PROPOSAL FOR INSTITUTIONAL RELATIONSHIPS AMONG

STAKEHOLDERS IN THE DEVELOPMENT AND SUPPORT OF

SMALL AND MEDIUM ENTERPRISES IN BOSNIA AND
HERZEGOVINA
Elvira Catic-Kajtazovic
University of Bihac, Faculty of Economics, Bihac
elviracatickajtazovic@gmail.com

ABSTRACT
Despite the multiple significances of small and medium enterprises (SMEs) for the economic
development in Bosnia and Herzegovina (BiH), the support of authorities is still missing. The
circumstances that have negatively affected on the development of SMEs in BiH are
numerous: lack of unified legal framework; failure to recognize the significance of
development of SMEs; slowness in the processes of economic transition and privatization; the
post-war emphasis on efforts to revitalize large enterprises with incidental ignorance for the
SMEs. It is relevant to mention that there are two official definitions of SMEs in BiH, one
applied in the Republic of Srpska and the other one being used in the Federation of Bosnia
and Herzegovina. Existence of multiple levels of authority in BiH (state, entity, canton and
municipality) contributed to establishment of a complex legal framework. Furthermore, this
system sometimes causes not only overlaps in jurisdiction and applicability of laws, but also
conflicting legal regulations. Apart from that, it frequently happens that the efforts for
development of entrepreneurship include persons that do not have adequate experience,
competencies and readiness to be instrumental in the development of SMEs. In this analysis
will be elaborate on fundamental problems in the development of SMEs in BiH, and the effort
to identify solutions to the problem of lack of systematic and institutional support in the
development of SMEs. Aim of this paper is to present a proposal for structuring of
relationships between institutions in BiH in order to facilitate effective support to growth and
development of SMEs in BiH.

Keywords: Bosnia and Herzegovina, Development, Institutions, Small and medium

enterprises

1 INTRODUCTION
The process of transition in Bosnia and Herzegovina produced significant changes in creation
and establishment of the private sector, with emphasis on the relevance of development of
entrepreneurship and SMEs. The significance of the small and medium enterprises for Bosnia
and Herzegovina is multiple:
1. All of the following emphasize the core significance of SMEs for recovery and
development of Bosnia and Herzegovina: General framework of the economic strategy
for development (1999), Mid-term development strategy of BiH (2004), other cantonal
strategies, signing of the European Charter for small and medium enterprises.
2. According to the last OECD report, the SMEs in BiH constitute the backbone of the
economy, producing over 60% of the GDP and most of the new jobs (OECD, 2005, p.
30).
3. According to the Statistical business register (published by the Statistics Agency of
BiH as the first register of this kind in BiH), SMEs constitute 99.1% of all the active
enterprises in BiH.

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 4. SMEs are also in focus of the strategies of EBRD (European Bank for Reconstruction
and Development) for the period 20102013.
5. Along with the EBRD, the World Bank is also actively involved in supporting the
growth and development of the SMEs in BiH.

However, despite the multiple significances of the SMEs for the development of BiH, the
systematic and institutional support to the development of the SMEs is still lacking.

2 PROBLEMS AND OBSTACLES IN DEVELOPMENT OF SMEs IN BIH

Most of the problems faced by the entrepreneurs in BiH are directly associated with the
governmental institutions. This fact logically imposes the need for special attention to be
given to the following analysis: 1. Fundamental problems in growth and development of
SMEs in BiH, 2. Roles of all the levels of authority in development of SMEs in BiH.

2.1 Fundamental problems in growth and development of SMEs in BiH

For the purpose of this analysis, the following fundamental problems in growth and
development of SMEs in BiH have been identified:

1. Inadequate statistical support and the problem of grey economy in in BiH

It is difficult to obtain the correct data on the state of SMEs in BiH. There are information
available from the ministries, chambers of economy, and similar institutions, but they are
mostly based on their estimates. This situation results in different figures even in the number
of SMEs, and those discrepancies are not counted in tens but even in thousands in some
instances. The analysis and research of the following official documents, also produces
inconsistent data and values:
Statistical business register of BiH;
Project Development of small and medium entrepreneurship in the Federation of
Bosnia and Herzegovina, Federal Ministry of Development, Entrepreneurship and
Trade;
Strategy of development of SMEs in the Republic of Srpska, based on data obtained
from the Pension and Disability Insurance Fund (PIO) and the Statistical Institute of
the RS;
Strategy for developments of SMEs in Bosnia and Herzegovina 20092011.

