Annual Report 2008 - ProCredit Bank

procreditbank.ba

Annual Report 2008 - ProCredit Bank

Annual Report 2008 Bosnia and Herzegovina

Annual Report 2008


2

Annual Report 2008

Key Figures

EUR ’000 BAM ’000 Change

2008 2007 2008 2007 BAM

Balance Sheet Data

Total Assets 237,314 216,717 464,146 423,861 10%

Gross Loan Portfolio 162,880 162,102 318,566 317,045 0%

Business Loan Portfolio 96,479 96,208 188,697 188,168 0%

EUR < 10,000 41,444 46,542 81,058 91,028 -11%

EUR > 10,000 < 50,000 26,873 25,829 52,559 50,518 4%

EUR > 50,000 < 150,000 15,806 14,590 30,914 28,536 8%

EUR > 150,000 12,356 9,247 24,166 18,086 34%

Agricultural Loan Portfolio 42,085 50,082 82,311 97,952 -16%

Housing Improvement Loan Portfolio 4,496 3,663 8,793 7,164 23%

Other 19,820 12,149 38,765 23,761 63%

Allowance for Impairment on Loans 5,529 4,354 10,814 8,517 27%

Net Loan Portfolio 157,351 157,748 307,752 308,528 0%

Liabilities to Customers 171,585 143,093 335,591 279,867 20%

Liabilities to Banks and Financial Institutions

(excluding PCH) 33,561 39,994 65,639 78,221 -16%

Shareholders’ Equity 22,822 19,249 44,635 37,648 19%

Income Statement

Operating Income 19,343 18,619 37,831 36,415 4%

Operating Expenses 19,684 17,136 38,499 33,516 15%

Operating Profit Before Tax -342 1,482 -668 2,899 -123%

Net Profit -384 1,304 -751 2,551 -129%

Key Ratios

Cost/Income Ratio 86.3% 81.9% 86.3% 81.9%

ROE -1.8% 8.1% -1.8% 8.1%

Capital Ratio 18.4% 16.5% 18.4% 16.5%

Operational Statistics

Number of Loans Outstanding 65,277 68,752 -5%

Number of Loans Disbursed within the Year 41,972 61,348 -32%

Number of Business and Agricultural

Loans Outstanding 57,245 62,928 -9%

Number of Deposit Accounts 113,096 84,126 34%

Number of Staff 888 831 7%

Number of Branches and Outlets 44 38 16%

Exchange rate as of December 31:

2008: EUR 1 = BAM 1.95583

2007: EUR 1 = BAM 1.95583


Contents 3

Mission Statement 4

Letter from the Supervisory Board 5

The Bank and its Shareholders 6

The ProCredit Group: Responsible Banks for Ordinary People 8

ProCredit in Eastern Europe 11

Highlights in 2008 14

Management Business Review 16

Special Feature 24

Risk Management 26

Branch Network 30

Organisation, Staff and Staff Development 32

Business Ethics and Environmental Standards 35

Our Clients 36

Financial Statements 40

Contact Addresses 70


4

Annual Report 2008

Mission Statement

ProCredit Bank Bosnia and Herzegovina is a development-oriented full-service bank.

We offer excellent customer service and a wide range of banking products. In our credit

operations, we focus on lending to very small, small and medium-sized enterprises, as

we are convinced that these businesses create the largest number of jobs and make a

vital contribution to the economies in which they operate.

Unlike other banks, our bank does not promote consumer loans. Instead we focus on

responsible banking, by building a savings culture and long-term partnerships with our

customers.

Our shareholders expect a sustainable return on investment, but are not primarily

interested in short-term profit maximisation. We invest extensively in the training of our

staff in order to create an enjoyable and efficient working atmosphere, and to provide

the friendliest and most competent service possible for our customers.


Letter from the Supervisory Board 5

Letter from the Supervisory Board

The year under review was challenging for the financial sector due to the global economic downturn that

followed a collapse of the subprime mortgage market in the United States. This crisis has illustrated all

too clearly the negative effects that can result from irresponsible consumer lending when the main institutional

objective is short-term profit maximisation. International capital market restrictions and a loss of

trust among savers and investors were soon visible in the USA and parts of Western Europe. An indirect

impact was later felt in transition economies, including Bosnia and Herzegovina (BiH). Faced with reduced

liquidity, many local banks launched a series of non-transparent saving campaigns devised to attract private

deposits; they also increased interest rates on outstanding short-term loans, particularly with regard

to consumer and credit card lending.

Operating in this environment, ProCredit Bank BiH continued to support private sector development by

providing fixed-rate loans to very small, small and medium-sized entrepreneurs and farmers across the

country. At year-end, the loan portfolio consisted of more than 57,000 loans, representing a total volume

of BAM 271 million (EUR 138.5 million). In line with our business policy to focus on lending to these core

groups, only 3.3% of our portfolio consisted of consumer loans.

The banking sector in BiH is highly competitive, consisting of 31 banks and twenty microcredit organisations.

1 Many of these institutions have disbursed so many loans over recent years without conducting a

sound analysis that their clients have in many cases become over-indebted and are now unable to meet

repayments. Run by the central bank, the Central Credit Registry became fully functional in 2008. Thanks

to its ability to cross-reference data from all lending institutions, we learnt that, although credit analysis

was performed on an individual basis, many of our own clients were in fact deeply indebted. Given this

information, our most important task remained to adhere to our traditional principles of responsible banking,

assessing each client’s true ability to meet obligations. The Central Credit Registry provides additional

strength to our credit risk management strategy.

A major achievement in 2008 was another step towards funding the loan portfolio entirely through domestic

deposits. Given the general loss of public confidence in the banking sector, this result demonstrates our

solid reputation amongst savers. By offering simple and appealing savings products, we increased our

deposit base by 20% to BAM 335.6 million (EUR 171.6 million).

On the basis of this growth, ProCredit Bank opened seven units in 2008, extending the branch network to

44 offices in 33 towns and cities. In line with the approach we have always taken to our business, all of our

new branches offer our clients professional and friendly financial advice from the very first day of operation.

This is achieved through heavy investment in staff development and training.

ProCredit Bank now has over 880 employees. Remaining true to our principles, we emphasise the significance

of transparent communication and a socially responsible attitude towards our staff members,

clients, business partners and the broad community. These priorities were reflected in the financial education

activities we carried out during the year. Our campaigns aimed to enable people to understand

standard banking services and use them wisely. The bank also undertook a number of projects to benefit

the communities in which it operates, including the building of playgrounds, improvement of local parks

and renovation of children’s day care centres.

In closing, I would like to acknowledge our staff and to thank our shareholders for their long-term commitment

to supporting our mission. ProCredit Bank BiH has a responsibility to provide sound financial advice

and transparent services, and I trust that our employees will endeavour to make 2009 a successful year

for the institution.

Claus-Peter Zeitinger

Chairman of the Supervisory Board

Members of the

Supervisory Board as of

December 31, 2008:

Claus-Peter Zeitinger

Helen Alexander

Frieder Wöhrmann

Klaus Glaubitt

Nicolas Antonio Baron Adamovich

Members of the

Management Board as of

December 31, 2008:

Peter Moelders

Maja Hrnjić

Sabina Mujanović

Edin Hrnjica

Vedran Hadžiahmetović

Senad Redžić

Radomir Savić

1

Annualised data based on CBBH bulletin No. 3


6

Annual Report 2008

The Bank and its Shareholders

ProCredit Bank Bosnia and Herzegovina is a

member of the ProCredit group, which is led by

its Frankfurt-based parent company, ProCredit

Holding. ProCredit Holding is the majority owner

of ProCredit Bank Bosnia and Herzegovina and

now holds 92.4% of the shares.

ProCredit Bank BiH was founded in October 1997

as Micro Enterprise Bank (MEB) by an alliance of

international development-oriented investors.

Their goal was to establish a new kind of financial

institution that would meet the demand of

small and very small businesses in a socially

responsible way. The primary aim was not shortterm

profit maximisation but rather to deepen

the financial sector and contribute to long-term

economic development while also achieving a

sustainable return on investment.

The founding shareholders of ProCredit Bank

BiH were Internationale Projekt Consult (IPC),

International Finance Corporation (IFC), the European

Bank for Reconstruction and Development

(EBRD), the Netherlands Development Finance

Company (FMO), and BH Bank. Over the years,

ProCredit Holding, working closely with IPC, has

consolidated the ownership and management

structure of all the ProCredit banks and financial

institutions to create a truly global group with a

clear shareholder structure and to bring to each

ProCredit institution all the synergies and benefits

that this implies.

Today’s shareholder structure of ProCredit Bank

BiH is outlined below. Its current share capital is

EUR 18.1 million.

Shareholder

(as of Dec. 31, 2008)

ProCredit Holding

Commerzbank AG

Sector

Headquarters

Share

Paid-in Capital

(in EUR million)

16.75

1.38

Investment

Banking

Germany

Germany

92.4%

7.6%

Total Capital

100%

18.13

ProCredit Holding is the

parent company of a global

group of 22 ProCredit banks. ProCredit Holding

was founded as Internationale Micro Investitionen

AG (IMI) in 1998 by the pioneering development

finance consultancy company IPC.

ProCredit Holding is committed to expanding access

to financial services in developing countries

and transition economies by building a group of

banks that are the leading providers of fair, transparent

financial services for very small, small and

medium-sized businesses as well as the general

population in their countries of operation. In addition

to meeting the equity needs of its subsidiaries,

ProCredit Holding guides the development

of the ProCredit banks, provides their senior management,

and supports the banks in all key areas

of activity, including banking operations, human

resources and risk management. It ensures that

ProCredit corporate values, best-practice banking

operations and Basel II risk management

principles are implemented group-wide.

IPC is the leading shareholder and strategic

investor in ProCredit Holding. IPC has been

the driving entrepreneurial force behind the

ProCredit group since the foundation of the

banks.

ProCredit Holding is a public-private partnership.

In addition to IPC and IPC Invest (the investment

vehicle of the staff of IPC and ProCredit), the

other private shareholders of ProCredit Holding

include the Dutch DOEN Foundation, the US

pension fund TIAA-CREF, the US Omidyar-Tufts

Microfinance Fund and the Swiss investment

fund responsAbility. The public shareholders of

ProCredit Holding include KfW (the German promotional

bank), IFC (the private sector arm of the

World Bank), FMO (the Dutch development bank)

and BIO (the Belgian Investment Company for Developing

Countries).

ProCredit Holding has an investment grade rating

(BBB-) from Fitch Ratings Agency. As of the

end of 2008, the equity base of the ProCredit

group is EUR 387 million. The total assets of the

ProCredit group are EUR 4.8 billion.


The Bank and its Shareholders 7

Commerzbank AG, established

in 1870, is Germany’s second-largest

bank and one of the leading financial institutions

in Europe. The bank is a competent provider

of financial services, primarily for private

customers and small- and medium-sized enterprises

(SMEs). It also manages major corporate

customers and institutions in Europe as well

as multinational enterprises around the world.

Commerzbank aims to enhance its market share

among these core target groups and, in particular,

to establish itself as the number one bank for

Germany’s SME market.

Commerzbank runs a nationwide banking network

in its domestic market. Following the acquisition

of Dresdner Bank, it is the leading bank for private

and corporate banking with some 1,200 branches

in Germany and a strong presence in Central and

Eastern Europe. In Asia and the US, the bank is active

in all major commercial centres.

Commerzbank AG is the parent company of a global

financial services group. The group’s operating

business is organised into five segments providing

each other with mutually beneficial synergies:

Private Customers, Mittelstandsbank (SME bank),

Central & Eastern Europe, Corporates & Markets

and Commercial Real Estate / Shipping.


8

Annual Report 2008

The ProCredit Group: Responsible Banks for Ordinary People

The ProCredit group comprises 22 financial institutions

whose business focus is on providing

responsible banking services in transition economies

and developing countries. We aim to provide

accessible, reliable services to small businesses

and the ordinary people who live and work in the

neighbourhoods in which we operate. Today our

21,400 employees, working in 814 branches,

serve 2.9 million customers in Eastern Europe,

Latin America and Africa.

The first ProCredit banks were founded more than

a decade ago with the aim of making a significant

development impact by promoting the growth of

small businesses. We sought to achieve this by

providing loans tailored to their requirements and

offering attractive deposit facilities that would enable

and encourage low-income individuals and

families to save. The group has grown strongly

over the years – today we are one of the leading

providers of banking services to small business clients

in most of the countries in which we operate.

Our development mission and socially responsible

approach remain as relevant today as they

have ever been. Indeed, their importance has

been underscored by the global financial crisis

and the challenges this has created for individual

clients as well as for national economies.

The impact of the “credit crunch” will differ from

country to country and from region to region, but

now more than ever our customers need a reliable

banking partner. That is why we have consistently

applied the principles that have defined the

ProCredit group since its foundation.

Our mission is to provide credit in a responsible

manner to very small, small and medium-sized

enterprises, as we are convinced that these businesses

create the largest number of jobs and

make a vital contribution to the local economy.

Unlike most other banks operating in our markets,

we avoid aggressive consumer lending and

all speculative lines of business. Instead, the

ProCredit banks work in close contact with their

clients to gain a profound understanding of the

problems small businesses face and the opportunities

that are available to them.

Our tailored credit technology reflects the realities

of our clients’ operating environment. Developed

by the German consulting firm IPC, this

technology combines careful individual analysis

of all credit risks with a high degree of standardisation

and efficiency. It enables ProCredit institutions

to reach a large number of small businesses

while maintaining high loan portfolio quality. By

making the effort to know our clients well and

build long-term working relationships based on

trust and understanding, we are well positioned

to support them not only when the economy is

buoyant, but also during a downturn.

Furthermore, our targeted efforts to foster a savings

culture in our countries of operation have enabled

us to build a stable deposit base. ProCredit

deposit facilities are appropriate for a broad

range of customers, and for low-income groups

in particular. We offer simple savings products

with no minimum deposit requirement. ProCredit

banks place great emphasis on children’s savings

products and on running financial literacy

campaigns in the broader community. In addition

to deposit facilities, we offer our clients a full

range of standard non-credit banking services.

The ProCredit group has a simple business model:

lending to a diverse range of enterprises and

mobilising local deposits. As a result, our banks

have a transparent, low-risk profile. We do not

rely heavily on capital market funding and have

no exposure to complex financial products. Furthermore,

our well-trained staff are highly flexible

and able to provide competent advice to

clients, guiding them through difficult times. Despite

the turmoil of the global financial markets,

the performance of the ProCredit group has been

remarkably stable: we ended 2008 with approximately

15.4% year-on-year growth in assets over

the year and a comfortable level of profitability.

Our shareholders have always taken a conservative,

long-term view of business development,

aiming to strike the right balance between a

shared developmental goal – reaching as many

small enterprises and small savers as possible –

and achieving commercial success.

Strong shareholders provide a solid foundation

for the ProCredit group. It is led by ProCredit

Holding AG, a German-based company that was

founded by IPC in 1998. ProCredit Holding is a

public-private partnership. The private shareholders

include: IPC and IPC Invest, an invest-


The ProCredit Group: Responsible Banks for Ordinary People 9

ment vehicle set up by IPC and ProCredit staff

members; the Dutch DOEN Foundation; the US

pension fund TIAA-CREF; the US Omidyar-Tufts

Microfinance Fund; and the Swiss investment

fund responsAbility. The public shareholders

include the German KfW Bankengruppe (KfW

banking group); IFC, the private sector arm of the

World Bank; the Dutch development bank FMO;

and the Belgian Investment Company for Developing

Counties (BIO). The group also receives

strong support from the EBRD and Commerzbank,

our minority shareholders in Eastern Europe, and

from the IDB in Latin America.

ProCredit Holding is not only a source of equity

for its subsidiaries, but also a guide for the development

of the ProCredit banks, providing the

personnel for their senior management and offering

support in all key areas of activity. The

holding company ensures the implementation of

ProCredit corporate values, best practice banking

operations and Basel II risk management

principles across the group. The group’s business

is run in accordance with the rigorous regulatory

standards imposed by the German banking

supervisory authority (BaFin).

ProCredit Holding and the ProCredit group place

strong emphasis on human resource management.

Our neighbourhood banking concept is

not limited to our target customers and how we

reach them, it is also about our staff: how we

work with one another and how we work with

our customers. The strength of our relationships

with our customers will be central to working with

them effectively in 2009 and achieving steady

The international group

of ProCredit institutions;

see also

www.procredit-holding.com

ProCredit

Mexico

Banco ProCredit

Honduras

Banco ProCredit

El Salvador

Banco ProCredit

Nicaragua

Banco ProCredit

Colombia

Banco ProCredit

Ecuador

Banco Los Andes

ProCredit Bolivia

ProCredit Bank Serbia

ProCredit Bank

Bosnia and Herzegovina

ProCredit Bank Kosovo

ProCredit Bank Albania

ProCredit Bank Macedonia

ProCredit Bank

Sierra Leone

ProCredit

Savings and Loans Ghana

ProCredit Bank

Democratic Republic of Congo

Banco ProCredit Mozambique

ProCredit Bank Ukraine

ProCredit Bank Moldova

ProCredit Bank Romania

ProCredit Bank Georgia

ProCredit Bank Armenia

ProCredit Bank Bulgaria


10

Annual Report 2008

business results. A responsible neighbourhood

bank approach requires a decentralised decisionmaking

process and a high level of judgment and

creativity from all staff members, especially our

branch managers. Our corporate values embed

principles such as honest communication, transparency

and professionalism into our day-to-day

business. Key to our success is therefore the recruitment

and training of a dedicated staff. We

maintain a corporate culture which strengthens

the professional development of our staff, while

fostering their deep sense of personal and social

responsibility. This entails not only intensive

training in technical and management skills, but

also a continuous exchange of personnel among

our member institutions in order to take full advantage

of the opportunities for staff development

that are created by their participation in a

truly international group.

A central plank in our approach to training is the

group’s ProCredit Academy in Germany, which

provides a three-year, part-time “ProCredit Banker”

training programme for high-potential personnel

from each of the ProCredit institutions. The

programme includes intensive technical training

and also exposes participants to a very multicultural

learning environment and to subjects such as

anthropology, history, philosophy and ethics. The

programme provides an opportunity for our future

leaders to develop their views of the world, as well

as their communication and staff management

skills. The first year of ProCredit Academy participants

graduated in September 2008. The professional

development of local middle managers is

further supported by three regional academies in

Latin America, Africa and Eastern Europe, which

provide similar off-site training for a larger number

of people.

The group’s strategy for 2009 will reflect the

prevailing conditions of the countries in which

we work. We plan to intensify our focus on loan

portfolio quality and to offer personal support

to our existing clients. We will continue to invest

in our staff since it is their skills which enable us

to work effectively with our clients under changing

macroeconomic conditions. As responsible

banks for ordinary people, with prudent policies

and an excellent staff to ensure our steady performance,

we look forward to consolidating our

position in all our countries of operation.


ProCredit in Eastern Europe 11

ProCredit in Eastern Europe

ProCredit operates in 11 countries across Eastern

Europe. With more than 611,000 loans outstanding,

it is the region’s leading provider of banking

services to very small, small and medium-sized

businesses.

2008 proved to be a challenging year for the

region. After several years of strong economic

growth and rapid expansion of banking sector

assets, the effects of the global financial crisis

were felt in the latter half of the year as credit

growth slowed and public trust wavered. Although

the medium-term implications are not

yet clear, the region will certainly be affected

by both the worldwide economic downturn and,

with the banking sector dominated by western

European banks, the turmoil in the global financial

sector. We anticipate lower economic

growth and higher levels of market volatility in

our countries of operation – conditions to which

ProCredit and its clients must adapt.

Given our consistent, reliable approach, ProCredit

institutions are well placed to succeed in the current

economic environment. We have a stable,

straightforward balance sheet and a highly diversified

client base. Our expansion in the first

half of the year continued to be strong. Growth

levelled off during the final two quarters as we introduced

more conservative lending policies in response

to greater credit risk. Our staff focused on

working closely with our debtors and retail clients

to help them understand and respond to changing

conditions.

