Role of the Central Role of the Central BBank of ank of Bosnia and Herzegovina in Bosnia and Herzegovina in

SSocially ocially RResponsible esponsible FFinancinginancingPanel discussion: “Socially Responsible Financing in BH”

Kemal Kozarić, Ph.D., Governor of the Central Bank of BH Sarajevo, 8 December 2009

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CBBH and Responsible FinancingCBBH 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 Credibility and Responsibility of the Central BankCentral 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.”

WHO IMPLEMENTS IT

WHAT IS IMPLEMENTED

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The System of Control in the CBBHThe System of Control in the CBBH

Controlling

Governing Board,

Governor, Audit

Committee, Management Audit in

accordance with

the degree of

risk

Office of the Main Internal

Auditor

Management,

All employees

Internal control system

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Risk Management in the CBBHRisk 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 CBBHRisk 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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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)

Impact of Crisis on the Banking BusinessImpact of Crisis on the Banking Business

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Behavior of Commercial Banks 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 deposits2. Conservative and restrictive business approach3. Extensive risk evaluation for new investments

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The Structure of the Financial Sector in The Structure of the Financial Sector in BHBH 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 2006 2007 2008

Value in KM,

millions

Share, %

Value in KM,

millionsShare,

%

Value in KM,

millions

Share, %

Value in KM,

millions

Share, %

Banks 1) 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

Leasing 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

Total 14,883   18,394   24,510   25,743  

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Liquidity Risk is Low, the Main Problem is Liquidity Risk is Low, the Main Problem is the Quality of Loansthe Quality of Loans

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The Ratio of Loans and DepositsThe Ratio of Loans and Deposits

112%107%

132%71%

83%141%

195%240%

185%125%

122%127%

124%141%

80%223%

120%166%

0% 50% 100% 150% 200% 250%

CEEPoland

HungaryCzech R.

SlovakiaSlovenia

EstoniaLatvia

LitvaniaBulgariaRomania

CroatiaBosnia and Herzegovina

SerbiaTurkey

UkraineRussia

Kazakhstan

(% in overall banking system)

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Clients’ BehaviorClients’ 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?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 The Media as a Partner in the Responsible FinancingFinancing

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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ConclusionConclusion 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