BOSNIA AND HERZEGOVINA - · place in Bosnia and Herzegovina (BiH).1 The purpose of the toolkit is...

BOSNIA AND HERZEGOVINA

Country Level Savings Assessment

January 2006

Monica Lindh de Montoya, independent consultantRani Deshpande, Microfinance Analyst, CGAP

Jasmina Glisovic-Mezieres, Associate Microfinance Analyst, CGAP

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List of Acronyms

BiH Bosna i Hercegovina (Bosnia and Herzegovina)

CBBH Central Bank of Bosnia and Herzegovina

CGAP Consultative Group to Assist the Poor

FBiH Federation of Bosnia and Herzegovina

IFAD International Fund for Agricultural Development

KM Convertible mark (also known as BAM)

MCO Microcredit organization

OHR Office of the High Representative

RS Republika Srpska

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TABLE OF CONTENTS

Executive Summary ............................................................................................................................. 1

Introduction .......................................................................................................................................... 3

Bosnia and Herzegovina: Moving Forward, Looking Back ............................................................ 3

Clients: Learning to Trust ................................................................................................................... 4Unmet Demand for Deposit Services is Significant ................................................................. 4Demand is Constrained by Habits and Trust ............................................................................ 5

Micro Level: A Paradox of Incentives and Ability ............................................................................ 6Dimensions of Access ............................................................................................................... 7Ability, But Little Incentive ...................................................................................................... 8Incentive, But No Ability .......................................................................................................... 8

Meso Level: Still Embryonic ............................................................................................................... 9Training and Technical Assistance ........................................................................................... 9Supervisory Structures .............................................................................................................. 9Payment Alternatives ............................................................................................................... 10Funding Flows ......................................................................................................................... 10

Macro Level: A Red Herring ............................................................................................................. 11Banking Laws May Discourage Small Deposit Mobilization.................................................. 11Microfinance Law is Less of an Obstacle Than Thought ....................................................... 11

Conclusion and Suggestions ............................................................................................................... 13

Annexes Annex 1: Matrix of Opportunities, Obstacles, and Suggested Actions ................................... 15Annex 2: Key Economic Indicators – Bosnia and Herzegovina ............................................. 16Annex 3: Deposits in Selected BiH Banks .............................................................................. 17Annex 4: Conditions for demand accounts in selected BiH banks ......................................... 18Annex 5: Leading MCOs in BiH, 2004 ................................................................................... 19Annex 6: Sources Consulted .................................................................................................... 10Annex 7: List of Interviewees .................................................................................................. 22Annex 8: Branch distribution of largest six banks in BiH .......................................................24

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EXECUTIVE SUMMARY

This report summarizes the fourth test of CGAP’s Country-Level Savings Assessment Tool, which tookplace in Bosnia and Herzegovina (BiH).1 The purpose of the toolkit is to help government agencies,donors, international networks, and technical service providers to define potential strategies for increasingpoor people’s access to high-quality deposit services. The methodology examines four levels of thefinancial system: client demand, institutional capacity, industry infrastructure and support services, andpolicy. The assessment concludes with suggested strategies for improving the quality and quantity ofdeposit services available to poor and low-income households.

Bosnia and Herzegovina is in the process of rebuilding its economy and society after a destructivewar which ended in late 1995 with the signing of the Dayton Accords. The banking system has receivedconsiderable attention and is today highly competitive, strictly regulated, and considered to be the mostsuccessful sector of the economy. However, a substantial amount of currency is still outside the bankingsystem compared with other transitional economies.

Demand for savings services is constrained by mistrust in the banking system and the loss ofsavings habits during the war period. A recent survey shows that unmet demand is significant. However,the savings products currently on offer do not seem to provide the services that the unbanked populationneeds since banks do not direct their efforts towards mobilizing savings from the poor. While micro-credit organizations (MCOs) know the low-income market and have incentives to gather deposits, theylack legal structures and the technical capacity to do so. Supervisory structures have been the focus ofintense rebuilding efforts, but training and technical assistance for small-balance deposit mobilization,electronic payment methods, and liquidity management alternatives are all in need of development.

Based on the information gathered though this country assessment, seven suggestions forpromoting quality deposit services for low-income people emerged:

1. Conduct more research on the unbanked population to provide information on their habits andneeds.

2. Carry out financial education focused on savings with low-income and unbanked clients toprovide information on banking services and rebuild trust.

3. Develop specialized products and services for low-income clients.

4. Encourage partnerships between institutions that bring together the capacity, permission, andincentive to mobilize small deposits.

5. Offer technical assistance for bank downscaling.

6. Expand the e-payment infrastructure to bring more money into the system and increase the con-venience of access.

7. Stimulate stronger communication and policy dialogue between policy makers and microcreditinstitutions to clarify the legal infrastructure and to inform policymakers about the needs of themicrofinance industry.

Bosnia and Herzegovina - Country Level Savings Assessment

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__________________________1 For more information on the Tool, please see http://microfinancegateway.org/resource_centers/savings/country_level_assessments.

INTRODUCTION

This report summarizes the results of CGAP’scountry-level savings assessment in Bosnia andHerzegovina (BiH). The assessment was conduct-ed to test the Country Savings Assessment Toolkitunder development as part of CGAP’s SavingsInitiative.2 The purpose of the tool is to helpgovernment agencies, donors, internationalnetworks, and technical service providers todefine potential strategies for increasing poorpeople’s access to high-quality deposit services.

Country-Level Savings Assessmentsgauge the level and characteristics of client demandfor financial savings among low-income clients ina given country, and identify opportunities andconstraints to meeting that demand. While poorpeople save in a variety of ways, including infor-mal and in-kind savings as well as formal savings,this assessment examines the supply and demandof deposits in formal financial institutions.3 Themethodology examines three levels of the financialsystem: 1) the capacity for small deposit mobiliza-tion among financial service providers (“micro”level); 2) financial infrastructure and second-tiersupport services for retail institutions (“meso”level); and 3) public policies and government enti-ties that offer an enabling environment (or not)for savings mobilization (“macro” level). Theassessment concludes with suggested strategies forimproving the quality and quantity of depositservices available to low-income households.

The assessment draws on 1) analysis ofexisting studies and information on demand levels,institutional capacity and the macro environmentin Bosnia (see Annex 6 for sources consulted) and2) interviews with over 84 informants related tosmall deposit mobilization in BiH during the in-country assessment carried out September 12 – 23,2005 (see Annex 7 for the list of interviewees); 3)visits to financial institution branches to collectinformation on savings products.4

BOSNIA AND HERZEGOVINA: MOVINGFORWARD, LOOKING BACK

BiH is a multiethnic European country with aturbulent recent history, and it ‘moves forwardwith one eye on the rearview mirror,’ as oneinformant aptly noted. The series of wars markingthe disintegration of the federation of nations thatwas Yugoslavia reached BiH in 1992, resulting in250,000 of the prewar population of 4.4 millionkilled or registered as missing, and about half ofthe population forced out of their homes. TheUnited Nations recorded around 1,325,000refugees and exiles. The social fabric of thecountry was severely affected, and the country’sproductive infrastructure, which had been heavilyindustrial, was nearly completely destroyed.Only a small fraction of the prewar working pop-ulation of 900,000 was still employed after thewar.5 Much of the population’s asset base, includ-ing housing, vehicles, farm equipment and live-stock and household possessions was also lost ordestroyed.6

The banking system that existed at theend of the war in 1995 was weak, with mostbank assets state-owned and over 90 percent ofthe loans non-performing. Most banks’ foreigncurrency deposits had been seized by the NationalBank of Yugoslavia prior to the war. Severalbanks had failed at the end of the 1980s, and justunder 2.5 billion KM (~$1.5 billion) in publicsavings were lost – slightly less than the currenttotal amount of deposits.

More banks failed shortly after the war,and a subsequent crash in the late 1990s lost 50million KM7 – which, as the third crisis within arelatively short period, had a considerable impacton client confidence. The Former Yugoslaviawas the guarantor of the resulting ‘old’, or lostsavings, and the Bosnian government has takenover this responsibility. The negotiation of asolution to this issue is still underway, and likelyto be solved with long-term bonds and a smallcash payment.

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__________________________2 For further information on CGAP’s savings initiative andinformation on small-balance deposit mobilization visit theCGAP Savings Information Resource Center (SIRC) atwww.microfinancegateway.org/savings.3 See Marguerite Robinson (2001) and Stuart Rutherford(2001) for good descriptions of the savings habits of thepoorer population. 4 The assessment team was comprised of Monica Lindh deMontoya, Independent Consultant; Rani Deshpande,Microfinance Analyst at CGAP; Jasmina GlisovicMezieres,Associate Microfinance Analyst at CGAP; and IvanaBusic, Logistics Coordinator for the mission.