Even all the listed documents analyze different categories. E.g., the Statistical business
register provides data for all the enterprises in BiH (although only 0,9% have over 250
employees) but the trades are not included. The project of the Federal Ministry of
Development, Entrepreneurship and Trade considers only SMEs including trades.
Nevertheless, the most recent information are provided in the Statistical business register.
Along with the listed problems with inadequate statistical support, the closely-related problem
of grey economy is also causing difficulties in determination of the state of SMEs in BiH.

2. Problems of financing of SMEs in BiH

According to the Global Competitiveness Index (GCI) BiH is rated 122nd in the list of 142
countries rated for simplicity of procedures in loan availability (Federal Institute for
Programming of Development, 2011, p. 20). Analysis of the banking operations indicates a
higher rate of provision of loans to citizens rather than to SMEs. Apart from this, even when
they provide loans to SMEs, the banks are tendentious in providing loans to large enterprises.
The practice has shown that the banks calculate higher interest rates to small and medium

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enterprises, as opposed to the interest rates for their regular clients, and the banks name higher
risk rate as the reason for this practice. The crediting terms are especially difficult for the
entrepreneurs beginners. On the other hand, over the past couple of years, the micro-credit
organizations have been approving loans for the SMEs, particularly trades. However, the
fundamental problem is that such credits are expensive (high interest rates). Absence of more
acceptable terms of financing frequently represents the main hindrance in the business
operations of SMEs.

3. Tax policies and administrative procedures

Tax policies and administrative procedures represent significant obstacles in the business
operations of SMEs. The most recent data from 2012 (www.doingbusiness.org) provide some
defeating facts: When compared with the OECD member states, every enterprise in BiH
makes three times more payments to the administration (40 in BiH compared to the average
13 in the OECD states) and spends over two times more working hours working on
administration of taxes (422 hours in BiH compared to 186 hours in the OECD states). Even
when compared with the other countries from the region, the enterprises in BiH waste more
hours working on administration of taxes than any of the neighboring countries: Macedonia
(75 hours), Croatia (196 hours) or Serbia (279 hours). A special problem is recognized in the
process of registration of enterprises in BiH. Unfortunately, BiH is the leading country when
it comes to the number of days required for registration, enormous administrative demands,
and lack of understanding for the need of the entrepreneurs. All of those defeating facts
illustrate the difficult position of the SMEs in BiH. Since all those procedures, rules and
policies, are directly connected with the governmental institutions, it is evident that there has
not been any serious consideration given to the solving of those problems. Also, it is difficult,
if not even impossible, to find an excuse for such approach.

The example of Macedonia can be used as a confirmation for the said claims. The table below
provides a comparative illustration of progress made in BiH compared to Macedonia (as a
similar country in transition, with positive improvements) in the procedures for registration of
enterprises and business start-up:

Table 1: Starting a Business, Comparison of BiH with FYR Macedonia (World Bank, 2010
and 2012)

Indicator 2010 2012

Bosnia and Macedonia Bosnia and Macedonia
Herzegovina FYR Herzegovina FYR
Procedures (number) 12 4 11 2
Time (days) 60 4 37 2
Cost (% of income per 15,8 2,5 14,9 1,9
capita)
Paid-in Min. Capital (% 29,8 0,0 29,1 0,0
of income per capita)

4. Implementation of policies for development of SMEs in BiH

According to the OECD Report SME Policy Index 2009, Progress in the Implementation of
the European Charter for Small Enterprises in the Western Balkans (Report made for 2007
and 2009, with preparation of the report for 2012 in progress) the progress made by Bosnia
and Herzegovina in implementation of policies for development of SMEs in the period 2007-

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2009 is as follows: BiH did not achieve progress in any out of ten areas that were included in
the research (Entrepreneurship education and training, Cheaper and faster start-up, Better
legislation and regulation, Availability of skills, Improving online access, Getting more out of
the Single Market, Taxation-Access to finance, Strengthening the technological capacity of
small enterprises, E-business and Developing stronger and more effective representation of
small enterprises interests). Each of the ten areas remained at the level of 2009, i.e. 2007. The
report for 2009 addresses the area of business start-up with particular criticism, providing the
following conclusion: BiH is the only country in the Western Balkans that is not
implementing a systematic reform in the processes of registration of enterprises. Also, in the
subject of e-business i e-governance: BiH is the weakest of all the countries included in the
research(OECD, 2009, pp. 202205).

