 | | "I used to count ATM machines on my way to work. I've stopped doing that now. Banks are driving the growth," says former Central Bank Governor Peter Nicholl | | |  | | "Competition has resulted in a good product, with variety and good interest rates," says Finance Minister Ljerka Maric. | | |  | | "We know our banking sector is one of the best in the Balkans, but we have to make progress in other sectors and improve the foreign investment climate," says Dzenita Foco, Deputy Finance Minister. | |  | | Construction has begun on a new Production-Distribution Center that will allow HVB’s corporate client, Bosnalijek, to increase pharmaceutical production fourfold. MIGA’s guarantee is enabling the expansion. | |  | | Gras has detailed repair and modernization plans, which are being supported by MIGA-guaranteed loans from RZB. "These loans are the only way to achieve a sustainable situation and modernize the fleet," says Todorovic Predrag of Gras. | |
August 10, 2005 - Foreign direct investment into developing countries is on the rise. But the benefits aren’t shared equally by all. Countries perceived as high-risk by investors, despite having a sound and open policy environment for foreign investment, are often ignored as investment destinations. Yet these are the markets that tend to have the most need. Fortunately, these are also the markets where the Multilateral Investment Guarantee Agency can help the most.
“MIGA’s investment insurance mitigates the political risks the private sector faces when investing in such nations,” says the agency’s Executive Vice President, Yukiko Omura. “Our guarantee coverage is often the determining factor in whether or not a private investor goes forward with a project.” One country in particular illustrates the comprehensive effect MIGA can have when it comes to spurring growth in frontier countries. From ‘Mattress Money’ to Mortgages in Bosnia
At the end of the war in 1995, few banks operated in Bosnia. Those that did set interest rates very high and required multiple guarantors to co-sign loans, making borrowing next to impossible for the average citizen and for small businesses.
Mismanagement of banks was common, as was outright theft by corrupt insiders. Others were faced with massive war-related debts and ended up in collapse, taking with them people’s life-savings. Many citizens didn’t trust the safety of the institutions, preferring instead to stuff what money they had under their mattresses and into other old-fashioned household financial repositories. Banks that were able to stay solvent were undercapitalized. The banking sector—the lynchpin of a well-functioning economy—was in a state of crisis.
Today, the sector stands transformed. An influx of activity by foreign banks, purchasing locally owned banks or starting anew, has brought a vibrancy and competitive edge to the moribund industry, spurring a wide range of new economic and consumer activity.
“The transformation of the banking sector has been quite remarkable,” says Peter Nicholl, former Governor of the Central Bank of Bosnia, and former World Bank Executive Director.
The dramatic shift in the banking landscape is in part a result of the introduction of a new Central Bank in 1997, mandated by the Dayton Peace Accord, which established strict capitalization requirements and regulations. Combined with a new law calling for the privatization of all banks, these changes paved the way for an influx of foreign banks.
But banking sector reform isn’t the whole picture. Foreign banks, which tend to finance expansions through loans from parent banks, often seek political risk insurance as a condition of expansion. In fact, three of the country’s top four banks, in terms of market share, have received political risk insurance from MIGA.
The impact of foreign banks on the domestic banking scene has been highly beneficial. They have reduced interest rates from around 30 percent in 2000 to an average of 9 percent today, increased consumer confidence in the banking system, introduced a wide range of new services and products, such as leasing, and brought in new ways of doing business, making loans accessible to everyday citizens and not just those with connections.
Foreign banks have also opened up financing options, including long-term loans for big borrowers, who provide key goods and services and tend to be the country’s largest employers. Retail banking has also seen radical change, with banking deposits and loans growing rapidly.
Banks supported by MIGA are driving these changes. For example, with MIGA’s support, HVB Central Profit Bank of Austria took over a bankrupt domestic bank and is now a market leader when it comes to new products and services. Individual consumer loans, the centerpiece of HVB’s portfolio, have traditionally helped finance the reconstruction of property damaged during the war. And now demand for home mortgages is also on the rise, along with new home construction activity—a strong driver of economic growth. With default rates low and demand for its products climbing, the bank is building a strong revenue stream while contributing to the growth and stabilization of an economy that had been in tatters just a few years ago.
MIGA guarantees have also played a key role in the commitment of another bank, Raiffeisen Zentralbank, in Bosnia. One of the bank’s key clients and a critical cog in the daily life of Sarajevo’s citizens is Gras, the city’s public transportation authority. Gras’ assets were severely damaged during the war. RZB is supporting the company’s repair and modernization plans, which include the ongoing replacement of vehicles, introduction of natural-gas powered buses, and additional railway tracks for trams. Gras has so far received KM 20 million in loans from RZB—loans made possible through MIGA’s political risk insurance.
“These loans are the only way to achieve a sustainable situation and modernize the fleet,” says Todorovic Predrag, Deputy General Technical Manager of Gras.
Banking as a First Step towards Other Investment
Like basic infrastructure, a healthy financial system is a critical foundation for investment, both local and foreign. Because of the new availability of commercial credit and other banking services in Bosnia, other companies are growing too, adding jobs and contributing to the public coffers so that the country can continue to rebuild and grow. But other reforms are needed to take investment to a higher level.
“We know our banking sector is one of the best in the Balkans, but we have to make progress in other sectors and improve the foreign investment climate,” says Dzenita Foco, Bosnia’s Deputy Finance Minister.
Despite strong potential, foreign investment in Bosnia has yet to take off in other sectors. Investors point to impediments such as an onerous business registration process, a complicated and inconsistent regulatory structure, and high labor costs. Important reforms are underway, however. For example, the country will be implementing a new value-added tax system in 2006. In addition, the World Bank is currently advising the government on other reforms affecting investment climate, and a program is in the works to privatize utilities, which are expensive to end-users and add to the cost of running a business.
“These reforms, along with the opportunities afforded by a fully functional banking sector, are important steps towards increasing foreign investments in the country,” says Omura.
For more information on the Multilateral Investment Guarantee Agency, visit: http://www.miga.org |
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