Bosnia and Herzegovina - Country Level Savings Assessment

__________________________5 BiH Demobilization and Reintegration Project, WorldBank.6 World Bank, Bosnia and Herzegovina. PovertyAssessment, 20037 Approximately USD 31.6 million at current exchangerates.

A number of currencies circulated in thecountry after the war. A currency board was setup in the Central Bank in 1997 and a new curren-cy, the convertible mark (KM), pegged to theDeutsche Mark (DM), was introduced. When theDM was abolished at the end of 2001, the KMwas pegged at 1.9558 to the Euro. The Euro stillcirculates widely; savings deposits are around 50percent in Euro and 50 percent in KM. Whilethe war disrupted links to international financialmarkets and produced a period of very highinflation, the currency board has delivered lowlevels of inflation similar to the Euro area.

Since the end of the war, the reform in theBiH banking sector has advanced faster andfurther than in any other sector of the economy.The entity legislatures passed new banking lawsand established a deposit insurance agency, andthe regulators undertook a courageous round ofbank liquidations, among other actions. Thestability produced by these reforms hasencouraged a flood of foreign banks to enter theBiH market. Their appearance on the scene hasbeen credited with increasing competition, raisingstandards, and improving services to the public.

However, economic statistics indicatethat still more efforts and time are needed in orderto bring BiH deposits in line with comparablecountries. As shown in Figure 1, currency outsidebanks is high.

Figure 1. Currency in circulation as percentage ofGDP in five countries in transition

Sources: IMF, National Bank of Poland, CzechStatistics Office.

Several factors probably affect theamount of money in circulation. One is the largegrey economy. Another is the substantial amountof remittances that enter BiH yearly, estimatedto be about 13 to 14 % of GNP. According toaverage IMF figures from 1999—2003,8 Bosnianswere the sixth largest recipients of remittances asa percentage of GDP worldwide. The World Bankdatabase records formal remittance inflows at$1.1—1.2 billion per year between 2000 and2003, but it is believed that between 30 to 50 per-cent of total remittances enter the country throughinformal channels (for example via travelers andinternational bus couriers).9 This implies thatapproximately $300—$600 million could bebypassing the banking system entirely.

CLIENTS: LEARNING TO TRUST

Unmet demand for deposit services is significant

Despite the widespread use of banks before thewar, relatively few Bosnians have bank accounts

Bosnia and Herzegovina

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Box 1. The Dayton Accords

The Dayton Peace Accords signed onDecember 14, 1995 negotiated to end the warand brought a peculiar governmentalorganization to the country. The Accordsretained BiH's international boundaries andcreated a joint multi-ethnic and democraticgovernment, tasked with formulating the budgetand foreign policy. The agreement alsoestablished a second tier of government that ismade up of two entities roughly equal in size: theBosniak/Croat Federation of Bosnia andHerzegovina (FBiH) and the Bosnian Serb-ledRepublika Srpska (RS).

A primary challenge facing the country in thewake of the Dayton Agreement is theconstruction of one economic space, whichinvolves having the governmental functions ofthe FBiH and the RS adopt common goals andpolicies. This is one of the conditions for thefuture entry of BiH into the European Union, andthus a major driver of overall policy in thecountry.

Satisfying current unmet demand for depositservices could more than double the number ofaccounts in Bosnian banks, but will depend inpart on continuing to overcome a persistent lackof trust in the banking system.

__________________________8 IMF Balance of Payments Statistics Yearbook and IMFstaff calculations.9 The high cost of sending funds via formal means is a rea-son for resorting to informal cash transports. According to arecent study (Schrooten, Bringing Home the Money - WhatDetermines Worker’s Remittances to Transition Countries?2005), Western Union charged 14.5 percent, or 14.5 Eurosto send 100 Euros from Germany. Costs were even higherpercentage-wise for smaller sums, but lower for larger sums.

Currency outside banks as percenatge of GDP

6

8

9

12

14

0 2 4 6 8 10 12 14 16

Croatia

Poland

Czech Republic

Bosnia

Bulgaria

today. In a survey conducted by Mareco IndexBosnia (MIB) in June 2003,10 only 26 percent ofthe participants in the survey said that they had abank account of some kind.11 However, as illus-trated in Figure 2, almost 1.5 times this numberreported demand for a bank account.

Figure 2. Percentages of MIB survey sample with,without, or wanting savings accounts

The Bosnian banking system currentlyhas approximately 1.5 million accounts (thedeposit insurance agency covers 1.4 millionaccounts, which are estimated to represent 90% ofthe accounts in the system).12 Therefore, if onlythose who expressed demand for bank accountscould be brought into the banking system,

accounts could potentially grow by 2 million –with another 2 million accounts possible ifdemand could be created among those that saythey currently do not want bank accounts.

As illustrated in Figure 3, even a moreconservative analysis that takes client incomelevels into account indicates that there are at least650,000 attractive clients still unbanked in themarket. If each of these clients could be enticedto open just one account, the total number ofaccounts would still grow by 50 percent.

Figure 3. Potential market segments by income level

Sources: World Bank, Mareco, authors’ calculations.

Demand is constrained by habits and trust

At the client level, perhaps the most relevantquestion is why 36 percent of Bosnians did notexpress any demand for deposit services. Ourinterviews indicate that this is partially due to losthabits. The long period during which they lackeda dependable banking system forced Bosnians toresort to alternative modes of saving, which havebecome new habits. These include saving largeramounts in hidden places at home, saving abroad,or investing in business, real estate, animals orgoods. In addition, a generation of young adultsthat grew up during the conflict never had theopportunity to become accustomed to depositingin a bank.

However, interviewees indicated that afar larger obstacle lies in clients’ widespreadmistrust of the banking system, an observationcorroborated by findings from the Marecosurvey. For example, when savers were askedwhether they felt their savings were safe, 95percent said yes. However, as illustrated inFigure 4, nearly 60 percent of these respondents


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__________________________10 This survey contains the most recent research availableon savings habits in BiH. The survey sample contained2900 respondents from throughout the country and wasselected to correspond with the characteristics of the BiHpopulation. The study was funded by USAID and is citedin the assessment Microcredit Organizations and SavingsMobilization in Bosnia and Herzegovina (Lindh deMontoya and McNeil 2003). MIB is a Gallup Internationalcertified market research company in BiH.11 By comparison, the average proportion of banked adultsin EU-15 countries is 86.9 percent, with usage in certaincountries at over 99 percent (Source: Steve Peachey,Access to Finance – The Role of Savings Banks.Presentation to 12th World Savings Banks Institute GeneralAssembly. Lima, September 2005). 12 Twenty-six percent of the approximately 2.7 millionadults in Bosnia equals some 700,000 banking clients,implying that each direct client has approximately twoaccounts. However, it is likely that this pair of accountsmay serve an entire household. If a typical household hastwo working adults, the ratio of accounts to individualsreturns to 1:1.

26%

36%

38%

Have an account

Do not have account, do not want account

Do not have account, want account

2.7million

Poverty line 20%

Vulnerablepopulation 50%

Unbankedpopulation 74%

2million

650,000

1.5million

were keeping their savings at home. Just under30 percent of those who felt their savings weresafe kept them in a bank, while nearly 5 percentinvested in their businesses, 3.6 percent saved inlife insurance products, and 1 percent saved inanother country.

Figure 4. Why do you feel your savings are safe?

As significant as this obstacle has been,the steady upward trend in deposits since 1998indicates that clients are slowly regaining confi-dence in Bosnian banks. Better supervision,along with the entry of foreign banks and theestablishment of a national deposit insuranceagency, are said to be the three main factors thathave re-established trust in the system. Theintroduction of the Euro in late 2001 also pushedclients to return to banks, as many offered toconvert foreign currencies into the Euro withoutcharge if those funds were then put on deposit.As citizens took advantage of this offer, banksavings more than doubled in a four-monthperiod. A total of 4.3 billion deutschemarkbanknotes were shipped back to Germany, andmost of the money that flowed into the BiH banksstayed there.13

Bank deposits have continued to increasesince Euro conversion, rising by 20 percent in thefirst ten moths of 2005 to bring the total up to 3.04billion KM (~$1.9 billion) in October 2005.14

Figure 5 illustrates the trend over time, indicatingthe upward leap in deposits resulting from Euroconversion.

Figure 5. Bank deposits in the FBiH and RS,December 1997 – October 2005 (KM millions)

While restoring trust in the bankingsystem may overcome the reluctance of many todeposit, lack of confidence does not seem toaffect those who do want a bank account, but donot have one. What prevents this segment ofclients from accessing deposit services? Thefollowing section examines how well Bosnianbanks are meeting the demand for depositservices that already exists in the market.