Across the region, the focus of most other banks in

recent years has been on corporate financing and

consumer lending. In comparative terms, these

institutions have neglected the provision of credit

to small entrepreneurs and family businesses.

At ProCredit, we consider such clients to be our

core target group. We are their banking partner

of choice, able to understand their needs and offer

sound, professional advice. These businesses

will remain the driving force behind economic

growth and job creation across Eastern Europe,

just as they have been since the collapse of Soviet

influence and large, state-owned enterprises. As

other banks provide fewer loans in the region, due

to either domestic or international constraints, it

will be more important than ever that we provide

our clients with access to sufficient finance to

support their operations.

ProCredit has always emphasised the fact that

consumer lending, which has been so aggressively

pursued by other banks in Eastern Europe, has

never been a line of business in which we wish to

engage. Such loans can easily lead to over-indebtedness

when banks advertise and disburse them

irresponsibly in a competition to gain market

share. We fear that the widespread practice of approving

loans with an inadequate analysis of customers’

repayment capacity may now exacerbate

the problems that individuals and families face in

less prosperous times. This poses further potential

difficulties for the banking sector as a whole.

Our approach is to provide primarily business

loans following a careful, individual analysis of

each client’s ability to meet his or her obligations.

We have decentralised decision-making systems

in place and a body of highly qualified staff who

are able to conduct an efficient and reliable risk

assessment even in more volatile economic conditions.

ProCredit is guided by a responsible, longterm

attitude towards business development. We

aim to build lasting relationships with our clients

and do not forget that a loan is also a debt. These

values will be particularly pertinent when managing

potential arrears in cases where clients have

to adapt to lower than anticipated sales.

Our lending activities include the provision of

agricultural loans; we are keen to support a sector

that has been particularly neglected by other

banks and that is vital for employment and social

cohesion outside the main urban areas. We also

provide housing improvement loans to help lowincome

families renovate their homes and improve

energy efficiency.

Alongside its credit operations, ProCredit has

invested strongly over the years in creating a

savings culture amongst clients and the broader

public. We believe that setting money aside can

help protect savers against the uncertainties of

life. This is perhaps truer now than ever before.

The ratio of deposits to GDP in Eastern European

countries is well below Western European levels,

typically at around 50%. Through promotional

events and direct, personal communication, we

encourage people – particularly those who do not

yet have a bank account – to make use of banking

services and to regularly save a portion of their

earnings.


12

Annual Report 2008

Belarus

Russia

Poland

Germany

Czech Republic

Ukraine

Slovakia

Switzerland

Austria

Slovenia

Hungary

Romania

Moldova

Italy

Croatia

Bosnia

and

Herzegovina

Serbia

Montenegro Kosovo

Macedonia

Albania

Bulgaria

Georgia

Armenia

Azerbaijan

Turkey

Greece

Syria

We offer simple and reliable retail banking services,

including flexible savings and deposit accounts

to accommodate depositors’ long- and short-term

needs. Our belief in transparent, direct communication

is particularly important in fostering clients’

trust in these difficult times. We understand

that our clients want to know in simple language

how to save safely; they also want to access their

money when they need it without unexpected

complications. Thanks to the trust that the public

has placed in ProCredit, local deposits are the

principal source of funding for our lending activities

to local businesses. We have therefore not had

to rely on unpredictable capital markets. All the

ProCredit institutions in Eastern Europe ended the

year with a comfortable liquidity position and a stable,

indeed increasing, net interest margin.

In line with our mission to reach clients in their

neighbourhoods wherever they are, the ProCredit

group continued to expand in 2008: we opened

116 branches and recruited more than 2,500 people

in Eastern Europe alone, bringing the regional

total to over 13,500 employees in 557 branches.

In the coming year we will focus on strengthening

our business operations from this base. We

place a strong emphasis on transparency and will

continue to run information campaigns in 2009 to

ensure that people understand the pricing of our

products as well as those of our competitors.

Our staff is the key element in our approach to being

a stable, down-to-earth and personal banking

partner. The ProCredit group has a strong commitment

to staff training, professional development

and the cultivation of an open, honest communication

culture. Staff exchanges, cross-border training

programmes and regional workshops are an important

part of our approach. In September 2008, construction

was completed on the new Eastern European

Academy, located near Skopje in Macedonia.

Dedicated to the training of ProCredit middle managers,

the Academy is an important channel for

rapid and consistent communication region-wide

and one that helps us adapt quickly to face new

challenges: 210 managers have already graduated

from the six-week intensive course since the facility

was founded. A language centre at the Academy

also provides residential English courses, maximising

the potential for international exchange within

the group. Like all prudent banks, we will continue

to focus on efficient cost management in 2009 and

beyond. Investment in our staff is however an ongoing

commitment and will remain a central plank

in the ProCredit Bank approach. A qualified, motivated

and professional team lies at the root of our

lasting success across Eastern Europe.


ProCredit in Eastern Europe 13

Name

ProCredit Bank

Albania

ProCredit Bank

Armenia

ProCredit Bank

Bosnia and Herzegovina

ProCredit Bank

Bulgaria

ProCredit Bank

Georgia

ProCredit Bank

Kosovo

ProCredit Bank

Macedonia

ProCredit

Moldova

ProCredit Bank

Moldova

ProCredit Bank

Romania

ProCredit Bank

Serbia

ProCredit Bank

Ukraine

Highlights*

Founded in October 1998

34 branches

40,619 loans / EUR 134.1 million in loans

177,630 deposit accounts / EUR 203.9 million

1,003 employees

Founded in December 2007

4 branches

2,340 loans / EUR 16.7 million in loans

6,592 deposit accounts / EUR 6.7 million

203 employees

Founded in October 1997

44 branches

65,277 loans / EUR 162.9 million in loans

113,096 deposit accounts / EUR 171.5 million

888 employees

Founded in October 2001

87 branches

66,612 loans / EUR 578.9 million in loans

220,023 deposit accounts / EUR 341.9 million

1,955 employees

Founded in May 1999

58 branches

66,083 loans / EUR 221.8 million in loans

364,742 deposit accounts / EUR 126.1 million

1,815 employees

Founded in January 2000

60 branches

98,366 loans / EUR 439.6 million in loans

402,214 deposit accounts / EUR 570.0 million

1,158 employees

Founded in July 2003

40 branches

35,493 loans / EUR 129.1 million in loans

129,687 deposit accounts / EUR 127.6 million

791 employees

Founded in December 1999

13 branches

13,221 loans / EUR 23.5 million in loans

175 employees

Founded in December 2007

17 branches

2,973 loans / EUR 8.7 million in loans

9,226 deposit accounts / EUR 5.1 million

350 employees

Founded in May 2002

40 branches

41,948 loans / EUR 214.0 million in loans

142,379 deposit accounts / EUR 148.1 million

1,121 employees

Founded in April 2001

86 branches

133,043 loans / EUR 453.3 million in loans

478,745 deposit accounts / EUR 332.3 million

2,058 employees

Founded in January 2001

74 branches

45,858 loans / EUR 262.6 million in loans

105,656 deposit accounts / EUR 122.8 million

2,035 employees

Contact

Rruga Sami Frasheri

Tirana

Tel./Fax: +355 4 2 271 272 / 276

info@procreditbank.com.al

www.procreditbank.com.al

31, Moskovyan Str.

Building 99

Yerevan 0002

Tel./Fax: + 374 10 514 860 / 853

info@procreditbank.am

www.procreditbank.am

Emerika Bluma 8

71000 Sarajevo

Tel./Fax: +387 33 250 950 / 250 971

info@procreditbank.ba

www.procreditbank.ba

131, Hristo Botev Blvd.

Sofia 1233

Tel./Fax: +359 2 813 51 00 / 51 10

contact@procreditbank.bg

www.procreditbank.bg

154 D. Agmashenebeli Ave.

0112 Tbilisi

Tel./Fax: +995 32 20 2222 / 24 3753

info@procreditbank.ge

www.procreditbank.ge

“Mother Tereze” Boulevard No. 16

10 000 Prishtina

Tel./Fax: +381 38 555 777 / 248 777

info@procreditbank-kos.com

www.procreditbank-kos.com

Bul. Jane Sandanski 109a

1000 Skopje

Tel./Fax: +389 2 321 99 00 / 01

info@procreditbank.com.mk

www.procreditbank.com.mk

65, Stefan cel Mare Ave.

office 900, Chisinau

Tel./Fax: +373 22 836555 / 273488

office@procredit.md

www.procredit.md

65, Stefan cel Mare Ave.

office 901, Chisinau

Tel./Fax: +373 22 836555 / 273488

office@procreditbank.md

www.procreditbank.md

62-64 Buzesti Str., Sector 1

011017 Bucharest

Tel./Fax: +40 21 2016000 / 305 5663

headoffice@procreditbank.ro

www.procreditbank.ro

Milutina Milankovica 17

Belgrade

Tel./Fax: +381 11 20 77 906/ 905

info@procreditbank.rs

www.procreditbank.rs

107a Peremogy Ave.

Kyiv 03115

Tel./Fax: +380 44 590 10 17 / 01

info@procreditbank.com.ua

www.procreditbank.com.ua

* The figures in this section have been compiled on the basis of the financial and operational reporting performed in accordance with groupwide

standards; they may differ from the figures reported in the bank’s local GAAP statements.


14

Annual Report 2008

Highlights in 2008

• The bank’s loan portfolio grew to over BAM

318.6 million (EUR 162.9 million) at yearend.

At the same time, by offering simple

and transparent saving products, we were

able to increase the deposit base by 20% to

BAM 335.6 million (EUR 171.6 million). This

achievement brought the bank closer to its

goal of being able to fund the entire loan portfolio

through customer deposits.

ProCredit Bank opened seven offices across

the country, bringing the total number of units

to 44. We focused on opening offices in smaller

cities to reach clients who had previously

not had access to our entire range of services.

ProCredit Bank recruited 166 staff, bringing

the total number of employees to 888. We assigned

a high priority to training and professional

development measures for employees at

all levels, conducting seven induction courses

and providing a total of 30 internal and external

training measures for existing staff.

ProCredit Bank was chosen as one of the most

desirable employers in 2008 by visitors to one

of the country’s biggest Internet job search

engines, Posao.ba.

• The bank initiated a high-profile savings campaign

in June to promote our range of easily

accessible savings products to potential depositors.

ProCredit Bank provides transparent,

easy-to-understand interest rates and

five deposit options designed to meet the

needs of its broad customer base.

• We continued implementing neighbourhood

projects to help improve the quality of life in

our local communities. ProCredit Bank built

two children’s playgrounds, renovated classrooms

in elementary schools, and planted

trees in public areas, such as outside a children’s

day care centre in Banja Luka.


Highlights in 2008 15

• Financial education activities were an important

focus in 2008, and we held a total of

59 educational events at locations throughout

the country. As part of these activities,

ProCredit Bank launched its “Kids’ Corner”

website, which provides information on money

and banking in a form which children can

easily understand.

ProCredit Bank launched a promotional campaign

under the name “ProBiznis” which

highlighted the ways in which small and medium

enterprises can improve their performance

using our services. The focus was on

the advantages of having a reliable banking

partner that offers loans on straightforward

terms and conditions, including interest rates

that are fixed for the entire maturity period.


16

Annual Report 2008

Management Business Review

Management

standing,

from left to right:

Senad Redžić

Executive Director, Corporate Business Sector

Vedran Hadžiahmetović

Executive Director, General Services Sector

Edin Hrnjica

Executive Director, Treasury, Retail and Payments Sector

Radomir Savić

Executive Director, Risk and Compliance Sector

seated,

from left to right:

Sabina Mujanović

Executive Director, Accounting and Controlling Sector

Peter Moelders

Director

Maja Hrnjić

Senior Management Advisor


Management Business Review 17

Political and Economic Environment

The Stabilisation and Association Agreement

(SAA) with BiH was signed in June 2008, signalling

the European Union’s readiness to support

the country’s bid for EU accession. Reform of the

national constitution, however, remains at the top

of the international political agenda. Progress on

this front has been impeded by the apparent irreconcilability

of the major political parties’ positions

and deteriorating relations between them.

An agreement on constitutional reform therefore

seems unlikely in the near future. A high level of

public spending and inefficient public administration,

as well as the general lack of fiscal responsibility

shown by the country’s governing entities,

will continue to be high on the agenda of pressing

political issues in 2009 and beyond.

Annual GDP growth came to 6.8% in 2008, up from

5.8% in 2007. The expansion was driven by a favourable

external environment and a strong rise in

private consumption due to increased real wages

and consumer borrowing. However, due to a tighter

monetary policy and slower export growth, real

GDP growth is projected to slow to 5.5% in 2009,

stabilising thereafter at a level of around 5%. 1

There was greater industrial output during the

year, which is projected to continue rising with

large-scale developments in road networks and

energy grids. The SAA will probably have a positive

impact on some local producers due to the reduction

or abolition of customs duties on a wide

range of imports from the EU. At the same time,

reduced collection of duties might lead to further

declines in the revenues of the country’s governing

entities.

The currency board arrangement remained in place

with the local currency – the convertible mark

(BAM) – pegged to the euro at a fixed rate. This

contributed greatly to macroeconomic stability.

Consumer price inflation stood at 9.9% at yearend.

2 Inflation during 2008 was driven primarily

by increases in food prices and housing and heating

costs, which together accounted for 55% of

household expenditures in BiH.

Both exports and imports rose during 2008. Although

electricity exports doubled, a greater

level of imports drove the current account deficit

to 16%. This is projected to remain high in the

coming year.

The International Monetary Fund and other international

institutions have urged the authorities in

BiH to make a greater effort to reduce the regulatory

burden on businesses. In 2008 the World Bank’s

“Doing Business” report ranked BiH 119th among

181 countries in terms of the constraints faced by

businesses. This poor ranking was attributable to

the difficulties involved in starting a business and

registering property, as well as other bureaucratic

requirements to be met by businesses.

Financial Sector Developments

The banking industry comprises 31 institutions

and is dominated by foreign capital. Banks with foreign

capital held 81.9% of the sector’s total capital

at year-end. Concentration was moderate, with the

three largest banks holding 67.4% of total assets. 3

Growth in the banking sector slowed down in

2008 compared to the previous two years. Total

assets increased by 11% to BAM 22.2 billion (EUR

11.1 billion) at year-end.

The banking sector’s total loan portfolio grew

to BAM 14.6 billion (EUR 7.4 billion), 4 which was

63% of GDP. Loans with a maturity of more than

one year accounted for 74% of total loans, or BAM

10.9 billion (EUR 5.6 billion).

The overall rate of credit growth in 2008 was

22% on an annual basis, somewhat below the reported

increase of 28% in 2007. While the sector

was growing at the same year-on-year pace over

1

Unless otherwise indicated, figures are based on:

www.imf.org, Bosnia and Herzegovina: On the Road to

EU Accession, November 2008

2

Data in this and the following sections are based on EIU,

Country Report Bosnia and Herzegovina, November

2008. Inflation is calculated according to the EU-harmonised

measure, which differs from the IMF source

3

Federation of Bosnia and Herzegovina only, Federal

Banking Agency Report: September 30, 2008.

4

Data based on Central Bank BiH monthly statistics as of

December 2008


18

Annual Report 2008

the first two quarters, the second half of the year

was characterised by restricted lending growth,

especially in the final quarter. The majority of

loans outstanding on December 31 had maturities

exceeding one year. Short-term loans increased

at a rate of 35% over the course of the year, with

most growth occurring between January and June.

Loans with a maturity over 12 months grew at a

slower pace of 18% with a slight negative growth

rate in November and December. 5

Stricter lending conditions were largely an effect

of the international financial crisis. Liquidity levels

declined when depositors’ confidence was briefly

shaken in October, leading them to withdraw

some EUR 400 million from commercial banks,

or 6.3% of total sector deposits. To reassure savers,

deposit insurance coverage was significantly

increased and banks demonstrated an ability to

meet withdrawal requests. This action steadied

the volume of household deposits in particular,

which accounted for 46% of total deposits. Due

to additional withdrawals by state bodies and

state-owned companies in the last quarter, total

deposits decreased by 1% to EUR 6.1 billion 6 over

the year.

been required for new foreign loans since October.

The banking sector showed reduced profitability

in 2008 compared to the previous year. This was

due in part to losses from securities trading, but it

also reflected increased funding costs.

In 2008, the Central Credit Registry for both companies

and private individuals became fully functional.

Managed by the Central Bank of Bosnia and

Herzegovina (CBBH), it now includes information

on all loans disbursed by banks and microcredit

organisations in BiH. By enabling lenders to determine

precisely how much debt loan applicants

have already incurred from other institutions, the

registry has greatly increased transparency in the

lending market.

The 10 largest of the 20 microcredit organisations

operating in BiH increased their combined

loan portfolio by 17% to BAM 1 billion (EUR 511

million). 7 While this segment continued to show

strong growth, it was at a lower pace due to more

formal banking regulation, which will also lead to

stricter lending requirements in the coming period.

The central bank increased the mandatory reserve

requirement from 15% to 18% at the beginning of

2008 in order to stabilise lending growth, but then

reduced the requirement to 14% in October. To encourage

additional inflows of long-term financing

from foreign sources, no mandatory reserve has

5

Data based on monthly statistics provided by the CBBH

6

Annualised data based on CBBH monthly statistics

7

Figures on number of registered micro credit organisations

are based on Central Bank annual report 2007.

Gross loan portfolio growth is based on data provided by

the respective institutions.

Loan Portfolio Development

Number of Loans Outstanding – Breakdown by Loan Size*

Volume (in EUR million)

Number (in ’000)

180

90

2.74% 0.35%

160

140

80

70

o.08%

120

60

100

50

80

40

46.8%

60

40

30

20

50.0%

20

10

0

Jun

04

Dec

Jun

05

Dec

Jun

06

Dec

Jun

07

Dec

Jun

08

Dec

0

< EUR 1,000 EUR 50,001 – EUR 150,000

EUR 1,001 – EUR 10,000 > EUR 150,000

EUR 10,001 – EUR 50,000 * 31 Dec 2008


Management Business Review 19

Business Loan Portfolio – Breakdown by Maturity

Loan Portfolio Quality (arrears >30 days)

in %

in % of loan portfolio

100

90

80

70

60

50

40

30

20

10

0

Jun

04

Dec

Jun

05

Dec

Jun

06

Dec

Jun

07

Dec

Jun

08

Dec

3.0

2.7

2.4

2.1

1.8

1.5

1.2

0.9

0.6

0.3

0

Jun

04

Dec

Jun

05

Dec

Jun

06

Dec

Jun

07

Dec

Jun

08

Dec

< 12 months 12 – 24 months > 24 months

Net write-offs:

in 2004: EUR 59,124

in 2005: EUR 270,002

in 2006: EUR 254,409

in 2007: EUR 703,616

in 2008: EUR 2,538,340


20

Annual Report 2008

Lending Performance

ProCredit Bank continued to provide loans on an individually

assessed basis to very small, small and

medium-sized businesses and agricultural producers

throughout BiH. By targeting such enterprises,

we contributed to economic growth and job creation

and helped to improve income distribution.

We made no major increases in our lending interest

rates in 2008 despite the changes taking place

both in the local market and around the world. In

view of the role of our target clients in the overall

development of the economy, we considered it extremely

important to be able to provide them with

as much certainty and predictability as possible

in their credit relationships with us. To this end,

we did not change our policy of charging fixed interest

rates on all loans. Only a few other banks in

the country have fixed loan rates.

As the Central Credit Registry was taken over

by the CBBH in 2008, banks and micro credit

organisations were finally able to assess both

companies’ and private individuals’ total levels

of indebtedness with a high degree of accuracy.

