Banking System Reform



In 2001, the Central Bank of Montenegro started to perform a supervisory function by appointing the Council of the Central bank in April and began the reform of the banking system. The reform of the banking system was carried out through various activities:

·         Change of institutional framework

·         banks supervision

·         reconciliation of banking operations with new institutional framework and licensing

·         undertaking measures towards non-solid banks

·         developing communication with banking sector

·         implementation of international accounting and audit standards

·         organizational and personnel changes within the Central bank



Change of Institutional Framework

Central bank is a regulator of the banking market and, in the area of banking operations, an initiator for passing a number of laws which regulate banking operations in Montenegro on the basis of generally accepted international standards, and with an aim to establish sound banking system and financial stability on macro level.  

Since the beginning of the realisation of the reform, the CBM has:

·       prepared around twenty decisions and other enabling acts which regulate banking operations and bank supervision more closely ;

·        prepared four proposals for laws, out of which two were adopted with an aim to strengthen the stability of the financial system;

·        prepared or is in process of preparing instructions for supervision of banks or other financial institutions, for introducing interim administration, bankruptcy or liquidation of banks.


Banks Supervision

Collection and analysis of information is necessary for supervision. Central bank performs continuous control of banks by following reports, information and other data which banks submit in accordance with a special regulation of the Central bank, as well as other information and data which banks submit upon the request of the Central bank through – indirect – off-site control. That includes basic financial reports of banks as well as reviews which contain more details on exposures to different types of risks and other different financial aspects including reserves and off-balance sheet activities. Through supervision based on reports, potential problems may often be identified, which enables early detection and urgent corrective actions before problems become more serious. In 2001, off-site control made 30 off-site analyses on banks' operations based on reports submitted by the banks.

Direct – on-site control performs examinations by direct review of business books and other documents in the bank and it can be regular or irregular. Regular examination of a bank is full-scope and is performed, as a rule, once a year. Irregular examination, on the basis of previously done analysis, comprise particular elements of banks' operations.

On-site supervision of the Central bank included 22 full-scope examinations of banks and 8 targeted examinations.


Reconciliation of banking operations with new institutional framework and licensing

Based on the findings of on-site and off-site controls, documents on operations that banks submitted, presentations of audit reports, meetings with management of the banks, the Central bank of Montenegro granted licenses to the banks which fulfilled legal conditions and prescribed standards. Those are: Podgorička bank a.d. Podgorica, Hipotekarna bank a.d. Podgorica, Euromarket bank a.d. Podgorica, Crnogorska komercijalna bank ad Podgorica, Ekos bank a.d. Podgorica, Nikšićka bank a.d. Nikšić,  Pljevaljska bank a.d. Pljevlja, and upon successfully performed reorganization aimed at further privatization, Montenegrobanka a.d. Podgorica.

 In 2002 Central bank of Montenegro licensed two new banks: Atlasmont bank ad Podgorica and Opportunity bank a d Podgorica.


Undertaking measures towards non-solid banks 

The Central bank of Montenegro has at its disposal adequate supervisory measures for timely corrective actions for banks which have the status of non-solid banks. Banks classified in the category of banks which should be specifically followed or banks going through crisis are considered non-solid banks. Those are the banks: 1) whose composite CAMELS rating is 3 or less,  2) whose risk based capital is below the prescribed level, 3) that is determined to have acted opposite to the regulations or became involved in unsafe and non-solid operations, which, if continued without being adequately controlled and limited, may jeopardize its credit worthiness and 4) which were warned by the Central bank because of financial activities that represent material risk for successful operations of the bank.

Towards non-solid bank, depending on the seriousness of the financial condition of that bank, the Central bank has the power to order adequate measures with an aim to rehabilitate the bank. Failure in reaching agreement with bank’s management force supervisory authorities to undertake corrective actions such as limitation of bank’s current activities, limitations in granting approvals for new activities or acquisitions and introduction of interim administration in the bank. Once the action or corrective activities are undertaken, the Central bank permanently monitors mentioned activities. When measures undertaken do not produce expected results, the Central bank revokes the license and undertakes adequate measures to protect overall stability of the banking system.