MICRO LEVEL: A PARADOX OFINCENTIVES AND ABILITY

Banks are the only financial institutionspermitted to receive deposits from the public inBiH.15 A new banking law has raised capitalrequirements in a series of steps from an initial 2.5million KM (~$1.5 million) up to 15 million (~$9million) as of the beginning of 2003, forcing manysmall banks to merge or find strategic partners. Theresult has been a salutary consolidation of the sec-tor. The total number of banks dropped from 72 in1998 to 28 in 2005, and non-performing loan levelsdropped from 59 percent in 1999 to 11.5 percent in


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__________________________13 Nicholl, Bosnia and Herzegovina – progress andpartnership, 2003.14 CBBH.

__________________________15 Insurance companies also receive savings in the form oflife insurance premiums, but this is only a small part of totalsavings deposits in BiH. Companies in FBiH wrote lifeinsurance policies for 18 million KM (approximately USD12 million) in 2003 and 27 KM million (approxi-matelyUSD 18 million) in 2004, according to data on the website ofthe Insurance Supervisory Agency of the FBiH. Informationfor the RS was not available (see www.nados.ba).

Bosnian banks have little incentive to direct theirefforts towards mobilizing savings from the poor;on the other hand, microcredit organizations(MCOs) know the low-income market and haveincentives to gather deposits but they lack legalstructures and the technical capacity to do so.

5%

59%

36%

95%

Feel savings are not safe

Feel savings are safe

Keep savings at home

Keep savings elsewhere

Citizen Savings

0500

1,0001,5002,0002,500

3,0003,500

79

91

89

91

99

91

00

02

10

02

20

02

30

02

4002

5002

2002.16 Banking sector employment has simultane-ously grown from 6,986 in 2000 to 7,839 in 2004.17

Bank ownership has also transitionedfrom public to private and now increasingly toforeign hands, as the clean-up and rationalizationof the Bosnian banking sector spurs the entry ofmany foreign players (see Annex 3 for details onforeign ownership). Ninety percent of the capitalin the banking industry was in private hands bythe end of June 2003, as compared with just overhalf in the end of 2000. Sixty-seven percent of thecapital was in foreign hands in mid-2003, and thispercentage is steadily increasing.18

Bosnian banks’ need for medium- andlong-term funds provides additional impetus to thistrend, as foreign ownership enables them to sendshort-term deposits abroad for investment by theirparent banks, and receive longer-term lines of cred-it in return. The largest banks in the country arenow foreign-owned, and there are expectations thateven more local banks will be acquired by shortlyas competition in the market remains intense.

Dimensions of access

Despite the increasing strength of the bankingsector, the number of unbanked Bosniansindicates that banks are not meeting the needs ofall potential clients. Physical access to bankbranches does not seem to be a major obstacle, asthe number of bank branches in BiH is relativelyhigh at 809 (or 5,068 people per branch) andfairly well distributed throughout the country.

It is unknown to what extent banks reach thepoorer sector of the population, especially peopleliving in rural areas. In a focus group of micro-finance practitioners held as part of this assessment,most participants believed that few people currentlyhave to travel more than 30 minutes to get to a bank.19

This may well be the case, as seen in Annex 8,which maps the branches and agencies of the sixlargest banks in terms of savings deposits.20

At the product level, a survey of eightBosnian banks’ basic deposit products (currentaccounts) indicates that they generally do not poseinsurmountable obstacles in terms of affordabilityor accessibility (mystery shopping results areshown in Annex 4). Most banks do not requireany minimum balance, and some even offerinterest on current accounts regardless of thebalance maintained – a relatively rare featureinternationally. Monthly maintenance fees werealso very low in relation to typical incomes; themost common amount charged, 1 KM, is just .5%of monthly poverty-line income in Bosnia. Therequirement of an identity card to open an accountis also manageable for the vast majority of peoplein Bosnia, where such IDs are widespread. Nordid any of the banks mention other costs orrequirements to open or maintain accounts.

However, this last point brings up a criti-cism of bank offerings regarding the prevalenceof “hidden” charges and conditions pertaining tobank accounts. Some interviewees reported anec-dotes of less bank-savvy customers discoveringsuch charges only at the time of or after makingcertain transactions, such as payments or accountclosures. While Bosnian bank products appearattractive at first glance, they may thus sufferfrom a certain lack of transparency regarding theirtrue cost.

Whether true or not, this perceived lackof transparency signals a need for more attentionto the client-service needs of customers who maybe less used to dealing with banks. The wide-openbanking market in Bosnia since the end of the warhas prompted most banks to pursue a universalstrategy, offering a wide range of relativelystandardized products to appeal to the broadestpossible target audience. However, as the Marecosurvey has shown, there is a large segment ofpotential clients whom these standardizedproducts do not attract. While an egalitarianapproach to clients is commendable, low incomeand/or rural clients may require more or differentexplanations and more personal treatment in orderto feel welcome and well-served by a bank.


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__________________________16 See Stubos, George and Ioannis Tsikripis, 2004.‘Banking Sector Developments in South-eastern Europe,’May 2004. Available at:http://www.wiiw.ac.at/balkan/files/GDN_EU_IBEU_Stubos_BankingSectorSEE.pdf17 “Foreign buyers speed up Bosnia consolidation,” TheBanker, October 3, 2005, p.16. 18 Nicholl, Bosnia and Herzegovina – progress and part-nership, 2003.19 BiH market research firms define about 43 percent of thepopulation in BiH as rural, living in villages or settlements of2,000 people or less (Lindh de Montoya and McNeil 2003:vii),but some estimates are higher. A census (none has been car-ried out after the war) is badly needed to generate dependableinformation on the characteristics of the current population.

__________________________20 These numbered 250 (of 809 total) and the banks plottedon the map are Raiffeisen Bank, Hypo Alpe Adria Bank(both Banja Luka and Mostar-based chains) UnicreditZagrebacka Bank, HVB Central Profit, and Razvojna Bank.

Ability, but little incentive

Smaller, local banks seem to be most explicitlyfocused on a more personalized model ofcustomer service because, in the words of oneinterviewee, “every customer counts for us.”Large foreign-owned banks express less need forsmall deposits, which are widely perceived to becostly to mobilize and mostly short-term.Although the banking sector is slightly under-liquid overall, with 6.69 billion KM (~$4 billion)in loans and 6.02 billion KM (~$3.9 billion) indeposits in June 2005, 75% of loans are medium-or long-term as against only 40% of deposits.The fact that foreign-owned banks are able toimport longer-term funds from their motherinstitutions for on-lending reduces their incen-tives to invest in mobilizing small deposits. Theabsorption of smaller local banks by larger play-ers thus raises questions about whether consoli-dation may reduce service options for smalldepositors.21

Incentive, but no ability

With their very personal service and knowledgeof low-income clients, microcredit organizations(MCOs) could be well-placed to address theclient-interface needs of small depositors. Over50 organizations offering microcredit are regis-tered in BiH, but only about fifteen are substan-tially active (for a table of leading MCOs, seeAnnex 5).22 Their method of interfacing with low-income clients would give MCOs an advantage inmobilizing small deposits, and their rapidly grow-ing and largely short-term loan portfolios mean

that they also have a strong incentive to do so.While banks have regulatory permission to collectsmall deposits but little incentive, the situationis exactly the opposite among MCOs. Lack ofregulatory permission to collect deposits has inturn meant that MCOs have not developed theinternal structures, processes, or skills to managedeposit mobilization.

There have been some limited attemptsby MCOs to mobilize savings by using othermethods than direct deposit-taking. LOK Micro,for example, offers a life insurance product incooperation with Triglav, a Slovenian insurer.The MCO Mikra has taken another approach,mobilizing savings through a village bankingmodel and thus illustrating the demand for depositservices among even the poorest MCO clients(see Box 2).


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__________________________21 A possible exception to this trend could be the postbank, now undergoing privatization. The reorganized postbank will have the largest number of branches and possi-bly the deepest geographical outreach in the country. Italso plans on a more service-oriented approach thanconventional banks, including outreach efforts to youthand senior citizens, many of whom already receive smallconsumer loans and remittances there. With appropriateproducts and management, the post bank could be well-positioned to provide deposit services to the low-incomemarket. 22 The microcredit sector has been supported by the WorldBank Local Initiatives Project, which provided funding andtechnical assistance to facilitate the development of strong,finan-cially viable institutions and to create an appropriatelegal and regulatory framework. Seventeen organizationswere supported in the first phase of LIP, and eight in asecond phase. Seven of these eight organizations hadreached full financial sustainability over the course of thefirst project (LIP 2 2003).

Box 2. Mobilizing savings through thezadruga - MIKRA

Using village banking methodology and a tradi-tional concept known as the zadruga (collectivegroup), Mikra has been able to facilitate andencourage savings among poor clients bycollaborating with commercial banks. Micro-finance clients form zadrugas with between 20 to30 members, and these groups create a common"mutual support fund" that each contributor canaccess when needed.