Given the greater transparency that this created,

it became clear to us that many of our clients were

indeed over-indebted – above all because they

had been taking out consumer loans from other

Customer Deposits

Number of Customer Deposits – Breakdown by Size*

Volume (in EUR million)

Number (in ’000)

180

135

1.6%

0.1%

160

140

120

120

105

90

8.8%

o.04%

100

80

75

60

15.3%

60

40

45

30

74.0%

20

15

0

Jun

04

Dec

Jun

05

Dec

Jun

06

Dec

Jun

07

Dec

Jun

08

Dec

0

Term Savings Sight Total number

< EUR 100 EUR 10,001 – EUR 50,000

EUR 101 – EUR 1,000 EUR 50,001 – EUR 100,000

EUR 1,001 – EUR 10,000 > EUR 100,000

* 31 Dec 2008


Management Business Review 21

banks and microcredit organisations that had

lent liberally over the years. Although ProCredit

Bank has always maintained a conservative and

prudent approach when approving loans, the fact

that many of our borrowers also had loans outstanding

at other institutions adversely affected

their repayment capacity, and thus impacted our

portfolio at risk (the proportion of total loans in arrears

by over 30 days). The PAR rose from 1.6% at

the end of 2007 to 2.3% at year-end. Additional

causes for this increase could be seen in external

shocks, such as accelerating inflation, which created

liquidity constraints for small businesses.

As of December 31, the portfolio comprised

65,277 outstanding loans totalling BAM 318.6

million (EUR 162.9 million). The bank disbursed

42,000 loans during the year with a combined

volume of BAM 273.0 million (EUR 139.6 million).

An average loan disbursement of BAM 6,505 (EUR

3,326) reflects our continuing focus on our designated

target groups.

Loans outstanding to agricultural producers and

sole proprietors amounted to BAM 163.4 million

(EUR 83.5 million) at year-end, representing 51.3%

of the bank’s total portfolio. Loans to small and medium

enterprises stood at BAM 107.7 million (EUR

55.0 million), representing an increase of 10.8%

over 2007. In the coming year, the bank will focus

on boosting its market share in this segment, introducing

new products and services that are tailored

to the requirements of the SME target group.

Our portfolio of bank guarantees and letters of

credit increased by 22.5% to BAM 9.3 million

(EUR 4.8 million). In line with our mission to support

the development of as many small businesses

as possible, we will seek to further increase

our market share of these non-lending products

in the coming year.

Deposits and Other Banking Services

Despite turbulence in the BiH economy, ProCredit

Bank significantly expanded its deposit base during

2008. At year-end, the bank had over 145,000

account holders with 113,096 active accounts.

Total deposits were up by 20%, compared to a

total decrease of 1% for the banking sector as a

whole. At BAM 335.6 million (EUR 171.6 million),

this amount was equivalent to 72.3% of total assets

and 105.0% of the bank’s loan portfolio.

The average individual deposit amount was BAM

2,406 (EUR 1,230), while the average balance per

customer stood at BAM 2,347 (EUR 1,200).

Given the general loss of public confidence in

the banking sector, we consider the growth we

achieved in our deposit business to be a positive

reflection of our solid reputation amongst savers.

It also demonstrates the success of our efforts

to promote a savings culture in BiH and the effectiveness

of our commitment to providing simple,

transparent savings products and high-quality

service.

Domestic Money Transfers

International Money Transfers

Volume (in EUR million)

750

675

600

525

450

375

300

225

150

75

0

Jan–

Jun

04

Jul–

Dec

Jan–

Jun

05

Jul–

Dec

Jan–

Jun

06

Jul–

Dec

Jan–

Jun

07

Incoming Outgoing Number

Jul–

Dec

Number (in ’000)

Jan–

Jun

08

Jul–

Dec

1,000

900

800

700

600

500

400

300

200

100

0

Volume (in EUR million)

200

180

160

140

120

100

80

60

40

20

0

Jan–

Jun

04

Jul–

Dec

Jan–

Jun

05

Jul–

Dec

Jan–

Jun

06

Jul–

Dec

Jan–

Jun

07

Incoming Outgoing Number

Jul–

Dec

Number (in ’000)

Jan–

Jun

08

Jul–

Dec

30

27

24

21

18

15

12

9

6

3

0


22

Annual Report 2008

As the result of intensive direct promotions, we

mobilised a significant volume of new corporate

deposits, demonstrating that our savings products

continued to hold their appeal to business

clients. At year-end, corporate deposits accounted

for 53.8% of total deposits.

The structure of the deposit portfolio was well

balanced in terms of maturity structure: 19.2%

of the total volume was in current accounts, with

savings accounts contributing 7.7% and term

deposits 73.1%. The average retail term deposit

came to BAM 14,200 (EUR 7,270), compared with

BAM 13,900 (EUR 7,100) in 2007, while the average

corporate term deposit amounted to BAM

1,177,350 (EUR 601,970).

In 2008 we sought to encourage people who receive

their salaries through current accounts at

ProCredit Bank to begin using our full range of

services. To this end, we organised numerous

promotional events for the managers and employees

of our corporate salary account clients.

We expanded our ATM network to 33 units, installing

seven new ATMs mainly in smaller cities.

We also actively promoted our electronic banking

services: the number of clients using our e-banking

system increased by 68.4% to 1,623 users by

the end of 2008. The number of e-banking transactions

also increased, rising to over 40,260,

while the volume of such transactions was up by

506.6%.

ProCredit Bank continued to promote the use of

cards as a safe and convenient way for both legal

entities and private individuals to conduct payment

and cash withdrawal transactions. We had

a total of 32,423 active cards in circulation at the

close of 2008, of which 5.2% had been issued to

legal entities. Most of our cards are debit cards,

while 4.3% are charge cards that require the balance

to be paid within one month. In line with its

commitment to responsible consumer lending,

the bank took great care to appropriately analyse

the debt capacity of each client to whom a charge

card was issued.

Domestic as well as international payments grew

significantly in 2008 in terms of both number

and volume. ProCredit Bank executed 1,678,709

domestic payments with a total volume of

BAM 2.7 billion (EUR 1.4 billion), an increase of

30.5% in number terms and a rise 43.7% in volume

terms over 2007. The number of international

payments rose by 37.2%, while the volume of

such transactions was up by 18.4%.

Financial Results

ProCredit Bank’s total assets increased by 10%

to BAM 464 million (EUR 237 million) in 2008.

Due to the slowdown in economic growth in the

third quarter and the level of over-indebtedness

in BiH, we focused on loan monitoring and recovery

more than on portfolio expansion. As a

result, the total loan portfolio grew by only 0.5%

in 2008, reaching BAM 318.6 million (EUR 162.9

million) and accounting for 68.6% of total assets

at year-end. The bank maintained a sound liquidity

position with the share of liquid assets in total

assets rising to 30.4%.

To provide a solid foundation for our continuing

asset growth, we further diversified our funding

sources, drawing upon retail deposits and

deposits from other banks as well as loans from

international financial institutions and ProCredit

Holding. We also focused on attracting customer

deposits, which grew by 20% to BAM 335.6 million

(EUR 171.6 million). Balances in savings and

term deposit accounts increased steadily, accounting

for 80.8% of the total deposit volume

by year-end. The resulting shift in the maturity

structure of our deposits brought the structure of

our liabilities more into line with that of our assets,

thus greatly facilitating liquidity management.

The increase in customer deposits reduced

the share of total liabilities accounted for by borrowings

from international financial institutions

from 23% to 16%.

Interest income for the year amounted to BAM

57.9 million (EUR 29.6 million). This remained

the main source of income, accounting for 89% of

total income. Lending activities generated 87%

of interest income. Even though the market was

very competitive, ProCredit Bank did not have to

alter its interest rates thanks to the continuing

high demand for its loans. Deposit interest expenses

were up, rising to BAM 19.2 million (EUR

9.8 million) due to increasing competition in the

local market and a rise in global interest rates.


Management Business Review 23

The growth in interest income largely offset this

increase in interest expenses.

Net fee and commission income totalled EUR

2.3 million. The growth here was greater than

expected, reflecting a strong increase in the

number and volume of payment transactions and

the excellent development of the documentary

and card businesses. Provisioning for loan impairment

losses rose from BAM 4.5 million (EUR

2.3 million) to BAM 6.8 million (EUR 3.5 million),

a modest increase, given the higher credit risk

which the bank faced in the market.

To ensure the continuing growth of our institution,

ProCredit Bank made substantial investments

in personnel and fixed assets. We hired

166 employees, increasing the number of staff to

888. The bank established seven new branches,

and many existing offices were extended and

renovated. Thanks to rigorous cost controls, we

were able to keep administrative expenses at the

same level as in 2007.

With a total operating income amounting to EUR

19.3 million, the cost-income ratio (the ratio of

operating expenses to operating income before

provisioning) increased to 86.3% (2007: 81.9%).

The bank posted a net loss of EUR 383,865, resulting

in a return on equity of -1.8%, compared

to 8.1% in 2007.

Dividends amounting to BAM 2 million (EUR 1 million)

were paid to the shareholders in December

2008.

In 2008 we carried out a capital increase in the

amount of EUR 5 million, boosting total shareholders’

funds to EUR 18.1 million. The bank’s

capital adequacy ratio (total Tier 1 plus Tier 2 capital/risk-weighted

assets) was 18.4% at year-end.

Outlook

During the first half of the year, some progress

was made in terms of implementing much-needed

reforms, which created a more favourable environment

for potential economic growth. As the effects

of the financial crisis begin to be felt on an increasing

scale in the real economy, however, banks are

applying more stringent credit standards and loans

are more expensive. The overall economic outlook

could therefore worsen significantly.

Even in a significantly more challenging economic

environment, ProCredit Bank will continue to provide

loans to small and medium enterprises in order

to support economic growth. In line with our

mission, we will contribute further to the creation

of a transparent and efficient banking sector in

BiH. However, we will sharpen our focus on the

accurate assessment of our customers’ ability to

meet their obligations to our bank, taking into account

their overall debt capacity and cumulative

financial obligations.

Ensuring that we carry out a sound analysis of our

clients’ overall financial situation is of course a

mark of prudence on our part as lenders. Moreover,

it is one of our most important responsibilities,

as our target groups are usually highly vulnerable

to the adverse effects of changes in the

economic environment.


24

Annual Report 2008

Special Feature

Promoting financial education in Bosnia and Herzegovina

When we talk about “financial literacy”, what we

usually mean is people’s ability to manage their

assets wisely with an understanding of what banks

do. But financial literacy has implications and benefits

that go far beyond the scope of individual

people’s lives. It helps to improve the financial

situation of a household, and can also enhance

the quality of the financial system as a whole, ultimately

contributing to a stronger overall economy.

Nowadays, people wishing to make use of banks’

deposit or credit facilities have a sometimes overwhelming

number of options to choose from.

While the emergence of new banking products

is a welcome development from a consumer perspective,

the process of choosing among the

various options has become quite complex. It is

often difficult for people who lack experience in

dealing with financial institutions to make sound

decisions when selecting products or services,

and the choices they make can sometimes lead to

financial problems in the future.

Recognising that it has an important role to play

in raising the overall level of financial literacy in

BiH, ProCredit Bank organised 59 financial education

events during 2008, both for clients and the

broader community. Our employees explained

key banking terminology and gave presentations

that helped people further their understanding

of banking products and how they are used.

ProCredit staff also detailed the obligations that

clients incur in conjunction with these services.

Our financial education activities for clients never

involve the promotion of our own products or

services. Our aim is to to be a long-term partner

for our clients – a partner that offers not only a

range of financial services but also sound advice.

In line with our commitment to promoting financial

literacy, we encourage our clients to direct

their questions regarding banking products to

our branch-level staff, either in person or via telephone

or e-mail. We regularly receive positive

feedback from our clients on this service, such as


Special Feature 25

the comments made by one customer: “I feel more

comfortable going to the bank and asking questions.

I can really understand what is being offered

to me.”

Because we know how important it is for people

to begin learning about money matters at an early

age, activities aimed at children are an important

part of our financial education programme.

Our employees visited primary and secondary

schools in our local communities to help children

learn about money and the importance of saving

through specially designed games and activities.

We also launched our “Kids’ Corner” website, which

teaches children about money, savings and banks

through a series of stories and interactive games.

We plan to continue our financial education activities

in 2009 because we are convinced that

promoting financial literacy supports ProCredit

Bank’s mission in a number of important ways.

We are committed to supporting the overall process

of national economic development, and it follows

that the local economy will function much

more efficiently if people understand the role of

banks and are empowered to intelligently assess

the services they offer.


26

Annual Report 2008

Risk Management

Strong risk management is crucial to the achievement

of ProCredit Bank’s main objective, which is

to provide reliable banking services to its clients.

The bank has a conservative approach in its credit

operations and follows a policy not to engage in

speculative transactions. Its adheres to a simple

business model of lending to core target groups

and mobilising retail deposits, undertaking other

business activities on only a limited scale to support

its lending activities.

Our assets and liabilities are broadly diversified

across thousands of small businesses and lowerand

middle-income savers. This minimises the

risk that an individual borrower or group of borrowers

could have a substantial adverse impact

on loan portfolio quality or that the withdrawal of

an individual deposit could jeopardise the bank’s

liquidity position.

Risks are assessed by four committees, all of which

support the Risk Department and operate under its

supervision: the Loan Portfolio Review Committee,

the Assets and Liabilities Committee (ALCO),

the Operational Risk Committee and the Credit

Risk Committee. These bodies all meet at least on

a monthly basis, while the Risk Department conducts

more frequent tests on key risk indicators.

The Risk Department is responsible for identifying,

measuring, analysing and monitoring potential

risks. It reports its findings and recommendations

to the Management Board and the relevant

departments. However, responsibility for ensuring

that the level of risk is properly controlled and

managed lies with the respective departments,

and ultimately with the members of the Management

Board.

In line with the ProCredit group’s risk management

policy, the bank’s risk position is described

in a quarterly risk report, which the Risk Department

discusses with the management of

ProCredit Bank, the Board of Directors and

ProCredit Holding’s Group Risk Management Department.

The bank has clearly defined procedures in place

and invests heavily in staff training to ensure that

all employees are aware of them and of the risks

that are entailed in their respective field of operations.

In addition, process-based internal controls

carried out by the Internal Audit Department

are an integral part of the bank’s risk management

system. They ensure compliance with legal

regulations and internal procedures in all areas.

Credit Risk

ProCredit Bank makes use of a highly developed

technology to manage credit risk at all stages of

the lending process. Regardless of the amount

involved, each loan is assessed on an individual


Risk Management 27

basis; we do not use scoring systems when analysing

loan applications and we maintain close

relationships with credit customers throughout

the maturity period. Intensive monitoring enables

us to identify potential repayment problems

at an early stage.

We have a broadly diversified portfolio which

contains over 65,000 outstanding loans. The average

amount disbursed in 2008 was EUR 3,326,

and 85.6% of all disbursements were in amounts

of less than EUR 10,000. The Loan Portfolio Review

Committee analysed outstanding loans both

by size and by sector to gauge the bank’s risk exposure

in these areas in the light of adverse local

and regional economic trends.

Despite our adherence to sound credit risk management

principles, the portfolio at risk (the proportion

of loans in arrears by more than 30 days)

increased from 1.6% at the end of 2007 to 2.3%

at year-end. This increase can mainly be attributed

to very small businesses that became overly

indebted. Although our credit risk management


28

Annual Report 2008

has always been robust, easy access to loans

from microcredit organisations compromised our

clients’ ability to meet their cumulative obligations.

Additionally, accelerating inflation created

liquidity constraints for many of our customers.

As part of our thorough review of the internal

factors that may have contributed to the rise in

arrears, we closely examined our credit analysis

and monitoring procedures, making further improvements

where possible. Our assessment of

clients’ overall levels of indebtedness was facilitated

by the expansion of the Central Credit Registry

and its takeover by the CBBH.

Net write-offs in 2008 totalled EUR 2.5 million, or

1.6% of the outstanding portfolio at year-end. The

bank takes a conservative approach to allowing for

loan impairment and was able to cover the portfolio

at risk by 145% with loan loss provisions.

As a responsible lender with prudent policies,

ProCredit Bank has always striven to maintain

high portfolio quality. Given the implications of

a global economic turndown, however, our activities

in this area have become more intensive. In

the coming year, we will continue to develop the

training of our loan officers to further strengthen

their credit analysis skills, making full use of centralised

data to assess their clients’ cumulative

level of indebtedness. The bank will also review

its internal controls and update procedures regarding

very small loans to minimise exposure to

credit risk.

Market Risk

Our management of market risk involves reducing

the impact of adverse movements in interest and

exchange rates on the bank’s profitability and on

its capital. With the local currency pegged to the

euro and its other foreign currency positions kept

at minimal levels, the bank does not face substantial

risk from foreign currency fluctuations.

To measure and mitigate interest rate risks, the

bank uses models based on maturity gap and duration

analysis. In 2008, it refined and developed

the capabilities of these tools to enable them to

support scenario analysis.

Liquidity Risk

ProCredit Bank is rigorous in its approach to

managing its exposure to liquidity risk, as was

reflected in the ample volume of liquidity which

it maintained throughout 2008: the ratio of liquid

assets to total assets was 30.4% at year-end. Our

loan portfolio provides a reliable source of cash inflow

through regular repayments, most of which

are made as monthly instalments.

The ALCO monitors the bank’s liquidity position

on at least a monthly basis and oversees the

parallel development of the loan and deposits

portfolios. It reviews the maturity structure of

the bank’s assets and liabilities and projects the

cash flow for both the following month and the

coming six months. The ratios of deposits held by

the largest 10 and 20 clients are also registered

and used as the basis of frequent stress testing.

The bank maintained a highly diversified base

of savings from individuals and legal entities in

2008, ensuring the stability of this major source

of financing. Following media attention, the financial

crisis impacted depositors’ confidence

considerably, which led to withdrawals of some

EUR 400 million in October, or 6.3% of total sector

deposits. During this bank run, ProCredit

Bank proved its ability to honour its obligations

by providing its clients with their funds on time

and in accordance with regular procedures. The

ratio of highly liquid assets to customer deposits

at year-end was 10.9%. Total deposits were

equivalent to a comfortable 105% of the total

loan portfolio, and additional sources of shortterm

liquidity and long-term funding were readily

available from sister ProCredit institutions

across the group throughout the year.

Operational Risk

Although the management of operational risk is

part of our overall risk management activities,

this is treated as a separate risk area to facilitate

effective control procedures. ProCredit Bank

shares its definition of operational risk with that

of the regulatory authorities: the risk of losses

resulting from inadequate or failed internal processes,

people and systems or from external

events. This also includes legal risk.


Risk Management 29

In light of the bank’s continuing growth, we introduced

an improved framework for managing

operational risk based on international best

practice standards. It provides for the sound allocation

and separation of risk-related responsibilities,

an integrated system of internal controls

and transparent, well-documented procedures.

We upgraded the bank’s system for collecting

and assessing risk event data both at branches

and the head office in 2008. The Risk Department

updated the documentation used for identified

operational risks and reviewed its implementation

throughout the year.

To ensure that our employees have the skills and

knowledge needed to identify and effectively

manage operational risks, each new employee

receives thorough introductory training in this

area and regular refresher courses are conducted

to promote risk awareness among all staff.

Capital Adequacy

Our equity provided sufficient coverage of all

risks throughout the year. The ProCredit group

requires the bank to maintain a capital adequacy

ratio of at least 12%. At the end of 2008,

ProCredit Bank had sufficient Tier 1 and Tier 2

capital to cover its risk-weighted assets by 18.4%

(2007: 16.5 %).

Shareholder support remained strong, as evidenced

by the capital increase of EUR 5 million in

June, which boosted total shareholders’ funds to

EUR 18.1 million.


30

Annual Report 2008

Branch Network

The year 2008 saw a significant expansion of

ProCredit Bank’s branch network. Our priority

was to make it easier for people outside of the

major population centres to access our services,

and we established five new offices in smaller

cities and towns: in Bosanska Gradiška in northern

Bosnia, in Bosanski Šamac in north-eastern

Bosnia, in Livno in western Bosnia, in Bugojno in

central Bosnia, and in Ljubuški in western Herzegovina.

At year-end, ProCredit Bank was operating

a total of 44 offices in 33 towns and cities.

The increased outreach not only enabled us serve

a larger client base, but also made the full range

of our services available to numerous clients who

had not previously had access to fully-fledged

ProCredit branches.

The activities of six information centres in the

Bosanska Krajina region of north-western Bosnia

were consolidated and upgraded, with the bank

creating two new units – one in Bosanska Krupa

and one in Velika Kladuša. Clients in these areas

can now access the full range of ProCredit Bank’s

services closer to home.

