Better Risk Measurement Means More Bank Lending in Bosnia and Herzegovina

Tuesday, March 26, 2019
Central Bank of Bosnia and Herzegovina, in Sarajevo.
Professional photographer Almin Zrno, Sarajevo, Bosnia and Herzegovina (alminzrno.com)

Safe banks – safe banking – is good for everyone. Want to buy a car? Build a home? Start or expand a business? Safer banking makes it easier for deserving souls to get loans for major purchases or events to improve and live their daily lives.

That is why it may be worth listening to your colleague describe over coffee how her organization (say, USAID) helped implement international accounting standard IFRS 9 in the banking system of Bosnia and Herzegovina (BiH). To most people, accounting is a dry, boring subject. But reliable numbers, along with money itself, matter.

The purpose of accounting is to provide a clear picture of the financial state of an enterprise. This goes for the simplest household or sole proprietor to the largest multinational corporations. It also applies to banking, which is where USAID’s Financial Reform Agenda project (FINRA) comes in. FINRA’s mission is to strengthen supervision of the financial sector in BiH. The overall goal is not regulation per se but to increase access to finance for the qualified firms and households.

With USAID’s assistance, BiH banking supervisors implemented the single most far-reaching recent reform in financial sector supervision: IFRS 9. IFRS 9 is a new way of interpreting the true economic value of a bank’s primary product – loans – and better account for the level of risk in the banks. It was introduced worldwide in early 2018 to address a problem that contributed greatly to the 2008 global financial crisis, which had catastrophic effects on access to finance for years to come, even in BiH.

Bosnia is starting to see the benefits of these improvements.

“Introducing this standard further strengthened the stability and resilience of the entire BiH banking sector,” said Amir Softić, director of the BiH Association of Private Risk Managers (the senior risk managers of the banks). And greater stability in the banking system means greater access to finance. After near-stagnation for eight years, bank credit to the private sector in Bosnia and Herzegovina has started to recover: The annual rate for bank credit was over 6.5 percent for 2018, according to the BiH Central Bank.

This means that Bosnian businesses can more easily obtain loans to grow by investing in equipment and hiring workers, and families can build homes and make major household purchases. The result is a better standard of living for the citizens of BiH. So don’t underestimate accounting, especially IFRS 9: It really can change people’s lives.

Last updated: August 13, 2019

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