The common funds are owned and only used bythe groups, whose members decide how theycan be used according to their internal arrange-ments and procedures. The remaining balanceis kept in a group deposit account in a local bank,generating a regular market rate. The sums lentout to zadruga members are repaid with interest,which when accumulated over time, can gener-ate earnings up to 40% annually for each groupmember, depending on the size of the group andits account.

Mikra simply facilitates this process in eachgroup and ensures that the funds are not mis-used by individual members. The householdsthat Mikra works with have an income of between500 (~$300) and 2000 KM (~$1200). The aver-age loan amount is 2000 KM or two-thirds theaverage size of the main players in the industry,indicating that Mikra works with a generallypoorer section of the population. Nonetheless,Mikra now has 9000 active clients, who haveaccumulated 2 million KM in total funds throughthe zadrugas.

MESO LEVEL: STILL EMBRYONIC

Training and technical assistance

Training and technical assistance for small depositmobilization present a particular problem in thefinancial sector as a whole. Expertise on thissubject has not developed in the local market, andforeign banks send staff to their mother institu-tions for training. The training needed to designproducts and marketing strategies for low-incomedepositors is therefore unlikely to be found withinBiH. However, both the bank and microfinancesectors do have industry associations that couldserve as conduits for relevant technical support.

The Association of Bankers was foundedin 2004 and already counts all BiH banks asmembers. It is the product of several years’ workto establish a state-level organization, and iscommitted to working on relationships betweenbanks, establishing codes of conduct, and improv-ing the general business environment. All mem-bers contribute to the association’s budget, fivebank directors sit on the board, it has 100registered expert advisors, and the strong supportof the international community.

The association considers education to beone of its core functions, and conducts seminarsand workshops on important current issues suchas the effect of the upcoming VAT on the bankingsector. They see their role in training and educa-tion as very broad; for example, an initiativecurrently underway concerns working with banksand the police to inform both about the legalrequirements and implications of anti-money-laundering legislation. Although marketing tolow-income clients does not currently figureamong their training topics, the staff expressedunderstanding of the importance and marketpotential of this segment.

The Association of MicrofinanceInstitutions (AMFI) is the microfinance counter-part of the Association of Bankers. It grew out ofthe World Bank Local Initiatives Projects (LIP 1and LIP 2), although membership is open to all

licensed and registered microfinance organizationsthat have been providing services for a minimumof 12 months and are willing to submit to anaudit report. With the end of LIP 2, it is intendedthat AMFI will continue the training, research,support, advocacy and lobbying activities formerlyundertaken through the project. The staff is well-qualified to meet future challenges which includeundertaking the important task of political lobby-ing for the microfinance sector, establishing appro-priate industry standards, and working towardslegislation allowing MCOs to develop new busi-ness options and sources of funding. There is somequestion, however, as to how well AMFI will beable to replace the World Bank initiative.

Supervisory structures

Supervisory structures are a bright spot at themeso level in BiH. Bank supervision is done bytwo entity banking agencies, with a coordinatingrole for the Central Bank, and supervisory qualityhas increased significantly with technical assis-tance from donor organizations. Plans are under-way to merge the two banking agencies into theCentral Bank (CBBH) to strengthen the independ-ence of bank supervision.

In addition, a state-level DepositInsurance Agency was established in 2002. Anindependent non-profit organization with assetsof 1.2 billion KM (~$716 million), the agencyrecently raised the maximum level of insureddeposits from 5,000 KM (~ $3,000) to 7,500 KM(~$4,500) per person per bank, with the eventualgoal of reaching the Euro-area standard of 20,000Euros (~ 40,000 KM). As of the end of July 2005,insured banks held over 90 percent of savers’deposits, and 1.4 million accounts were covered –most of them with a balance well under theinsured amount. In September 2005, twenty-twobanks were insured by the agency, and three morewere in line for membership.

In the last few years the agency has runaggressive marketing campaigns in order topresent and to explain its role to the public viatelevision, radio, and billboards, and has carriedout market research to gauge their impact.Interestingly, insured banks are not the only onesto report upswings in deposits, suggesting that theagency may need to do more to distinguish banksthat are covered. The agency believes that finan-cial education is as important as informing the


9

While supervisory structures have been the focusof intense rebuilding efforts, training and TA forsmall-balance deposit mobilization, electronicpayment methods, and liquidity managementalternatives are all in need of development.

public about deposit insurance, and plans toconduct additional campaigns together with thebanks.23

Payment alternatives

The national payment system that existed in theFormer Yugoslavia closed in 2001 and wasreplaced with a modern European-type systemwith two clearing houses. One is a real-time grosssettlement system and the other is based on giro,and both are owned and operated by the CentralBank. Payments are processed by the commercialbanks, and the stiff competition between banks iscurrently driving transaction fees down.

The e-payment system in BiH is still verylimited. Croatia, with a population of 4.5 million,has 6.8 million debit and credit cards in forcewhile BiH, with a similar population (roughly10% less), has only 680,000 cards. The vastmajority of ATMs are located at bank branchesand do not accept deposits, rendering them of lit-tle value for increasing access to deposit services.Although to date there has been no coordinationin establishing ATMs, interviewees indicated thatthe ATM and POS network has potential to dou-ble or triple in size.

Extending the e-payment infrastructurewould help to bring cash into the banking systemand keep it there, but a number of obstaclesconstrain such expansion. A race to establishacquiring networks several years ago led to inad-equate screening of merchants by issuing banks,resulting in a rash of fraud. In addition, incom-plete regulation governing e-payments means thatsettlement risk continues to be high. Perhaps inreaction to this, clients have been skittish aboutadopting card technology. Marketing campaignsgeared mostly toward product awareness ratherthan overcoming customer apprehensions havenot helped the situation.24

In addition, the prevalent use of foreignswitching centers (owned by foreign banks operat-ing in BiH) to process card payments drives up thecost of such transactions. In 2002 a local cardissuer attempted to establish a national switching

center, but its efforts proved premature in theabsence of a unified financial sector law. Thepossibility of opening a domestic switching centeris still open, but runs counter to the business incen-tives of established players, who earn more feeswhen transactions are routed through foreign cen-ters. Nor are consumers active or educated enoughto push for the establishment of a national switch.

A final obstacle to the spread of e-pay-ments relates to the preference for cash paymentsamong grey-economy and even many formalemployers. As direct deposits are the main driverof card growth, increase in usage has been slow.Government benefits and pensions can also bepaid in cash, and it is estimated that 80% arereceived this way because of the convenience ofdoorstep delivery provided by the post office.Reducing the attractiveness of this cash delivery,for example by offering incentives to recipients toreceive government payments in bank accounts,could therefore increase deposit mobilization bothdirectly and by encouraging the use of cards.

Funding flows

The liquidity management mechanisms open tobanks are quite limited. There are no treasurynotes, no interbank market, and no repurchaseagreements. The 95 percent term-matchingrequirement limits banks to sending demanddeposits abroad for overnight investment, orkeeping them with the Central Bank. Many optfor the latter, and banks are over-reserved by atotal of about 600 million KM (~$360 million).

The MCOs’ main source of liquidity isbank refinancing, but if efficiently done, in thelong run mobilizing deposits directly could be aless costly source of funding. In the absence ofregulatory permission to mobilize savings, MCOswill continue to rely on financing from banks andthe second-tier institution left behind by the WorldBank’s LIP projects. KfW and SIDA have decid-ed to fund loan guarantees of up to 15 millionEuros in order to expedite commercial loans to theMCOs at lower rates.25 The World Bank’s coordi-nation of donor support to the sector has until nowdone an admirable job of keeping subsidized on-lending funds to a minimum, and it is hoped thatthis situation will continue to encourage MCOs tooperate on a financially sustainable basis.


10

__________________________23 Interview with Josip Nevjestic, Director, Agencija zaOsiguranje Depozita (Deposit Insurance Agency),September 19, 2005. 24 Interview with Amel Kovacevic, General Manager, BamCard, September 21, 2005.

__________________________25 They will also provide 500,000 Euros for technicalassistance.

MACRO LEVEL: A RED HERRING

Banking laws may discourage small-balancedeposit mobilization

The regulatory framework in BiH has been muchdiscussed and much maligned as discouragingsmall-balance deposit mobilization. It is truethat some aspects of the banking law, such asstrict asset-liability matching rules, providedisincentives for banks to go down-marketin deposits. At 95 percent matching, Bosnianbanking ratios are among the most conservativein the world. This renders short-term depositsall but useless for lending, which in turn discour-ages further deposit mobilization, especiallyfrom small-balance savers. While there is goodreason for this conservatism consideringBosnia’s history and the need to build publicconfidence in banks, anecdotal evidence fromaround the world indicates that demand depositsare more stable than the current prudential ratioswould suggest.

Unfortunate, too, is the fact that there areno other institutional forms, such as savings andloans associations or cooperatives, with legalframeworks that would encourage them to targetdifferent client niches.26 One banker noted thatlarge and small banks have opposing goals –while the large ones want to raise capital require-ments in order to fund larger projects such asinfrastructure, the smaller ones want to keep therequirements lower and concentrate on smallerand more specialized markets.