5. Complexity and conditional relationships between authorities in BiH

Apart from creating legal framework, the State should use its economic policies to create an
environment that will foster successful growth and development of the SMEs. The level of
undertaking in that direction depends on the ruling structures and their systems of values. It is
the complexity and mutual conditional relationships between authorities in BiH that pose the
main problem and the main obstruction in the development of the SMEs, and those issues will
be separately addressed in the next chapter.

2.2 Roles of all the levels of government in development of SMEs in BiH

In order to completely comprehend the roles of authorities in development of SMEs in BiH,
their mutual complexity and terms of interaction, the following scheme of legislative and
executive bodies in BiH should be considered.

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 House of Reps BiH House of Peoples BiH
S 42 delegates 15 delegates; 5 Bosniaks, 5
T 28 elected in FBiH Croats (from the House of
A 14 elected in RS Peoples of FBiH) 5 Serbs from
T Peoples Assembly of RS
E Presidency BiH
1 Bosniak, 1 Croat (elected in FBiH), Council of Ministers BiH
President and 9 Ministers
1 Serb (elected in RS), rotating the
position of the chairman

ENTITY
House of Peoples Peoples Assembly RS
House of Reps FBiH FBiH - 58 delegates;
17 Bosniaks, 17
83 delegates
98 delegates
Croats, 7 others
delegated from
Cantonal Assemblies
Council of
Peoples
Clubs of 8 Bosniaks, 8
Bosniaks, Croats, 8 Serbs
Croats/Serbs 1 Presidency RS
candidate each President and 2
vice-Presidents Government RS
16 Ministries, 5
Government Bosniaks, 5
FBiH Presidency FBiH Croats, 8 Serbs
16 Ministries President and 2 vice-
8 Bosniaks, 5 Presidents, 1 Bosniak, 1
Croats, 5 Croat, 1 Serb
Serbs

CANTON 10 Cantonal
(only FBiH) Assemblies

LOCAL Municipal Municipal

LEVEL Councils Councils

Voters FBiH Voters RS

Direct election Confirms Nominates Delegates

Figure 1: Diagram of legislative and executive bodies in BiH (EBRD, p. 26)

The schematic layout clearly illustrates the complexity of the decision-making process at the
state level, that is based on a complex system of leverage, constructed to protect the interests
the three constitutional peoples (Bosniaks, Croats and Serbs). Furthermore, those are the
peoples that were in a war against each other not so long ago. An additional complication is

1442
the political stage dominated by ethnic political parties. Under the disguise of protection of
national interests any serious engagement in solving of the economic problems is still
missing, and the same applies when speaking of any serious approaches to stimulation of
development of SMEs in BiH.

Bosnia and Herzegovina lacks the necessary legal and institutional framework of state-level
support for the development of SMEs. Such framework should include the following: Law on
SMEs, Strategy of Development of SMEs, Agency for SMEs and a Fund for SMEs. From the
listed elements, BiH only has the Strategy of Development of SMEs that was adopted only in
2009 although the first proposal was prepared in 2005. This is to say that despite the evident
multiple significance of development of SMEs, the support of the government is still lacking.
Lack of a universal legal framework, failure to recognize the significance of development of
SMEs, slowness in the process of economic transition, post-war emphasis and efforts on
revival of large enterprises while ignoring SMEs all those are circumstances that have
negatively affected development of SMEs in BiH. For eventual acceptance of SMEs as an
element in the development of the country, a credit is to be given to the influence of
international institutions and successful accomplishments of domestic entrepreneurs.

At the level of Bosnia and Herzegovina, the sector of SMEs is governed by the Ministry of
Foreign Trade and Economic Relations. Within that Ministry exists a Sector for economic
Development and Entrepreneurship that includes a special Department for Entrepreneurship.

