02 January 2007

The wild frontier of European securities

By Eric Jansson
Published by Financial Times, 20 December 2006

Ahmed Hodzic and FIMA International, the Sarajevo stock brokerage he runs, operate on the wild frontier of emerging Europe’s new securities markets.

To visit FIMA’s offices, one must leave the cozy eastern end of the Bosnian capital, the zone where the big yellow Holiday Inn and the twin glass towers of the UNITIC office try to offer visiting foreign businesspeople a sensation of being somewhere like home.

The taxi pulls up at a concrete apartment block riddled with shrapnel splashes and bullet holes. Dreary shops occupy the street level. In a window above a hairdresser, a paper sign reads “FIMA”, indicating that the company’s entrance is around the other side.

Though a back passage and up a dim flight of stairs one finds Mr Hodzic and his assembled brokers, attending to telephones and computer screens. Market demand imposes a sober discipline in the modest office. Mr Hodzic checks his watch and explains that a surge in trading is anticipated in half an hour.

Perched in this battered apartment block, FIMA International claims to handle a third of total turnover on the five-year-old Sarajevo Stock Exchange.

By its appearance, the local brokerage firm is still a world away even from Croatia, where FIMA International’s parent company, FIMA Holding, is based.

But Mr Hodzic is counting on the emergence of a bigger, livelier market for Bosnian securities, having witnessed similar developments elsewhere in the region. “Our people still do not believe in markets like the Croatians or the Slovenes now do, having seen what happens when markets really take off. But they should, and I hope they will,” he says.

Growing demand is evident. Most of the business after the Sarajevo exchange’s opening involved domestic trades of publicly-issued funds, akin to privatisation vouchers. Today some 90 per cent of FIMA International’s clients are foreign. Many but not all come from wealthier Balkan economies, Mr Hodzic says.

This influx has helped push the SASX-10, an index of 10 leading Sarajevo-listed stocks, up 70 per cent from January to early December, despite lacklustre performance in the first half of this year.

Brokers in emerging markets expect big fluctuations. The recent strong gains do not eliminate concerns expressed by Mr Hodzic and other securities market experts that growth is artificially restrained by Bosnia’s restrictive trading rules and by a lack of transparency on the Sarajevo exchange.

Outdated law is the fundamental problem. Sarajevo is located in the Federation, the post-war “entity” in Bosnia-Herzegovina populated predominantly by Bosnjak-Muslims and ethnic Croats, where a new draft law on securities has been stuck in parliamentary procedure for a year.

The current law dates back to before the Sarajevo exchange existed. The result is a complicated mismatch between legislative theory and market realities, with regulatory institutions ill-equipped to carry out their duties and traders left to improvise. Neither brokers nor exchange officials are satisfied, yet together they have failed to persuade legislators to move faster.

“We constantly apply pressure, but we don’t have results,” Mr Hodzic says. Despite growth in demand, “investors have taken out a lot of money and gone to other markets such as Montenegro”.

Growth is also restrained by the division of the country’s securities markets along post-war entity lines. The country’s other, Serb-dominated, entity Republika Srpska, is home to a second, smaller exchange in Banja Luka. Laws prohibit a broker based in one entity from trading securities on the exchange in the other entity. Everyone but the country’s most hard-line ethnic politicians wants this changed.

The Serb sub-state has taken the first step, offering to open its market to Federation brokers if lawmakers in Sarajevo reciprocate. So far there is no deal, but chief executives at both exchanges are agitating for openness.

Jasna Zrilic, director of Broker Nova, the biggest broker in Banja Luka, predicts eventual market unification. “I think that the Sarajevo Stock Exchange and the Banja Luka Stock Exchange will be one in the future. It’s only natural. They are both so small,” she says.

One reason they are small is the underdevelopment of Bosnia’s bond market, still in its earliest infancy amid predictable political friction. For now, company shares and investment funds are the only products on offer.

Kemal Kozaric, governor of the country’s central bank, has dropped his previous cautious opposition to the issuance of securities by the central state. “There is no reason for Bosnia not to go ahead and issue state securities. I have been preaching so much on this point at conferences that my chest hurts from all the effort,” he says.

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