Watch Out for Interest Rates: Clients in the Federation Unprotected Before Banks Unlike Clients in the RS

The Central Bank of Bosnia and Herzegovina has published on its official website a kind of instruction or warning about variable interest rates for those who want loans. A loan with a variable interest rate is a loan where the interest rate is not fixed during the term of the loan agreement but may vary.

Many clients who have so far taken out loans with variable interest rates were surprised when banks frequently and significantly increased interest rates on these loans. Of course, citizens in the Federation were far more exposed to errors, and they still are today.

Federation Without Regulation

Banks had a legal right to do so based on contracts signed by clients, which did not limit how often banks could change the interest rate and did not require banks to specify a basis that would justify the interest rate increase. However, many banks made serious mistakes in public communication about their actions, according to the official website of the Central Bank of Bosnia and Herzegovina.

One way to correct the aforementioned errors was the introduction of adequate regulation regarding the basis used to increase the interest rate on loans with variable interest rates and the frequency with which banks can do so. To improve disclosure and protect users of services at banks and microcredit organizations, amendments to the Law on Banks of the Republika Srpska were adopted in 2011.

The Federation of Bosnia and Herzegovina proposed similar amendments that have yet to be adopted. 

Clients in the Federation will continue to face problems with variable interest rates, unlike clients in the RS where this relationship has long been legally regulated. Practically, the Central Bank warns clients in the Federation that the loan agreement must specify the basis for any potential increase in the interest rate. 

The basis cannot be something that one of the contracting parties can unilaterally change. Although this clause applies to both contracting parties, the client does not have many opportunities to influence the reference rate, so this primarily refers to reducing the influence of banks on changes in the interest rate on loans with variable interest rates. The loan agreement must specify the minimum frequency with which the bank can change the interest rate in the future.

EURIBOR in the Contract

All changes to the nominal interest rate must be communicated to the client BEFORE the new nominal and effective interest rate takes effect.

EURIBOR is the interest rate that banks in the eurozone use for interbank loans. There are several EURIBOR reference rates that are calculated and published, so the borrower in Bosnia and Herzegovina must ensure that the loan agreement precisely specifies which EURIBOR rate is in question. The loan agreement must not allow the bank to use different EURIBOR reference rates at its discretion.

Therefore, citizens of the Federation who want loans must be far more vigilant than those in the RS because their parliamentarians are not doing their job conscientiously and in their interest. Namely, in the RS, the Law on Banks even includes Articles 98 “a” through 98 “t”, which in 26 paragraphs deal with the protection of rights and interests of service users, and require fair treatment from the bank.

The Law on Banks of the RS specifically addresses informing users during the negotiation phase, down to the details of contracting, writes Patria.