The Republic of Macedonia became an independent currency area at the end of April 1992, when its own currency, the denar, was issued. On the day of economic and monetary independence there were five commercial banks, two of which had an oligopolistic position. The largest bank had a market share of nearly 65 per cent of the total banks' assets. In order to change such a banking structure, as well as to increase the quality of banking services, the National Bank of the Republic of Macedonia (the Central Bank) supported the establishment of new banks requiring a very low amount of regulatory capital (core capital) for establishing a bank. This resulted in the establishment of 13 new banks in the period May 1992 - May 1993. Thus, at the end of June 1993, the total number of banks was 18.

However, because of the minimal capital structure (the average size of the share capital of newly established banks was 8.5 million denar, or US$ 0.5 million), the newly established banks did not break the monopolistic structure of Macedonian banking. Their share in the total domestic assets at the end of 1993 was 8 per cent. On the contrary, small dwarfish banks with a scope of operations that did not guarantee their efficient and profitable operation were created. For that reason, later on in 1994, two of them went bankrupt and one was transformed into a saving house. The increased competition and the burden of the bad loans brought two of the old banks, one of them the second largest, to bankruptcy.

By enacting the Banks and Saving Houses Act in May 1993, the National Bank of Macedonia lost its right to determine the level of regulatory capital for establishing a bank. It was legally stipulated that:

• Deutsche Mark 3 million in denar countervalue for establishing a bank (only for domestic operations);
• and Deutsche Mark 9 million in denar countervalue for establishing a full fledge bank with authorisation for external capital operations.

According to the provisions of the Act, banks should be the spinal column of the new financial system and of universal type. Besides that, existence of saving houses was enacted. The minimum capital for establishing a saving house was determined according to the amount of DEM, 150,000 in denar countervalue. Their role is to collect and allocate household savings.

With respect to the new institutional regulation, 8 new banks and one overseas branch was established. Of these, 5 were created by splitting the largest bank in the process of its rehabilitation. In addition, 30 saving houses were established, of which one was created by transforming a newly established bank into a saving house.

In April 1996 the amendments to the Banks and Saving Houses Act were adopted. The minimum level of share capital for a bank was increased to:

• Deutsche Mark 7 million in denar countervalue for establishing a bank only for domestic operations;
• and Deutsche Mark 21 million in denar countervalue for establishing a full fledge bank with authorisation for external capital operations.

By the end of December 1997 the financial sector of Macedonia comprised of banks, saving houses, insurance companies, a Deposit Insurance Fund, a Stock Exchange and a Money Market Broker. The banking system consisted of 21 universal banks and 1 foreign branch bank, of which 19 have a full fledged license and 2 were licensed only for domestic operations. The majority of the banks are located in Skopje, the capital of the Republic of Macedonia. The unequal regional distribution of banks is alleviated through bank branches, offices and bank business units dispersed throughout the country. The total gross bank capital at the end of November 1997 was 11,453 million denar or 370 million DEM, while at the end of June 1997 the amount was 11.197 million denar, or 420 million DEM (according to the NBRM average exchange rate). The average share capital per bank is 520 million denar or 16,8 million DEM.

From the total number of banks operating in Macedonia, half of these have mixed capital and the remaining 10 banks are fully owned by domestic shareholders. The countries of foreign bank shareholders are: Slovenia, Austria, Bulgaria, Russia, Croatia and Germany. In 1996 the European Bank for Reconstruction and Development (EBRD) became the shareholder of one of the largest banks in Macedonia. In addition, during 1997 the negotiations for privatisation of Stopanska banka A.D. Skopje, whose total assets are 38 per cent of the entire financial system, had reached the final phase, due to the entrance of the strategic investor (Die Erste, EBRD and IFC).

Saving houses represent other banking institutions in Macedonia. They are small financial institutions which collect savings deposits from households, to extend credits directly to households or indirectly through banks to the enterprises sector. Without bank guarantees, saving houses can only extend credits to enterprises to 30 per cent of their capital. There were 19 saving houses at the end of December 1997. Their regional distribution was more equal than the distribution of the commercial banks. Most of the saving houses are located in the capital of the country (Skopje) and the rest are dispersed in other cities. At the end of November 1997, the total gross capital of saving houses was 252 million denar (8.1 million DEM), while at the end of June 1997 the amount was 236 million denar (8.8 million DEM).

The participation of the banks in the total financial potential is 98,5 per cent and the participation of the saving houses is 1.5 per cent.

