Vienna, January 16 – Policymakers in the Western Balkans should rebalance their financial sectors to encourage long-term growth in the region, says a new World Bank report. According to Risks and Returns: Managing Financial Trade-Offs for Inclusive Growth in Europe and Central Asia, presented at an event today in Vienna, an over reliance on bank credit has contributed to underdeveloped capital markets and a high number of nonperforming loans across the region.
The report argues that financial sector development must go beyond improving access to bank credit, allowing financial systems to develop in a balanced way across both bank and nonbank financial subsectors - in particular capital markets and insurance - to support inclusive growth in Europe and Central Asia (ECA).
“Although progress has been made in the region since the onset of the global financial crisis, the financial sector can do much more to unleash opportunities for sustained and equitable growth,” notes Ewald Nowotny, Governor of the Austrian National Bank and host of the event. “This report analyzes key dimensions of financial development to boost inclusive growth and offers a broad strategy for implementing financial sector reforms in the Western Balkans and the ECA region as a whole.”
The event focuses on specific challenges in the Western Balkans, with participation from high-level representatives, including Governors, from the Central Banks of Albania, Kosovo, FYR Macedonia, Montenegro, and Serbia.
In the Western Balkans, 16 percent of the loan portfolio is nonperforming - among the highest in the world. Furthermore, across the broader ECA region, only about 38 percent of adults use savings products - compared with the developing world average of 54 percent - and just a few percent use insurance products. Distrust in banks is also higher than in any other region of the world.
“Overcoming this distrust and increasing the diversity of the financial system in the region is crucial for sustainable and inclusive growth. It requires further international cooperation, because diversified and stable financial systems require a larger scale than individual countries in the region can provide,” says Chief Economist for the Europe and Central Asia (ECA) Region, Hans Timmer.
To achieve sustainable and inclusive growth, the report argues that countries in the region have to balance financial development along the dimensions of:
- Stability (e.g. addressing nonperforming loans and decreasing the volatility of private credit)
- Efficiency (e.g. reducing overhead costs and net interest margins on assets)
- Inclusion (e.g. increasing the use of saving and insurance products)
- Depth (e.g. developing capital markets and diversifying a country’s financial system)
“The Western Balkan countries can best advance inclusive growth by focusing more on improving financial efficiency, increasing savings, and developing capital markets,” notes Ellen Goldstein, World Bank Country Director for Western Balkans.
The report points out that throughout the 1990s countries across ECA opted for a model of rapid financial development, focused on expanding bank credit often funded by foreign capital. This model helped boost the financial inclusion of firms and households—but was also accompanied by lower financial efficiency and increased vulnerability. Consequently, the region experienced two major banking crises, first in the late 1990s and again after 2008.
