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Western Balkan Banks Struggle with Funding Constraints and Weak Credit Growth
Banks in Western Balkan countries such as Herzegovina, Kosovo, and Serbia face significant challenges in boosting financial penetration and supporting economic growth. Two major hurdles they must overcome are funding constraints and weak credit growth.
Credit-to-GDP Ratios
According to recent data, credit-to-GDP ratios in these countries have been moving sideways or contracting. In 2016, credit-to-GDP ratios were below their fundamental values, with small but consistent gaps between actual levels and long-term trends. This pattern is consistent across countries: credit-to-GDP ratios were below their fundamental values in the early 2000s, rapidly increased during the boom period, and have since declined back down.
Funding Constraints
The International Monetary Fund (IMF) has identified weak funding as a key reason for continued modest credit growth in the region. Parent bank funding, which had recovered slightly in 2015, fell again last year and remains more than 10 percentage points of GDP below its peak. The prospects for a turnaround in parent funding do not seem promising, with foreign funding likely to continue contracting.
Limited Prospects for Foreign Banks
Furthermore, foreign banks have limited prospects in the region, citing current modest profitability as a major factor. This phenomenon is self-reinforcing, as limited prospects influence funding decisions, which in turn limit opportunities and profits. According to a recent European Investment Bank survey, none of the largest three foreign banks in the Western Balkans plan to expand operations in the region.
Parent Bank Stress
Another challenge facing banks in the Western Balkans is parent bank stress. Some parent banks have faced stress in the past, while others remain vulnerable. This stress has had an impact on the region’s banking systems, either through pressure to consolidate capital at the parent level or outright deposit outflows in subsidiaries when depositors lost confidence.
Box 3.2: Parent Bank Stress
Parent bank stress has had a significant impact on the Western Balkan banking system. In some cases, this stress has led to pressure to consolidate capital at the parent level, while in others it has resulted in outright deposit outflows in subsidiaries when depositors lost confidence. This stress has been particularly pronounced in countries with a high degree of foreign ownership.
Charts
Chart 3.20: Credit to GDP, Change from Trough to 2016
This chart shows the change in credit-to-GDP ratios from the trough to 2016 for various Western Balkan countries. The data highlights the significant challenges facing banks in these countries, including funding constraints and weak credit growth.
Chart 3.21: External Bank Claims on Western Balkans
This chart shows the percentage of GDP accounted for by external bank claims on the Western Balkans from 2000 to 2016. The data highlights the decline in external bank claims over this period, reflecting the challenges facing banks in these countries.
Sources
- International Monetary Fund (IMF)
- Bank for International Settlements (BIS)
- European Investment Bank (EIB)
Note: Country abbreviations are according to the International Organization for Standardization (ISO).