How the Profit of the Central Bank of Bosnia and Herzegovina is Distributed

When performing their issuing function and other operations, after covering their business costs, central banks generate so-called issuing profit, which is partly or entirely distributed to the institution responsible for the state budget, and represents state budget revenue.

The method of profit distribution should be defined by law, and in cases where there are no such legal or statutory solutions, the distribution of profit should be determined by the highest bodies of the central bank exclusively on a professional basis. In recent times, the distribution of net profit of central banks and its modalities are generally regulated by legal solutions, which prefer the option that a part of the central bank's net profit be distributed to general reserves and other reserves of the central bank, in order to strengthen the capital and reserves of the central bank, and the other part of the net profit is directed to the state budget.

Legal solutions vary from country to country. In covering potential losses, the usual solution is that the excess of expenses over revenues is covered from the central bank's reserves up to the available amount, and if these funds are not sufficient for coverage, then the state budget is obliged to cover them. Central banks should pay special attention to the categories of realized and unrealized profit when calculating net profit in the income statement for a financial year, because only realized profit can be directed to the state budget. Unrealized gains or losses are mainly generated on financial assets held at fair value, due to price changes, as well as due to exchange rate differences.

Capital is usually defined as the remainder of an entity's assets after deducting all its liabilities. The capital and reserves of the Central Bank of Bosnia and Herzegovina (CBBiH) as of December 31, 2014, totaled BAM 585.04 million. According to the Law, if the CBBiH makes a net profit in any year, the Management Board distributes it applying the following order of priority:

- a portion of the net profit is allocated to the general reserve account of the CBBiH, so that the amount of initial capital and general reserve is equivalent to 5% of the total amount of monetary liabilities shown in the CBBiH accounts at the end of that financial year;

 - the remaining net profit is distributed such that 40% is allocated by the Management Board by its decision to increase the capital and reserves for the general reserves of the CBBiH, and 60% is paid by the CBBiH to the account of the institution responsible for the BiH budget, within four months after the end of the budget year;

- net unrealized profit is distributed to the revaluation reserve account, which is kept in the CBBiH balance sheet.

The CBBiH has operated with a positive financial result every financial year, and achieved a total net profit of BAM 921.88 million, of which BAM 402.16 million was distributed to the state budget, and the remainder was allocated to the general reserves of the CBBiH.

Although profit generation is not the primary goal of central banks, but rather monetary stability and investment security, the profits achieved and the amount of capital and reserves of the CBBiH reflect its successful operations, even in the last five years, despite the negative effects of the global financial crisis, but also reasonable and prudent solutions in the legal regulations concerning capital and reserves and profit distribution. Generally speaking for all central banks, an adequate amount of capital and reserves of a central bank can serve as a so-called buffer to absorb and mitigate shocks in potential unexpected and unforeseen events that may arise beyond the control and influence of the central bank.