Notes from the Field: Bosnia

» The more things change ...

While the methodology of the Bosnia Country-level Savings Assessment was similar to our previous studies in Mexico, the Philippines, and Benin, the context we confronted differed in several important ways. First, only banks are allowed to mobilize deposits. Secondly, with 5,068 people per branch, the bank network is much denser than any of the other countries we have studied, so physical access is not a significant obstacle.

Nor were products especially unaffordable; our "mystery shopping" results revealed minimal opening and maintaining balances and fees. Rather, complaints focused on the standardization of bank products and services and a certain lack of transparency about terms and conditions. Banks have been in a race for market share in Bosnia, and so have mostly created mass-market products designed to appeal to a wide, undifferentiated clientele.

This strategy has succeeded in attracting clients who know how to deal with banks and understand their product offerings. However, it has left out a significant minority who are less savvy about dealing with banks either because they never had the habit before the war, or because the conflict and surrounding bank collapses meant that they lost it. With the best estimates available indicating that only 26% of Bosnians have bank accounts, these segments are much larger than commonly believed.

» ... the more they stay the same.

Deposit Insurance Agency billboard: "Only safe banks deserve trust of their savers"

While product and especially service quality are issues, there was no question that lack of trust in banks was the biggest obstacle to bringing small depositors into the system. In Bosnia, three episodes of bank failure between 1990 and 1997 destroyed the previously strong confidence enjoyed by Yugoslav-era banks, turning Bosnia into a cash economy. Even today, cash in circulation remains at 12% of GDP by the IMF's own estimates (double the rate in both the US and neighboring Croatia).

Resuscitating the banking sector was thus one of the foremost priorities of Bosnian reconstruction efforts, and steady deposit growth since 1998 (see presentation) is evidence of the results. However, most of these deposits are short-term which, under the country's extremely conservative banking regulations, renders them basically useless for lending when most lending opportunities banks see are longer-term. This term mismatch gives foreign banks an edge in the Bosnian market, as foreign parent banks can extend longer-term lines of credit to their Bosnian subsidiaries while investing short-term liquidity in overnight markets abroad. However, this arrangement doesn't seem to be motivating those Bosnian subsidiary banks to mobilize additional of short-term funds.

Meso-level constraints such as limited e-payment systems, are also holding back small deposit mobilization. After a race to establish acquiring networks caused a surge in fraud, banks have temporarily halted POS growth. ATMs are mostly on-site right now and very few take deposits because no one wants to invest in the software needed to read local currency notes when Bosnia's eventual goal is EU accession -- and the euro.

Meanwhile, the institutions that do have short-term lending opportunities the MCOs cannot directly mobilize deposits to fund them. However, our exploration revealed no legal obstacles that prevent an MCO from either transforming into a bank, or from pursuing other options such as partnering with banks as deposit collection agents. While there are specific institutional obstacles that different MCOs may face in implementing either of the above arrangements, such as funding strict requirements for systems or infrastructure required by the banking law, the legal framework itself is not as prohibitive as it seems.