most of us who live and work here believe it is higher than justified because external perceptions of bih are still more negative than the reality of bih. we all have to work on changing these perceptions and on improving the reality of bih even further. what can we do : • show more political cohesion and decisiveness. i see many signs that the three governments in bih are working together in bih much more than before. this has to be continued by the bih politicians, encouraged by the international community and explained to the rest of the world by both ; • one of the main reasons we got a formal sovereign credit rating earlier this year was to improve the external perception of bih. the initial rating of b3 with a positive outlook was quite good and has helped improve bih ’ s international image. once the laws on the internal debt issue are passed in both entities, i intend to go back to moodys rating agency and request that they consider an upgrade for bih ; • information : road - shows, article etc. the government, banks and business can all play a role. we all need to be ‘ salesmen ’ for bih. capital markets : bih has a strong central bank and a banking system that is now playing a major economic role. we need to focus now on accelerating the development of the capital markets in bih as they are still extremely small. this will have two major impacts on the cost of capital in bih : • it will provide the banks with instruments in which they can invest their substantial liquid funds and earn a better return than they do at present. banks at present have quite a large proportion of their asset portfolio on which they earn very little : 1 - 2 %. they therefore have to earn more on their loan portfolio in order to improve their overall rate of return on assets ; • it will give enterprises a larger range of sources of capital. this should allow the types of capital available to better meet their needs and could also reduce the cost of capital by increasing competition. what are we doing to develop the capital markets : • stock exchanges : two stock exchanges have been established in bih but both are still very small. but there are two very positive trends already underway : a ) turnover on both exchanges is steadily increasing ; b ) most of the stock exchanges in the region have agreed to develop a common database. they have announced that this is the first step towards common trading. this is very good news for the capital markets in the

peter nicholl : is the capital in bosnia and herzegovina expensive? speech by mr peter nicholl, governor of the central bank of bosnia and herzegovina, at the conference “ is the capital in bosnia and herzegovina expensive? ”, sarajevo, 13 october 2004. * * * is the price of capital in bih high? based on a simple comparison with western europe and a number of the countries in eastern europe that are further down the reform path than bih, the answer is clearly yes. given the risks and uncertainties that still exist in the political, economic and legal systems in bih the answer is no. what we need to focus on today is what are these risks and uncertainties and how can we work together to reduce them. this meeting today is focusing on the banking sector. there are a lot of improvements that still need to be made in the bih banking sector. but we also need to remember that reform in the banking sector has gone further and faster than reform in any other sector of the economy. as a consequence of that, both the availability and the cost of capital has come down substantially in bih over the last few years. the first area to focus on therefore is the reform of the rest of the economy. the banking sector is extremely liquid at present - even though their lending is growing at a rate that worries the imf. they are holding km 790 million more on their reserve deposits at the cbbh than required by our 10 % reserve ratio. they are also holding substantial short - term funds abroad. one of the reasons for this is that there is still a shortage of credit - worthy borrowers. it is easy for a bank to lend money. the challenge for a successful bank is to make sure the borrowers will be able to pay it back. while this simple rule seems blindingly obvious, the bih banking system in the past was burdened by bad debts because this simple banking rule was ignored. what needs to be done to increase the number of credit - worthy borrowers in bih? a ) company registration process ( and the process for closing a company ) : a simplified system is under preparation but i am very surprised by how slow the process has been. the banks and the central bank together reformed the internal payments system in bih over nine months. the issue of simplifying the company registration process has been talked about for about four years. it is time some of these reforms were completed rather than just talked about. b )