Competencies for SMEs in FBiH are governed by the Law on Incitement of Development of
Small Entrepreneurship (Official Gazette FBiH, No. 19/06). According to that Law, the
parties charged with program of development of SMEs are:
1. Government of FBiH and Cantonal governments
2. Federal Ministry of Development, Entrepreneurship and Trade
3. Respective Federal and Cantonal ministries and institutions, and
4. Local self-governance units

At the level of FBiH the problems of SMEs are in the jurisdiction of the Federal Ministry of
Development, Entrepreneurship and Trade. At the Cantonal level (only in FBiH) the bodies
that perform professional and administrative services, also relevant for the SMEs, are in the
jurisdiction of respective Ministries of Economy, with the following exceptions:
1. Posavina Canton Ministry of Economy and Physical Planning.
2. Tuzla Canton Ministry of Development and Entrepreneurship (Department for
entrepreneurship and trade), Ministry of Reconstruction, Development and Return
(development and incitement of entrepreneurship, especially trades), and the Ministry
of Commerce, Tourism and Traffic (Department for Commerce and Tourism).

In the RS, within the Ministry of Industry, Energy and Mining, there is an Assistant to the
Minister responsible for development of SMEs and entrepreneurship. At the lower
administrative levels (municipalities) there are also departments or persons responsible for
promotion, growth and development of the SMEs.

Nevertheless, without a universal state-level legal framework, this enormous and frequently
contradictory system of competencies and responsibilities of institutions can hardly contribute
to the development of entrepreneurship and the SMEs. Also, it occurs rather frequently that

1443
any efforts for the development of the SMEs involve individuals without adequate experience,
competencies and readiness to assist the process of development of the SMEs.

3 PROPOSAL OF AN INSTITUTIONAL SOLUTION FOR DEVELOPMENT OF

THE SMEs IN BIH

However, with consideration for the proposals outlined in the Strategy of Development of
SMEs in BiH 20092011 and the existing structure of legislative and executive authorities in
BiH, the authors proposes the following schematic layout of institutional relationships:

Agency for SMEs in BiH

Business-Innovation
STRATEGIC LEVEL
Fund for
Center of Bosnia and Ministry of Foreign Commerce and Economic
Development of
Herzegovina Relations Council for development of SMEs
SMEs in BiH

RS FBiH
Minister's Assistant Minister's Assistant
for the SMEs for the SMEs Chambers of
Economy
Entitety Agencies Chambers of Trades
for development of and Crafts
Sectoral Associations
SMEs

Cantonal Ministries of
Economy
Minister's Assistant for
the SMEs

Municipalities
Offices for support to SMEs

Business Development Network consists of all the agencies

that provide business support; all the centers and offices that
are actively providing business-support types of services;
including entity-level agencies for development of SMEs;
regional, local and other development agencies; agency for
innovations; FIPA; chambers of economy, trades and crafts;
universities; incubators; technology parks; entrepreneurship
zones/centers, etc.

Figure 2: Proposed institutional relationships between stakeholders in development and

support for the SMEs in BiH

The central position in the schematic layout is given to the Agency for Development of SMEs
in BiH that should be responsible for strategies, plans (especially the urgent adoption of a an
action plan for development of SMEs in BiH), but also lobbying for adoption and
implementation of laws that concern development of the SMEs at the state level (especially

1444
the Law on SMEs, and the Law on State Aid). Particular start-up efforts the Agency should
make in the processes of registration of enterprises (taking a positive example of a successful
reform implemented in Albania). A strategic level of support for the development of SMEs in
BiH is required for the two main reasons:
1. Bosnia and Herzegovina still does not dispose with a significant, or even the required
capacities for a strong development of SMEs
2. Taking into consideration the said circumstances in BiH, the ongoing process of
globalization, and the openness of economy of this country; Bosnia and Herzegovina
must not allow the luxury of dispersion of knowledge, capital and evidently
expensive business.

So, the Agency would represent a key institution in development of the SMEs in BiH. The
Agency would make strategic plans on distribution of financial support for the SMEs (with
particular consideration for the types of business), which would ensure to avoid the practices
of lump-sum support and uncoordinated support. The Law on State Aid should serve as a
basis for a transparent distribution of financial incentives to the enterprises. The Agency
would be responsible to the Government of BiH, i.e. directly to the Ministry of Foreign
Commerce and Economic Relations.

The Council for Development and Entrepreneurship of SMEs, within the Ministry, monitors
and supervises the work of the Agency, collects information from respective entity and
cantonal ministries. The Council would have a rather coordinating role between the ministries
and the Agency.

Business Innovation center of BiH should be established by the Government of BiH. The
Center would have a central role in development and promotion of innovation and
technical/technology system. The primary goal of the Center should be incitement of
innovations, recognizing potentials in inovative ideas, and support to materialization of those
ideas. The Center would also be in charge of the EU funds.