Non-bank financial institutions are financial institutions that do not accept deposits. This group consists of insurance companies (8), a Deposit Insurance Fund (1), a Stock Exchange (1) and a Money Market Broker (1).

The Deposit Insurance Fund was established at the end of 1996. Its purpose is to compensate depositors of banks and saving houses in case some of them go bankrupt; to build confidence; and to prevent runs on banks. In order not to undermine competition among financial institutions and to prevent spread of moral hazard, the coverage ratio of the savings deposits of households is 75 per cent. The Fund is a shareholding company and all banks and saving houses (only those which were assessed by the Central Bank as sound) are shareholders.

Established in March 1996, the Macedonian Stock Exchange is an emerging one. As banks are of universal type, they are the main participants at the Stock Exchange. In the period March 28 1996 - December 31 1997, 103 securities were offered for trading (100 stocks and 3 securities), out of which 23 have been subject to substantial trade. As for any emerging market, the total turnover in this period was modest and amounted to DEM 37,45 million. Nevertheless, its volume is expected to increase significantly in the near future, when shares of well-rated enterprises will be offered for trading. However, the Stock Exchange enables market valuation of enterprises which are on the trading list, thus providing clear signals for potential domestic and foreign investors.

In Macedonia the two-tier banking system has existed since 1964, providing for a long tradition of money market operations. However, due to the easy and unlimited access of the commercial banks to the Central Bank refinancing facilities in the economic system of associated labour, this market was underdeveloped until 1993. After the monetary reforms and the introduction of market determined interest rates for all refinancing facilities of the Central Bank, the volume of trading among financial institutions has been strongly enhanced. As a consequence, the enlarged number of banks and saving houses has developed money market brokers that have been intermediating in the process of interbank trading. Until November 12 1997, the Central Bank was intermediate among financial institutions at the money market, which, at that time, was at the National Bank of the Republic of Macedonia. Afterwards, when money market was established as a separate institution founded by the banks and saving houses, the Central Bank stopped to act as a broker at the money market. In the period November 12 1997 - December 31 1997, the average daily turnover on the money market was denar 17.8 million, which is in line with the depth of the financial system and the level of monetarisation of the economy. The average weighted interest rate is 19.88% on an annual level.

The Bank and Saving Houses Act sets supervision standards in line with the Basle Capital Standards, which each bank and saving house has to fulfil. There are requirements for capital adequacy ratios (8 per cent); for single big loans (10 per cent of capital); for total loan exposure to a single client (30 per cent of capital); for total big credit exposure of a bank (300 per cent of share capital); for credits to shareholders and bank insiders (10 per cent of share capital and 1 per cent of share capital, respectively); for provisions and loan classifications (in 5 categories A,B,C,D,E); for non-performing assets (D and E); and capital links among shareholders. Off and on-site supervision is a responsibility of the Central Bank.

Regarding privatisation (ownership), banks in the Republic of Macedonia have never been state owned. Until 1976, as a shareholder each enterprise had only one vote, no matter the volume of shares it owned. After 1976 the voting power of the shareholders was distributed according to the number of shares they owned. But socially owned enterprises have been bad shareholders of the banks. The main objective was to maximise the wages within the enterprise as a shareholder, not to maximise the profit of either the enterprise or the bank. As a consequence, in the economic system of associated labour, the primary function of a bank was to extend credits as much as possible and at the lowest possible price (interest rate).

The change of the ownership structure of the old banks has been one of the main ingredients of the reforms in the last few years. There were no special plans for banks' privatisation, as they were not state owned. The privatisation of the banks was a spontaneous process which was in line with the privatisation of the enterprises. The ownership structure of the banks has been changed automatically, by changing the ownership structure of the enterprises. At present the average level of privatisation of the old three banks and the five banks emanating from the splitting of Stopanska banka, a.d. Skopje is between 55 and 70 per cent. Meanwhile, the newly established banks are almost totally privatised, with private ownership being more then 90 per cent.

In accordance with the Banks and Saving Houses Act, the ownership of a single shareholder is constrained to 20 per cent. But if some domestic or foreign banks appear as shareholders, there is no limit for the ownership. Banks are considered less risky shareholders then the individual entities because they have a broad base of their own shareholders between which to spread the risk. Non-residents as shareholders have the same rights as domestic residents. In that way, the foreign ownership of banks and the inflow of foreign capital is encouraged.