There is no mutual fund industry in Bosnia and Herzegovina (BiH). This is partly a result of the underdeveloped economy, but the current legislative framework addresses itself to financial products that the BiH economy is not yet ready to support. It could be that generalization of the legislation could assist in developing the market for personal investment products.
BiH is composed of two entities or territories (as well as a much smaller area, Brcko District, not addressed here). In the entity of Federation of BiH (FBiH), the main laws applicable are the Law on Securities and the Law on Funds, Management Companies and Investment Funds (the Law on Funds). The main regulatory body is the FBiH Securities Commission. In the entity of Republika Srpska (RS), the Law on Securities and the Law on Privatization Investment Funds and Privatization Fund Management Companies apply. The RS Securities Commission is the regulatory body. This briefing addresses the FBiH legislation, but the investment situation is similar in the RS.
Just as in the other republics of the former Yugoslavia, the process of ownership transformation in FBiH started by apportioning internal shares to workers within the framework of the Markovic privatization. Accordingly, the Law on Funds in FBiH provides for establishment of privatization investment funds (PIFs), founded to collect certificates in the privatization process and their investment in shares or holdings of enterprises. Under the Law on Funds, a PIF is defined as a close-ended fund. Eleven PIFs are established in FBiH. It is highly unlikely that more will be established as privatization by certificates has been completed and the equity to found a new PIF is prohibitively large, at KM200 million, about $120 million.
The Law on Funds was also meant to facilitate open-ended investment vehicles in the form of mutual and investment funds and legal entities allowed to manage them. Under the Law on Funds, only management companies are allowed to own funds.
No fund or management company exists in BiH. At the outset, there is nothing inherently unreasonable about the Law on Funds, which appears to be modelled on the EU Ucits directive. But the particularities of the FBiH market mean that it is impractical to establish funds domestically. Firstly, the funds are only allowed to invest in assets traded on the Sarajevo Stock Exchange, which rules out the ability to invest in non-liquid assets, such as property and private equity. It also rules out the possibility of investing in securities traded in the world's main markets. This limits the funds' ability to invest more securely, for example, in bonds with high credit ratings, which do not exist in the FBiH market.
Secondly, the domestic market itself is dominated by PIFs, financial institutions and state-owned companies. PIFs account for most transactions and own a preponderance of the privatized economy. Access to those companies appears to be dictated by PIFs, which probably means that there is little value to be added by mutual funds.
Thirdly, the start-up capital is daunting in a nascent market. The minimum registered capital of a management company that manages a single fund is KM1 million. A management company must increase the registered capital by KM250,000 for each additional fund that it will manage. This is a lot of money for any institution to provide for an uncertain business proposition, and comes on top of the other start-up costs that the fund will face. A further restriction is that a foreign natural or legal person may directly or indirectly own more than 10% of the shares or holdings of the management company, based on the approval of the FBiH Securities Commission. Because many of the institutions that have mutual fund infrastructure, expertise and capital are foreign-owned, this shuts off an obvious source of potential players in the market.
Although the regulations for domestically established funds are limiting, the opposite case is true for foreign established funds. Funds established in other jurisdictions are not covered by domestic legislation, which leaves domestic investors vulnerable. However, requiring a foreign-established fund to register domestically by law would be an administrative burden on the Securities Commission. The foreign funds themselves could incur considerable costs for local expertise for applications to register, which might make the BiH market financially unviable.
The best solution might be to delegate decisions to a competent third party and recognize the regulation by the third party as being adequate for the purpose. Perhaps the Ucits rules defined by the EU to facilitate cross border sales internally could be used. Or the BiH could take a bilateral approach and agree to recognize regulation by appropriate other countries. If the third party were an EU country, the bilateral approach might actually admit a wider range of funds than adopting the Ucits standards alone.
Extend the framework
Bosnia has a well-developed set of rules for domestically established mutual funds, but the BiH economy is not large enough to take advantage of these rules. This does not mean that there is no interest in personal investment products from suppliers or customers. It is possible that extending the current legal framework to cover a wider range of products will promote growth.
Jack Evans and Renuka Kukanesen