Croatia is a newly independent country since 1991. Therefore its experience in creating and managing a sovereign financial system is rather limited. The National Bank of Croatia, formerly a branch of the National bank of Yugoslavia, started to act as an independent central bank only at the end of 1991. With a currency reform the Croatian dinar (HRD) as a transitional currency (on December 25, 1991), the National Bank of Croatia (NBC) became the monetary authority of Croatia. The Law on the National Bank of Croatia laid down legal framework for its activities. (A full list of Laws is given at the end of this paper). Permanent currency - the kuna (HRK) - was introduced in end-May 1994.

Unfortunately, with independence, the aggression on Croatian territory started. Mainly due to the war and disintegration of former Yugoslavia major macroeconomic imbalances emerged (see Skreb and Bicanic, 1993). The most visible consequence was that the Croatian economy suffered from a very high inflation. On average during the first ten months of 1993, monthly inflation rate was 28%. This prompted the NBC and the Croatian Government to launch in October 1993 a Stabilisation program (see Anusic, Rohatinski and Sonje, 1995). Its immediate aim was to swiftly slow down the inflation rate. The Program is envisaged to proceed in three, overlapping phases. The first one is aimed at achieving rapid disinflation. The second phase comprises of structural changes in the economy. They include: speeding up of the privatisation process, demonopolization of the economy, restructuring of loss-making industries like shipbuilding, rehabilitation of the banking sector, etc.. The last one should build up sound foundations f or reconstruction of the Croatian economy and start sustained economic growth path.

The general economic and political uncertainty is affecting business policy of all commercial banks in Croatia. War damages are estimated to about US $ 22 billion US $, which is more than the estimated value of pre-war GDP. Due to the war and disintegration of Yugoslavia, enormous supply shock caused GDP to decline by one third in the 1989-1993 period, unemployment rose to high level (17.5%), real wages more than halved (compared to 1990), industrial production declined. On top of the effects of the war, the economy is still burdened with old socialist legacy. This very unfavourable macroeconomic environment has to be taken into account when assessing banking in Croatia. Like in other formerly socialist countries (see Bicanic and Skreb, 1991) in Croatia the service sector is not adequately developed, especially the financial sector. Financial markets are narrow and shallow. With the long history of high inflation and socialist system this in of no surprise. A Money market and Stock exchange exist in Zagreb, but trading is very limited. There are just a few stocks and no bonds traded and the total turnover on the Zagreb Stock Exchange in was only US $ 270 million (single accounting) in 1994. According to available data, non-bank financial institutions do not play an important role (with the possible exception of very short, i.e. less than a month, lending). By mid-1995 there were 25 savings banks, about 170 other savings ins titutions (like credit co-operatives, credit unions, etc.) and 14 insurance companies. Taken together, they are rather small intermediaries. Out of total assets of financial institutions, the share of savings banks and other financial institutions is probably less than 10%. Pension Fund, whose assets have increased with the privatisation process does not play an active role in intermediation of resources. Total revenues of the Pension Fund were more than 10 percent of the 1994 GDP.

The basic aim of this paper is to depict legacies, problems and prospects of commercial banks in Croatia. The paper is divided into the following parts:

1. Basic Information on the Banking System

1.1. The Introduction of the Two-tier Banking System

1.2. Banks in Croatia as of end-1994

2. Ownership and Regulation of Banks

2.1. Ownership of Banks and the Privatisation Process

2.2. Regulation of Banks

3. Performance of the Banks

4. Credit Activity

5. Main Problems

5.1. Rehabilitation and Restructuring of Banks

5.2. Plans for Future Reform of the Banking System

5.3. Obstacles to Speedier Bank Rehabilitation In Croatia

6. Conclusion

References

Comments by Messr: Anton op de Beke, John Pattison, Damir Odak and Marko Curavic are greatly appreciated. Remaing errors are strictly the authors. Views expressed here are not necessarily the views of the National Bank of Croatia. An earlier version of this paper has been published as the NBC Working Paper #2 (September 1994).