ProCredit Bank also moved a number of its existing

offices to new, larger premises in more accessible

and visible locations. The most noteworthy

projects of this type were the relocation of units

in Mostar, Zenica and Travnik. We also renovated,

expanded and upgraded a number of our existing

premises over the course of the year. Apart from

providing a more attractive environment for our

customers, the goal here was to ensure that these

older offices conform to the ProCredit group’s

current corporate design standards in terms of

their layout and overall appearance.

Velika

Kladuša

Cazin

Bihać

Gradiška

Šamac

Gradačac

Brčko (2)

Prijedor

Laktaši

Bijeljina (2)

Doboj

Srebrenik

Banja Luka (2)

Gračanica

Bosanska Krupa

Bosnia and Herzegovina

Tuzla (2)

Zavidovići

Zvornik

Živinice

Serbia

Bugojno

Travnik

Nova Bila

Kiseljak

Zenica

Sokolac

Sarajevo (5)

Croatia

Livno

Ilidža (2)

Pale

Konjic

Posušje

Mostar (2)

Ljubuški

Montenegro

Adriatic Sea

Trebinje


Branch Network 31

ProCredit Bank installed seven additional ATMs

in 2008, allowing its clients to access their funds

around the clock at 42 ATMs in 33 towns and cities

throughout Bosnia and Herzegovina.

We plan to continue renovating and expanding

our branch network during 2009, making

ProCredit a true “neighbourhood bank” in more

and more local communities.


32

Annual Report 2008

Organisation, Staff and Staff Development

ProCredit Bank hired and trained 166 new employees

during 2008, bringing the total number

of staff to 888. In line with our proven recruitment

policy, we hired individuals who not only had the

necessary qualifications but also identified with

our corporate values and mission.

In order to strengthen our capabilities in training

and staff development, we restructured the

Human Resources Department, dividing its functions

among three new organisational units: the

Personnel Administration Unit, the Recruitment

Unit, and the Staff Development and Training

Unit. A new computer system was installed in the

department to enable it to deal efficiently with

the growing volume of personnel-related information

which it must organise and manage on a

day-to-day basis. In addition, we completed the

development work on new software that will play

a key role in supporting the activities of the department,

which have become increasingly complex

as our staff has grown.

The labour market in BiH is not subject to a uniform

set of regulations, which creates a considerable

administrative workload for the HR department.

The Personnel Administration Unit focuses

on efficiently managing all of the tasks involved;

its importance will become even more apparent

when a new income tax law becomes effective on

January 1, 2009 with all its complex administrative

requirements.

The Recruitment Unit refines and supports the

hiring process. With 597 new employees over the

past three years, staff development was an important

priority in 2008. The Staff Development

and Training Unit assumed the challenging task

of carrying out training and professional development

measures for both new and existing staff. All

newly hired employees took part in the bank’s introductory

training, which was provided through

seven induction courses. After completing these

courses, classroom and on-the-job training was

given in the specific area of operations for which

staff had been hired.


Organisation, Staff and Staff Development 33

Several follow-up and refresher training sessions

consisting of a total of 301 training days

were held for more experienced staff members.

Selected loan officers from the team serving

very small enterprises were given training in the

lending methodology used for small and medium

businesses, and they also took part in follow-up

training conducted at the regional level.

To reinforce technical and management training

provided during 2007, refresher courses in key

people skills were held for all of our middle managers.

This gave the participants an opportunity

to reflect on what they had learned, as well as to

discuss the constraints they face in their day-today

work and the importance of people management

skills in their jobs.

In 2008, more than 20 credit co-ordinators were

promoted to middle management positions, which

improved quality management in our branches.

Building on their practical experience in lending,

the targeted training which they received focused

on managing the credit-granting process, managing

staff, and ensuring that employees adhere to

the bank’s code of conduct at all times.

We continued to take advantage of the training

opportunities offered by the ProCredit group. Ten

members of our staff successfully completed the

six-week training course for middle managers at

the Regional Academy in Macedonia. Three employees

graduated from the ProCredit Academy

in Germany after completing its three-year course

for high-potential middle managers. In the coming

year, two more of our employees will begin

attending the courses at the ProCredit Academy.

In addition, 13 of our employees significantly

improved their command of English by attending

the two-month language courses offered by

ProCredit Holding in Germany and Macedonia.

In a year of continued institutional growth despite

global financial turmoil, it was imperative

that our staff could offer clients sound advice and

explain our products clearly in a frequently confusing

banking market. This is why we invest so

heavily in training and will continue to do so in

the coming years.


34

Annual Report 2008


Business Ethics and Environmental Standards 35

Business Ethics and Environmental Standards

Part of the overall mission of the ProCredit group

is to set standards in the financial sectors in which

we operate. We want to make a difference not only

in terms of the target groups we serve and the

quality of the financial services we provide, but

also with regard to business ethics. Our strong

corporate values play a key role in this respect. We

have established six essential principles which

guide the operations of ProCredit institutions:

• Transparency: We adhere to the principle of

providing transparent information both to our

customers and the general public and to our

employees, and our conduct is straightforward

and open;

• A culture of open communication: We are

open, fair and constructive in our communication

with each other, and deal with conflicts

at work in a professional manner, working together

to find solutions;

• Social responsibility and tolerance: We give

our clients sound advice; their economic and

financial situation, their potential and their

capacities are assessed so that they can benefit

from appropriate “products”; promoting a

culture of savings is important to us; we are

committed to treating all customers and employees

respectfully and fairly, regardless of

their origin, colour, language, gender or religious

or political beliefs;

• Service orientation: Every client is served in

a friendly, competent and courteous manner.

Our employees are committed to providing excellent

service to all customers, regardless of

their background or the size of their business;

• High professional standards: Every employee

takes responsibility for the quality of his/her

work and strives to do his/her job even better;

• A high degree of personal commitment: This

goes hand-in-hand with personal integrity

and honesty – traits which are required of all

employees in all ProCredit institutions.

These ProCredit values represent the backbone of

our corporate culture and are discussed and actively

applied in our day-to-day operations. Moreover,

they are reflected in the Code of Conduct,

which transforms the ProCredit group’s ethical

principles into practical guidelines for all ProCredit

staff. To make sure that new staff fully understand

all of the principles that have been defined, the induction

training for new employees includes dedicated

sessions dealing exclusively with the Code of

Conduct and its significance for all members of our

team. And to ensure that employees remain committed

to our high ethical standards and are made

aware of new issues and developments which have

an ethical dimension for our institution, refresher

training sessions – at which case studies are presented

and grey areas discussed – are regularly

conducted for existing staff.

Another aspect of ensuring that our institution

adheres to the highest ethical standards is our

consistent application of international best-practice

methods and procedures to protect ourselves

from being used as a vehicle for money laundering

or other illegal activities such as the financing of

terrorist activities. The important focus here is to

“know your customer”, and, in line with this principle,

to carry out sound reporting and comply with

the applicable regulations. In 2009 we will implement

updated anti-money laundering and fraud

prevention policies to ensure compliance with

German regulatory standards across the group.

We also set standards regarding the impact

of our lending operations on the environment.

ProCredit Bank Bosnia and Herzegovina

has implemented an environmental

management system

based on continuous assessment

of the loan portfolio according

to environmental criteria, an indepth

analysis of all economic activities

which potentially involve

environmental risks, and the

rejection of loan applications

from enterprises engaged in activities

which are deemed environmentally

hazardous and

appear on our institution’s exclusion

list. By incorporating

environmental issues into the

loan approval process, ProCredit Bank

Bosnia and Herzegovina is also able to raise its

clients’ overall level of environmental awareness.

We ensure that when loan applications are evaluated,

compliance with ethical business practices

is a key consideration. No loans are issued to enterprises

or individuals if it is suspected that they

are making use of unsafe or morally objectionable

forms of labour, in particular child labour.


36

Annual Report 2008

Our Clients

Nevresa Ahatović,

Handicraft Artist

Nevresa Ahatović has turned an exceptional talent

into a profession. She makes handicraft items that

are in great demand in Sarajevo among foreign

tourists and locals alike. She also paints, finding

inspiration in Baščaršija, the main area in the capital’s

old town.

Nevresa has been doing this kind of work for 17

years. She used to sell her handicraft items and

paintings to various stores and companies, but

began to encounter some problems over time.

Her buyers would typically insist on paying small

amounts that greatly undervalued her hard work.

This did not allow Nevresa to support her son, so

she decided to make crucial changes to improve

their standard of living.

In 2006, she set out to realise a long-held plan to

open her own shop. Nevresa needed financial resources

in order to start, but all the banks she visited

refused to grant her a loan. When she finally

contacted ProCredit Bank, this enterprising artist

realised there was a bank that supports the small

entrepreneurs whom other banks refuse to serve.

the municipality, she opened a shop in Baščaršija.

Nevresa used the money to buy the materials she

needed for production. It did not take long for passers-by

to notice the originality of her work; she

was pleased to welcome more and more customers

every day.

A year later, Nevresa needed additional funds to

upgrade her store and to buy more materials.

She wanted to create gift items for companies to

present to their business partners. Once again,

Nevresa turned to ProCredit Bank, this time receiving

a loan of EUR 5,000. The investment paid off by

bringing her many new clients. As a result, she and

her son both now enjoy a better quality of life.

“I am currently considering expanding my production

facilities and finding a bigger shop to

operate from. I believe that ProCredit Bank will

continue to be a reliable banking partner and

provide me with services that will support the

growth of my business,”

Nevresa explains.

She took out her first loan from ProCredit Bank in

June 2006, and, with EUR 2,500 and support from


Our Clients 37

Enver Šuvalija,

Independent

Timber Merchant

Enver Šuvalija started making and selling chipboard

products in 1994 when he founded the

company Fructas. Today, the firm has 16 employees

and is one of Sarajevo’s best-known enterprises

in its field.

Initially, Fructas had only five employees and

took orders from private clients. The business

developed quickly and began to produce furniture

and other fixtures and fittings such as doors,

window frames and kitchen units. Most Fructas

items are custom made to meet clients’ specific

requirements. The business continued to expand

when Enver began receiving orders generated by

the private housing construction boom.

He first visited ProCredit Bank by chance in 2006

and was impressed by the very friendly, professional

service and sound financial advice he received.

This encouraged Enver to take out a loan

with ProCredit Bank for EUR 10,000 in order to

buy machinery and equipment.

Using these funds, he purchased a machine that

automatically cuts chipboard according to preset

measurements. This technology greatly facilitated

the work of his company, increasing both the

production rate and the quality of the output. In

addition to investments in new technology, Enver

is keen to create a good working environment for

his employees.

“It is very important that staff enjoy the workplace,

so we spend money on improving working

conditions as much as possible. We foster open

communication and a friendly climate in our

company,”

he says.

Today, as his business continues to develop, Enver

is considering expanding his production line

and hiring five more employees. Those who work

for Fructas are grateful to have stable employment

and are more than satisfied with the working

atmosphere.

“I am glad that there is a bank for entrepreneurs

that efficiently provides resources when they are

needed,”

Enver adds.


38

Annual Report 2008

Zilha Korkalić,

Savings Customer

“First and foremost, I save for my granddaughter’s

future. She is ten now, and I hope that if I

continue to save I will be able to help to support

her through university. But I also set aside small

amounts for myself to buy the little things that

make me happy,”

says Zilha.

Zilha Korkalić is an active 63-year-old who

loves working with children. She learned about

ProCredit Bank in 2007 when it supported the efforts

of Amici dei Bambini, the non-governmental

organisation she works with to help children who

do not have parental care.

Zilha was impressed to see that, through its work,

ProCredit Bank plays a proactive and positive role

in the communities where it operates. She also

appreciated its simple, easy-to-understand savings

products with fixed interest rates. A few days

later, she decided to open a deposit account.

In light of the global financial crisis that took

hold towards the end of the year, Zilha wanted to

make sure that her money was safe. For her own

peace of mind, she needed to know it was there to

support her if needed. It was therefore a relief to

learn that ProCredit Bank and its shareholders do

not invest in any kind of speculative securities or

similar financial instruments abroad.

“It feels good knowing that I have a bank that is

committed to protecting my hard-earned

savings,”

she says.


Our Clients 39

Borivoje Glogovac,

Specialty Cheese Producer

Five years ago, Borivoje Glogovac began producing

a local specialty cheese that is ripened in a

sheepskin sack. This type of cheese is one of the

most famous cheeses in BiH, and it is typical for

the areas where there is extensive sheep farming.

Borivoje works with his wife, Ljubica. They soon

decided to expand the business in order to put

their children through university and improve

their future prospects. Miroslav, Goran and Marko

also help their parents run the family business.

Borivoje contacted a non-governmental organisation

which had connections with Italian partners

interested in importing his speciality “cheese in

a sack”. The NGO provided him with training and

technical assistance, but Borivoje also needed

additional equipment to develop his business.

He became a client of ProCredit Bank when a

loan officer visited him in 2004. He was pleased

to see a bank that supports the work of agricultural

entrepreneurs through its specially tailored

loans, and he decided to borrow EUR 8,000 to buy

equipment for cheese production.

Using the new specialist equipment, Borivoje

was able to boost his output, sell more cheese

and subsequently increase his profits. This success

encouraged him to continue producing the

traditional cheese of the region. It is only produced

by small family businesses and has never

been manufactured on a large scale in factories.

Borivoje guards his secret recipe to preserve the

tradition and heritage of his ancestors. He is not

so reserved, though, about where he does his

banking.

Looking to the future, he states,

“I will continue to work with ProCredit Bank, as

I am very satisfied with the professional and

friendly service, as well as the fast and efficient

procedures for obtaining a loan. It is good to

know that I can access the funds I need when I

need them the most.”


40

Annual Report 2008

Financial Statements

Prepared in accordance with International Financial Reporting Standards.

For the year ended 31 December 2008.

Responsibilities of the Management and Supervisory Boards for the preparation and approval of

the annual financial statements

The Management Board of the Bank is required to prepare financial statements of the Bank for each

financial year which give a true and fair view of the financial position of the Bank and of the results

of its operations and cash flows, in accordance with International Financial Reporting Standards,

and is responsible for maintaining proper accounting records to enable the preparation of such financial

statements at any time. It has a general responsibility for taking such steps as are reasonably

available to it to safeguard the assets of the Bank and to prevent and detect fraud and other

irregularities.

The Management Board is responsible for selecting suitable accounting policies to conform with applicable

accounting standards and then apply them consistently; making judgements and estimates

that are reasonable and prudent; and preparing the financial statements on a going concern basis

unless it is inappropriate to presume that the Bank will continue in business.

The Management Board is responsible for the submission to the Supervisory Board of its annual

report on the Bank together with the annual financial statements, following which the Supervisory

Board is required to approve the annual financial statements for submission to the General Assembly

of Shareholders for adoption.

The financial statements set out on pages 4 to 60 were authorised by the Management Board on 9

February 2009 for issue to the Supervisory Board and are signed below to signify this.

On behalf of ProCredit Bank d.d., Sarajevo.:

Peter Moelders

Director of the Bank

Sabina Mujanović

Executive Director for

Accounting and Controlling


Financial Statements 41


42

Annual Report 2008


Financial Statements 43

Income Statement

For the year ended 31 December 2008

Notes Year ended Year ended

(all amounts are in BAM thousands, unless otherwise indicated) 31 Dec 2008 31 Dec 2007

Interest and similar income 5 57,903 50,752

Interest expense and similar charges 5 (19,177) (13,835)

Net interest income 38,726 36,917

Fee and commission income 6 5,612 4,433

Fee and commission expense 6 (1,049) (833)

Net fee and commission income 4,563 3,600

Foreign exchange differences (net) 7 201 168

Other operating income 8 1,126 219

Operating income 44,616 40,904

Other operating expenses 9 (38,499) (33,516)

Impairment losses and provisions 10 (6,785) (4,489)

(Loss)/profit before tax (668) 2,899

Income tax expense 11 (83) (348)

(Loss)/profit for the year (751) 2,551

The accompanying notes on pages 47 to 69 form an integral part of these financial statements.


44

Annual Report 2008

Balance Sheet

For the year ended 31 December 2008

Notes At 31 Dec At 31 Dec

(all amounts are in BAM thousands, unless otherwise indicated) 2008 2007

Assets

Cash and balances with the Central Bank 12 112,123 95,458

Loans and advances to banks 13 28,754 5,832

Loans and advances to customers 14 307,752 308,528

Financial investments available for sale 15 196 196

Property and equipment 16 11,333 10,945

Intangible assets 17 992 961

Deferred tax assets 18 47 26

Other assets 19 2,949 1,915

Total assets 464,146 423,861

Liabilities

Deposits from customers 20 335,591 279,867

Borrowings 21 65,662 88,263

Subordinated debt 22 16,081 16,095

Provisions 23 322 260

Other liabilities 24 1,700 1,354

Current income tax payable 155 374

Total liabilities 419,511 386,213

Shareholders’ equity

Share capital 25 35,458 25,679

Share premium 293 293

Statutory reserves 1,623 1,383

Retained earnings 7,261 10,293

Total shareholders’ equity 44,635 37,648

Total equity and liabilities 464,146 423,861

The accompanying notes on pages 47 to 69 form an integral part of these financial statements.


Financial Statements 45

Statement of Changes in Equity

For the year ended 31 December 2008

Share Share Statutory Retained Total

(all amounts are in BAM thousands, unless otherwise indicated) capital premium reserve earnings equity

Balance at 1 January 2008 25,679 293 1,383 10,293 37,648

Issue of share capital 9,779 – – – 9,779

Loss for the year – – – (751) (751)

Appropriations to statutory reserve – – 240 (240) –

Dividend payment – – – (2,041) (2,041)

Balance at 31 December 2008 35,458 293 1,623 7,261 44,635

Balance at 1 January 2007 15,679 293 1,258 7,867 25,097

Issue of share capital 10,000 – – – 10,000

Profit for the year – – – 2,551 2,551

Appropriations to statutory reserve – – 125 (125) –

Balance at 31 December 2007 25,679 293 1,383 10,293 37,648

The accompanying notes on pages 47 to 69 form an integral part of these financial statements.


46

Annual Report 2008

Cash Flow Statement

For the year ended 31 December 2008

Notes Year ended Year ended

(all amounts are in BAM thousands, unless otherwise indicated) 31 Dec 2008 31 Dec 2007

Operating activities

(Loss)/profit before tax (668) 2,899

Adjustments:

Depreciation and amortisation 3,734 2,678

Impairment losses and provisions 10 6,785 4,489

Changes in other provisions 56 137

Property and equipment written off 20 14

Cash flows from operating activities before changes in operating assets and liabilities 9,927 10,217

(Increase)/decrease in operating assets

Obligatory reserve with Central Bank (4,719) (15,889)

Loans and advances to customers (6,107) (96,496)

Loans and advance to banks (22,922) 2,237

Other assets (1,034) (294)

Increase/(decrease) in operating liabilities

Deposits from customers 55,724 103,023

Other liabilities 346 42

Current tax payable (219) 100

Net cash inflow/(outflow) from operating activities 21,069 (7,277)

Investing activities

Purchase of property and equipment (3,729) (5,430)

Purchase of intangible assets (444) (621)

Increase of financial investments available for sale – (196)

Net cash (outflow)/inflow from investing activities (4,173) (6,247)

Financing activities

Issued share capital 9,779 10,000

Proceeds from borrowings and subordinated debt 13,545 24,126

Repayments of borrowings and subordinated debt (36,160) (11,310)

Dividends paid (2,041) –

Net cash (outflow)/inflow from financing activities (14,877) 22,816

Net increase in cash and cash equivalents 11,946 19,509

Cash and cash equivalents at 1 January 41,260 21,751

Cash and cash equivalents at 31 December 26 53,206 41,260

The accompanying notes on pages 47 to 69 form an integral part of these financial statements.


Financial Statements 47

Notes to the Financial Statements

For the year ended 31 December 2008

(all amounts are in BAM thousands, unless otherwise indicated)

1. General Information

ProCredit Bank d.d., Sarajevo (further “the Bank”) is incorporated

to perform all banking activities in accordance with the law.

