Kemal Kozarić: I expect further consolidation of the banking market in BiH

For the first time in a long time, corporate debt is ahead of citizen loans. This indicates that the population is over-indebted and that banks should redirect their money towards the real sector, says Kemal Kozarić, Dean of the Faculty of Economics in Sarajevo, in an interview with eKapija, reports Patria. 

Kozarić explains that the current credit growth of 3% cannot be sufficient support for the economy, and that a growth of 6% would satisfy all those companies seeking money. He says that the recent introduction of a negative rate on commercial bank deposits with the Central Bank of BiH has a certain effect, as banks have channeled some money to companies during this period.

eKapija: In the EU, as much as 99.8% of companies belong to the micro, small, and medium-sized enterprises sector, which generates 55% of GDP. What is your opinion on the situation in BiH regarding the MSME sector? Can they be the engine of economic growth announced by the IMF and the World Bank?

- Before the war, BiH had the five largest exporters in former Yugoslavia, such as Šipad, Famos, Unis, UPI... Unfortunately, these systems that employed tens of thousands of workers no longer exist, and whether we like it or not, the transition and the organizations that have occurred have oriented the economy towards small and medium-sized enterprises. They certainly play a big role in the real sector today, and it is a fact that foreign investors mostly turn to these very companies. It's just a question of what constitutes a small and medium-sized enterprise, because what is a small and medium-sized enterprise in Europe is large in BiH. Simply put, these economic entities have become fragmented and they now employ the largest number of workers. 

Given that unemployment in BiH is 27%, it indicates that there is a lot of room and that SMEs are the target group that could drive economic development, as the World Bank and the IMF have stated.
On the other hand, the IMF precisely specified in the Letter of Intent that the state is obliged to privatize all companies in which it holds a majority stake, as it has proven to be a poor manager. This will happen, and it has already happened with FDS, as well as recently with Bosnalijek.

eKapija: Do these companies have sufficient support from the banking sector, given that banks are increasingly reluctant to provide money for starting companies or innovative projects?

- Commercial banks in BiH have disbursed loans worth 14 billion KM. In the last two years, this ratio has been 55%:45% in favor of private companies. This is the first time that the citizen sector is represented by a smaller amount in loans, which clearly indicates that citizens are quite saturated with loans. Namely, the debt per capita is 1,800 KM, which indicates that there is no more room for new borrowing. The real sector is indeed the one that can receive funds, and this sector often seeks money from banks. 

Before the crisis, specifically in 2008, credit growth was around 30%, and now it is around 3%, which means that no extreme situation is good. We called it a "credit boom" and it had to lead to a banking crisis, but this underestimated credit growth of 3% also cannot support the real sector, nor citizens. A growth of around 6% should be good and would satisfy most of those seeking money. 

eKapija: On the other hand, we often hear from bankers the remark that there is money, but fewer and fewer good projects and healthy, liquid companies. It seems to be a vicious circle, where companies lack money, and banks lack companies. What are the alternative sources of financing, besides loans, that you could recommend to entrepreneurs in BiH at this moment?

- Banks have now changed their approach to risk management. Due to the new approach and Basel II, they are required to act preventively so as not to deal with consequences, but to identify who can repay a loan. From that perspective, banks have reduced lending activity. Now it happens that banks generate almost 50% of their balance sheet income through services, such as payment transactions, exchange operations, current accounts... As soon as you cross the bank's threshold, you have to pay something, precisely to compensate for credit income or interest income. 

However, the primary task of banks is to collect funds, and then to disburse them to the real sector and citizens. I think this will change because it is a fact that there are funds in BiH, but they are not being disbursed sufficiently. 

On the other hand, companies could increase their capital by going public on the stock exchange, and investors could disburse surplus money through the capital market.

eKapija: Do you expect credit growth in the coming period?

- The Central Bank of BiH introduced a negative deposit rate a few months ago to encourage commercial banks not to hoard money, but to release it into the real sector. This measure has had some effects, but part of it went into banks repaying their parent companies, and another part went into loans to the real sector. This has increased credit growth to about 4%, so we can say it has had some effect. 

On the other hand, what banks often use, and it is not good, is that the state, i.e., both entities, often appear as the most desirable borrowers. Namely, entities close their deficits through securities and absorb free money that should be disbursed to the real sector and citizens. This is not good at all, but banks know that it is a safe placement for them. It is good that this also has its limits, because an arrangement has been signed with the IMF which sets certain limits, beyond which entities cannot borrow. As I said, credit growth could be expected, but not like in 2008.

eKapija: Is the NPL problem the biggest one that bankers in BiH are currently facing, and how could it be most effectively mitigated?

- NPL is indeed one of the problems in the banking sector, as the share of such loans is around 14%. A law on banks is currently being drafted at the entity level, which should adopt a legal framework for cleaning up bank balance sheets. We expect this, as it has been adopted in other countries in the region where our groups such as Raiffeisen, UniCredit, Hypo are also active. This would contribute to banks cleaning up their balance sheets and being more active in the coming period, which would stimulate credit growth. 

Also, bank resolution is in the negotiation phase. There are dilemmas about where it should be, whether in the Banking Agency or the Deposit Insurance Agency, and who will manage it. This is, in fact, a fund to which banks would themselves allocate a certain percentage from their assets, which would serve as protection for potential bank errors. 

eKapija: How do you assess the situation in the BiH banking sector? What do you expect to change in the coming period?

- I expect further consolidation of banks to occur. Four banks in FBiH have merged into two - Privredna and Bor banka, as well as IKB and Moja Banka. Unfortunately, no single bank in BiH can follow a larger project, such as Corridor 5C; they mostly go in consortia of banks. In this regard, I expect further consolidation of banks, because 25 banks is too many for BiH; about 10 banks would be quite sufficient. 

I also expect the maintenance of client trust. Namely, clients also have the right to choose where they will assess which banks are healthy, transparent, and which publish their financial results, as well as how banks are positioned in the capital market. Financial education for every client, starting with me and all of us, is necessary. We need to be informed because interest rates can often be a trap – those banks that offer the highest interest rate or a higher interest rate than their competitors are the first sign that the bank has liquidity problems. Therefore, my recommendation is to consider all elements of the financial health of each bank and to decide based on that. In the end, you don't have to be with one bank; as the old saying goes, "don't put all your eggs in one basket," so risk diversification is desirable from that perspective.