While increasing minimum capitalrequirements thus seems to work against thesurvival of small banks more focused on lowincome clients, they are not currently prohibitive.Procredit Bank focuses on small deposits undercurrent laws and regulations, and local bankssuch as Gospodarska Bank and Vakufska Bankapproach this market as part of their overall

customer mix. It is thus unclear how much thelack of lower-end deposit services is due to legalobstacles, and how much to a standardizedapproach and lack of awareness of or interest inthe potential in such markets.

Nonetheless, alternative institutionalforms could be helpful at some point in the devel-opment of the sector. A new banking law expect-ed to pass in late 2006 may address the need forthese forms, but there is understandably greatwariness of opening the door to a multitude ofmore loosely regulated institutional types andnew players. The sector is likely to move towardsgreater consolidation with improved alternativesfor liquidity management.

Microfinance law is less of an obstacle thanthought

Establishing the legal framework for the micro-credit sector was the most challenging of theLocal Initiatives Project’s first-phase goals. Afterconsiderable compromise and delays, similarmicrocredit laws were passed in 2000 in the FBiHand in 2001 in the RS. The MCOs have grownrapidly and some MCO leaders are concernedabout the lack of clarity in the law regarding thediversification of activities into new productssuch as micro-insurance and micro-leasing. Also,by 2003 there was some concern that as donorsleft BiH it would be difficult for MCOs to accessfunds for continued lending. Some organizationsviewed savings mobilization as a possibility forincreasing outreach and mobilizing inexpensivefunds.


11

__________________________26 The International Fund for Agricultural Development(IFAD) has tried to gain governmental support for a law onsavings and credit associations that they have drafted inorder to establish such associations for farmers. Effortshave been unsuccessful, however, and IFAD has reducedtheir level of engagement in this area.

Some aspects of the banking law discouragesmall-balance deposit mobilization, but the lackof alternative institutional forms is less of anobstacle than often claimed.

Box 3. Macro-level Institutions in BiH

The main regulatory institutions are the state-level Central Bank and the entity-level BankingAgencies and Ministries of Finance. The CentralBank (CBBH) was established in August 1997,and is the only monetary authority in BiH. TheBanking Agencies were established in 1998, andare charged with supervision and enforcement ofbanking regulations. These agencies have beeninstrumental in 'cleaning up' the banking sectorafter the huge defaults prior to and just after thewar. The Ministries of Finance have the respon-sibility of monitoring the financial sector and initi-ating new laws. MCOs are monitored by theMinistry of Social Affairs in FBiH and the Ministryof Finance in RS, but in practice left this to theLIP project. It is expected that future monitoringwill be done by the Banking Agencies.

LIP’s second-phase project chose tofocus on making it possible for MCOs to trans-form from non-profit organizations into a com-mercial legal form.27 The new MCO law, whichwas expected to pass by the end of 2005, pro-vides MCOs with the possibility of registeringas foundations with a capital of at least 50,000KM (~$30,000), or as finance companieswith a minimum capital of 500,000 KM(~ $300,000). As finance companies, the MCOswill become commercial entities that canenter into commercial partnerships or attractcommercial capital. There is some disagreementas to the incentive to become a finance compa-ny, however, as the tax burden will increasesubstantially and it is still questionable whatnew products might be developed under the newlaw. The mobilization of savings will not bepossible; the only way to move into that areadirectly is to become a bank.

However, there are ways for MCOs towork within existing regulations to facilitateaccess to deposit services for the low-incomepopulation (see Box 4). Although there seems tobe some confusion around this issue, bank-MCOpartnerships are legal. It is also fully possible forMCOs to transform into banks under the currentframework. The new MCO law only facilitatesthis process by allowing MCOs to receive com-mercial equity. Current obstacles to this processare not legal, but stem from a lack of strategicinvestors and, sometimes, a lack of desire to trans-form on the part of MCOs.

Although the new MCO law will alsoopen the door to bank buyouts of MCOs, it isquestionable whether buyouts will result inbetter availability of small deposit services.Given their current liquidity situations, banks arelikely to be interested in keeping MCOs asseparate loan subsidiaries. The new law there-fore does not pose additional obstacles to small-balance deposit mobilization beyond those thatexist now.

A larger threat to MCOs might be thelack of familiarity and mistrust from somesections of the government. There is a generallack of understanding of the benefits of micro-finance among BiH politicians. The issues ofownership of MCO assets and market-based

interest rates are particularly questioned. Withthe closing of World Bank initiatives in the sec-tor and the lack of a strong lobbying association,MCOs are concerned that they may become thevictims of uninformed legislation due to simmer-ing mistrust of their activities. It is imperativethat microcredit activities are completely inte-grated into the mainstream financial system, andthis is the wish of the donors that have beenactive in the sector. But such integration is farfrom complete.

SUGGESTIONS

In light of the information gathered though thiscountry assessment, seven promising strategiescould promote access to quality deposit servicesfor low-income people.

1. Conduct more research on the unbankedpopulation. There has been insufficient research on the num-bers, needs and habits of people who currently donot use the banking system. Research should beconducted not only on the potential for mobilizingdeposits from low-income clients, but also ontheir progression to products with higher revenuepotential for banks, such as loans and moneytransfers. The MCOs, best situated to carry outsuch research, have no motivation to do so untilthey see the possibility of legally mobilizingdeposits. The banks have hitherto only carried out


12

__________________________27 Lyman, Legal and Regulatory Environment forMicrofinance in Bosnia and Herzegovina, 2005.

Box 4. Bank-MCO partnerships: the case ofMi-Bospo

Market research carried out among MCOMi-Bospo's poor women clients in 2005 showedthat there was a demand for financial servicessuch as savings and insurance in addition to theloans already offered. As Mi-Bospo cannot offersuch services directly, other approaches wereconsidered, and management concluded thatcooperation with the commercial banking sectorseemed to be the best way to provide a full rangeof financial services, particularly savingsproducts. Analysis showed that if formulated andstructured well, this partnership could meet clientneeds as well as bring strategic and financialbenefits to Mi-Bospo and to the commercial bankinvolved. The MCO is currently finalizingnegotiations with the bank chosen on the basis ofthe market research - the bank recognized byMi-Bospo's clients as being 'the best' and themost flexible.

their own market research individually, butknowledge of the potential and needs of thismarket segment is of interest to all the banks.Collective research, useful to the entire sector,might therefore initially be carried out through aconsortium to minimize costs. The Bankers’Association would be well-placed to coordinatesuch research.

2. Carry out financial education focused onsavings with low-income and unbanked clients.While the former suggestion is focused on under-standing potential clients, this one concentrates onincreasing their understanding of the bankingsystem, and the advantages that it can offer them.The BiH economy has been largely cash-based forthe last fifteen years, and part of the population isnot familiar with banking mechanisms. Bankofferings may be confusing to some of them. Anumber of informants underlined the importanceof providing counseling on the strategic use ofsavings for particular life cycle needs. Greatertransparency is also needed on fees and charges –no charge should ever come as a surprise to aclient. Financial education on these topics couldbe carried out via the Bankers’ Association,through public awareness campaigns, as well asby banks within their branches. It could alsobuild off the deposit insurance agency’s co-mar-keting with banks.

3. Develop specialized products and servicesfor low-income clients.Technical assistance may well be neededfor this suggestion, and perhaps the kinds ofproducts developed by microfinance institutionsand credit unions operating in other countriescan serve as inspiration. The Bauspar-systemprevalent in certain eastern European countriesis one such example: a collective self-help sys-tem providing housing finance, it consists of asavings phase prior to the investment and a loanphase after the investment.28 There are also anumber of international institutions with consid-erable experience in developing small balancedeposit services, which could be tapped totransfer knowledge and help implementation inlocal players.29

4. Encourage partnerships between institu-tions that bring together the capacity, permis-sion, and incentive to mobilize small deposits.By increasing each other’s capacity to providesmall deposit services, banks and MCOs can teamup to reach a wider population with a greater mixof products. The type of life-cycle customerresearch described in (1) above could be used toincentivize banks to enter into such partnerships.Retail institutions should work with regulators toexplain the need for them and to develop depositcollection systems that satisfy concerns for thesafety of client deposits. Organizations at themacro level must also clarify the legal parametersfor such partnerships.

5. Offer technical assistance for bank down-scaling.Another alternative for scaling up small-balancedeposit mobilization is for banks to move into pro-viding services to the low end of the market ontheir own. All banks are at least theoretically inter-ested in this market, as BiH does not encompass ahigh proportion of wealthy people or corporateentities. It seems likely that the pressures of con-solidation and competition in the banking sectorwill eventually lead some banks to diversify orspecialize into the low-end market, especially thesmaller ones. Technical assistance for downscal-ing could be provided on a cost-sharing basis byinternational donors and coordinated throughmechanisms such as the Association of Bankers.

