By Tarik Kurbegović, chief executive, Sarajevo Stock Exchange
On the walls of the conference hall of the Sarajevo Stock Exchange hang copies of shares from the era when Bosnia was ruled by the Austro-Hungarian monarchy. While this suggests a long tradition of capital markets culture, it does not, alas, reflect the true state of awareness among Bosnian citizens. We have started to work on improving the country’s financial literacy. But it will take time.
Although some steps towards the re-establishment of capital markets were made in the last years of former Communist Yugoslavia, this stopped with the war of 1992-95. After the 1995 Dayton Peace agreement, every adult citizen of Bosnia-Herzegovina received certificates with a nominal value of approximately €10,000, and the right to use these to buy shares of companies in the planned privatisation process.
It was here that reformers lost their first battle in terms of educating the public about capital markets: most people, simply unaware of the potential of their free certificates, went for the quick option and sold for cash cash, typically at 2-3 per cent of face value.
What is more, when the first investment funds intended to buy shares in the privatisation tenders were established, they were barely publicised, leaving ordinary citizens totally unaware of what was happening. It was as if someone fully intended for this to pass unnoticed. This meant only a small proportion of people’s certificates were used to invest in shares and/or the investment funds.
A boom in the capital market in 2006-2007 motivated domestic retail investors to show some interest in the capital market for the first time, investing their vouchers in companies which were then being actively traded on the Sarajevo Stock Exchange (SASE).
Unfortunately, most were seeking quick riches, and only a small group of domestic investors gave a second thought to analysing the companies into which they had invested. For the majority, the stock market was merely an alternative betting shop.
With the collapse of the market in the second half of 2007, investor interest rapidly waned, leaving those who had bought in at the peak of the bubble with serious portfolio losses and, in many cases, unpaid loans taken out to buy shares.
Today, according to data published by the Central Bank of Bosnia-Herzegovina, the population has more than Km 6bn (ca €3bn) in bank deposits, which at best yield 3-4 per cent per annum. After inflation, that is a break-even investment.
While the memories of the crash of 2007 are still fresh in the collective memory, the public shy away even from secure state bonds, which have been issued since 2009. The average daily turnover on the stock exchange last year was just KM 1.46m, a tad under €750,000. The market capitalisation at the year-end was KM4.5bn or €2.3bn.
There are two main causes for this – lack of financial education and fear of losing their investment.
Interestingly, foreign investors and the banks themselves are much less suspicious of the federal bonds than citizens, as evidenced by a large trading volume of these securities. It’s hardly surprising; yields on state bonds in some cases are about 12 per cent.
Thus far, in Bosnia-Herzegovina we have not held a single IPO, probably because there is a general lack of understanding why a company should go public. Company owners see it as a loss of ownership, while investors do not see IPOs as investment opportunities.
And while we have had some secondary public offerings (bonds and shares), but no big corporate bond offering.
So, we have opportunities to assist entrepreneurs with great ideas to raise cash through IPOs, and lowering the cost of capital for existing companies, as well as creating a transparent means of investing and saving through stocks and bonds.
Taking over as director the Sarajevo Stock Exchange eight months ago, I knew that the “golden age,” (such as it was up to 2007) of business expansion on our capital market had long ended, and that the period since had not been used for the development of the stock exchange.
True, the bourse has been acting as a platform for trading in the 173 listed companies, but it has not actively promoted the development of market products and services.
In response, the exchange has decided to launch a new marketing and educational strategy, to enhance citizens’ awareness of what a capital market is and how they can benefit themselves and the economy.
This year, the bourse will begin a series of seminars to help the public understand and participate in the capital market, beginning in Sarajevo and visiting provincial towns throughout Bosnia-Herzegovina. Organised by the exchange, the road shows will be financed by participants and municipalities.
We have also lobbied to have capital markets introduced as a mandatory subject in economic high schools, and the Sarajevo Stock Exchange is now preparing textbooks for such courses, financed by the International Finance Corporation and the education ministry of Bosnia-Herzegovina.
In addition, the bourse and the BURCH International University of Sarajevo will create a course in capital markets using an Sarajevo Stock Exchange trading room to combine both theoretical and practical teaching input.
We believe the expansion of activities of the stock exchange into education will significantly improve the financial literacy of our future professionals, raising their awareness of the proper role and value of well-regulated markets in an open economy, and thus help the formation of a new generation of smart investors.
It will take time, but with this strategy we aim to create a dynamic, economically self-sustaining stock exchange that compares well with any modern bourse in terms of products and quality of service, thereby putting capital to more efficient use and reducing Bosnia-Herzegovina’s excessive reliance on the banking sector.
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