Investigations reveal rotten side of Bosnian Republika Srpska’s bank sector

Investigations reveal rotten side of Bosnian Republika Srpska’s bank sector
Republika Srpska President Milorad Dodik, who's under growing pressure over an alleged mortgage at Pavlovic Banka. / Photo by CC
By Clare Nuttall in Bucharest May 13, 2016

A series of corruption investigations have been launched in recent months into several banks in Republika Srpska, the Serbian entity of Bosnia & Herzegovina, culminating in the arrest of 10 people, including the head of the local regulator in March.

The banks under investigation are small, so this is not expected to have a wider impact on the stability of the Bosnian banking sector, which is dominated by international banking groups. However, it could create pressure for a review of the way the sector is regulated – something the International Monetary Fund (IMF) has been pushing for.

Reports of corrupt practices at banks in the smaller of Bosnia’s two entities (the other being the Muslim-Croat Federation) have been circling for more than a year, but the links between the banks and key government officials resulted in inaction by the entity-level regulator and law enforcement agencies. It was not until late 2015 that the national State Investigation and Protection Agency (SIPA) stepped in, carrying out a raid at Pavlovic Bank. Probes have followed at Bobar Bank and Banka Srpske, and the head of the Investment and Development Bank was among those detained in March.

Inevitably, this added to tensions between Bosnia’s federal- and entity-level governments, but now that Bosnia is actively pursuing EU membership (Sarajevo submitted a formal application in February) as well as a new stand-by arrangement (SBA) with the IMF, the pressure is on to clean up the banking sector.

Below par Bobar

Bobar Bank started to unravel after the death of its owner, businessman and MP Gavrilo Bobar, back in September 2014. When its shareholders failed to agree on a recovery plan, the bank entered bankruptcy three months later and its licence was cancelled. At the time, the bank held around BAM250mn (€125mn) of deposits, of which around one-fifth were personal savings. The Bosnian state Deposit Insurance Agency was forced to pay out, but efforts to investigate the collapse of the bank were slow.

The launch of the probe at Bobar Bank follows more than a year of campaigning – including the launch of several lawsuits to force the regulator to reveal information about Bobar Bank and Banka Srpska – by the local affiliate of the anti-graft group Transparency International. The NGO started pushing for an investigation into the local banking regulator’s management and employees in order to determine who bears responsibility for the collapse of Bobar Bank back in 2014.

Transparency International BiH criticised in particular the March 2015 decision of the special prosecutor’s office not to proceed with the Bobar Bank case as “absolutely confusing”, and it cited indications that the “competent institutions are trying to avoid accountability”. The following month, the NGO claimed the ruling majority in the Republica Srpska was trying to cover up the Bobar Bank affair after members of the entity’s finance and budget committee voted against a public hearing, according to documents shared with bne IntelliNews.

An investigation was finally launched by SIPA, which in March 2016 arrested six people including ARBS head Slavinica Injac on suspicion of being part of an organised criminal group that siphoned off around BAM123mn (€63mn) from Bobar Bank.

Meanwhile, in November news broke about a raid at another Republika Srpska bank, Pavlovic Banka. The bank’s owner, Slobodan Pavlovic, and three other employees were arrested in February and charged with money laundering, abuse of power and forgery of official documents.

Local media later reported that national-level prosecutors were investigating Republika Srpska President Milorad Dodik’s purchase of a €1.26mn villa in the upscale Dedinje district of Belgrade back in 2007. They claimed Dodik had paid in full for the villa – raising questions about where the money came from – and that the loan from Pavlovic Banka that he claimed had been used to pay for the villa was only extended the following year.

Dodik defended himself to reporters at a press conference on February 16, saying he had a contract with the bank dated May 14, 2007. He added that, “Obviously someone either misled the prosecution or it is some sort of revenge,” daily Nezavisne Novine reported.

Indications of problems at Banka Srpske also surfaced in November when the Banking Agency of Republika Srpska (ABRS) fired the bank’s director, Zdravko Trivunic, who it said had ignored an explicit ban on accepting deposits as the bank’s capital fell below the legal threshold.

The bank was already understood to be in difficulties. It inherited its business from Lithuania’s Balkan Investment Bank, whose owners pulled out of Bosnia, leaving the bank and its other holdings indebted and under investigation. The Republika Srpska’s government took over the bank after recapitalising it in 2013.

