbrance of state banks is the result of prewar burden in business operation (2.4 billion German marks of foreign currency savings of the citizens, 3.2 billion of foreign loans, etc.), which prevents them from pull themselves out of the chasm. Private banks are free of that burden and at the moment they are conducting significant business operations for the economy and the population.

In order to make the banking system in B&H capable of meeting the current needs of its clients, its transformation through privatisation is inevitable. The international community has been warning about it for a few years already, but it seemed that the remedy of the banks would never begin. The recently passed law on banks will without doubt accelerate this process, but also bring receivership managers into many banks, and some will simply have to be shut down. Two agencies were founded for the banking system, one in each entity, charged with financial rehabilitation of banks. The main goal of rehabilitation is remedy of the banking system which international community especially insists on, but also attracting of fresh capital to B&H via these financial institutions. The reason why it has not happened yet is in the fact that banks have become very bureaucratic. As bureaucracy does not stimulate, but on the contrary, stifles the economy, without money enterprises were not able to reconstruct and modernise their facilities, so economy in general is inactive. Foreigners did not wish to invest into such banks and enterprises, so the result was a lack of money, unemployment, lagging behind in development and similar.

The excess of manpower in the banks resulted in slackness and inefficiency, so that inevitably the question arises what will happen with the surplus of bank clerks? Privatisation will cut the number of bank employees at least by half, and the lucky ones who remain employed will have to be trained and adopt western European methods of work. Although one might reach the conclusion that the situation in all banks is the same or at least similar, the public was informed a few days ago that there are banks which have managed to be privatised even before the deadline set by law, but that there are also those which have done nothing but made fine declarations. For example, Komercijalna banka in Tuzla has successfully overcome most of the problems, its workers have bought a part of the shares and have already been trained for market operation. Payment of dividents to share-holders has already begun in this bank, which illustrates successfulness of its business operation. There is a quite an opposite example - Kreditna banka from Doboj, which from prewar 600 employees, nowadays employs about 70 persons who almost have nothing to do, but it survives in the market thanks to the rent it collects for its leased business premises. The destiny of these two banks will be decided by their present status, and it is not difficult to assume what the outcome will be, especially because time is a decisive factor for banks and their future. It seems that at this moment it is more precious than money. Indeed, the law prescribes that state banks must be privatised in 28, and the ones with minority state capital in 24 months from the day the Law on Banks came into force. If this is not done within the time limit, the banks will be liquidated. Liquidation will not be avoided by banks which by the beginning of May this year do not increase their capital from 2.5 million convertible marks (KM) to 5 million of share-holding capital. The reason for doubling share-holding capital is clear - to eliminate fragmentation of capital.

However, increased share-holding capital is not the only condition for survival of banks. According to the words of Dr Obrad Piljak, chief controller in the Central Bank of B&H, by April this year, the Agency for Banking System and the Control Agency, based on received balance sheets from all the banks, will give a solvency test for each one of them and make certain corrections, and in respect to the established status, it will be known which banks will be able to continue operation, and which will be liquidated. Estimates of analysts are that almost one third of the currently existing banks might be shut down.

Foreign experts in the field claim that Bosnia & Herzegovina needs only about twenty banks organised according to world standards. Estimates are not arbitrary, but are based on experience of other states in transition. Althougfh all the banks in B&H have made their rehabilitation programs, only half of them will survive transition.

It is certain that generally, in the reform of B&H economy based on market principles, only those will survive which have an ear for business and changes. Some of them will emerge from state banks (by selling their shares), others (privately-owned ones) will in time adapt to demands of the market, while some will be founded by foreigners - either as branches of their own banks or by purchase of some of the existing banks. The latter will start happening as soon as foreign investors are sure where they will invest their money, more precisely when investment in B&H and its economy becomes profitable.

Privatisation of banks will bring another novelty to the market of capital: economic collecting and investing of money existing in the country (estimates say that nowadays the population of B&H keeps at least 300 million German marks at home), but also accelerated inflow of money from abroad.

Should the long lost confidence in banks be restored, inflow of money in these financial institutions will be accelerated, and this will mean accelerated revival of the economy through more favourable loans (and cheaper capital), which will result in the rise of the standard of living of the population.

Raif CEHAJIC

AIM Sarajevo