6. Expand the e-payment infrastructure.Expanding the network of ATMs outside of bankbranches and into rural communities can encour-age people to deposit savings in and channelremittances through banks. Encouraging govern-ment benefits and pensions to be paid out via bankaccounts will also bring new accounts anddeposits into the banking system. Mobile tele-phone services may also be of interest to smalldepositors, if they provide an easy and cheap wayto bank. The Association of Bankers should beable to play an important role in coordinatingATM expansion among banks, and lobbying tobring government benefits and pensions into thebanking system.

7. Stimulate stronger communication andpolicy dialogue between policy makers andmicrocredit institutions.With regard to MCOs, there appears to be consid-erable lack of clarity about what alternatives to


13

__________________________28 See http://www.lbs.de/schleswigholstein/english/bausparen/bauspar-system for further information.29 See for example the product development consultancyMicroSave (www.microsave.org) and the World Council ofCredit Unions (www.woccu.org).

direct deposit mobilization are or would beallowed by current and future laws. Some MCOsexpressed reservations about pursuing businessrelationships with banks because they did notthink it would be legal. Others expressed a desirefor a new law in order to be able to transform intodeposit-taking intermediaries, when this is notstrictly necessary. We urge stronger policy dia-logue between MCOs and policymakers, so thatall uncertainties about future legal opportunitiesand limitations can be cleared up. Policymakersalso need to become far more familiar with micro-finance and its functions, in development and as

part of a financial system. The microfinance asso-ciation, AMFI, is one candidate to lead such dis-cussions, but capacity-building within the organi-zation is necessary before undertaking this role.Because the leader of such dialogue should beperceived as a disinterested ombudsman by allparties, AMFI’s position as an industry represen-tative may also impede its effectiveness here. Analternative could be the Foundation Odraz, whichis part of the government but has deep ties withand understanding of MCOs because of its role inadministering the World Bank’s LIP projects.


14

Annex. 1. Matrix of Opportunities, Obstacles, and Suggested Actions


15

Opportunities Obstacles Suggested Action

Client Level - Substantial unmet demand for bank accounts

- Lack of research on the savings needs and habits of the unbanked- Demand constrained by continuing mistrust of banks, lost banking habits, and lack of understanding of bank offerings

(1) Conduct more research on the unbanked population.(2) Carry out financial education focused on savings with low-incomeand unbanked clients

Micro Level - Reformed, well-performing banking sector- Dense bank branch network- Largely affordable products

- Banks’ service approach not designed to attract those not comfortable with banks- Institutions most familiarwith low-incomepopulations (MCOs) cannot mobilize deposits

(3) Develop specialized products and services for low income clients(4) Encourage partnerships between combinations of institutions to mobilize small deposits(5) Look into technical assistance for bank downscaling

Meso Level - Industry associations potentially capable of coordinating sector-wideefforts- Strong deposit insurance agency, bank supervisors

- Lack of domestic expertise in small-balancedeposit mobilization- Limited e-paymentsinfrastructure and liquidity management mechanisms

(5) Look into technical assistance for bank downscaling(6) Expand the e-paymentinfrastructure

Macro Level - Competent and respected institutions- Current legal framework allows bank-MCOpartnerships and MCO transformation into a bank

- Lack of clarity around deposit-taking possibilities allowed by current law - Certain aspects of banking regulations disincentivize small deposit mobilization- Lack of alternative institutional forms adapted for mobilizing small deposits

(7) Stimulate stronger communication and policy dialogue between policymakers and MCOs

Source: Unless otherwise indicated, figures are from ‘Bosnia and Herzegovina at a glance’,available at: http://www.worldbank.org/data/countrydata/aag/bih_aag.pdf. Population figurefrom The Economist. Bosnia and Herzegovina. Country Profile, 2005. Labor force, officialunemployment and estimated actual unemployment figures available on the CIA WorldFactbook page for Bosnia and Herzegovina at: http://www.cia.gov/cia/publications/factbook/geos/bk.html. Exchange rate from CIA World Factbook at: http://www.cia.gov/cia/publications/factbook/fields/2076.html. Data on average gross salaries provided by the BiHCentral Bank. Poverty line data from World Bank Poverty Assessment, Bosnia andHerzegovina, 2003. National savings rate based on IMF staff estimates in Bosnia andHerzegovina, 2005 Article IV Consultation, June 2005. Source for M2/GDP: World Bank andOECD, quoted in “Social and Economic Background of Bosnia and Herzegovina,” availableat: http://www.yearofmicrocredit.org/docs/countryprofiles/Bosnia_and_Herzegovina.doc.Count of bank branches from Mr. Peter Nicholl, former Governor of the CBBH. Currencyoutside banks from Central Bank of Bosnia and Herzegovina.


16

__________________________30 Vulnerability is defined as not being under the official economic poverty line, but not having income in excess of 50 percentmore than the poverty line (World Bank 2003). The vulnerable are at a high risk of falling into poverty due to unexpectedevents such as illness, loss of job, etc. 31 The official unemployment rate reflects the number of people officially registered as unemployed. As such registration isrequired in order to main health benefits, many workers in the informal or grey economy are registered as unemployed. Theestimated actual unemployment rate thus provides a clearer idea of real unemployment.

Annex 2. Key Economic Indicators – Bosnia and Herzegovina

Population, 2004 (est.) 4.18 million

Labor force 1.026 million

GNI per capita, 2004 (Atlas method) 2,080 USD

GDP, 2004 8.5 billion USD

GDP growth rate, 2004 6.2%

Inflation rate, 2004 0.4%

Average dollar exchange rate, 2004 1 USD = 1.58 KM

Average salary (gross) 784 KM in FBiH642 KM in RS

Population under the poverty line, 2003 (6 KM/adult/day) 19.5%

Population vulnerable to poverty, 200330 30%

Official unemployment, 2004 (estimated)31 44%

Estimated actual unemployment, 2004 20%

National savings (as percent of GDP) 3%

M2/GDP, 2004 51%

Currency outside of banks 1.6 billion KM

Bank branches 809

Population/bank branch 5,068

Source: Unless otherwise indicated, figures are from ‘Bosnia and Herzegovina at a glance’, available at:http://www.worldbank.org/data/countrydata/aag/bih_aag.pdf. Population figure from The Economist. Bosnia andHerzegovina. Country Profile, 2005. Labor force, official unemployment and estimated actual unemploymentfigures available on the CIA World Factbook page for Bosnia and Herzegovina at:http://www.cia.gov/cia/publications/factbook/geos/bk.html. Exchange rate from CIA World Factbook at:http://www.cia.gov/cia/publications/factbook/fields/2076.html. Data on average gross salaries provided by theBiH Central Bank. Poverty line data from World Bank Poverty Assessment, Bosnia and Herzegovina, 2003.National savings rate based on IMF staff estimates in Bosnia and Herzegovina, 2005 Article IV Consultation, June 2005. Source for M2/GDP: World Bank and OECD, quoted in “Social and Economic Background of Bosnia and Herzegovina,” available at: http://www.yearofmicrocredit.org/docs/countryprofiles/Bosnia_and_Herzegovina.doc.Count of bank branches from Mr. Peter Nicholl, former Governor of the CBBH. Currency outside banks fromCentral Bank of Bosnia and Herzegovina.

Annex 3. Deposits in Selected BiH Banks

Source: Condensed Reports of External Auditors on the Financial Statements of Banks in the FBiH for 2004, andAnnual Reports of Banks. In 2004, Average U.S. Dollar / Bosnian KM currency rate was 0.67.

Notes: (*) based on staff estimates; (**) total number of individual clients; number of individual accounts notavailable; (***) represents accounts with balances less than 1000 KM.


17

__________________________32 As compiled from websites, September 2005.

Bank MajorityOwnership

TotalDeposits

(KMmillions)

Total Savings Accounts

(thousands)

TotalIndividual

Deposits (KM millions)

IndividualAccounts

(thousands)Locations32

RaiffeissenBank Austrian 1,462 600 n/a 382 60

UnicreditZagrebackaBank

Italian 1,072 n/a n/a 337 74

Hypo Alpe Adria Bank (Mostar)

Austrian 938 140 220 110 37

HVB Central Profit Bank Austrian 600 n/a 220 n/a 36

Hypo Alpe Adria Bank (Banja Luka)

Austrian 498 n/a 110 n/a 29

Razvojna Bank Slovenian 237 n/a 118 254 56Volksbank Austrian 205 n/a 123 n/a 12UPI Bank Local 180 n/a 65 n/a 12Zepter Komerc Bank Local 165* 100 93* n/a 17

Nova Banja-lucka Bank Local 138 158 n/a 142** 44

CBS Bank Slovenian 121 n/a 25 n/a 13

Nova Bank Slovenian(Poteza) 116 60 n/a n/a 31

ABS Bank* Local 112 28 33 18 41LTGospodarskaBank

Local 104 44 64 38*** 25

Vakufska Bank Local 80 n/a n/a n/a 17

ProCredit Bank

IMI, EBRD, IFC,Commerz-bank AG and KfW

41 25 20 6 18

Union Bank State-owned 20 n/a n/a n/a 13

Source: Condensed Reports of External Auditors on the Financial Statements of Banks in the FBiH for 2004, and Annual Reports of Banks. In 2004, Average U.S. Dollar / Bosnian KM currency rate was 0.67.

