The economy of Montenegro was severely impacted by the breakup of Yugoslavia into its constituent parts. In order to jump start its economy, calculated and efficient measures had to be undertaken. One of these measures was selecting a stable foreign currency as its own: first the Deutschmark (which was used in parallel with the Yugoslav dinar from 1999 to 2000), then, later, the Euro. This paved the path for economic growth and the creation of an open market, more welcoming to investors.
Today, Montenegro’s financial sector consists of financial institutions, a financial market, and financial infrastructure. The Central Bank of Montenegro is responsible for monetary and financial stability and the functioning of the banking system. The Central Bank also has a supervisory role, cooperating with international financial institutions such as the International Monetary Fund and relevant European Union bodies.
The banking system is by far the most dominant component of the financial sector, taking up to 92.3% of shares in active assets and consisting of a dozen banks, divided almost evenly between corporations based in Montenegro and ones from other countries. Some of the key laws regulating the system are: the Central Bank of Montenegro Law; the Financial Stability Council Law; the Banking Law; the Bank Bankruptcy and Liquidation Law; the Law on Credit Institutions; and the Law on the Capital Market.
Insurance companies and monetary financial institutions are the second and third largest actors in the financial sector, followed by leasing companies, investment funds, and factoring companies.
Three authorities are jointly tasked with regulating the financial market: the Central Bank, the Insurance Supervision Agency, and the Capital Market Authority. The Central Bank is authorized to supervise other banks, monetary financial institutions, and institutions dealing with leasing, factoring, purchasing receivables, and credit-guarantee operations. The Insurance Supervision Agency supervises insurance companies. The Capital Market Authority is tasked with supervising investment and pension funds, along with the Central Securities Depository and Clearing Company, which is the relevant body regarding trading on the Montenegroberza, the only stock exchange in Montenegro.
The Central Bank, the Insurance Supervision Agency, and the Capital Market Authority have representatives in the Financial Stability Council, which was established in 2010 as part of the Financial Stability Council Law. The Financial Stability Council provides advice on how to maintain or improve financial stability and detects and mitigates systemic risks threatening the financial system of Montenegro.
The entire world has been impacted by the negative effects of the coronavirus outbreak, and Montenegro is no exception. In order to mitigate the negative effects of the COVID-19 pandemic the Central Bank offered two moratoria on credit loans: the first became effective on March 20, 2020 and the second became effective on June 1, 2020. For the first moratorium debtors were obligated to notify the banks of their acceptance of the moratorium and the banks had to ensure the effectiveness of the moratorium with five business days from receipt of that notification. The deadline for the second moratorium was eight days. The maximum extension of the repayment period in both moratoria was 90 days, and debtors were also offered a moratorium of 30 or 60 days.
It is evident that the development of the banking sector in Montenegro has already been significantly influenced by the financial technology that has changed the business models of traditional providers of financial services, with which the efficiency of the operation of service users has also improved significantly. The pandemic has accelerated digitization, and the digital identity systems that have been introduced are likely to stimulate greater financial inclusion and frictionless payments and mitigate the impacts of COVID-19.
As Montenegro strives towards membership in the European Union, it is important to create a stable and predictable financial sector as well as to harmonize it with other major European financial systems. This can be achieved by close cooperation with other central banks in order to improve standards and practices and to include new activities.
By Igor Zivkovski, Partner, Zivkovic Samardzic Law Office
This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.