THE BANKING SYSTEM AND THE ECONOMIC DEVELOPMENT OF THE REPUBLIC OF MACEDONIA

1
THE BANKING SYSTEM AND THE ECONOMIC
DEVELOPMENT OF THE REPUBLIC OF MACEDONIA

• Petar Goshev M.Sc.
• Governor

2
Role and importance of the Banking System in the
Republic of Macedonia

• The Banking System is the main financial
  intermediary in the Republic of Macedonia, and
  hence it plays the key role in financing the
  economic growth of the country.
• There is no prosperous market economy without
  stable and efficient financial intermediation.
• There is no doubt that in circumstances when
  banking dominates the financial intermediation in
  the Republic of Macedonia, the Banking System
  should be a driving force of the growth and
  development of the country.

3
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• Main preconditions for the banks to perform their
  role
• Stability
• Operational efficiency primarily expressed by
• Sound internal policies and procedures for
  efficient allocation of the financial potential
• Optimization of the overhead expenses

4
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• Business environment which will enable
  functioning of the principles of market economy
  and reasonable level of risks undertaken by the
  banks when performing financial intermediation.

5
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• Banking System stability as the main precondition
  for efficient conducting of its main function in
  the Republic of Macedonia has been achieved
• Avoided systemic banking crisis which a number of
  countries in transition faced with (Czech
  Republic, Croatia, Bulgaria etc.). The Banking
  System of the Republic of Macedonia passed the
  stability test in 1999 during the Kosovo crisis
  and in 2001, during the political and security
  crisis in the Republic of Macedonia.

6
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• The average capital adequacy ratio of the banks
  is 23.1, however registering a downward trend,
  as a result of the growing financial
  intermediation in the Republic of Macedonia
• Satisfactory liquidity position of banks. During
  the first half of 2005, the average liquid assets
  of banks equaled 43.3.

7
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• The level of credit risk retains the downward
  trend. Banks credit exposure classified in risk
  categories C, D and E was 11.8 at the end of
  June 2005, which is a decline of 4.1 p.p.
  relative to end 2002.
• The process of operational restructuring of banks
  continues, especially in the banks that are part
  of larger banking groups (establishing adequate
  risk management systems, adequate systems for
  increasing internal efficiency and costs
  optimization, broadening of the array of banking
  and financial products etc.)

8

• Is stability sufficient?
• Once stability is established and maintained,
  the challenge comes from the need this stability
  to be used as a basis for increasing the banks
  efficiency for the benefit of the economy of the
  Republic of Macedonia, however, not compromising
  their stability. On its part, increased
  efficiency should bring sustainable stability for
  banks in a medium and in a long run.

9
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• What do indicators of banks efficiency in the
  financial intermediation in the Republic of
  Macedonia show?
• Total assets/GDP50
• Total credits/GDP23.8
• Total deposits/GDP35.3

10
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• Trend of improvement of the three indicators of
  efficiency in the banks financial intermediation

11
Does the Banking System in the Republic of
Macedonia perform its role, and to what extent?

• Sources of this trend
• Increase in deposits
• Increase in credits
• Increase in total assets
• All three categories are at the historically
  highest level since the
• Republic of Macedonia gained its monetary
  independence.

12
According to the credit volume and dynamics, are
the banks in the Republic of Macedonia
supportingdevelopment?

• Continuous upward trend in the banks credit
  activity
• Growth of credits of 39.4 for the period
  31.12.2003 30.06.2005
• In the same period, the total banks credit
  exposure registered an increase of 25.1

13
According to the credit volume and dynamics, are
the banks in the Republic of Macedonia supporting
development?

• Starting from 31.12.2004, there is a change in
  the structure of banks assets in favor of
  credits to the non-financial sector, at the
  expense of the share of the placements to foreign
  banks.
• Credits to non-financial entities/Total
  assets40.7
• Placements to other banks/Total assets34.2

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According to the credit volume and dynamics, are
the banks in the Republic of Macedonia supporting
development?
15
Can be more done?

• Banks financial potential is continuously
  increasing
• During the first half of 2005, total banks
  assets registered an increase of 12.1 and
  reached Denar 132.2 billion, which is
  historically the highest level since the Republic
  of Macedonia gained its monetary independence
• The process of operational restructuring of banks
  and improvement of their internal policies and
  procedures continues, and the array of products
  offered on the banking market is broadened

16
Can be more done?

• On the other hand, there are factors which
  restrict further credit growth
• Major credit expansion of banks in a short period
  may cause instability which, in turn, will have
  an adverse effect on the economy as a whole. In
  the race for higher profit, the banks must retain
  their prudential position

17
Can be more done?

• The average capital adequacy ratio of the group
  of large banks, where the largest potential for
  increasing the financial intermediation is
  concentrated, equals 14.9, which could be a
  restrictive factor
• Lack of quality demand for credits for financing
  profitable projects with acceptable level of
  credit risk
• Despite the downward trend, credit risk in the
  Republic of Macedonia is still relatively high.

18
Is the price of bank credits in the Republic of
Macedonia high?

• It is a fact that interest rates on bank credits
  are relatively high.
• Presumptions for lowering the interest rates
• Lessening of the political risk and improvement
  of the overall business climate in the Republic
  of Macedonia
• Increased demand for credits by quality
  borrowers
• Increased competition in the banking sector
• Increased internal efficiency of the banks and
  reduced level of their overhead expenses
• Increased efficiency of the judiciary. According
  to the latest analyses, banks claims in the
  amount of nearly Denar 25 billion are blocked
  in the courts in the Republic of Macedonia. Some
  of those claims go back as early as 1993.

19
Can we be satisfied with the existing conditions
in the Banking System and its role in the economy?

• The answer is positive if one has in mind how
  long-lasting the development of the banking on
  market basis in the Republic of Macedonia is,
  with all risks in its surrounding.
• If we have in mind the point at which we should
  arrive, the answer is negative, and there are
  still many things to be done in order to
  strengthen the role of the banking in the economy
  of the Republic of Macedonia.

20
Concept and activities of the National Bank of
the Republic of Macedonia for strengthening the
role of the Banking System in the economy

• Further strengthening of the supervisory
  function
• Strict implementation of the prudential standards
  for sound banking operations
• Implementation of a strategy for increased
  presence of financial institutions as
  shareholders in the banks in the Republic of
  Macedonia v.s. the shareholders from the
  corporate sector and the natural persons
• Maintaining and development of the Credit
  Registry as an instrument for reducing the
  asymmetry of information in the system and
  increasing the quality of information that the
  banks use in their credit decision-making process

21
Concept and activities of the National Bank of
the Republic of Macedonia for strengthening the
role of the Banking System in the economy

• Amendments to the Banking Law are proposed,
  envisaging
• Increase of the capital census for establishing
  and operating a bank
• Strengthened fit and proper criteria for
  eligible shareholding in a bank
• Enhanced legal power of the National Bank with
  respect to revoking approvals from existing
  shareholders in the banks if they represent risk
  for the banks and their creditors, as well as for
  the system as a whole

22
Concept and activities of the National Bank of
the Republic of Macedonia for strengthening the
role of the Banking System in the economy

• New solutions pertaining to receivership, which
  should enable its efficiency in the
  rehabilitation of banks and adequate protection
  of the assets of their creditors
• Possibility to introduce receivership in case
  when over 50 of the common shares are without a
  voting right
• Introducing a mechanism for auction sale of
  shares if the existing shareholders, on the one
  hand, are not able to rehabilitate the bank, and
  on the other, they are blocking the sale of the
  shares to other entities which have the know how
  and are able to rehabilitate and run a bank
• Other solutions which increase the competences of
  the receivership towards maximum protection of
  the position of the creditors of a bank in
  receivership.

23
Concept and activities of the National Bank of
the Republic of Macedonia for strengthening the
role of the Banking System in the economy

• Giving initiatives and proposals for amendments
  to other Laws in the Republic of Macedonia, which
  directly or indirectly influence banks security,
  stability and efficiency.

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Summarized in a few words

• The Banking System in the Republic of Macedonia
  is relatively stable.
• The growth dynamics is accelerated.
• Its role as the key factor for the growth and
  development of the economy is increasing.
• From the viewpoint of the initial position, we
  may be satisfied, but having in mind the point at
  which we should arrive, a lot of work remains to
  be done.

25
Yet, when evaluating the role of the banking
system, we must not forget that

• Just as it is not possible to have a market
  economy without sound, stable, and efficient
  financial intermediation, it is not possible to
  have a sound financial sector without firmly
  established system of market economy.
• Hence, the evaluations of the efficiency of the
  banking sector must always consider this
  interaction. Isolated consideration may lead to
  biased and incorrect evaluations of the banking
  and its role in the economy.