The Bank has been registered as a joint stock company domiciled

in Bosnia and Herzegovina. ProCredit Bank d.d., Sarajevo is part of

a global network of financial institutions, managed and controlled

by ProCredit Holding AG.

The Bank is incorporated to perform all banking activities in accordance

with the law and the main activities include commercial lending,

receiving of deposits, foreign exchange deals, and payment

operation services in the country and abroad and retail banking

services. In addition, it provides trade finance facilities to companies

for export and import purposes.

These financial statements were authorized for issue by the Board

of Directors on 9 February 2009.

Revised IAS 1 Presentation of Financial Statements (effective from

1 January 2009)

The revised Standard requires information in financial statements

to be aggregated on the basis of shared characteristics and introduces

a statement of comprehensive income. Items of income and

expense and components of other comprehensive income may be

presented either in a single statement of comprehensive income

(effectively combining the income statement and all non-owner

changes in equity in a single statement), or in two separate statements

(a separate income statement followed by a statement of

comprehensive income). The Bank is currently evaluating whether

to present a single statement of comprehensive income, or two

separate statements.

Revised IAS 23 Borrowing Costs (effective from 1 January 2009)

The revised Standard removes the option to expense borrowing

costs and requires the capitalisation of borrowing costs that relate

to qualifying assets (those that take a substantial period of time

to get ready for use or sale). The Bank has not yet completed its

analysis of the impact of the revised Standard.

2.4 Functional and presentation currency

2. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of

these financial statements are set out below. These policies have

been consistently applied to all the years presented, unless otherwise

stated.

2.1 Statement of compliance

The financial statements of ProCredit Bank d.d., Sarajevo have

been prepared in accordance with International Financial Reporting

Standards (IFRS) as issued by the International Accounting Standards

Board (IASB).

2.2 Basis of preparation

The financial statements have been prepared on the historical cost

basis except for loans and receivables that are stated at amortised

cost.

The preparation of financial statements in conformity with IFRS

requires the use of estimates and assumptions that affect the application

of policies and reported amounts of assets and liabilities

and disclosure of contingent assets and liabilities at the date of the

financial statements and the reported amounts of income and expenses

during the reporting period. Although these estimates are

based on management’s best knowledge of current events and actions,

actual results ultimately may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing

basis. Revision to accounting estimates are recognised in the

period in which the estimate is revised and in any future period

affected. Information about significant areas of estimation uncertainty

and critical judgments in applying accounting policies that

have the most significant effect on the amounts recognized in the

financial statements are described in note 4.

2.3 Adoption of new and revised standards

The following new Standards and Interpretations issued by the

International Accounting Standards Board and its International

Financial Reporting Interpretations Committee, have been authorised

for issue but are applicable to entities reporting under IFRS in

periods commencing after 1 January 2009, and might have impact

on the Bank.

The Bank’s financial statements are presented in Bosnian Marks

(“BAM”), which is the Bank’s functional and presentation currency,

rounded to the nearest thousand.

2.5 Foreign currency translation

Monetary assets and monetary liabilities denominated in foreign

currency at reporting date are retranslated into functional currency

using the exchange rates prevailing at the balance sheet date. Income

and expenses denominated in foreign currency are translated

into functional currency at the exchange rates valid at the date of

the transactions. Gains and losses resulting from the settlement of

such transactions and from the translation of monetary assets and

liabilities denominated in foreign currencies are recognized in the

income statement. Non-monetary assets and items that are measured

in terms of historical cost in foreign currency are translated

using the exchange rate at the date of the transaction and are not

retranslated at the balance sheet date.

Exchange rates 31 Dec 2008 31 Dec 2007

BAM BAM

USD 1.387310 1.331221

EUR 1.955830 1.955830

2.6 Financial assets

The Bank classifies its financial assets in the following categories:

loans and receivables and financial assets available for sale. Management

determines the classification of its investments upon initial

recognition.

a) Loans and receivables

Loans and receivables are non-derivative financial assets with

fixed or determinable payments that are not quoted in an active

market. They arise when the Bank provides money, goods or services

directly to a debtor with no intention of trading with the receivable

and include loans to and receivables from banks, loans to and

receivables from customers and obligatory reserves with the Central

Bank.

All loans and advances are recognized when cash is advanced to

borrowers.

Loans and receivables are initially recognised at fair value plus


48

Annual Report 2008

transaction costs. Subsequently, they are measured at amortised

cost using the effective interest method.

The Bank assesses at each balance sheet date whether there is objective

evidence that loans and receivables are impaired.

An allowance for loan impairment is established if there is objective

evidence that the Bank will not be able to collect all amounts due

according to the original contractual terms of loans. The amount of

the provision is the difference between the carrying amount and

the recoverable amount, being the present value of expected cash

flows, including amounts recoverable from guarantees and collateral,

discounted at the original effective interest rate of loans. The

carrying amount of loans and receivables is reduced through the allowance

account and the amount of loss is recognized in the income

statement. Interest on impaired assets continues to be recognized

through unwinding of the discount in interest income.

If the amount of the impairment subsequently decreases due to

an event occurring after the impairment was recognized, the previously

recognized impairment loss is reserved by adjusting the

allowance account. Subsequent recoveries of amounts previously

written off are recognized as a reversal of impairment losses in the

income statement. The provision for loan impairment is further analyzed

in note 2.10.

b) Financial assets available-for-sale

Available-for-sale financial assets are non-derivative investments

that are designated as available-for-sale or are not classified as another

category of financial assets.

Available-for-sale financial assets are initially recognised at fair

value plus transaction cost that are directly attributable to its acquisition

or issue. Regular-way purchases and sales of financial

assets available for sale are recognised on trade date, which is the

date when the Bank commits to purchase or sell the asset.

Available-for-sale financial assets are subsequently measured at

their fair value. Gains and losses from a change in the fair value of

available-for-sale financial assets are recognized directly in a fair

value reserve within equity. Equity instruments classified as available

for sale that do not have a quoted market price in an active

market and whose fair value cannot be reliably measured are stated

at cost less impairment.

Available-for-sale financial assets include equity securities. Dividends

on available-for-sale equity instruments are recognised in

the income statement when the entity’s right to receive payment

is established.

Financial assets are derecognised when the rights to receive cash

flows from the financial assets have expired or where the Bank has

transferred substantially all risks and rewards of ownership.

2.7 Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported

in the balance sheet when there is a legally enforceable

right to set off the recognized amounts and when there is an intention

to settle on a net basis, or realize the asset and settle the liability

simultaneously.

Income and expenses are presented on a net basis only when permitted

by financial reporting standards, or for gains and losses

arising from a group of similar transactions.

2.8 Interest income and expense

Interest income and expense are recognized in the income statement

for all interest bearing instruments on an accrual basis using

the effective interest rate, i.e. at the rate that discounts estimated

future cash flows to net present value over the life of the underlying

contract. Such income and expense is presented as interest

and similar income or interest expense and similar charges in the

income statement. Interest income and expense also includes fee

and commission income and expense in respect of loans to and receivables

from customers or borrowings from other banks, recognized

on an effective interest basis.

The effective interest method is a method of calculating the amortised

cost of a financial asset or a financial liability and of allocating

the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts

estimated future cash payments or receipts over the expected life

of the financial instrument or, when appropriate, a shorter period

to the net carrying amount of the financial asset or financial liability.

When calculating the effective interest rate, the Bank estimates

cash flows considering all contractual terms of the financial instrument

(for example, prepayment options) but does not consider future

credit losses. The calculation includes all fees and points paid

or received between parties to the contract that are an integral part

of the effective interest rate, transaction costs and all other premiums

or discounts.

2.9 Fee and commission income and expenses

Fees and commission income and expenses mainly comprise fees

received from enterprises arising from domestic and foreign payments,

the issue of guarantees and letters of credit and credit card

business. Fees and commissions, except for those which form part

of the effective interest rate of the instrument, are generally recognized

on an accrual basis when the service has been provided.

2.10 Impairment losses on loans and advances

The Bank assesses at each balance sheet date whether there is objective

evidence that a financial asset or group of financial assets is

impaired. A financial asset or a group of financial assets is impaired

and impairment losses are incurred if there is objective evidence of

impairment as a result of one or more events that occurred after the

initial recognition of the asset (a “loss event”) and that loss event

(or events) has an impact on the estimated future cash flows of the

financial asset or group of financial assets that can be reliably estimated.

Objective evidence that a financial asset or group of assets

is impaired includes observable data that comes to the attention of

the Bank about the following loss events:

• significant financial difficulty of the borrower;

• a breach of contract, such as a default or delinquency in interest

or principal payments;

• the Bank granting to the borrower, for economic or legal reasons

relating to the borrower’s financial difficulty, a concession

that it would not otherwise consider;

• it becoming probable that the borrower will enter bankruptcy or

other financial reorganisation;

• the disappearance of an active market for the financial asset

because of financial difficulties;

• observable data indicating that there is a measurable decrease

in the estimated future cash flows from a group of financial assets

since the initial recognition of those assets, although the

decrease cannot yet be identified with the individual financial

assets in the group.

If there is objective evidence that an impairment loss on loans

and receivables carried at amortised cost has been incurred, the

amount of the loss is measured as the difference between the asset’s

carrying amount and the present value of estimated future

cash flows discounted at the financial asset’s original effective interest

rate. The carrying amount of the asset is reduced through the

use of an allowance account and the amount of loss is recognized in

the income statement. If a loan or receivable has a variable interest

rate, the discount rate for measuring any impairment loss is the current

effective interest rate determined under the contract.


Financial Statements 49

The Bank considers evidence of impairment for loans and receivables

at individual and collective level. Individually significant financial

assets are tested for impairment on individual basis.

When the Bank determines whether there is objective evidence of

impairment for an individually assessed financial asset, whether

significant or not, it includes the asset in a group of financial assets

with similar credit risk characteristics and collectively assesses

them for impairment. Assets that are individually assessed for impairment

and for which an impairment loss is or continues to be recognized

are not included in a collective assessment of impairment.

Individually assessed loans

The assessment for impairment of individually significant loans is

based on an evaluation of the ability and willingness of the customer

to service their debt.

The amount of the loss is measured as the difference between the

asset’s carrying amount and the present value of estimated future

cash flows (excluding future credit losses that have not been incurred)

discounted at the financial asset’s original effective interest

rate. The carrying amount of the asset is reduced through the

use of an allowance account and the amount of the loss is recognized

in the income statement.

Management uses estimates based on historical loss experience

for assets with credit risk characteristics and objective evidence

of impairment similar to those in the portfolio when scheduling

its future cash flows. The methodology and assumptions used for

estimating both the amount and timing of future cash flows are reviewed

regularly to reduce any differences between loss estimates

and actual loss experience.

The amount of the allowance is equal to the difference between

the carrying value of the loan and the present value of future cash

flows that the bank expects to realize from the claim against the

borrower, discounted at the financial asset’s original effective interest

rate.

If a loan has a variable interest rate, the discount rate for measuring

any impairment loss is the current effective interest rate determined

under the contract. The calculation of the present value of

the estimated future cash flows of a collateralized financial asset

reflects the cash flows that may result from foreclosure less costs

for obtaining and selling the collateral.

Collectively assessed loans

All individually significant loans found not to be specifically impaired

are collectively assessed for any impairment that has been

incurred but not yet identified. Loans that are not individually significant

are collectively assessed for impairment by grouping loans

with similar characteristics.

In assessing collective impairment the Bank uses a historical loss

model adjusted for management’s judgment as to whether current

economic or credit conditions are such that the actual losses are

likely to be greater or less than suggested by historical modelling.

Impairment on loans are written off after all the necessary procedures

have been completed and the amount of the loss has been

determined.

If, in a subsequent period, the amount of the impairment loss decreases

and the decrease can be related objectively to an event

occurring after the impairment was recognized (such as an improvement

in the debtor’s credit rating), the previously recognized

impairment loss is reversed by adjusting the allowance account.

The amount of the reversal is recognized in the income statement

within the impairment charge for credit losses.

2.11 Impairment losses on available-for-sale financial assets

is impaired. In the case of equity investments classified as available

for sale, a significant or prolonged decline in the fair value of

the security below its cost is considered in determining whether the

assets are impaired.

If any such evidence exists for available-for-sale financial assets,

the cumulative loss, measured as the difference between the acquisition

cost and the current fair value, less any impairment loss

on that financial asset previously recognised in profit or loss, is

removed from equity and recognised in the income statement.

Impairment losses recognised in the income statement on equity

instruments are not reversed through the income statement. If, in

a subsequent period, the fair value of a debt instrument classified

as available for sale increases and the increase can be objectively

related to an event occurring after the impairment loss was recognised

in profit or loss, the impairment loss is reversed through the

income statement. However, any subsequent recovery in the fair

value of an impaired available-for-sale equity security is recognized

directly in equity.

2.12 Property and equipment

Property and equipment are tangible assets that are held for use in

the supply of services, for rentals to others or administrative purposes.

Property and equipment are stated at historical cost less accumulated

depreciation. Historical cost includes expenditure that is directly

attributable to the acquisition of the items.

Subsequent cost is included in the asset’s carrying amount or is

recognized as a separate asset, only when it is probable that future

economic benefits associated with the item will flow to the Bank

and the rest of the item can be measured reliably. All other repairs

and maintenance costs are charged to the income statement during

the financial period in which they are incurred.

Property and equipment are periodically reviewed for impairment.

Where the carrying amount of an asset is greater than its estimated

recoverable amount, it is written down immediately to its recoverable

amount.

Assets in course of construction are reported at their cost of construction

including costs charged by third parties. Upon completion,

all accumulated costs of the asset are transferred to the relevant

tangible property and equipment category and subsequently

subject to the applicable depreciation rates.

Gains and loses on disposal of property and equipment are recognized

in the income statement.

Depreciation is provided on all assets except assets in the course of

construction on a straight line basis so as to write off the cost of the

assets over their estimated useful lives to their estimated recoverable

amounts at the following annual rates:

in % 2008 2007

Buildings 2.5 10

Computers and

telephone equipment 20-33 20-33

Furniture and equipment 17 -25 17-25

Leasehold improvements Over the Over the

lease period lease period

In 2008, depreciation rate for buildings has changed from 10% to

2.5%. Had the depreciation rate not changed, respective depreciation

charge in 2008 would have been higher for BAM 39 thousand.

The assets’ residual values and useful lives are reviewed, and adjusted

if appropriate, at each balance sheet date.

The Bank assesses at each balance sheet date whether there is objective

evidence that a financial asset or a group of financial assets


50

Annual Report 2008

2.13 Intangible assets

Intangible assets that are acquired by the Bank are stated at cost

less accumulated amortization and impairment losses.

Subsequent expenditure is capitalized only if all of the features required

by IAS 38 are satisfied. All other expenditure is expensed

as incurred.

Amortization is charged to the income statement on a straight-line

basis over the estimated useful lives as follows:

2008 2007

Software 5 years 5 years

Licenses and other intangible assets 5 years 5 years

2.14 Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation

and are tested annually for impairment. Assets that are subject

to amortisation are reviewed for impairment whenever events or

changes in circumstances indicate that the carrying amount may not

be recoverable. An impairment loss is recognised for the amount by

which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of an asset’s fair value less

costs to sell and value in use. For the purposes of assessing impairment,

assets are grouped at the lowest levels for which there are

separately identifiable cash flows (cash-generating units).

2.15 Leases

To date, premises rental contracts entered into by the Bank are operating

leases. The total payments made under operating leases

are charged to the income statement on a straight-line basis over

the period of the lease. When an operating lease is terminated before

the lease period has expired, any payment required to be made

to the lessor by way of penalty is recognized as an expense in the

period in which termination takes place.

2.16 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents

comprise balances with less than 90 days maturity from the

date of acquisition including: cash in hand, current accounts with

domestic and foreign banks and balances with the Central Bank.

2.17 Provisions

Provisions are recognized when the Bank has a present legal or constructive

obligation as a result of past events, it is probable that an

outflow of resources embodying economic benefits will be required

to settle the obligation, and a reliable estimate of the amount of the

obligation can be made.

Provisions for liabilities and charges are maintained at the level

that the Bank’s management considers sufficient absorption of

incurred losses. The management determines sufficiency of provisions

on the basis of insight in specific items, current economic circumstances,

risk characteristics of certain transaction categories,

as well as other relevant factors.

Provisions are released only for such expenditure in respect of

which provisions are recognized at inception. If the outflow of economic

benefits to settle obligations is no longer probable, the provision

is reversed.

Employee benefits

a) Defined contribution plans

The Bank, in the normal course of business, makes payments on

behalf of its employees for pensions, health care, employment and

personnel tax that are calculated on the basis of gross salaries and

wages, food allowances and travel expenses according to the legislation.

The Bank makes these contributions to the Government’s

health and retirement funds, at the statutory rates in force during

the year, based on gross salary payments.

The Bank pays contributions to public pension insurance fund on a

mandatory basis. Once the contributions have been paid, the Bank

has no further payment obligations. The regular contributions constitute

costs for the year in which they are due and as such are included

in staff costs. The cost of these payments is charged to the

income statement in the same period as the related salary cost.

b) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted

basis and are expensed as the related service is provided.

A provision is recognized for the amount expected to be paid under

short-term cash bonus or profit-sharing plans if the Bank has

a present legal or constructive obligation to pay this amount as a

result of past service provided by the employee and the obligation

can be estimated reliably.

c) Long-term employee benefits

According to local legal requirements, employees of the Bank are

entitled to receive one-time benefit on retirement, dependent on

factors such as age, years of service and salary they had with the

bank.

Such payments are treated as other long-term employee benefits

and the liability recognized in the balance sheet is the present value

of the defined benefit obligation at the balance sheet date less

the fair value of plan assets (if any), together with adjustments for

unrecognized actuarial gains or losses and past service costs.

This obligation is calculated annually by independent actuaries

using the projected unit credit method. The present value of the

defined benefit obligation is determined by discounting the estimated

future cash outflows using average interest rate of long term

time deposit accounts kept with commercial banks in the country,

as the local capital market is not developed and neither high quality

corporate bonds nor government bonds exist on the market.

Actuarial gains and losses arising from experience adjustments

and changes in actuarial assumptions are recognized immediately

in profit and loss as well all past service cost.

2.18 Taxation

Income tax charge is based on taxable profit for the year and comprises

current and deferred tax.

Current tax is the expected tax payable on the taxable income for

the year, using tax rates enacted or substantially enacted at the

balance sheet date, and any adjustment to tax payable in respect

of previous years. The statutory corporate profit tax rate for 2008,

applicable to taxable profits is 10% (2007: 30%).

Deferred income tax is provided in full, using the liability method,

for all temporary differences arising between the tax basis of assets

and liabilities and their carrying values for financial reporting

purposes. The movement of deferred tax liabilities and deferred tax

assets reflects the tax consequences that would follow from the

manner in which the enterprise expects, at the balance sheet date,

to recover or settle carrying amount of its assets and liabilities,

based on tax rates enacted or substantially enacted at the balance

sheet date. Currently enacted tax rates are used in the determination

of deferred income tax.

Deferred tax assets are recognized to extend that it is probable that

future taxable profit will be available against which the deferred

tax assets can be utilised.


Financial Statements 51

2.19 Deposits, borrowings and subordinated liabilities

3.1 Credit risk

Deposits, borrowings and subordinated liabilities are the Bank’s

sources of debt funding.

The Bank classifies capital instruments as financial liabilities or

equity instruments in accordance with the substance of the contractual

terms of the instrument.

The Bank initially recognizes deposits, borrowings and subordinated

liabilities on the date that they are originated.

Deposits, borrowings and subordinated liabilities are initially measured

at fair value net of transaction costs, and subsequently measured

at their amortized cost using the effective interest method.

2.20 Retained earnings

Any profit for the year after appropriations is transferred to reserves.

2.21 Share capital

Share capital represents the nominal value of paid-in ordinary

shares classified as equity and denominated in BAM. Dividends are

recognized as liability in the period in which they are declared.