Notes: (*) based on staff estimates; (**) total number of individual clients; number of individual accounts not available; (***) represents accounts with balances less than 1000 KM.

Annex 4. Conditions for demand accounts in selected BiH banks

Source: Mystery shopping, September 2005 (1 KM = $0.60).

* If no transactions for 12 months and balance is less than 10 KM, the account is closed and balance is recorded asincome


18

Name of institution

Minimumopeningbalance

Documentationneeded to open

account

Maintenancefee

Minimummaintaining

balance

Maximumper

withdrawal

Fee on dormantaccount

Annualinterest

rate

Debitcard?

Procredit 0 ID card 0 0 no limit 0 0% Yes

Nova Bank Bijeljina 0 ID card 1 KM monthly 10 KM

not limited,but need a day notice for larger amounts

none* 1% Yes

Raiffeisen 0 ID card 1 KM monthly 0one day

notice if over 10,000 KM

0 1% Yes

Hypo-Alpe-Adria 0 ID card 1 KM montly 0

not limited,but need a day notice for larger amounts

0 1% Yes

UnicreditZagrebacka 0 ID card 1.65 KM

monthly 0

not limited, but need a day notice for larger amounts

0 1% Yes

NovaBanjalucka 0 ID card 1 KM monthly 0


0 1% Yes

Gospodarska 0 ID card 1 KM monthly 0


0 1% Yes

Volksbank 10 KM ID card 2 KM monthly 0


10 KM 3.75% Yes

Source: Mystery shopping, September 2005 (1 KM = $ 0.60).

* If no transactions for 12 months and balance is less than 10 KM, the account is closed and balance is recorded as income

Annex 5. Leading MCOs in BiH, 2004

Self-reported data from MFIs.


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Institution Headquarters Total Portfolio (KM) Active Clients Original Affiliation

Partner Tuzla 43.023.712 19.834 Mercy Corps

Mikrofin Banja Luka 41.712.722 14.033 CARE International

EKI Tuzla 37.445.400 18.815 World Vision

Sunrise Sarajevo 18.529.391 10.294 Humanitarian organization

LOK Micro Sarajevo 15.385.870 5.097 Citizens association

Mi-Bospo Tuzla 13.540.869 9.206 Humanitarian organization

Prizma Sarajevo 13.356.055 12.603 International Catholic Migration Commission

Benefit Lukavica 12.514.673 7.068 Citizens association

Sinergija Plus Banja Luka 12.137.786 3.340 Citizens association

Mikra Sarajevo 10.340.288 7.735 Catholic Relief Service

Lider Sarajevo 6.505.997 3.180 n/a

Mikro Aldi Gorazde 3.354.215 3.805 Citizens association

Women for Women

Sarajevo 2.147.207 2.919 NGO Women for Women

Self-reported data from MFIs.

Annex 6. Sources Consulted

Banking Agency of the Federation of Bosnia and Herzegovina. 2005. Information on the Banking Systemof the Federation of Bosnia and Herzegovina as of 12/31/04.

Banking Agency of the Federation of Bosnia and Herzegovina. 2004. Condensed Reports of ExternalAuditors on the Financial Statements of Banks in the FBiH for 2004.

Central Bank of Bosnia and Herzegovina website. http://www.cbbh.gov.ba/en/index.html

Central Intelligence Agency (CIA) World Factbook for Bosnia and Herzegovina. Available at:http://www.cia.gov/cia/publications/factbook/geos/bk.html

Dunn Elizabeth. 2005. Impact of Microcredit on Clients in Bosnia and Herzegovina: Final Report.Impact Assessment/Research and Development Component, Local Initiatives (Microfinance)Project II (LIP II).

The Economist. Bosnia and Hercegovina. Country Profile. 2005.

Emerging Europe Monitor: South East Europe Monitor. 2005. Economic Outlook Bosnia andHerzegovina: Building on the Strengths. August.

International Monetary Fund (IMF). 2005. Selected Economic Issues, Bosnia and Herzegovina.

International Monetary Fund (IMF) 2005. Bosnia and Herzegovina: 2005 Article IV Consultation.

Lindh de Montoya, Monica and J. Kent McNeil. 2003. Microcredit Organizations and SavingsMobilization in Bosnia and Herzegovina. USAID, Financial Sector Business Advocacy andTraining Project (FSBAT).

Local Initiatives (Microfinance) 2 (LIP 2). 2003. Clients of Microcredit Organizations in Bosnia andHerzegovina. Report on Baseline Survey. Impact Assessment Component. April.

Lyman, Timothy R. 2005. Legal and Regulatory Environment for Microfinance in Bosnia andHerzegovina: A Decade of Evolution and Prognosis for the Future. April.http://www.microfinancegateway.org/files/25462_file_Bosnia.pdf

Mareco Index Bosnia (MIB) Gallup International, 2003. Omnibus Survey, June 2003.

Matul, Michel and Caroline Tsilikounas. 2004. ‘Role of Microfinance in the Household ReconstructionProcess in Bosnia and Herzegovina.’ Journal of International Development 16(2004):429-66.

Mid-Term Development Strategy (MTDS). 2004. Bosnia and Herzegovina.

Microfinance Information Exchange. 2003. A Review of the Bosnian Microfinance Sector: Move toFinancial Self-Sufficiency.

Nicholl, Peter. 2003. Bosnia and Herzegovina – progress and partnership. Comments by Mr., Governorof the Central Bank of Bosnia and Herzegovina, at the second annual business conference. London,9 December. http://www.bis.org/review/r031223d.pdf

Ohanyan, Anna. 2002. ‘Post-Conflict Global Governance: The Case of Microfinance EnterpriseNetworks in Bosnia and Herzegovina.’ International Studies Perspectives 3: 396-416.

Peachey, Steve. 2005. Access to Finance – The Role of Savings Banks. Presentation to the 12th WorldSavings Banks Institute General Assembly – Lima, September.

Robinson, Marguerite. 2001. The Microfinance Revolution. Sustainable Finance for the Poor. The WorldBank, Washington, D.C. Open Society Institute, New York.

Rutherford, Stuart. 2001. The Poor and their Money. Oxford India Paperbacks.


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Schrooten, Mechthild. 2005. ‘Bringing Home the Money - What Determines Worker’s Remittances toTransition Countries?’ Discussion Paper Series A466, Institute of Economic Research, HitotsubashiUniversity.

Social and Economic Background of Bosnia and Herzegovina available at:http://www.yearofmicrocredit.org/docs/countryprofiles/Bosnia_and_Herzegovina.doc

Stubos, George and Ioannis Tsikripis, 2004. ‘Banking Sector Developments in South-eastern Europe.’Available at: http://www.wiiw.ac.at/balkan/files/GDN_EU_IBEU_Stubos_BankingSectorSEE.pdf

United Nations Development Program (UNDP). 2002. Human Development Report, Bosnia andHerzegovina.

World Bank. 2001. Project Appraisal Document on a Proposed Credit in the Amount of SDR 15.8Million (USD 20 Million) to Bosnia and Herzegovina for Local Initiatives (Microfinance).Project II, Human Development Sector Unit, South East Europe Country Unit, Europe and CentralAsia Region.

World Bank. 2003. Bosnia and Herzegovina. Poverty Assessment. Volume 1: Main Report. 21November.

World Bank.2004. Country Assistance Strategy for Bosnia and Herzegovina. International DevelopmentAssociation

World Bank. 2005. Country Economic Memorandum, Bosnia and Herzegovina. Poverty Reduction andEconomic Management Unit, Europe and Central Asia Region.

World Bank. n.d. BiH Demobilization and Reintegration Project.


