Over the past two years Bosnia and Herzegovina (BiH) has seen its economy return to stable growth and move past the impact of the Euro Crisis. The financial sector has been particularly resilient. This growth has come from both banking and from what the Central Bank of Bosnia and Herzegovina recognizes as non-banking institutions: insurance companies, investment funds, leasing companies, microcredit organizations, brokerage houses and stock of exchanges. According to figures from the Central Bank of Bosnia and Herzegovina, there was a 5% total growth in bank assets during this period to reach a total value of $14bn, equaling to more than 87% of the financial market.

The primary entities responsible for supervision of the banking sector include the Central Bank of Bosnia and Herzegovina (CBBH), the Currency Board, and the Agency for the Security of Deposits. The Central Bank of Bosnia and Herzegovina was established in 1997 with the initial aim of maintaining monetary stability, defining and executing the monetary policy, as well as ensuring a functional payment and settlement systems. By the late 1990s there were four different currencies in circulation BiH dinar, Yugoslav Dinar, Croatian kuna and Deutsche Mark. This contributed to the rationale behind the establishment of Currency Board. The Currency Board also thought that a solid nominal anchor was required to provide fixed exchange, keeping the inflation rate low, and ensuring the stability of the national currency. Moreover, given the complexity of political and institutional structure of the country, a strict approach towards monetary policy was seen most plausible to facilitate decision making processes and transactions within the federation.

In line with the country’s goal of integration into the wider European economy the nation’s currency known as the “Convertible Mark” was pegged with Euro (1 EUR = 1,95 BAM).

Finally, field of operations of Agency for Security of Deposits in Bosnia and Herzegovina encompasses for instance provision of protection for deposits in accordance with the Law on Deposit Insurance in Banks of Bosnia and Herzegovina.

Given the need for further development of the country, establishment of an up-to-date and solid financial sector in Bosnia and Herzegovina has been a priority issue for the country’s partnership with the International Monetary Found (IMF). In achieving this, the banking sector has played the major role in terms of securing financial stability and harmonization of the republic’s financial frameworks with EU directives and Basel standards. In this sense, efficient and transparent banking regulations as well as resilience in banking system are aimed to enhance certainty in the economic realm. Prior to the 2000s, the financial sector in Bosnia and Herzegovina was dominated traditionally by payments bureaus which had the upper hand in banking services ranging from clearing payments to collecting statistics. These institutions prevented the emergence of traditional banking institutions which can initiate financial intermediation. It also hindered the establishment of trust in the BiH banking system in general. In order to address these issues, by 1997 an encompassing banking reform package was launched aiming to eliminate all payment bureaus by the end of 2000 and place private banks in the heart of financial system. Moreover, privatization of state-owned banks was also initiated.

Today, it can be seen that many of these targets have been achieved. The share of state owned banks fell to 1% and foreign-owned banks occupy a market share of 90%. As this figure was 95% by 2009, this can be seen as an indicator for gradually strengthening local banks which regained their market share by 5% within 4 years. Currently both domestic and international banks are present in the country and are the central actors of monetary intermediation. The Bosnian financial market has continued to develop a competitive and liberal character. In this sense, as Bosnia and Herzegovina represents a relatively small-scale economy remains open to international investment banking. Moreover, credit rating of Bosnia and Herzegovina has been assessed as "B", standing for "stable outlook", by Standard & Poors on September 2014. A stable and solid financial market environment therefore is worth considering for foreign investors looking for brilliant investment potentials.

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There are in total 28 banks in Bosnia and Herzegovina divided between the two constituencies. There are 18 banks in Federation of Bosnia and Herzegovina and 10 in the Republika Srpska.

There are in total 28 banks in Bosnia and Herzegovina divided between the two constituencies. There are 18 banks in Federation of Bosnia and Herzegovina and 10 in the Republika Srpska. In terms of employment, Bosnian banking sector supplies employs 10,000 staff. Plurality in the banking sector demonstrates itself through the presence of both domestic as well as foreign-owned banks from Germany, Austria, Italy, Russia, Slovenia, and Turkey. In addition to these, Islamic banking also exists in Bosnia and Herzegovina. Early initiatives of Islamic banking in Bosnia were interrupted by the civil war until the establishment of Vakufska bank d.d. Sarajevo in 1992. Nevertheless, its operations were based on interest principles, rather than that of Sharia. A further attempt to establish a bank in line with Sharia was Orient bank d.d. Sarajevo in 1996. Its failure to fulfill minimum required capital led to its bankruptcy. Finally, since October 2000 Bosnia Bank International (BBI) has been operating in Bosnia as the sole bank in line with Sharia principles. Given the considerable amount of Muslims living in the country (over 1,5 million or 42% of total population) there is potential for more growth in Islamic banking.

Given the considerable amount of Muslims living in the country, there is potential for more growth in Islamic banking.

A recent development has been the acquisition of the Balkans network of nationalized Austrian institution Hypo-Alpe-Adria International AG by Advent International and its partner European Bank for Reconstruction and Development. The decision was declared in December 2014. Balkans network of the company encompasses 5 countries including Bosnia and Herzegovina with total assets valuing $10.6bn dollars and 1.15mn customers served.

Most of the banking sector is dominated by foreign banks. In this sense, market is quite consolidated that 72.3% of the market is shared among 6 multinational players.

Figures from the CBBH suggest that both assets and deposits in the banking sector are growing. According to calculations of CBBH, total assets held by banks in Bosnia and Herzegovina increased on from $13.757bn to $14.303bn in 2013. Furthermore, total loans went up from $10.147bn to $10,446bn last year. Moreover, total deposits recorded an increase as from $8.483bn to $9.071bn. In terms of net profit the most recent figures demonstrate that there has been a $41mn total net profit in the first quarter in 2014. This represented an increase around 18% compared to the same period of previous year. In this sense, majority of the banks (23) reported a net profit of $47mn while four other banks recorded a combined $5.8mn loss. Amongst the banks operating in the country, the most profitable one for the first quarter of 2014 was Raiffeisen Bank, which generated a net profit of almost $11mn. Unicredit Mostar and Intesa Sanpaolo followed their Austrian counterpart. In sum, positive figures for the first quarter of 2014 this can be seen as a promising sign, given the fact that the sector closed the year 2013 with a loss around $23mn.

In this sense, a 2013 report of the European Commission confirmed the Financial Stability Report 2013 issued by CBBH, which described the financial sector of Bosnia as resilient. However, in a recent publication of Journal of Economics it was pointed out as a major weakness: the growing share of non-performing loans. For instance, the share of non-performing loans was recorded as 11.7% in 2011 rising to 12.6% in 2012. This trend was eventually reversed by the beginning of 2014, going down from 15.1% to 14.9% or $1.61bn. As a result, the profitability indicators of banking sector improved with both positive returns on assets (ROA) and returns on equity (ROE) of 0.5% and 3.9% respectively.

IIG Comment

The BiH banking sector is promising with almost 4% growth in assets value recorded in 2013. After the enactment of new monetary policy in 1997, foreign banks were given the opportunity to penetrate to the market, which by far dominate the financial sector currently. Most recent data provided by the Foreign Investment Promotion Agency (FIPA) highlights that total amount of FDI that Bosnia and Herzegovina attracted was EUR 5.6bn between 1994-2013, 22% of which was generated by banking sector. Sector is clearly dominated by foreign banks. 6 multinational banks hold more than 70% of the total market. In short, presence of foreign banks and acquisitions taking place among them shows that the Bosnian financial market is attractive for foreign investors.