2.22 Financial guarantee contracts

The Bank is subject to credit risk through its lending activities and in

cases where it acts as an intermediary on behalf of customer or third

parties. The risk that counterparties to financial instruments might

default on their obligations is monitored on an ongoing basis.

3.1.1 Risk limit control and mitigation policies

The Bank takes on exposure to credit risk, which is the most important

risk for the Bank’s business; management therefore carefully

manages its exposure to credit risk. Credit exposures arise principally

in lending activities that lead to loans and advances and there

is also credit risk in off-balance-sheet financial instruments, such

as loan commitments.

The credit risk management and control are centralized in Risk Department

of the Bank and managed by Loan Portfolio Review Committee

and Credit Risk Committee. The Bank structures the levels

of credit risk it undertakes by placing limits on the amount of risk

accepted in relation to one borrower, or groups of borrowers, and to

geographical and industry segments.

Exposure to credit risk is managed through regular analysis of the

ability of borrowers and potential borrowers to meet interest and

capital repayment obligations and by changing these lending limits

where appropriate. Exposure to credit risk is also managed in part

by obtaining collateral and corporate and personal guarantees.

Financial guarantee contracts are contracts that require the issuer

to make specified payments to reimburse the holder for a loss it incurs

because a specified debtor fails to make payments when due.

Such financial guarantees are given to banks, financial institutions

and other bodies on behalf of customers to secure loans, overdrafts

and other banking facilities.

2.23 Off- balance-sheet commitments and contingencies

In the ordinary course of business, the Bank enters into related

commitments which are recorded in off-balance-sheet accounts

and primarily comprise guarantees, letters of credit, undrawn

loans commitments and credit card limits. Such financial commitments

are recorded in the Bank’s balance sheet if and when they

become payable.

2.24 Comparatives

Where necessary, comparative figures have been adjusted to conform

with changes in presentation in the current year.

(a) Collateral

The Bank measures the exposure to credit risk toward certain kind

of collateral. Accordingly, the Bank monitors its reliance on different

kinds of collateral. To the extent that real estate prices drop

significantly, the Bank expects that its credit risk losses on impaired

lending may increase significantly as the value of collateral

decreases.

The Bank employs a range of policies and practices to mitigate

credit risk. The most common is security for advances. The Bank

implements guidelines on the acceptability of specific classes of

collateral or credit risk mitigation. The principal collateral types for

loans and advances are:

• Cash,

Bank and corporate guarantees,

• Mortgages over residential properties;

• Charges over business assets such as premises, inventory and

accounts receivable;

• Charges over financial instruments such as debt securities and

equities.

3. Financial risk management

The Bank’s activities expose it to a variety of financial risks; credit

risk, liquidity risk and market risk. The Bank has established an integrated

system of risk management by introducing set of policies

and procedures for analysis, evaluation, acceptance and risk management.

Taking risk is core to the financial business, and the operational

risks are an inevitable consequence of being in business.

The Management Board has overall responsibility for the establishment

and oversight of the Bank’s risk management framework.

Risk management is carried out by the Bank’s Risk Department under

policies approved by the Management Board.

The most important types of risk are credit risk, liquidity risk, market

risk and other operational risk. Market risk includes currency

risk, interest rate and other price risk.

Risk steering and risk controlling processes are adjusted in a timely

manner to reflect changes in the operating environment.

In order to minimize the credit loss the Bank will seek additional

collateral from the counterparty as soon as impairment indicators

are noticed for the relevant individual loans and advances. Debt securities,

treasury and other eligible bills are generally unsecured.

(b) Credit-related contingencies

The primary purpose of these instruments is to ensure that funds

are available to a customer as required. Guarantees and standby

letters of credit carry the same credit risk as loans and are secured

with similar collateral as are loans.

3.1.2 Credit risk management

The Bank accounts for counterparty risks arising from the loan portfolio

by making allowances for impaired loans. A financial asset or

a group of financial assets is impaired and impairment losses are

incurred if, and only if, there is objective evidence of impairment as

a result of one or more events that occurred after the initial recognition

of the asset (a “loss event”) and that loss event (or events)

has an impact on the estimated future cash flows of the financial

asset or group of financial assets that can be reliably estimated.


52

Annual Report 2008

The Bank assesses at each balance sheet date whether there is objective

evidence that a financial asset or group of financial assets

is impaired.

The Bank assesses the probability of default of individual counterparties

using internal rating tools tailored to the various categories

of counterparty. They have been developed internally and combine

statistical analysis with credit officer judgment and are validated,

where appropriate, by comparison with externally available data.

Clients of the Bank are segmented into four rating classes. The

Bank’s rating scale, which is shown below, reflects the range of default

probabilities defined for each rating class. This means that, in

principle, exposures migrate between classes as the assessment

of their probability of default changes. The rating tools are kept under

review and upgraded as necessary.

The Bank regularly validates the performance of the rating and their

predictive power with regard to default events.

Bank’s internal ratings scale

Bank’s rating

Description of the grade

A

Investment grade

B

Standard monitoring

C

Special monitoring

D+E

Sub-standard

Criteria for classification of financial assets or contingent liabilities

into groups A, B, C, D and E are as follows:

Financial assets or contingent liabilities are classified into Group A

if they are towards:

• debtors which is not likely to default and who repay their obligations

on a timely basis; and

• exposures secured by pledging collateral graded as first class

collateral.

Financial assets or contingent liabilities are classified into Group B

if they are towards debtors:

• whose cash flows are assessed as adequate to duly fulfil their

due obligations, regardless of whether or not their present financial

position is assessed as weak, without signs of further

deterioration in the future; and

• who settle their liabilities with delay of up to 30 days (B1), occasionally

with delay between 31 and 90 days.

Financial assets or contingent liabilities are classified into Group C

if they are towards debtors:

• for which it is assessed that their cash flows will not be sufficient

for regular repayment of matured liabilities, or

• that settle their liabilities with delay of up to 90 days, occasionally

with delay between 91 to 180 days, or

• that are clearly undercapitalized, or

• that do not have sufficient long term capital resources for financing

long term investments, or

• from whom the Bank does not receive currently satisfactory information

or adequate documentation concerning repayment

of liabilities.

Financial assets or contingent liabilities are classified into Group D

and E if they are towards debtors:

• for which a strong likelihood of loss of part or all of the financial

asset exists or of payment for contingent liabilities, or

• that settle their liabilities with delay of 90 to 180 days, occasionally

with delay between 181 to 360 days, or

• which are insolvent, or

• for which a motion for commencement of process of liquidation

or declaration of bankruptcy began and was filed at the provisional

court, or

• that are in the process of reform or in the process of liquidation,

or

• that have declared bankruptcy, or

• from whom no repayment is expected, or

• with questionable legal grounds for Bank to collateral.

Exposure at default is based on the amounts the Bank expects to be

owed at the time of default. For example, for a loan this is the face

value. For a commitment, the Bank includes any amount already

drawn plus the further amount that may have been drawn by the

time of default, should it occur.

Loss, given default, or loss severity represents the Bank’s expectation

of the extent of loss on a claim should default occur. It

is expressed as a percentage loss per unit of exposure and typically

varies by type of counterparty, type and seniority of claim and

availability of collateral or other credit mitigation.

3.1.3 Impairment and provisioning policies

The internal rating systems described in Note 3.1.2 focus more on

credit-quality mapping from the inception of the lending and investment

activities. In contrast, impairment provisions are recognized

for financial reporting purposes only for losses that have been incurred

at the balance sheet date based on objective evidence of

impairment (see Note 2.10). The impairment provision shown in the

balance sheet at year-end is derived from each of the internal rating

grades. However, the majority of the impairment provision comes

from bottom two gradings. The table below shows the percentage

of the Bank’s on and off-balance sheet items relating to loans and

advances and the associated impairment provision for each of the

Bank’s internal rating categories:

Bank’s rating

Loans and Impairment Other Impairment

advances provision assets provision

to customers

in %

2008

Investment grade 92.5 1.2 94.0 0.2

Standard monitoring 6.3 20.0 4.5 44.3

Special monitoring 0.65 70.8 0.6 70.0

Sub-standard 0.55 100.0 0.9 100.0

100 3.4 100 3.5

2007

Investment grade 93.4 1.0 97.3 0.3

Standard monitoring 6.0 19.0 1.8 43.0

Special monitoring 0.4 70.0 0.3 70.0

Sub-standard 0.2 100.0 0.6 100.0

100 2.6 100 1.9


Financial Statements 53

The internal rating tool assists management to determine whether

objective evidence of impairment exists under IAS 39, based on the

following criteria set out by the Bank:

• Delinquency in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower (e.g. equity

ratio, net income percentage of sales);

• Breach of loan covenants or conditions;

• Initiation of bankruptcy proceedings;

• Deterioration of the borrower’s competitive position;

• Deterioration in the value of collateral.

The Bank’s policy requires the review of individual financial assets

that are above materiality thresholds at least annually or more

regularly when individual circumstances require. Impairment allowances

on individually assessed accounts are determined by an

evaluation of the incurred loss at balance-sheet date on a case-bycase

basis, and are applied to all individually significant accounts.

The assessment normally encompasses collateral held (including

re-confirmation of its enforceability) and the anticipated receipts

for that individual account.

Collectively assessed impairment allowances are provided for: (i)

portfolios of homogenous assets that are considered individually

insignificant; and (ii) losses that have been incurred but have not

yet been identified, by using the available historical experience,

experienced judgment and statistical techniques.

3.1.4 Maximum exposure to credit risk before collateral held or

other credit enhancement

Maximum exposure

2008 2007

Loans and advances to banks 28,754 5,832

Loans and advances to customers 307,752 308,528

– Overdrafts 911 768

– Housing 16,014 12,468

– Consumer 11,573 6,015

– Very small business 138,121 167,162

– Small and medium sized enterprises

(SMEs) 122,364 109,909

– Business overdrafts 18,769 12,206

Other assets 2,949 1,915

Credit risk exposure relating to

off-balance sheet items are as follows:

Loan commitments 11,970 10,157

Financial guarantees 9,333 7,616

Total 360,758 334,048

The above table represents a worst case scenario of credit risk exposure

to the Bank at 31 December 2008 and 31 December 2007,

without taking account of any collateral held or other credit enhancements

attached.

For on-balance-sheet assets, the exposures set out above are

based on net carrying amounts as reported at the balance sheet.

3.1.5 Assets exposed to credit risk

Loans and advances are summarized as follows:

31 Dec 2008 31 Dec 2007

Loans and advances Loans and advances Loans and advances Loans and advances

to customers to banks to customers to banks

Neither past due nor impaired 299,911 28,754 301,988 5,832

Past due but not impaired 14,299 – 12,356 –

Impaired 4,356 – 2,701 –

Gross 318,566 28,754 317,045 5,832

Specific impairment 268 – 237 –

Collective impairment 10,546 – 8,280 –

Total impairment 10,814 – 8,517 –

Net 307,752 28,754 308,528 5,832

(a) Assets neither past due nor impaired

The credit quality of the portfolio of loans and advances that were

neither past due nor impaired can be assessed by reference to the

internal rating system adopted by the Bank.

Loans and advances to customers

Overdraft Housing Others Very small SMEs Others Total Loans and

business

advances

to banks

31 December 2008

Investment grade 932 16,001 11,584 132,401 119,988 19,005 299,911 28,754

Total 932 16,001 11,584 132,401 119,988 19,005 299,911 28,754

31 December 2007

Investment grade 799 12,365 5,989 162,226 108,214 12,395 301,988 5,832

Total 799 12,365 5,989 162,226 108,214 12,395 301,988 5,832

Information disclosed in the above tables is presented in gross

amounts.


54

Annual Report 2008

(b) Assets past due but not impaired

Loans and advances less than 180 days past due are not considered

impaired, unless other information is available to indicate the contrary.

Gross amount of loans and advances to customers by class

that were past due but not impaired were as follows:

Loans and advances to customers

Overdraft Housing Others Very small SMEs Others Total Loans and

business

advances

to banks

31 December 2008

Past due up to 30 days 1 256 145 6,987 1,683 44 9,116 –

Past due up to 90 days 2 33 29 2,660 356 39 3,119 –

Past due up to 180 days 2 – 24 1,860 119 59 2,064 –

Total 5 289 198 11,507 2,158 142 14,299 –

Collateral 5 829 208 12,057 5,505 194 18,798 –

31 December 2007

Past due up to 30 days 2 258 74 5,604 1,218 22 7,178 –

Past due up to 90 days 2 36 51 3,431 310 15 3,845 –

Past due up to 180 days 1 14 32 1,218 61 7 1,333 –

Total 5 308 157 10,253 1,589 44 12,356 –

Collateral 6 892 217 10,808 4,426 45 16,394 –

(c) Assets impaired

The breakdown of the gross amount of individually impaired loans

and advances to customers by class, along with the fair value of

related collateral held by the Bank as security, are as follows:

Loans and advances to customers

Overdraft Housing Others Very small SMEs Others Total Loans and

business

advances

to banks

31 December 2008

Sub-standard – 1 24 1,640 2,635 56 4,356 –

Total – 1 24 1,640 2,635 56 4,356 –

Collateral – 174 24 2,097 13,069 311 15,675 –

31 December 2007

Sub-standard – 29 3 479 2,186 4 2,701 –

Total – 29 3 479 2,186 4 2,701 –

Collateral – 79 3 958 9,370 4 10,414 –

Information disclosed in above tables are presented in gross

amounts.

(d) Loans and advances with renegotiated terms

Loans and advances with renegotiated terms include extended payment

arrangements, approved external management plans, modification

and deferral of payments. Once the loan is restructured, it

remains in this category independent of the satisfactory performance

after restructuring. Restructuring policies and practices are

based on indicators or criteria which, in the judgment of local management,

indicate that payment will most likely continue. These

policies are kept under continuous review.

Restructuring is most commonly applied to corporate entities

loans, in particular SMEs loans.

Renegotiated loans that would otherwise be past due or impaired

totalled BAM 358 at 31 December 2008 (2007: BAM 619).

2008 2007

Loans and advances to corporate customers

– Very small business 100 119

– Small and medium size enterprises (SMEs) 258 500

Total 358 619


Financial Statements 55

(e) Loans and advances to customers

The Bank holds collateral against loans and advances to customers

in the form of mortgage interest over property, other securities

over assets and guarantees. Estimates of fair value of collateral are

based on the value of collateral assessed at the time of borrowing,

and generally are not updated except when a loan is individually assessed

as impaired. Collateral is not held over loans and advances

to banks and financial assets available for sale.

The breakdown of the gross amount of individually impaired loans

and advances by class, along with the fair value of related collateral

held by the Bank as security, are as follows:

Overdraft Housing Others Very SMEs Others

small

business

31 December 2008

Individually impaired loans – – – 26 2,571 –

Collectively impaired loans 937 16,291 11,806 145,522 122,210 19,203

Collateral 952 28,395 17,879 156,956 365,316 51,527

31 December 2007

Individually impaired loans – – – 27 2,060 –

Collectively impaired loans 804 12,702 6,149 172,931 109,929 12,443

Collateral 1,099 24,399 7,764 180,000 299,220 37,186

The disclosed value of collateral is determined by local chartered

surveyors and represents value estimated as realisable by the legal

owners of the assets. Management considers the loans covered by

collateral as impaired because experience shows that a significant

proportion of the collateral cannot be enforced due to administrative

and legal difficulties. The impairment provisions reflect the

probability that management will not be able to enforce its rights

and repossess collateral on defaulted loans.

As at 31 December 2008 the Bank did not have any repossessed

property or some other type of collateral.

3.1.6 Concentration of risks of financial assets with credit risk

exposure

The Bank monitors concentrations of credit risk by economic sector

and by geographic location. Credit portfolio risk is limited by

the Bank’s credit strategy; in particular the focus on small and very

small loans and the broad geographical and economic sector diversification

of the loan portfolio. An analysis of such concentrations

at the reporting date is shown below:

Economic sector risk concentrations

Wholesale Agriculture, Production Individuals Tourism, Other Total

and retail forestry catering

and fishing

Loans and advances to banks – – – – – 28,754 28,754

Loans and advances to customers

– Overdrafts – – – 911 – – 911

– Housing – – 422 15,592 – – 16,014

– Consumer – – – 11,573 – – 11,573

Loans to corporate entities:

– Very small business 20,665 77,374 5,675 3,413 2,745 28,249 138,121

– Small and medium size enterprises (SMEs) 60,256 2,427 24,318 5,982 7,819 21,562 122,364

– Business overdrafts 12,209 185 3,129 922 235 2,089 18,769

Financial investments available for sale – – – – – 196 196

Other assets – – – – – 2,949 2,949

As at 31 December 2008 93,130 79,986 33,544 38,393 10,799 83,799 339,651

As at 31 December 2007 88,091 92,721 32,952 25,324 10,976 66,407 316,471


56

Annual Report 2008

Geographic risk concentrations

Bosnia and OECD Non-OECD Total

Herzegovina countries countries

Loans and advances to banks – 28,741 13 28,754

Loans and advances to customers

– Overdrafts 911 – – 911

– Housing 16,014 – – 16,014

– Consumer 11,573 – – 11,573

– Very small business 138,121 – – 138,121

– Small and medium size enterprises (SMEs) 122,364 – – 122,364

– Business overdrafts 18,769 – – 18,769

Financial investments available for sale – – 196 196

Other assets 2,949 – – 2,949

As at 31 December 2008 310,701 28,741 209 339,651

As at 31 December 2007 310,449 5,573 449 316,471

In addition, the structure of the loan portfolio is regularly reviewed

within the Risk Department and Credit Risk Committee in order to

identify potential events which could have an impact on large areas

of the loan portfolio (common risk factors) and if necessary limit the

exposure toward certain sectors of the economy.

3.2 Market risk

The Bank takes on exposure to market risks, which is the risk that

the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market prices. Market risks arise

from open positions in interest rate, foreign currency and equity

products, all of which are exposed to general and specific market

movements and changes in the level of volatility of market rates

or prices such as interest rates, credit spreads, foreign exchange

rates and equity prices.

The Management Board sets limits and guidelines for monitoring

and mitigating of market risks, which is regularly monitored by Risk

Committees of the Bank.

3.3 Foreign exchange risk

The Bank is exposed to currency risk through transactions in foreign

currencies. Foreign currency exposure arises from credit, deposit-taking

and trading activities. The Management sets limits on

the level of exposure by currency and in total for overnight position,

which are monitored daily. The table below summarizes the Bank’s

exposure to foreign currency exchange rate risk at 31 December

2008. Included in the table are the Bank’s assets and liabilities at

carrying amounts categorized by currency.

Concentrations of currency risk of on- and off-balance sheet assets

and liabilities

The Bank had the following significant currency positions:

As at 31 December 2008 EUR USD BAM Other Total

Assets

Cash and balances with the Central bank 11,612 2,441 97,107 963 112,123

Loans and advances to banks 28,754 – – – 28,754

Loans and advances to customers 246,549 – 61,203 – 307,752

Financial investments available for sale 196 – – – 196

Property and equipment – – 11,333 – 11,333

Intangible assets – – 992 – 992

Deferred tax assets – – 47 – 47

Other assets 669 39 2,241 – 2,949

Total assets 287,780 2,480 172,923 963 464,146

Liabilities

Deposits from customers 176,364 2,463 156,764 – 335,591

Borrowings 63,110 – 2,552 – 65,662

Subordinated debt 16,081 – – – 16,081

Provisions – – 322 – 322

Other liabilities 689 – 1,011 – 1,700

Current income tax payable – – 155 – 155

Total liabilities 256,244 2,463 160,804 – 419,511

Net balance sheet position 31,536 17 12,119 963 44,635

Contingencies and commitments 1,782 884 18,637 – 21,303

The local currency (BAM) is pegged to EUR under a currency board

arrangement.

A 10% fall in currencies (other than EUR) against BAM, with other

variables held constant would result with a decrease of the result of

the year by BAM 96 thousand (2007: BAM 63 thousand).

A 10% rise in such currencies would result with an increase of the

result of the year of BAM 96 thousand (2007: BAM 63 thousand).