In April SIPA launched yet another investigation, this time at Banka Srpske, following media reports that the bank had stolen hundreds of millions of Bosnian marka of its customers’ savings by investing the money in fake companies. On May 6, the local daily reported that the ABRS would start the liquidation of Banka Srpske – a process reportedly required by the IMF as a condition for reaching a new agreement with Bosnia.

The probes at the banks are not directly related, though an April report from the High Representative in Bosnia & Herzegovina – the West's authority that oversees the implementation of the Dayton agreement which brought the Balkan Wars to an end in the 1990s – points out that the bankruptcy of Bobar Bank “affected a number of public institutions, companies and individuals”, while the problems at Pavlovic Bank, which was “also in a difficult position”, were “mainly due to the domino effect of the previous two cases”.

“These are three separate cases, but what they have in common is their connection to the government of the Republika Srpska and the main people from the government,” a Transparency International BiH spokesperson tells bne IntelliNews

She points out that, “The local prosecution in the Republika Srpska did not want to take on the corruption cases”, meaning it was not until the Bobar bank case was transferred to the national prosecutors that there was some action.

Still stable

The unveiling of corruption at these banks is not expected to lead to wider instability in the Bosnian banking system which, as Srebrenko Fatusic, a financial analyst at Raiffeisen Bank Bosna i Hercegovina, points out, is highly concentrated, with almost two-thirds of the market in the hands of the top five banks – UniCredit Group, Raiffeisen Bank, NLB Group, Sberbank Group and Hypo Alpe Adria Group. “Therefore, problems in small banks are not jeopardizing the overall banking sector stability,” Fatusic tells bne IntelliNews.

Bobar Banka and Banka Srpske accounted for just 3% of market share in terms of total assets. Republika Srpska’s economy is also less than half the size of the Bosnian Federation; in 2015 its GDP stood at around €4.4bn compared to €9.4bn in the Federation.

“Despite many challenges, the B&H banking sector retained a very solid level of capitalization and liquidity. To be precise, the capitalization of the B&H banking sector stands at 15.0% as of 2015 (which is still well above the legal requirements of 12%) while the liquidity ratio of banking sector amounted to 26.4% as of 2015,” Fatusic says.

“From the fundamental perspective, the high level of [non-performing loans] NPLs is still the largest source of vulnerability for the B&H banking sector as NPL dynamics still determine the overall lending activity,” according to Fatusic. The high level of NPLs in the corporate segment has shifted the focus of Bosnian banks to the retail segment in recent years. The overall NPL ratio has fallen, dropping to 13.7% in 2015.

Potentially, the high-profile scandals could even lead to better banking regulation in future, by lifting the lid on the deficiencies of the current system. Bosnia has no national-level banking regulator; banks are regulated by the ABRS in Republika Srpska and the Banking Agency of the Federation of Bosnia and Herzegovina in the Muslim-Croat Federation. Perhaps inevitably there are close relations between the ABRS and politicians in the tiny Serb entity.

The IMF has already been pushing for change. In an October 28 statement, the fund “recommended that financial policies address remaining vulnerabilities in the banking system, particularly among domestically-owned banks.” Both Bobar and Pavlevic banks were owned by individuals, while Banka Srpske and Investment and Development Bank are owned by the Republika Srpska.

It also made the liquidation of Banka Srpske a condition for striking a new deal, something urgently sought by the governments of both entities. Even though, as Fatusic points out, the “Lack of the IMF funds, so far, did not cause any major fiscal problems,”, he adds that, “according to both entity governments, the new SBA is the best way to provide the fiscal stability of the country in medium-term.” An IMF delegation is currently in Bosnia, and a decision on a new SBA is expected soon.

“Having in mind that the [ABRS] adopted a decision on the liquidation of Banka Srpske in May 2016, we see no obstacles for signing the new SBA over the next few weeks,” says Fatusic. However, he adds that, “Which banking system reforms will follow after the signing of the SBA is yet to be seen.”

Bosnia has previously weathered major banking scandals. An international probe was launched after revelations in 1999 that $1bn worth of international aid had been stolen, much of it via the failed Bosnia Herzegovina (BH) Bank. And a few years later, a group of high-ranking Bosnian Croat officials were found to have embezzled at least BAM216mn of funds from the Croatian government through Hercegovacka Bank. In a dramatic incident in 2001, rioters broke into a branch of the bank and took international investigators hostage, as well as setting fire to vehicles belonging to the Nato-led Stabilization Force (SFOR).