to develop a broadly based strategy for the next stages of financial market development in bh. the council includes representatives from state and entity governments, regulatory authorities and market participants. all organizations that i invited to join agreed to do so and are participating enthusiastically. this is a very positive start for the process of capital market development. sovereign credit rating the council of ministers has decided that bh should seek its first sovereign credit rating and has asked the cbbh to administer the project. the credit rating should be available by april, 2004. the present international perception of bh is often very negative. we believe having a published rating will improve the knowledge about bh and the perceptions many potential investors currently have. securities market work is currently underway to draft a securities law and to develop selling, registry and settlement processes for a securities market in bh. it has not yet been decided whether the first securities will be issued by the state government, the entity governments or the cbbh - or all of them. but the legal and administrative work will be done to allow any or all of those organizations to issue securities in 2004. stock exchanges two stock exchanges have been established in bh but both are very small. this is the case with most of the stock exchanges established in the region. the positive development is that seven of the eight stock exchanges in fry have entered into a data sharing program. at its launch they said that this is just the first step on the way to shared trading. there is apparently interest in joining this group from some stock exchanges outside the fry region. so the exchanges are moving towards some form of regional stock exchange, which in my view is the only feasible and sensible option for bh and the other countries in the region. banking supervision banking supervision in bh is based on the basle principles. banking supervision is currently carried out by entity agencies, with the cbbh having a coordinating role. there is good cooperation among the three institutions and this was recently formalized by the signing of a memorandum of understanding. the banking system in bh is now essentially a single country - wide system. because of this, banking supervision is likely to move under the umbrella of the cbbh during 2004. harmonization with the eu standards and regulations in all areas in financial market developments ( as in all other areas ), we are trying to ensure that the things we introduce are consistent with eu standards and regulations. the economic outlook there are two things that make it difficult to predict the economic outlook in bh with precision

very positive because : • they were taken early thus avoiding any uncertainty ; • they provide a high degree of continuity in the management of the cbbh ; • they have looked well ahead, thus assisting a smooth transition to the new governor in 2005. banking sector the second area i want to focus on in my address is the commercial banking sector. bh has an improving banking sector. the reform in the banking sector has gone further and faster than reform in any other sector of the economy. confidence has come back and depositors are now prepared to put their savings in the banks rather than keep them at home in foreign cash under the mattress. bank lending also grew very rapidly last year and is continuing to rise strongly this year, though at a somewhat slower rate. the strong growth in bank credit led the cbbh in june, 2003 to take its first ever monetary policy action. the only monetary policy instrument the cbbh currently has is a reserve requirement that we apply to commercial bank deposits. a reserve requirement has been in place since we commenced operations in 1997. but we made a number of significant changes to the way in which it was implemented in june : • the reserve requirement had previously been applied only to km deposits. it is now applied to all deposits, thus more than doubling the base. • banks could previously meet their reserve requirement either by holding km banknotes in their vaults of having km deposits at the cbbh. now, the reserve requirement can only be met by deposits at the cbbh. • previously, banks ’ excess deposits at the cbbh were not remunerated. now, the cbbh pays an overnight interest rate on banks ’ total deposits at the cbbh. • the ratio level was reduced from 10 % to 5 %. but because of the other changes, the effect of this was an increase in the level of reserve deposits banks had to hold at the cbbh. competition in the banking sector is now very real, helped by the arrival of some good foreign banks. proportionately, foreign investment in the banking sector has been higher than in any other sector in bh. table 5 commercial bank deposits and lending annual percentage change deposits lending date dec98 dec99 dec00 dec01 dec02 sept03 business households total business households total – 3 – 9 – 5 bank interest rates on lending have fallen substantially under the pressure of increased competition, but are still relatively high. comprehensive data on interest rates was not collected prior to 2002 but most bank lending rates prior to 2001