Financial Statements 57

As at 31 December 2007 EUR USD BAM Other Total

Assets

Cash and balances with the Central bank 7,757 982 86,085 634 95,458

Loans and advances to banks 4,314 1,518 – – 5,832

Loans and advances to customers 228,227 – 80,301 – 308,528

Financial investments available for sale 196 – – – 196

Property and equipment – – 10,945 – 10,945

Intangible assets – – 961 – 961

Deferred tax assets – – 26 – 26

Other assets 411 31 1,473 – 1,915

Total assets 240,905 2,531 179,791 634 423,861

Liabilities

Deposits from customers 136,666 2,421 140,780 – 279,867

Borrowings 86,141 – 2,122 – 88,263

Subordinated debt 16,095 – – – 16,095

Provisions – – 260 – 260

Other liabilities 226 – 1,128 – 1,354

Current income tax payable – – 374 – 374

Total liabilities 239,128 2,421 144,664 – 386,213

Net balance sheet position 1,777 110 35,127 634 37,648

Contingencies and commitments 2,163 722 14,888 – 17,773

3.4 Interest rate risk

The Bank’s operations are subject to the risk of interest rate fluctuations

to the extent that interest earning assets and interest

bearing liabilities mature at different time and different amounts.

As tools for analysis of interest rate risk, the following models are

used: simple gap analysis, modified duration analysis and income

gap analysis. These basic analysis tools are developed by the Risk

Department towards scenario analysis, which provides estimates

on how the changes in the interest rate structure may affect the

earnings and the economic value of the Bank.

Interest rate risk is managed principally through monitoring interest

rate gaps and by having pre-approved limits for repricing

bands.

Interest sensitivity of assets and liabilities

The table below summarizes the Bank’s exposure to interest rate

risks. Included in the table are the Bank’s assets and liabilities at

carrying amounts, categorized by the earlier of contractual repricing

or maturity dates.

As at 31 December 2008 Up to 1 – 3 3 – 12 1 – 5 Over Non-interest Total

1 month months months years 5 years bearing

Assets

Cash and balances with the Central Bank 86,540 – – – – 25,583 112,123

Loans and advances to banks 23,473 5,281 – – – – 28,754

Loans and advances to customers 32,822 27,917 104,517 131,452 11,044 – 307,752

Financial investments available for sale – – – – – 196 196

Property and equipment – – – – – 11,333 11,333

Intangible assets – – – – – 992 992

Deferred tax assets – – – – – 47 47

Other assets – – – – – 2,949 2,949

Total assets 142,835 33,198 104,517 131,452 11,044 41,100 464,146

Liabilities

Deposits from customers 9,340 28,502 96,824 109,797 1,532 89,596 335,591

Borrowings – 20,157 15,275 6,454 2,510 21,266 65,662

Subordinated debt – – – – 15,647 434 16,081

Provisions – – – – – 322 322

Other liabilities – – – – – 1,700 1,700

Current income tax payable – – – – – 155 155

Total liabilities 9,340 48,659 112,099 116,251 19,689 113,473 419,511

Balance sheet interest sensitivity gap 133,495 (15,461) (7,582) 15,201 (8,645) (72,373) 44,635


58

Annual Report 2008

As at 31 December 2007 Up to 1 – 3 3 – 12 1 – 5 Over Non-interest Total

1 month months months years 5 years bearing

Assets

Cash and balances with the Central Bank 77,356 – – – – 18,102 95,458

Loans and advances to banks 5,832 – – – – – 5,832

Loans and advances to customers 24,908 27,914 111,576 138,139 5,991 – 308,528

Financial investments available for sale – – – – – 196 196

Property and equipment – – – – – 10,945 10,945

Intangible assets – – – – – 961 961

Deferred tax assets – – – – – 26 26

Other assets – – – – – 1,915 1,915

Total assets 108,096 27,914 111,576 138,139 5,991 32,145 423,861

Liabilities

Deposits from customers 6,909 32,809 84,451 75,018 1,685 78,995 279,867

Borrowings – 3,685 8,400 51,665 2,086 22,427 88,263

Subordinated debt – – – – 15,647 448 16,095

Provisions – – – – – 260 260

Other liabilities – – – – – 1,354 1,354

Current income tax payable – – – – – 374 374

Total liabilities 6,909 36,494 92,851 126,683 19,418 103,858 386,213

Balance sheet interest sensitivity gap 101,187 (8,580) 18,725 11,456 (13,427) (71,713) 37,648

By calculating of income gap based on the above interest rate

sensitivity, at 31 December 2008, if interest rates at that date

had been 1% lower with all other variables held constant, result

for the year would have been BAM 586 thousand (2007: BAM 504

thousand) higher. Conversely, the same effect with opposite result

would have been in a case of 1% increase of interest rates.

The interest rate sensitivity analysis includes all variable interest

rate assets and liabilities and assumes that all short term fixed

rate assets and liabilities will be reinvested upon maturity.

3.5 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in

meeting obligations associated with its financial liabilities. The

Supervisory Board has approved Policy and Procedures for Liquidity

Management. The Bank manages liquidity risk by seeking to

apply the optimum combination of maturity and foreign currency

structure of the assets and liabilities.

Sources of liquidity are regularly reviewed by Treasury Department

and the ALCO Risk Committee of the Bank to maintain a wide diversification

by currency, geography, provider, product and term.

The Bank’s liquidity management process, as carried out within

the Bank and monitored by Treasury Department includes:

these are key periods for liquidity management. The starting point

for those projections is an analysis of the contractual maturity of

the financial liabilities and the expected collection date of the financial

assets.

Treasury Department also monitors unmatched medium-term assets,

the level and type of undrawn lending commitments, the usage

of overdraft facilities and the impact of contingent liabilities

such as standby letters of credit and guarantees.

The table below analyses the assets and liabilities of the Bank into

relevant maturity groupings based on the remaining period at the

balance sheet date to the contractual maturity date.

Other assets and liabilities which do not have contractual maturity

are classified into relevant maturity groupings in accordance with

the Bank’s plan.

• Day-to-day funding, managed by monitoring future cash flows

to ensure that requirements can be met. This includes replenishment

of funds as they mature or are borrowed by customers;

• Maintaining a portfolio of highly marketable assets that can

easily be liquidated as protection against any unforeseen interruption

to cash flow;

• Monitoring balance sheet liquidity ratios against internal and

regulatory requirements;

• Managing the concentration and profile of debt maturities.

Monitoring and reporting take the form of cash flow measurement

and projections for the next day, week and month respectively, as


Financial Statements 59

3.6 Maturities of assets and liabilities

As at 31 December 2008 Up to 1 – 3 3 – 12 1 – 5 Over 5 Total

1 month months months years years

Assets

Cash and balances with the Central Bank 112,123 – – – – 112,123

Loans and advances to banks 23,473 5,281 – – – 28,754

Loans and advances to customers 32,822 27,917 104,517 131,452 11,044 307,752

Financial investments available for sale 196 – – – – 196

Property and equipment – – – – 11,333 11,333

Intangible assets – – – – 992 992

Deferred tax assets 47 – – – – 47

Other assets 2,920 – – – 29 2,949

Total assets 171,581 33,198 104,517 131,452 23,398 464,146

Liabilities

Deposits from customers 98,936 28,502 96,824 109,797 1,532 335,591

Borrowings 32 14,929 10,995 37,196 2,510 65,662

Subordinated debt – – 434 – 15,647 16,081

Provisions 322 – – – – 322

Other liabilities 1,700 – – – – 1,700

Current income tax payable 155 – – – – 155

Total liabilities 101,145 43,431 108,253 146,993 19,689 419,511

Net liquidity gap 70,436 (10,233) (3,736) (15,541) 3,709 44,635

Contingencies and commitments 3,387 4,208 11,702 2,006 – 21,303

As at 31 December 2007 Up to 1 – 3 3 – 12 1 – 5 Over 5 Total

1 month months months years years

Assets

Cash and balances with the Central Bank 95,458 – – – – 95,458

Loans and advances to banks 5,832 – – – – 5,832

Loans and advances to customers 24,908 27,914 111,576 138,139 5,991 308,528

Financial investments available for sale 196 – – – – 196

Property and equipment – – – – 10,945 10,945

Intangible assets – – – – 961 961

Deferred tax assets 26 – – – – 26

Other assets 1,886 – – – 29 1,915

Total assets 128,306 27,914 111,576 138,139 17,926 423,861

Liabilities

Deposits from customers 84,308 33,000 85,042 75,827 1,690 279,867

Borrowings 9 4,483 20,363 61,322 2,086 88,263

Subordinated debt – – 448 – 15,647 16,095

Provisions 260 – – – – 260

Other liabilities 1,354 – – – – 1,354

Current income tax payable 374 – – – – 374

Total liabilities 86,305 37,483 105,853 137,149 19,423 386,213

Net liquidity gap 42,001 (9,569) 5,723 990 (1,497) 37,648

Contingencies and commitments 2,419 5,433 8,432 1,489 – 17,773

Off-balance sheet items maturity

(a) Loan commitments

The dates of the contractual amounts of the Bank’s off-balancesheet

financial instruments that commit it to extend credit to customers

and other facilities are summarized in the table below.

(b) Financial guarantees and letters of credits

Financial guarantees and letters of credits are also included in the

table below based on the earliest contractual maturity date.


60

Annual Report 2008

(c) Operating lease commitments

Where the Bank is the lessee, the future minimum lease payments

under non-cancellable operating leases are summarized in the table

below.

No later than 1 – 5 Over Total

1 year years 5 years

As at 31 December 2008

Loan commitments 11,970 – – 11,970

Financial guarantees and letter of credits 7,327 2,006 – 9,333

Operating lease commitments 40 2,246 19,555 21,841

Total 19,337 4,252 19,555 43,144

As at 31 December 2007

Loan commitments 10,157 – – 10,157

Financial guarantees and letter of credits 6,127 1,489 – 7,616

Operating lease commitments 43 2,177 14,836 17,056

Total 16,327 3,666 14,836 34,829

3.7. Fair values of financial assets and liabilities

The table below summarizes the carrying amounts and fair values

of those financial assets and liabilities not presented on the Bank’s

balance sheet at their fair value.

Carrying value

Fair value

2008 2007 2008 2007

Assets

Loans and advances to banks 28,754 5,832 28,754 5,832

Loans and advances to customers 307,752 308,528 305,668 305,768

Liabilities

Deposits from customers 335,591 279,867 337,729 281,790

Borrowings 65,662 88,263 60,947 81,175

Subordinated debt 16,081 16,095 14,279 14,931

Financial assets available for sale are carried at cost as they do not

have a quoted market price in an active market and their fair value

cannot be reliably measured.

(i) Loans and advances to banks

Loans and advances to banks include inter-bank placements.

The fair value of floating rate placements and overnight deposits

is their carrying amount. The estimated fair value of fixed interest

bearing deposits is based on discounted cash flows using prevailing

money-market interest rates for debts with similar credit risk

and remaining maturity.

(ii) Loans and advances to customers

The estimated fair values of loans reflect changes in credit status

since loans were made and changes in fixed rate loans. The carrying

value of loans with variable interest rate approximates their fair

value.

(iii) Deposits from customers, borrowings and subordinated debt

The estimated fair value of deposits with no stated maturity, which

includes non-interest-bearing deposits, is the amount repayable on

demand.

The estimated fair value of fixed interest-bearing deposits and

other borrowings not quoted in an active market is based on discounted

cash flows using interest rates for new debts with similar

remaining maturity.

The fair value of the term deposits at variable interest rates approximates

their carrying values as of the balance sheet date.


Financial Statements 61

3.8. Capital management

The Bank’s objectives when managing capital, which is a broader

concept than the ‘equity’ on the face of balance sheets, are:

• To comply with the capital requirements set by the regulators of

the banking market in local environment;

• To safeguard the Bank’s ability to continue as a going concern

so that it can continue to provide returns for shareholders and

benefits for other stakeholders; and

• To maintain a strong capital base to support the development of

its business.

Capital adequacy and the balance of capital are monitored regularly

by the ALCO and Bank’s Management Board, based on the relevant

internal acts and regulations prescribed by the supervisory authority

(Banking Agency of Federation of Bosnia and Herzegovina). The

required information and reports are submitted to the Banking

Agency on a quarterly basis.

The table below summarizes the composition of regulatory capital and

the capital adequacy ratio of the Bank for the years ended 31 December

2008 prepared in accordance with Banking Agency regulations.

(c) Regulatory requirements

The Federation of Bosnia and Herzegovina is entitled to carry out

regulatory inspections of the Bank’s operations and to request

changes to the carrying values of assets and liabilities, in accordance

with the underlying regulations.

5. Net interest income

2008 2007

Interest and similar income

Loans and advances to customers 55,475 49,630

Loans and advances to banks 735 300

Obligatory reserve with the Central Bank 1,693 822

57,903 50,752

Interest expense and similar charges

Current accounts and deposits

from customers (13,822) (8,982)

Borrowings and subordinated debt (5,355) (4,853)

(19,177) (13,835)

2008 2007

Bank’s net capital according to

Banking Agency regulations 63,431 55,197

Risk of Risk Weighted Assets

and Loan Equivalent 342,469 335,489

Weighted operational risk 2,948 –

Total weighted risk 345,417 335,489

Capital adequacy ratio 18.4% 16.5%

4. Critical accounting estimates and judgments

The Bank makes estimates and assumptions that affect the reported

amounts of assets and liabilities within the next financial year. Estimates

and judgments are continually evaluated and based on historical

experience and other factors, including expectations of future

events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advances

The Bank reviews its loan portfolios to assess impairment at least

on a quarterly basis. In determining whether an impairment loss

should be recorded in the income statement, the Bank makes judgments

as to whether there is any observable data indicating that

there is a measurable decrease in the estimated future cash flows

from a portfolio of loans before the decrease can be identified with

an individual loan in that portfolio. This evidence may include observable

data indicating that there has been an adverse change

in the payment status of borrowers in a Bank, or national or local

economic conditions that correlate with defaults on assets in the

Bank.

Management uses estimates based on historical loss experience for

assets with credit risk characteristics and objective evidence of impairment

similar to those in the portfolio when scheduling its future

cash flows. The methodology and assumptions used for estimating

both the amount and timing of future cash flows are reviewed regularly

to reduce any differences between loss estimates and actual

loss experience.

Assets accounted for at amortised cost are evaluated for impairment

on a basis described in note 2.10.

6. Net fee and commission income

2008 2007

Fee and commission income

Foreign payment transactions 1,059 921

Domestic payment transactions 1,102 858

Guarantees and letters of credit 386 338

Foreign exchange transactions 850 658

Western Union and card business 303 213

Accounts maintenance fees 418 151

Other payment transaction fees 581 414

Other fees and commissions 913 880

5,612 4,433

Fee and commission expense

Banks (275) (190)

Other (774) (643)

(1,049) (833)

7. Foreign exchange differences (net)

2008 2007

Positive foreign exchange differences 57,101 11,958

Negative foreign exchange differences (56,900) (11,790)

201 168

8. Operating expenses

2008 2007

Reimbursements from insurance 520 –

Other 606 219

1,126 219

(b) Taxation

The Bank provides for tax liabilities in accordance with the tax laws

of Federation of Bosnia and Herzegovina. Tax returns are subject to

the approval of the tax authorities who are entitled to carry out subsequent

inspections of taxpayers’ records.


62

Annual Report 2008

9. Other operating expenses

Reconciliation of the accounting profit and income tax expense

2008 2007

Personnel 19,228 16,882

Rent 3,419 2,977

Promotion and marketing 1,561 2,277

Depreciation and amortisation 3,734 2,678

Consulting services 920 1,153

Insurance premiums 2,814 1,787

Post and telecommunication services 842 737

Stationery 611 688

Maintenance of fixed assets and equipment 783 775

Other taxes and contribution 111 33

Utilities and electricity 973 789

Administrative, court and other legal fees 385 231

Transport 414 362

Other consumables 251 176

Small inventory write offs 165 229

Donations 39 66

ProCredit Group consulting services 952 1,073

Other 1,297 603

38,499 33,516

2008 2007

Profit/(loss) before tax (668) 2,899

Tax calculated at a tax rate

of 10% (2007:30%) (67) 870

Tax effects of items which

are not deductible:

– tax exempt income – (653)

– non-taxable income (7) (72)

– non-deductible expenses 157 203

Income tax expense for the year 83 348

The Bank’s tax liabilities are ascertained in tax statements prepared

by the Bank and might be a matter of subsequent inspection

and consequent adjustment by tax authorities in a five year period

after recognition. The Bank’s Management Board is not aware of

any circumstances, which may give rise to a potential material liability

in this respect.

12. Cash and balances with the Central Bank

Personnel expenses

2008 2007

Salaries and wages 10,299 8,634

Taxes and contributions 6,538 5,513

Other long-term employee benefits (Note 23) 56 137

Food allowances and transportation 1,685 1,400

Other 650 1,198

19,228 16,882

The number of persons employed by the Bank at the year end was

888 (2007: 831).

10. Impairment losses and provisions

2008 2007

Cash in hand 20,071 13,679

Current accounts with other banks 5,505 4,423

Balances with the Central Bank other

than obligatory reserve 27,630 23,158

Obligatory reserve with the Central Bank 58,917 54,198

112,123 95,458

The Central Bank determines the requirement for banks to hold obligatory

reserves in the form of amounts required to be deposited

with the Central Bank. The obligatory reserve requirement at 31 December

2008 amounted to 14% (2007: 18%) of time deposits and

borrowings. The obligatory reserve is maintained through the average

balance on the ordinary reserve account with the Central Bank.

The interest rate on the obligatory reserve is 1.0% (2007: 1.0%).

2008 2007

Loans to individuals (Note 14) 131 5

Loans to corporate entities (Note 14) 6,519 4,816

Other assets (Note 19) 129 32

Contingencies and commitments (Note 23) 6 (364)

6,785 4,489

11. Income tax expense

13. Loans and advances to banks

2008 2007

Placements with foreign banks 28,754 5,832

28,754 5,832

Current 28,754 5,832

Non-current – –

2008 2007

Current income tax charge 104 311

Net deferred tax (credit)/charge (Note 18) (21) 37

Total income tax expense recognised

in the income statement 83 348

Further information about deferred income tax is presented in Note

18. The official tax rate within the country is 10% (2007: 30%).

The tax on the bank’s profit before tax differs from the theoretical

amount that would arise using the local tax rate on the profit before

tax presented in the financial statements in accordance with IFRS.

14. Loans and advances to customers

2008 2007

Loans to individuals

– short term 7,710 10,477

– long term 194,322 206,093

202,032 216,570

Loans to corporate entities

– short term 17,659 12,504

– long term 98,875 87,971

116,534 100,475

Gross loans and advances to customers 318,566 317,045

Less: allowance for impairment (10,814) (8,517)

Net loans and advances to customers 307,752 308,528

Current (net) 165,256 164,398

Non-current (net) 142,496 144,130


Financial Statements 63

Loans and advances to customers are presented including accrued

interest in the amount of BAM 2,466 thousand (2007: BAM 2,461

thousand), and net of deferred fees in the amount of BAM 2,852

thousand (2007: BAM 2,809 thousand).

The movement in impairment allowance for loans and advances to

customers is as follows:

Individuals

Overdraft Housing Others Total

Balance at 1 January 2008 37 235 134 406

Net charge/(release) to

income statement (Note 10) (11) 22 120 131

Amounts written off – 20 (21) (1)

Balance at

31 December 2008 26 277 233 536

Corporate entities

Very small SMEs Others Total

business

Balance at 1 January 2008 5,792 2,078 241 8,111

Net charge to income

statement (Note 10) 5,563 688 268 6,519

Amounts written off (3,928) (324) (75) (4,327)

Unwinding of discount – (25) – (25)

Balance at

31 December 2008 7,427 2,417 434 10,278

Individuals

Overdraft Housing Others Total

Balance at 1 January 2007 6 313 96 415

Net charge/(release) to

income statement (Note 10) 31 (73) 47 5

Amounts written off – (5) (9) (14)

Balance at

31 December 2007 37 235 134 406

Corporate entities

Very small SMEs Others Total

business

Balance at 1 January 2007 2,743 1,687 198 4,628

Net charge to income

statement (Note 10) 3,912 813 91 4,816

Amounts written off (863) (388) (48) (1,299)

Unwinding of discount – (34) – (34)

Balance at

31 December 2007 5,792 2,078 241 8,111

15. Financial investments available for sale

2008 2007

Investment in ProCredit Regional

Academy EE LLC Skopje 196 196

196 196

As at December 17, 2007 the Bank signed an Agreement for establishment

of ProCredit Regional Academy EE LLC Skopje, together

with 7 other banks from the ProCredit banking network.