Entity agencies for development of the SMEs would be responsible for implementation of
measures associated with provision of business services, trainings, educations, etc., in
accordance with the plans prepared by the Agency for MSE in BiH. Entity agencies would
cooperate directly with universities and secondary schools, with the primary aim of promotion
of entrepreneurship and entrepreneurial spirit in those institutions. Also, they would take on
the commitment to participate in the financing of education of entrepreneurs.

The primary task of the Fund for Development of SMEs should be financial mediation, and
support to entrepreneurs to overcome difficulties associated with liquidity, and facilitating
easier access to funding for development of SMEs (primarily beginners).

In that way, the established Network for business development (the network of support to
development of SMEs) would also function efficiently and at its full capacity.

The proposed scheme of institutional relationships would resolve the obligation of the two-
way vertical coordination between all the levels of authority in BiH, and also the necessary
horizontal coordination and collaboration at the entity level. Such created support mechanism
should result in creation of entrepreneurial climate where the entrepreneurial initiative will be
rewarded, appreciated and spurred, in ways that will provide incentives and the necessary

1445
skills to the entrepreneurs, and also promote awareness of advantages and benefits of
entrepreneurship. The ultimate goal of the proposed institutional relationships would be to
awaken the sleepy attitude of BiH towards private initiatives, bearing in mind the fact that one
part of the countrys legislation and citizens mindset rests on models inherited from former
Yugoslavia, i.e. the former system of socialism. The goal will be achieved when the
entrepreneurial ideas and undertakings receive support and become fully recognized as
generators of absolutely required new jobs, investment and innovations in Bosnia and
Herzegovina.

4 CONSLUSION
Bosnia and Herzegovina is a country consisting of two entities, Federation of Bosnia and
Herzegovina, and the Republic of Srpska, and Brcko District as a special territorial unit. BiH
is a relatively small country in the region with open economy. The process of transition in
BiH (with the ultimate goal of democratization and development of Western-European type of
market economy) represents a rather difficult path for this country followed by series of
problems such as: inappropriately implemented privatization; split markets and diversified
legal regulations; insufficient development of the financial market; lack of universal
implementation of crucial economic reforms. An additional aggravating circumstance is the
complexity and mutual conditional relationships between legislative and executive authorities
in BiH. In such a tangled network of relationships, unscrupulous and arrogant politicians,
working under the disguise of protection of vital national interests, any serious engagements
in solving of the burning economic problems yet remain to be seen. Also, regardless of the
multiple significances of the SMEs, the system of incitement for development of the SMEs
sector in BiH is almost non-existent in the true sense of the word. The necessary legal and
institutional state-level framework for support to the development of the SMEs does not exist.

This paper presents a schematic illustration of institutional relationships between actors in

development and support for the SMEs in BiH, which has the purpose to identify the strategic
level of support for development of the SMEs in BiH. The proposed scheme of institutional
relationships would resolve the obligation of the two-way vertical coordination between all
the levels of authority in BiH, and also the necessary horizontal coordination and
collaboration at the entity level. The ultimate goal is incitement, development and imposing
of the entrepreneurial mindset, which will be instrumental in bridging of the gaps in
development that resulted from dissolution of large enterprises from the former system of
socialism. This will be achieved by raising the institutional support to SMEs to a higher
strategic level, where the SMEs will be considered as the generators of the absolutely required
new jobs, investments and innovations in Bosnia and Herzegovina.

5 BIBLIOGRAPHY
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pdf.
2. Enterprise Policy Performance Assessment Bosnia and Herzegovina. (2005). Paris:
OECD. Retrieved 09.04.2010 from
http://www.oecd.org/countries/bosniaandherzegovina/35313064.pdf.
3. OECD. (2009). SME Policy Index 2009, Progress in the Implementation of the European
Charter for Small Enterprises in the Western Balkans. Retrieved 05.11.2010 from
http://ec.europa.eu/enterprise/policies/international/files/2009_charter_report_en.pdf.

1446
4. Official Gazette FBiH, No. 19/06.
5. Strategy for Bosnia and Herzegovina 20102013. (2010). Retrieved 10.08.2011 from
http://www.ebrd.com/downloads/country/strategy/bosnia_l.pdf.
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http://www.sme.ba/images/dokumenta/strategija%20msp%20bih.pdf.

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permission.