Academic journal article Journal of Economic and Social Studies

Evaluation of Financial Performance of Banking Sector: Evidence from Bosnia and Herzegovina, Croatia, Serbia and Slovenia

Academic journal article Journal of Economic and Social Studies

Evaluation of Financial Performance of Banking Sector: Evidence from Bosnia and Herzegovina, Croatia, Serbia and Slovenia

Article excerpt

Introduction

The banking sector is considered to be an important source of financing for most businesses. Increase in the financial performance leads to more improved functions and activities of any organization. It has effect on total economy of the country, because banks are the sources of finance for better job opportunities, development of new ideas; research and overall prosperity.

The factors that influence performance of banks are: bank size measured by its assets, profitability measured by returns on assets and equity, size of deposits and loans, as well as the percentage of non- performing loans in the total loans.

This study is organized as follows: the next section following the introduction discusses the characteristics of banking sector. Methodology of study is described in third section. The forth section provides details of the results and analysis of the available data, and final section presents the main conclusion.

Banking system

The Socialist Federal Republic of Yugoslavia (SFRY) was very strong in each field, in economic and political meaning. It had great impact on its member republics. The banking system was different than the system of other planned economics. Banks had participation in all activities for enterprises, in commercial and financial activities. All banks were nationalized.

The banking system of Yugoslavia in period from 1960 to 1980 was one of the most advanced banking systems in Central and Eastern Europe in that period. The system had social characteristics, introduced two-tier banking system in 60s when it left the Soviet style mono-banking system, and in 80s Yugoslavia was the most developed and the largest country in the region. The strong Yugoslavia represented a great base for development of the strong and healthy banking system. The National Bank of Yugoslavia controlled short-term loans, issued currency, performed general banking and agency services for government and served as a clearing house for the entire economy. The Bank through its branches had a monopoly of all commercial banking operations in the whole country.

In 1985 in Yugoslavia there were 170 banks and in one decade from 70s to 80s there was no bank liquidation or bankruptcy. In 1980s the Yugoslavia experienced crisis that were caused by a high exchange rate, a high fiscal deficit, and low performance in trade that were the consequences of the big recession and international crisis. During that period, national currency, Dinar, highly depreciated and it leads to the difficulties in repaying foreign loans that in previous century were taken. It negatively influenced the banks' portfolio and the growing debt of the country. Getting the agreement with Paris and London Club the debt was postponed. Failure of the reforms that were made in order to solve the crisis leads to the bringing new banking law in 1989. The government started to promote the Markovic's anti- inflation program to make faster economic stabilization. The plan allowed the establishment of private and mixed firms. These new reforms were interrupted by the weakness and collapse of the SFRY.

The reforms of the banking system started in 1990s. Those reforms happened after the breaking the SFRY and separation of its republics. Separation started first in year 1991 with small military conflict in Slovenia, then Croatia (1991-1992) and Bosnia and Herzegovina (1992-1995). The military conflicts, hyperinflation, high unemployment rates and other reasons influence the flow of the political and the economic reforms. These negatively influence the position of all former republics and took away all advantages they had before as the part of the SFRY.(Radzic and Yuce, 2008)

In order to perform better and to make system stronger there were introduced some measures such as implementation of solvency ratio, limiting the total amount of the assets to less than fifteen times the equity, also to decrease the risk exposure the ceilings on the foreign credits were imposed. …

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