Role of the Central Bank of Bosnia
and Herzegovina in Socially
Responsible Financing
Panel discussion: “Socially Responsible Financing in BH”
Kemal Kozarić, Ph.D., Governor of the Central Bank of BH
Sarajevo, 8 December 2009
CBBH and Responsible Financing
 The Central Bank, together with financial intermediaries and
clients, is a pillar of the financial system, so the maximum
engagement of all them is necessary to maintain the financial
stability
 There are four basic parameters which regulate the role of a
central bank:




Independence
Credibility
Responsibility
Confidence in the central bank
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Credibility and Responsibility of the Central Bank
 Credibility:
 Central bank has credibility if the public believes that it will actually do
what it has announced
 Responsibility:
 The responsibility of the central bank is reflected in the conduct of
monetary policy in a manner that will provide monetary stability and
financial stability, low inflation, confidence in the local currency
 An important factor is also confidence in the institution
 “Trust is hard to acquire, and easy to lose.”
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The System of Control in the CBBH
WHO IMPLEMENTS
IT
Governing Board,
Governor,
Audit Committee,
Management
Office of the
Main Internal
Auditor
Management,
All employees
WHAT IS
IMPLEMENTED
Controlling
Audit in
accordance
with the
degree of
risk
Internal control
system
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Risk Management in the CBBH
 Risk management in the function of socially responsible financing
in the CBBH
 The CBBH is especially exposed to the following risks:





System risk
Financial risk
Operational risk
Decision-making information risk (ISO 27001)
Internal and external reporting risk
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Risk Management in the CBBH
 System risks:
 Required reserve policy
 Control and maintaining the liquidity of commercial banks
 Foreseeing and preventing the possibility of domino effect
 Financial risks:
 Efficient management of foreign exchange reserves
 Credit risk – foreign exchange reserve investment risk
 Market risk – the possibility of external market influences on the value and the
structure of the CBBH balance sheet (interest rates risk and currency risk)
 Liquidity risk – the possibility to smoothly convert the invested portfolio into
liquid assets
 Operational risks:
 Culture - organisation management risk (encouraging of management and other
employees to show real performance)
 Reputation loss process – improper conducting of the process can result in the
loss of reputation and undermining the bank’s basic activities
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Impact of Crisis on the Banking Business
 The global financial crisis has proved that the responsible
financing principle was not developed enough by banks and
clients
 Business conditions deterioration, and overall decline of citizens
standard, as a consequence of the economic crisis, led to a
significant increase of non-performing loans, which caused the
deterioration of the assets quality (NPL 2,8% in the total assets)
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Behavior of Commercial Banks
 Before the crisis:
 Large expansion – high competition, a limited number of good quality
clients and projects
 Agressive marketing approach
 A large number of instant products without the adequate education of
clients
 Significant credit growth
 During the crisis:
 Insufficient partnership with the client – a lack of flexibility to the client
 PR and marketing services were not able to stop the negative
perception
 Change of business behavior:
1. Shifting the focus from lending to deposits
2. Conservative and restrictive business approach
3. Extensive risk evaluation for new investments
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The Structure of the Financial Sector in BH
 The banking sector dominates the financial system in BH. The
share of this sector’s assets in the total financial system assets at
the end of 2008 amounted to 80.9%. At the end of 2008 , 95%
of the total assets and 88.4% of average equity was
concentrated in banks with majority foreign ownership. Just like
the banking sector, the other parts of the financial sector have
also felt the effects of financial crisis.
 Table: Assets of financial intermediaries
2005
Value in
KM,
millions
Banks 1)
2006
Share,
%
Value in
KM,
millions
2007
Share,
%
Value in
KM,
millions
2008
Share,
%
Value in
KM,
millions
Share,
%
11,440
76.9
14,622
79.5
19,570
79.8
20,815
80.9
Investments Funds 2)
1,793
12.0
1,553
8.4
1,762
7.2
1,225
4.8
companies 3)
660
4.4
1,025
5.6
1,378
5.6
1,600
6.2
Insurance and reinsurance 4)
676
4.5
708
3.8
853
3.5
890
3.5
Microcredit organizations 5)
314
2.1
486
2.6
946
3.9
1,213
4.7
Leasing
Total
14,883
18,394
24,510
25,743
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Liquidity Risk is Low, the Main Problem is the
Quality of Loans
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The Ratio of Loans and Deposits
166%
Kazakhstan
Russia
Ukraine
Turkey
Serbia
Bosnia and Herzegovina
Croatia
Romania
Bulgaria
Litvania
Latvia
Estonia
Slovenia
Slovakia
Czech R.
Hungary
Poland
CEE
0%
120%
223%
80%
141%
124%
127%
122%
125%
185%
240%
195%
141%
83%
71%
132%
107%
112%
50%
100%
(% in overall banking system)
150%
200%
250%
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Clients’ Behavior
 Before the crisis:
 Large expansion in the use of services of commercial banks
 Lack of knowledge on every aspect of the service and wrong
perceptions from the past regarding commitments
 Frequent thoughtless entry in debtor-creditor relations
 During the crisis:
 “Meeting the reality”
 Unjustified and justified anger at banks
 Acceptance of the media as the best advisor.
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What has the Crisis Revealed?
 There is a question whether the clients were left alone?
 Consumers protection law proved to be incomplete
 The necessity of strengthening the other segments in order to
protect clients (deposit insurance scheme)
 Clients needs education on financial services
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The Media as a Partner in the Responsible
Financing
 Minimized role in responsible financing promotion
 Negative media campaign
 Lawsuits as a result
 Have we contributed to the current situation, by our actions?
 In the future we must work to develop partnership relations with
the media
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Conclusion
 All elements of financial sector must work on responsible financing promotion
 Banks must work on educating the public and clients, and adopt the concept of
individual approach to the client

Financial crisis has resulted in positive effects also:
 Risk management is improving
 Priority is the safety of return
 The most important approach in the future is an active approach to every client
 BH Commitee for Financial Stability is established, by the decision of the Fiscal
Council
 CBBH will continue to work on raising awareness of responsible financing
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