On April 9, 2001, the Central bank introduced interim administration in Montenegrobanka ad Podgorica. Analyses and indicators of the operations of banks in Montenegro did not include data on operations of Montenegrobanka ad Podgorica in the period of review. Namely, in December 2000, the examination of Montenegrobanka ad Podgorica took place using financial information as of 9/30/2000. The examination determined that condition of the bank is not satisfactory in all segments of business operations. This influenced the introduction of interim administration in Montenegrobanka ad Podgorica in April 2001. Also, the orders have been issued and other measures undertaken, according to the Law.

During the interim administration several studies have been prepared which resulted in an Reorganization plan that was, on the prior initiative of the government of Montenegro, adopted in December 2001. It was anticipated that the plan should be carried out in 4 phases.

Reorganization plan of Montenegrobanka ad Podgorica was mostly realized during interim administration (in a year). Upon the end of interim administration, Montenegrobanka was returned to its owners for  management, who then appointed international trustee to lead the bank towards privatization. International trustee prepared Privatization plan which anticipates selling via tender till the end of 2002.

Towards all banks that are in process of reconciliation of their operations with legal regulations and new standards, adequate measures have been permanently undertaken through determination of the position, suggestion of directions in the process of reconciliation, as well as following of that process.


 Bankruptcy and liquidation 

As the resulat of examination performed  disclosed that operations, organizations and act of Montenegro Bank for Development (Banka za razvoj a.d.), Podgorica, are not in compliance with the provisions of the Law on banks,

Central Bank of Montenegro initiated liquidation proceedings over this bank on February 7, 2002. 

Central Bank of Montenegro, also, initiated bankruptcy proceedings over Yugobank (Jugobanka a.d.), Podgorica, on April 15,2002 after the interim adminisration (introduced on February 7,2002) failed to produce expected results.


Developing communication with banking sector

In order to properly execute and improve the control function, the Central bank contacts the management of banks, Supervisory Committees, internal auditors and independent external auditors appointed by the banks and cooperates with bankers' association and other local and foreign institutions connected with financial market. In the process of reconciliation of operations, organization and acts, almost 40 meeting were held with management and Managing boards of the banks. Communication with the banks got the most important quality with the establishment of a new system of reporting of the banks and organizing of seminars for the employees of the banks for the sake of easier application of new scale of norms. Aiming to develop further the reporting system for the banks, the Central bank developed a software which was distributed to the banks for future electronic submission of data regulated by the Decision on reporting which was, after passing the amandments of the Law on banks, further improved and reporting formats were supplemented not only for the needs of the supervisory function of the Central bank but also for the need of realizing of its function in macro-economic research and reporting.  


Implementation of international accounting and audit standards 

The Central bank started the practical application of international banking standards on 6/30/2001. Since then, off-site reports have been prepared on the basis of documents which banks submit to the Cventral bank.

In the domain of implementation of international accounting standards, on its session held on 12/27/2001, the Council of the Central bank brought a Decision on chart of accounts for banks according to which the banks will show their positions and changes of property, capital and obligations, income and expenses and determine the results of business operations.


Organizational and personnel changes within Central bank

Department for bank supervision started its activities in 2001 with only a few employees, without adequate IT coverage of its needs which required conceptualization of its organization and supplementing in terms of personnel and communications in accordance with new needs. There are 25 workers in bank supervision department. In  order to improve functioning of the department, in 2001, eleven new workers were employed and in 2002, six new workers were employed. The work in the department is organized in 6 units coordinated by Director for bank supervision. In 2001, 8 seminars were organized and in 2002, 10 seminars for the department employees were organized. For future period, permanent advance training and education of employees is planned. Significant support for advance training of employees is provided by USAID consultants through joint work and organization of seminars.

As a result of previously mentioned activities, the position and stability of the banking sector have been improving with indicators of further positive trends. With respect to the changes of position and stability of the banking sector, the following is of special importance:


Further plans

In a strategic sense, further plans in banking reform especially refer to: