Balkans Need Legal Reforms to Boost Economies, IMF Says

BELGRADE/SARAJEVO (Reuters) - Balkan nations need to develop a legal framework for dealing with bad loans, speed up judicial reforms and improve bankruptcy and insolvency laws to improve their economic prospects, the International Monetary Fund said in report on Monday.

The report on six western Balkan nations - Albania, Bosnia, Kosovo, Montenegro, Macedonia and Serbia - found their banking systems were plagued by lack of funding, a high level of bad loans and poor bankruptcy procedures. Those drawbacks have slowed the growth of lending at their banks, it said.

"Sound institutions and a sound judiciary are essentially the source of all business transactions and economy," Jorg Decressin, the IMF European Department Deputy Director, said at the report presentation in the Bosnian capital, Sarajevo.

External bank funding rose by more than 500 percent before 2008, pushing economic growth in the six countries, the IMF said in a chapter of its European outlook. During that period, 70 to 95 percent of banking assets in the various countries were controlled by foreign banks, mostly based in the European Union.

But eight years after the world financial crisis broke, foreign banks still see limited prospects in the region, which has prompted the local banks to curb funding from abroad and rely on self-funding, the IMF report said.

Return on equity fell 10 to 35 percentage points during the crisis and still has not recovered to pre-crisis levels. In addition, a high percentage of non-performing loans (NPL) in most of the countries continues to hurt profitability.

"Only if you have a sound judiciary can you have contracts, only if you have contracts can you have exchanges of goods or exchanges of services or landing or borrowing money which is essential to keep economy going," Decressin said.

"Weak judiciaries make banks weary of lending for fear that debts will not be recovered," the IMF said in its report.

They also need to sort out property rights, since uncertainty means a range of asserts cannot be easily collateralized.

In addition those constraints, most of countries have too many banks. For example, Serbia, the biggest of the six, has 30 separate banking chains.

To expand the funding base and help banks grow, the countries could develop local capital markets where banks could issue corporate bonds, the report said.

Setting up private-sector pension funds and insurance companies would help create demand for bank bonds and could more generally spur domestic saving, the IMF said in the report.

Despite healthy economic growth rates - exceeding 3 percent at the moment - the region is lagging behind its European peers. Incomes in the region are 30 percent of those in the euro area.

"The slower pace of income convergence is a cause of concern," said Decressin. "That's why we are pushing ... to accelerate the income convergence through improvements in institutions and judiciary."

The reform of judiciary is vital for membership of the European Union, which all the Balkan countries want to join. But despite some progress over the past five years, reforms have stalled across the region.

(Reporting by Ivana Sekularac in Belgrade and Maja Zuvela in Sarajevo; Editing by Larry King)

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