Financial Crime World

Macedonia’s Financial Sector: Overcoming Governance Challenges and Bolstering Banking Resilience

Abstract

This article examines the current state of Macedonia’s financial sector, particularly focusing on governance challenges in the banking system and strategies for improvement.

I. Financial System Overview and Challenges

A. Context for Macedonia’s Financial Intermediation

  • Historical challenges: Aftermath of Yugoslavia’s breakup, conflicts, and civil unrest
  • Institution development hindrance
  • Pervasive governance issues

B. Vulnerabilities and Soundness of Macedonia’s Banking Sector

1. Current State

  • Showing improvement but challenges remain
  • Governance issues in smaller banks
  • Balance sheet weaknesses
  • High real interest rates, substantial spreads, limited lending appetite

2. Strategies for Overcoming Challenges

  • Enhance financial intermediation
  • Combat corruption and weak governance

II. Key Recommendations for Macedonia’s Financial Sector

A. Banking

1. Enhance bank ownership

  • Attract reputable strategic investors

2. Strengthen regulatory framework

  • Market risk
  • Internal risk management
  • Corrective actions

3. Supervisory oversight

  • Borrowers’ foreign exchange exposures

4. Financial sector soundness indicators

  • Promote more risk-oriented supervision

5. AML/CFT enforcement

  • Foster greater enforcement

B. Market Development

1. Government securities markets

  • Promote development

2. Liquidity management

  • Expand collateral options

C. Payment System

1. Clarify central bank’s role

  • Objectives for payment infrastructure

2. Establish a remote back-up facility

  • For payment system

3. Remove third-party guarantees

  • Involve courts instead

D. Financial Safety Nets

1. Emergency lending framework

  • Design and procedures

1. Judicial system reforms

  • Grant financial sector regulators

F. AML/CFT

1. Strengthen regulatory framework

  • Boost enforcement capabilities