Access to Finance and the Financial Sector Enabling Environment in the Balkans Facts, Figures, and How to Addres

1. Access to Finance and the Financial Sector Enabling Environment in the Balkans Facts, Figures, and How to Address the Weaknesses

2. Outline • About PFS • Key role of financial sector in economic growth • Measuring access to finance in the Balkans • Sizing up the enabling environment for financial services • What can be done? 2

3. About USAID’s Regional Partners for Financial Stability Program • PFS helps countries more effectively address their financial sector challenges focusing on stability, access to finance and growth. • Regional training and study tours to mentor countries, bringing together key players in the region • Crisis related focus: deposit insurance, access to finance, crisis preparedness measures, problem loans • Research, surveys, publications • Partnerships, leveraging program funds • Strengthening domestic institutions 3

4. Key Role of Financial Sector in Economic Growth 4

5. Key Role of Financial Sector in Economic Growth • Providing Credit & Specialized Financial Services • Providing Capital Economic Growth and Incomes • Noncash Payment System • Savings and Investment Vehicles 5

6. Measuring Access to Finance in the Balkans 6

7. What is Access to Finance Physical accessTo bank branches, other financial institutions Available funds Are banks are liquid and willing to lend? Affordability Are interest rates are reasonable? Suitability Are financial products and services “right” for SMEs? 7

8. Physical Physical Access to Bank Branches and Other Financial Services Number of branches is rather low; trend is downward or stagnant.

9. Available Funds: Healthy Banks Emerging Europe has the least stable financial institutions of any emerging region This chart compares the stability of financial institutions in the main “emerging regions” of the world. It shows that the 29-country Emerging Europe region has the least stable financial institutions of any emerging region. The financial stability indicator represents the average weighted z-score of commercial banks in each country (based on the volatility of bank profits). Source: World Bank, 2012

10. Physical Available Funds: Bank Liquidity Mixed picture in the Balkans. Banks are quite liquid in Albania. Banks in Serbia and Bosnia are least liquid.

11. Physical Available Funds: Banks’ Willingness to Lend Banks are not making new net loans in Montenegro, Serbia, or Bosnia. – similar to the Eurozone (Benchmark)

12. Physical Available Funds: Banks’ Willingness to Lend The ratio of bank credit to GDP is shrinking in Montenegro and Serbia, flat in Bosnia, and growing modestly in Macedonia, Albania and Kosovo.

13. Physical Affordability: Interest Rates Interest rates on loans (in local currency) range from 7% to 17% across the Balkans, compared to 6% in the Eurozone

14. Physical Suitability of Financial Products and Services SME lending will always carry a rather high interest rate What SMEs have: What SMEs need: Carefully managed, cash flow-based lending Specialized lenders who take the time to work closely with the SME Higher cost for the lender Flexible lending terms and conditions Higher risk for the lender Capital Forget it (for early phase SMEs) • Few assets to serve as collateral • Cash flow from sales • But only if financing is available (to produce goods, buy inventory) • Unproven track record with financial institutions • Very little capital

15. Sizing up the Enabling Environment for Financial Services in the Balkans 15

16. Keys to a Vibrant Financial Sector • Legal system • Financial sector supervision • Infrastructure • Competition 16

17. Keys to a Vibrant Financial Sector – Legal System • Judicial independence • Contract enforcement • Property registration • Collateral enforcement (foreclosure) 17

18. Judicial Independence Judicial independence is weak 18

19. Contract Enforcement Enforcing contracts is costly and difficult – this raises the risks and costs of lending 19

20. Property Registration Some countries have improved the process and cost of registering property (and mortgage liens) 20

21. Collateral Enforcement Weaknesses in the collateral enforcement regime translate into higher risks for lenders, higher interest rates for borrowers, and reduced supply of credit • Slow • Unreliable courts • Costly for the lender 21

22. Financial Sector Enabling Environment What Can be Done 22

23. Strengthening the Financial Sector • Domestic authorities, private sector players, and donors are working to: • Rid banks of problem loans • Strengthen banks, capital markets, and nonbank financial institutions • Implement new international standards to prevent and mitigate financial crises 23

24. Improving the Legal System • Domestic authorities, USAID, IMF, World Bank, other donors are working to: • Improve the legal system overall • Reduce corruption • Streamline collateral enforcement • Improve bankruptcy procedures • Remove tax impediments to writing off loans 24

25. . Partners for Financial Stability (PFS) 1919 N. Lynn Street Arlington. VA 22209 Phone: +1 571 882 5000 Fax: +1 571 882 5100 www.pfsprogram.org David Cowles COTR USAID +1 202 567 4052 dcowles@usaid.gov Pat Bryski Engagement Director Deloitte Consulting LLP +1 571 882 5330 pbryski@deloitte.com Leslie Sulenta Chief of Party Deloitte Consulting LLP +385 98 355 258 lsulenta@deloitte.com