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___________________________________________________________________________

Mr. Alen AmbrinacManagerDeloitte d.o.o.___________________________________________________________________________

Mr. Mads Baden JensenConsultant Carl Bro___________________________________________________________________________

Mr. Zlatko BarsDirectorBanking Agency of Federationof BiH___________________________________________________________________________

Mr. Tarik BarakovicMarketing and PR OfficerMCO “PARTNER”___________________________________________________________________________

Mr. Nedzad BeglerovicFinance DirectorMCO “LOK”___________________________________________________________________________

Ms. Sadina BinaDirectorMCO “EKI”___________________________________________________________________________

Mr. Djenan BogdanicExecutive Director for LoansMCO “LOK”___________________________________________________________________________

Mr. Zeljko BogdanicDirectorMCO “SINERGIJA PLUS”___________________________________________________________________________

Mr. Srecko BogunovicMember of the Management BoardHypo-Alpe-Adria bank___________________________________________________________________________

Mr. Mustafa BrkicDeputy DirectorBanking Agency of theFederation of BiH___________________________________________________________________________

Mr. Nedim BukvicSwedish InternationalDevelopment Agency___________________________________________________________________________

Mr. Sanin CamparaDirectorMCO “MIKRA”___________________________________________________________________________

Mr. Fikret CausevicDeputy DirectorEconomics Institute of Sarajevo___________________________________________________________________________

Mr. Nusret CausevicDirectorMCO “LOK”___________________________________________________________________________

Ms. Nusreta CerkezBanking SectorFederal Ministry of Finance___________________________________________________________________________

___________________________________________________________________________

Mr. Adnan CobicActing DirectorBusiness Network - CBS Bank___________________________________________________________________________

Ms. Emina CoricDirector of the DepartmentDepartment of Assets andPayments - ABS bank___________________________________________________________________________

Mr. Sefik DuranExecutive DirectorSUNCE insurance___________________________________________________________________________

Mr. Aleksandar DzombicExecutive DirectorRetail Banking - Nova Bank___________________________________________________________________________

Mr. Braco ErcegAssistant DirectorMCO “MIKROFIN”___________________________________________________________________________

Mr. Nikola FabijanicExecutive DirectorGospodarska bank___________________________________________________________________________

Mr. Brian FaheyHead of ProjectUnited States Agency forInternational Aid- LAMP – Linking AgriculturalMarkets to Producers___________________________________________________________________________

Mr. Dzevad GazibegovicProvisional AdministratorPostbank BH___________________________________________________________________________

Mr. Amir HadziomeragicHead of Statistics DivisionEconomic Research and StatisticsDepartment - Central Bank ofBosnia and Herzegovina___________________________________________________________________________

Mr. Hajrudin HadzovicAssistant DirectorABS bank___________________________________________________________________________

Mr. Zijad HasovicDirectorMCO “LIDER”___________________________________________________________________________

Ms. Senada HavicGeneral DirectorLRC Credit Bureau___________________________________________________________________________

Mr. Adnan HrenovicaExecutive DirectorLRC - Credit Bureau___________________________________________________________________________

Ms. Belma IzmirlijaSecretary of the MinistryFederal Ministry of Finance___________________________________________________________________________

___________________________________________________________________________

Ms. Snezana JanjicManager of the Monetary andFinancial StatisticsCentral Bank of Bosnia andHerzegovina___________________________________________________________________________

Mr. Petar JurcicDirectorHypo-Alpe-Adria bank___________________________________________________________________________

Mr. Ensad KaricCEO for OperationsMCO “LOK”___________________________________________________________________________

Mr. Aleksandar KesicExecutive Director of RetailBankingZepter Komerc bank___________________________________________________________________________

Mr. Dalid KlemencicDirectorMain Branch Office SarajevoCBS Bank___________________________________________________________________________

Mr. Reinhold KollandDirectorVolksbank___________________________________________________________________________

Mr. Amel KovacevicGeneral ManagerBamCard___________________________________________________________________________

Mr. Goran KovacevicHead of Retail Banking SectorVolksbank___________________________________________________________________________

Mr. Kemal KozaricGovernorCentral Bank of Bosnia andHerzegovina___________________________________________________________________________

Ms. Ornela KrasicHead of Commercial SupportRetail SectorUniCredit Zagrebacka bank___________________________________________________________________________

Mr. Aleksandar KremenovicDirectorMCO “MIKROFIN”___________________________________________________________________________

Mr. Samir LacevicHead of the DepartmentDepartment for BankingOperations, Education andTraining - Banks Association ofBosnia and Herzegovina___________________________________________________________________________

Mr. Dragoljub LekicDirectorNova Banjalucka bank___________________________________________________________________________


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Annex 7. List of Interviewees

___________________________________________________________________________

Mr. Ivica LucicDirectorMCO “MICRO-CREDO”___________________________________________________________________________

Mr. Nedim LuloExecutive DirectorRetail BankingUPI bank dd___________________________________________________________________________

Mr. Timothy Lyman Senior Policy Advisor, CGAP___________________________________________________________________________

Mr. Abdulaziz MahmutovicAdvisor to the DirectorUNION bank dd___________________________________________________________________________

Mr. Hasan MahmutovicSenior ResearcherEconomics Institute of Sarajevo___________________________________________________________________________

Mr. Kurt MakulaChairman of Bank SteeringBoardHypo-Alpe-Adria bank___________________________________________________________________________

Ms. Ljiljana MarkovicDirector Retail Banking Nova Bank___________________________________________________________________________

Mr. Mirsad MilavicGeneral ManagerMCO “SUNRISE”___________________________________________________________________________

Mr. Mijo MisicExecutive SecretaryBanks Association of Bosniaand Herzegovina___________________________________________________________________________

Mr. Peter MoldersDirectorProCredit bank___________________________________________________________________________

Ms. Belma MulaosmanovicMember of the managementBoardVakufska bank dd___________________________________________________________________________

Ms. Zrinka MusaHead of Retail BankingHypo-Alpe-Adria bank___________________________________________________________________________

Ms. Nejira NalicDirectorMCO “MI-BOSPO”___________________________________________________________________________

Ms. Mira NenadicDirectorMCO ”BENEFIT”___________________________________________________________________________

Mr. Josip NevjesticDirectorDeposit Insurance Agency ofBiH___________________________________________________________________________

___________________________________________________________________________

Mr. Peter NichollMember of the Governing Boardand Advisor to the GovernorCentral Bank of Bosnia andHerzegovina___________________________________________________________________________

Ms. Dusanka NovakovicActing DirectorBanking Agency of the RepublicSrpska___________________________________________________________________________

Mr. Halil OmanovicDirectorFederal Ministry of Agriculture Water Management and Forestry –Project Coordination Unit___________________________________________________________________________

Mr. Mirzet RibicDirectorODRAZ___________________________________________________________________________

Mr. Enes SadovicHead of Sales and MarketingDepartment MERKUR insurance___________________________________________________________________________

Mr. Ognjen SamardzicMember of the Management BoardRaiffeisen Bank___________________________________________________________________________

Mr. Pedja SarajlicDirectorProducts Development and Saleto Individuals - CBS Bank___________________________________________________________________________

Ms. Sejda SaricDirectorMCO “ZENE ZA ZENE”___________________________________________________________________________

Mr. Zrinko SarvanjaDirectorRetail Division and Family Banking -UniCredit Zagrebacka bank___________________________________________________________________________

Mr. Stjepan SaubertDirectorMERKUR insurance___________________________________________________________________________

Mr. Milan SeseljExecutive ManagerMCO “SUNRISE”___________________________________________________________________________

Ms. Leslie SherriffCountry RepresentativeCatholic Relief Services (CRS)___________________________________________________________________________

Mr. Miroslav SkalceriHead of the Branch OfficeGospodarska bank___________________________________________________________________________

Ms. Ferida SofticExecutive DirectorMCO “ALDI”___________________________________________________________________________

___________________________________________________________________________

Ms. Sabina SofticManagerDeloitte d.o.o.___________________________________________________________________________

Ms. Aida SokoHead of European Fund for BiHKfW___________________________________________________________________________

Mr. Aleksandar SurlanAdvisor to Bank Manager (CEO)Nova Banjalucka bank___________________________________________________________________________

Mr. Jusuf TanovicDeputy Chief of PartyCluster Competitiveness Activity –USAID Project United States Agency forInternational Aid___________________________________________________________________________

Mr. Goran TinjicOperations OfficerWorld Bank___________________________________________________________________________

Ms. Anna TrboglavBusiness Development OfficerFederal Ministry of Agriculture Water Management and Forestry –Project Coordination Unit___________________________________________________________________________

Mr. Velibor TrifkovicAgribusiness AnalystUnited States Agency forInternational Aid-LAMP – Linking AgriculturalMarkets to Producers___________________________________________________________________________

Mr. Senad TupkovicExecutive DirectorVolksbank___________________________________________________________________________

Ms. Amira Vejzagic-RamhorstProject Management SpecialistUnited States Agency forInternational Aid___________________________________________________________________________

Mr. Radovan VignjevicMinisterFederal Ministry of Labor andSocial Policy___________________________________________________________________________

Ms. Gorana ZoricExecutive DirectorRetail BankingNova Banjalucka bank___________________________________________________________________________

Mr. Alexsander ZsolnaiCEOHVB Central Profit bank___________________________________________________________________________

Mr. Olaf ZymelkaDirector KfW Office BiHKfW___________________________________________________________________________


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Annex 8. Branch distribution of largest six banks in BiH

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