Financial assets available for sale are carried at cost as they do not

have a quoted market price in an active market and their fair value

cannot be reliably measured.

16. Property and equipment

The cost of property and equipment and related depreciation for

2008 is presented below:

2008 Buildings Leasehold Furniture & Assets in course Total

improvements equipment of construction

Cost

Balance at 1 January 2008 448 3,959 11,874 1,671 17,952

Additions 137 451 2,296 845 3,729

Transfers 142 138 1,170 (1,450) –

Disposals and write off – (116) (191) – (307)

Balance at 31 December 2008 727 4,432 15,149 1,066 21,374

Accumulated depreciation

Balance at 1 January 2008 256 1,300 5,451 – 7,007

Charge for the year 32 585 2,704 – 3,321

Disposals and write off – (107) (180) – (287)

Balance at 31 December 2008 288 1,778 7,975 – 10,041

Carrying amount at

31 December 2008 439 2,654 7,174 1,066 11,333

1 January 2008 192 2,659 6,423 1,671 10,945


64

Annual Report 2008

In 2008, depreciation rate for buildings has changed from 10% to

2.5%. Had the depreciation rate not changed, respective depreciation

charge in 2008 would have been higher for 39 thousand.

The cost of property and equipment and related depreciation for

2007 is presented below:

2007 Buildings Leasehold Furniture & Assets in course Total

improvements equipment of construction

Cost

Balance at 1 January 2007 348 2,767 8,182 1,642 12,939

Additions 100 999 2,916 1,415 5,430

Transfers – 193 1,193 (1,386) –

Disposals and write off – – (417) – (417)

Balance at 31 December 2007 448 3,959 11,874 1,671 17,952

Accumulated depreciation

Balance at 1 January 2007 156 828 4,046 – 5,030

Charge for the year 100 472 1,808 – 2,380

Disposals and write off – – (403) – (403)

Balance at 31 December 2007 256 1,300 5,451 – 7,007

Carrying amount at

31 December 2007 192 2,659 6,423 1,671 10,945

1 January 2007 192 1,939 4,136 1,642 7,909

17. Intangible assets

18. Deferred income tax assets

2008 Software Licenses and Total

other intangible

assets

Cost

Balance at 1 January 2008 175 1,431 1,606

Additions 87 357 444

Balance at

31 December 2008 262 1,788 2,050

Accumulated amortisation

Balance at 1 January 2008 92 553 645

Charge for the year 40 373 413

Balance at

31 December 2008 132 926 1,058

Carrying amount at

31 December 2008 130 862 992

1 January 2008 83 878 961

Deferred income taxes are calculated on all temporary differences

under the liability method using an effective tax rate of 10%

(2007: 30%).

Movement in deferred tax assets

Loan Other Total

impairment items

Balance at 1 January 2008 26 – 26

Origination and reversal of

temporary differences 88 7 95

Reduction in tax rate (74) – (74)

Balance at 31 December 2008 40 7 47

Balance at 1 January 2007 66 (3) 63

(Decrease)/increase in

deferred tax asset (40) 3 (37)

Balance at 31 December 2007 26 – 26

2007 Software Licenses and Total

other intangible

assets

Cost

Balance at 1 January 2007 113 872 985

Additions 62 559 621

Balance at

31 December 2007 175 1,431 1,606

Accumulated amortisation

Balance at 1 January 2007 66 281 347

Charge for the year 26 272 298

Balance at

31 December 2007 92 553 645

19. Other assets

2008 2007

Prepaid rent 816 5

Prepaid income tax 855 1,091

Advance payments 611 278

Receivables from card operators 290 415

Other assets 486 164

Impairment allowance (109) (38)

2,949 1,915

Current (net) 2,920 1,886

Non-current (net) 29 29

Carrying amount at

31 December 2007 83 878 961

1 January 2007 47 591 638


Financial Statements 65

Movement in allowances for other assets impairment are as follows:

2008 2007

Balance at 1 January 38 15

Net charge to income statement (Note 10) 129 32

Amounts written off (58) (9)

Balance at 31 December 109 38

20. Deposits from customers

2008 2007

Corporate

– Current accounts and

demand deposits 45,080 39,565

– Term deposits 135,454 111,662

Individual customers

– Current accounts and

demand deposits 44,563 39,279

– Term deposits 110,494 89,361

335,591 279,867

Current 223,773 202,350

Non-current 111,818 77,517

21. Borrowings

2008 2007

The Commission of

the European Union 20,569 20,829

Royal Ministry of

Foreign Affairs of Norway – 605

Kreditanstalt fur Wiederaufbau 8,279 10,349

The European Fund for

Southeast Europe 19,886 24,830

Commerzbank 10,996 10,990

European Bank for

Reconstruction and Development 2,370 7,111

United States Agency for

International Development – 397

ProCredit Holding 23 10,043

International Fund for

Agricultural Development 2,552 2,122

Partners for Development 987 987

65,662 88,263

22. Subordinated debt

2008 2007

Subordinated debt 16,081 16,095

16,081 16,095

Current 434 448

Non-current 15,647 15,647

Subordinated loan agreement has been signed between ProCredit

Bank d.d. Sarajevo and ProCredit Holding AG on 31 August 2005.

The loan bears interest of 8.9 % p.a. The loan shall expire on 7 September

2015 and is repayable upon maturity.

Additional Subordinated loan agreement has been signed between

ProCredit Bank d.d. Sarajevo and ProCredit Holding AG on 26 September

2007. The loan bears interest of 10.51 % p.a. The loan shall

expire on 26 September 2022 and is repayable upon maturity.

The Bank has not had any defaults of principal, interest or other

breaches with respect to its subordinated debt.

23. Provisions

2008 2007

Provisions for contingencies

and commitments 129 123

Provisions for other long-term

employee benefits 193 137

322 260

Movement in provisions for contingencies and commitments are as

follows:

2008 2007

Balance at 1 January 123 487

Net release/(charge) to

income statement (Note 10) 6 (364)

Balance at 31 December 129 123

Movement in provisions for other long-term employee benefits are

as follows:

2008 2007

Balance at 1 January 137 –

Net charge to income statement (Note 9) 56 137

Balance at 31 December 193 137

24. Other liabilities

Current 25,914 24,855

Non-current 39,748 63,408

The Bank obtains long term financing from institutions sponsored

by European Union and the government of the Republic of Norway

at interest rates at which such institutions ordinarily lend in Bosnia

and Herzegovina and other emerging markets and which may be

lower than rates at which the Bank could source the funds from other

local lenders. As a result of such financing, the Bank advances

funds to specific customers at favourable rates.

The Bank has not had any defaults of principal, interest or other

breaches with respect to its borrowings.

As of 31 December 2008 Bank has signed contract with ProCredit

Holding AG in amount of EUR 15 million, which has not been drawn

as yet.

2008 2007

Fees and interest received in advance 279 350

Payables to suppliers 217 336

Accrued expenses 851 274

Other liabilities 353 394

1,700 1,354

25. Share capital

Ordinary shares

2008 2007

On issue at 1 January 25,679 15,679

New shares issued 9,779 10,000

At 31 December 35,458 25,679


66

Annual Report 2008

In number of shares Ordinary shares

2008 2007

On issue at 1 January 2,567,862 1,567,862

New shares issued 977,915 1,000,000

At 31 December 3,545,777 2,567,862

The Bank’s share capital consists of 3,545,777 ordinary shares. All

shares have a par value of BAM 10 and are fully paid.

Share premium represents the excess of paid-in amount over the

nominal value of the issued shares.

Statutory reserves represent additional capital set aside by appropriation

from net income. These reserves are used to cover losses

and are not distributable.

The shareholder structure of the Bank was as follows:

Name

% of voting share capital

2008 2007

ProCredit Holding AG 92.3 92.3

Commerzbank AG 7.7 7.7

100% 100%

26. Cash and cash equivalents

2008 2007

Cash in hand (note 12) 20,071 13,679

Current accounts with

other banks (note 12) 5,505 4,423

Balances with central bank other

than obligatory reserve (note 12) 27,630 23,158

53,206 41,260

27. Commitments and contingencies

The following table indicates the contractual amounts of the Bank’s

contingencies and commitments by category:

2008 2007

Guarantees

– in domestic currency 6,667 4,731

– in foreign currency 1,889 2,394

Letter of credits 777 491

Undrawn lending commitments 12,099 10,280

21,432 17,896

Less: Provision for contingencies

and commitments (note 23) (129) (123)

28. Related party transactions

21,303 17,773

Parties are considered to be related if one party has the ability to

control the other party or exercise significant influence over the

other party in making financial or operational decisions. A number

of banking transactions are entered into with related parties in the

normal course of business. These include loans, deposits and borrowings.

These transactions were carried out on commercial terms and at

market rates. The volumes of related party transactions, outstanding

balances at the year-end, are as follows:

Related party transactions for 2008

ProCredit Bank’s Bank’s management Total

Holding management close family members

Loans

Loans outstanding at 1 January – 184 – 184

Loans issued during the year – 195 3 198

Loan repayments during the year – (52) – (52)

Loans outstanding at 31 December – 327 3 330

Interest income earned – 18 – 18

Impairment losses for loans – 1 – 1

Deposits

Balance at beginning of year – 146 3 149

Deposits received during the year – 684 42 726

Deposits repaid during the year – (716) (35) (751)

Balance at 31 December – 114 10 124

Interest expenses on deposits – 5 – 5

Borrowings

Loans outstanding at 1 January 26,138 – – 26,138

Loans issued during the year (19,836) – – (19,836)

Loans repayments during the year 9,779 – – 9,779

Balance at 31 December 16,081 – – 16,081

Interest expenses on borrowings 2,093 – – 2,093

Transfers under license and finance agreements 1 771 – – 771

1

Transfers under license and finance agreements related to management

fee for providing management services and support.


Financial Statements 67

Related party transactions for 2007

ProCredit Bank’s Bank’s management Total

Holding management close family members

Loans

Loans outstanding at 1 January – 164 – 164

Loans issued during the year – 57 – 57

Loan repayments during the year – (37) – (37)

Loans outstanding at 31 December – 184 – 184

Interest income earned – 12 – 12

Impairment losses for loans – – – –

Deposits

Balance at beginning of year – 67 27 94

Deposits received during the year 6,845 881 66 7,792

Deposits repaid during the year (6,845) (802) (90) (7,737)

Balance at 31 December – 146 3 149

Interest expenses on deposits 27 4 – 31

Borrowings

Loans outstanding at 1 January 19,099 – – 19,099

Loans issued during the year 7,039 – – 7,039

Loans repayments during the year – – – –

Balance at 31 December 26,138 – – 26,138

Interest expenses on borrowings 1,652 – – 1,652

Transfers under license and finance agreements 1 65 – – 65

1

Transfers under license and finance agreements related to management

fee for providing management services and support.

Key management compensation

2008 2007

Salaries and other

short-term benefits 253 275

Other long-term employee benefits 5 3

258 278

Key management includes Management Board members and other

executive management and their close family members.


68

Annual Report 2008

Additional information

The address of its registered office is as follows:

Head office: Sarajevo

Address: Emerika Bluma 8

Bosnia and Herzegovina

Branch offices:

Sarajevo

Address: Muvekita 1

Ilidža

Address: Ibrahima Ljubovića 20

Bihać

Address: Safvet-bega Bašagića 18

Tuzla

Address: Džafer Mahala 29

Mostar

Address: Lacina 2

Banja Luka

Address: Kralja Petra I Karađorđevića

Brčko

Address: R. Dz. Čauševića 19

Bijeljina

Address: Karađorđeva 6

Travnik

Address: Bosanska 133

Zenica

Address: Maršala Tita bb

Outlets:

Sarajevo / outlet;

Address: Emerika Bluma 8

Novo Sarajevo / outlet;

Address: Topal Osman-paše 22

Otoka / outlet;

Address: Gradaćačka 1

Ciglane / outlet;

Address: Husrefa Redžića 1

Sokolac / outlet;

Address: Glasinačka 1

Ilidža / outlet;

Address: Hrasnička cesta bb

Cazin / outlet;

Address: Stara Čaršija

Tuzla / outlet;

Address:Turalibegova 48

Gračanica / outlet;

Address: H. K. Gradaščevića bb

Posušje / outlet;

Address: Fra Grge Martića bb

Mostar / outlet;

Address: Biskupa Čule bb

Trebinje / outlet;

Address: Kralja Petra I Oslobodioca bb

Banja Luka / outlet;

Address: Brace Potkonjaka 2

Gradačac / outlet;

Address: H. K. Gradaščevića bb

Travnik / outlet;

Address: RK Borac – Bosanska bb

Zavidovići / outlet;

Address: 8. Marta bb

Prijedor / outlet;

Address: Svetosavska bb

Doboj / outlet;

Address: Svetog Save 95

Bijeljina / outlet;

Address:TrgKraljaPetraI Karađorđevića 1

Konjic / outlet;

Address: Trg državnosti bb

Pale / outlet;

Address: Milana Simovića bb

Zvornik / outlet;

Address: Svetog Save 1

Brčko / outlet;

Address: Bosne Srebrene 22

Nova Bila / outlet;

Address: Nova Bila bb

Živinice / outlet;

Address: Alije Izetbegovića 10

Kiseljak / outlet;

Address: Josipa bana Jelačića bb

Srebrenik / outlet;

Address: Maršala Tita 40

Laktaši / outlet;

Address: Karađorđeva bb

Gradiška / outlet;

Address: Kozarskih brigada 26

Ljubuški / outlet;

Address: Kralja Zvonimira bb

Livno / outlet;

Address: Župana Želimira bb/Sinjska bb

Šamac / outlet;

Address:Kralja Aleksandra Karađorđevića 65

Bugojno / outlet;

Address: Kulina Bana 18

Bosanska Krupa / outlet;

Address: Sokak bb

Velika Kladuša / outlet;

Address: Kulište 2

Employees

As of 31 December 2008 ProCredit Bank d.d., Sarajevo employed

888 persons (2007: 831 persons).

Directors

The names of the Directors of the Bank serving during the financial

year and to the date of this report are as follows:

Director

Peter Moelders

Executive Director of Accounting and controlling sector

Sabina Mujanović

Executive Director of Treasury, retail and client services sector

Edin Hrnjica

Executive Director of General services sector

Vedran Hadžiahmetović

Executive Director of Corporate sector

Senad Redžić

Executive Director of Risk and Compliance sector

Radomir Savić


Financial Statements 69


70

Annual Report 2008

Contact Addresses

Head Office

Branches

Sarajevo

Emerika Bluma 8

Tel. +387 33 250 950

Fax +387 33 250 971

www.procreditbank.ba

info@procreditbank.ba

Banja Luka

Kralja Petra I Karađorđevića 91

Tel. +387 51 229 340 / 343

Fax +387 51 229 373

Banja Luka

Braće Potkonjaka 2

Tel. +387 51 431 530 / 430 000

Fax +387 51 431 537

Doboj

Svetog Save 95

Tel. +387 53 206 290

Fax +387 53 206 292

Gračanica

Alije Izetbegovića 23

Tel. +387 35 700 670

Fax +387 35 700 672

Bihać

Safvet-bega Bašagića 18

Tel. +387 37 313 203

Fax +387 37 319 121

Gradačac

H.K. Gradaščevića bb

Tel. +387 35 821 715

Fax +387 35 821 727

Bijeljina

Karađorđeva 6 / Atinska 1

Tel. + 387 55 220 980 / 225 955

Fax + 387 55 220 980

Gradiška

Kozarskih brigada 26

Tel. +387 51 826 600

Fax +387 51 826 606

Bijeljina

Trg Kralja Petra I Karađorđevića 1

Tel. + 387 55 224 541

Fax + 387 55 224 540

Ilidža

Ibrahima Ljubovića 20

Tel. +387 33 761 580 / 622 869

Fax +387 33 761 681

Bosanska Krupa

Sokak bb

Tel. +387 37 476 800

Fax +387 37 476 805

Ilidža

Hrasnička cesta 4

Tel. +387 33 771 130 / 137

Fax +387 33 771 131 / 132

Brčko

R.DŽ. Čauševića 19

Tel. +387 49 216 099

Fax +387 49 233 410

Kiseljak

Josipa bana Jelačića bb

Tel. +387 30 877 600

Fax +387 30 877 602

Brčko

Bosne Srebrene 22

Tel. +387 49 231 960

Fax +387 49 231 966

Konjic

Trg državnosti bb

Tel. +387 36 712 400

Fax +387 36 712 409

Bugojno

Kulina Bana br. 18

Tel. +387 30 259 520 / 259 524

Fax +387 30 259 529

Kovačići (Sarajevo)

Emerika Bluma 8

Tel. +387 33 250 950

Fax +387 30 253 991

Cazin

ZC “Stara čaršija”

Bošnjačkih šehida 1

Tel. +387 37 539 116 / 117

Fax +387 37 511 693

Ciglane (Sarajevo)

Husrefa Redžića 1

Tel. +387 33 554 955 / 995

Fax +387 33 554 996

Laktaši

Karađorđeva bb

Tel. +387 51 535 290

Fax +387 51 535 291

Livno

Želimira Župana bb / Sinjska bb

Tel. +387 34 208 280

Fax +387 34 208 288


Contact Addresses 71

Ljubuški

Kralja Zvonimira bb

Tel. +387 39 835 720

Fax +387 39 835 722

Sokolac

Glasinačka 1

Tel. +387 57 400 310

Fax +387 57 400 312

Zvornik

Svetog Save 1

Tel. +387 56 232 270

Fax +387 56 232 274

Mostar

Biskupa Čule bb

Tel. +387 36 449 720

Fax +387 36 449 729

Srebrenik

Maršala Tita 40

Tel. +387 35 646 150

Fax +387 35 646 151

Mostar

Braće Fejića bb

Tel. +387 36 502 050

Fax +387 36 502 051

Nova Bila

Nova Bila bb

Tel. +387 30 708 740 / 741

Fax +387 30 708 743

Novo Sarajevo

Topal Osman paše 26

Tel. +387 33 710 705

Fax +387 33 717 497

Kreditni Odiel

Topal Osman paše 32b

Tel. +387 33 614 401

Fax +387 33 721 149

Otoka (Sarajevo)

TC Otoka - Merkur

Gradačačka 1

Tel. +387 33 716 485 / 486

Fax +387 33 716 487

Šamac

Kralja Aleksandra

Karađorđevića 65

Tel. +387 54 621 590

Fax +387 54 621 590

Travnik

Bosanska bb

Tel. +387 30 510 510 / 512

Fax +387 30 510 522

Trebinje

Kralja Petra I Oslobodioca 33

Tel. +387 59 274 160

Fax +387 59 274 161

Tuzla

Džafer Mahala 29

Tel. +387 35 301 200

Fax +387 35 258 340

Tuzla

Turalibegova 48

Tel. +387 35 319 800

Fax +387 35 319 800

Pale

Milana Simovića bb

Tel. +387 57 202 140

Fax +387 57 202 181

Velika Kladuša

Kulište 2

Tel. +387 37 776 510

Fax +387 37 776 518

Posušje

Fra Grge Martića bb

Tel. +387 39 685 020

Fax +387 39 685 021

Zavidovići

8. Marta bb

Tel. +387 32 868 530

Fax +387 32 868 531

Prijedor

Svetosavska 12

Tel. +387 52 243 666

Fax +387 52 243 635

Zenica

Ugao Maršala Tita i Islambegovića put

Tel. +387 32 449 960 / 961

Fax +387 32 449 964

Sarajevo

Muvekita 1

Tel. +387 33 561 970

Fax +387 33 561 978

Živinice

Alije Izetbegovića 10

Tel. +387 35 743 150

Fax +387 35 743155

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