Bosnia & Herzegovina (B&H)’s Islamic finance industry has only one bank and one microcredit organization. For many years, Bosna Bank International (BBI) has been a role model for the expansion of Islamic banking in a conventional environment, although the bank itself cannot properly apply most Islamic finance models in practice because of the regulatory constraints. Similarly, The First Islamic Microcredit Foundation is the only microfinance organization in B&H that operates according to Shariah banking principles, and was established by Islamic Relief. Accordingly, the microfinance institution does not use interest in its operations and approves exclusively interest-free Qard Hasan loans in the maximum amount of up to BAM10,000 (US$5,112.9).
Review of 2022
The banking sector is well-capitalized and its profitability has increased further in 2022. Asset quality has further improved compared with the previous year and the pre-pandemic period, with the ratio of non-performing loans to total loans decreasing to 5.2% at the end of the second quarter of 2022, from 5.7% in the same period in 2021 and 8% in 2019.
The Islamic finance industry in B&H has turned toward a more social impact-oriented approach to Islamic finance, rather than just technically applying Islamic finance instruments in its operations. It started from a greenfield operation, while other European banks took over small banks that were established immediately after war.
BBI as a socially responsible development institution within the Sarajevo Business Forum (SBF) platform worked on creating and presenting various opportunities and potential for investments.
Having in mind the potential of B&H as an attractive ‘nearshoring’ destination for companies from the EU, BBI, together with domestic businessmen, recognizes nearshoring as an approach that can positively change the economic situation in B&H in the next five years. That idea was promoted within the SBF this year.
The 11th SBF 2022 was held in Sarajevo on the 11th and 12th May, attracting about 1,550 domestic, regional and global representatives of governments, ministries and entrepreneurs from nearly 40 countries. A record number of projects were submitted this year. During the two-day business–investment conference, 313 project presentations were presented and over 400 B2B meetings were held.
The Participation Banks Association of Turkiye (TKBB) signed an MoU with BBI to develop the Islamic banking sector. The cooperation to strengthen economic relations will allow the two countries to exchange information, and various events and activities will be mutually organized. The MoU signed between TKBB Acting Secretary-General Ismail Vural and BBI CEO Alek Bakalovic aims to develop Islamic banking.
Islamic finance institutions do everything that they can to help young people and support them on the path of education. BBI’s commitment is to invest in science and support the development of technology. Therefore, BBI supported B&H students at the Robotics World Championship. B&H students won first place at the Robotics Olympiad in the competition of 177 participants from around the world.
Furthermore, six graduates from B&H will continue their education at the prestigious Albukhary International University (AIU) in Malaysia. This is a program implemented by AIU with the support of BBI. Full scholarships are provided for students.
Preview of 2023
In accordance with its new strategy, BBI continues with the process of business transformation in 2023 as well, focusing on its core business and shutting down non-profit non-core activities. Above all, this implies an accelerated digital transformation process together with significant changes in the field of human resources. The process of business optimization continues, as 13% of BBI branches were closed while the bank purchased a significant number of modern multifunctional ATMs to respond to clients’ needs. Virtual branches are also under development.
Together with the IsDB, BBI was a shareholder of BBI Real Estate, a very successful Islamic leasing company in B&H, but the IsDB purchased BBI’s share during 2022.
With many non-core projects canceled, BBI is now focusing on the banking business alone and is slowly getting closer to the conventional business model. However, the organization of the SBF and the Sarajevo Halal Fair (SHF) as the bank’s two most important projects will continue as part of the bank’s socially responsible activities.
Conclusion
The outlook of B&H’s Islamic finance industry is unclear based on an inadequate regulatory environment. BBI still plays a significant role in the promotion of new foreign direct investments through the SBF and the SHF. A large portion of these new projects are carried out by BBI. We can conclude that Islamic banking in B&H has an increased influence despite regulatory constraints. Besides its Shariah compliance struggles, BBI has succeeded to maintain several unique features which can be a model for other Islamic banks in the conventional regulatory environment.
Kenan Žigovic is an expert associate and Admir Meškovic is a project manager at Bosna Bank International. They can be contacted at [email protected] and [email protected] respectively.