Liquidity Alone Won't Scale the Western Balkans

When financing needs in the Western Balkans are discussed, the focus often falls on bank lending. That focus is understandable: banks dominate the region's financial systems. But it can obscure a different question — whether local companies have access to the full range of capital they need to grow. 

Bosnia and Herzegovina illustrates the gap particularly clearly. Its financial system is overwhelmingly bank-dominated, yet many companies still struggle to obtain the financing they need to scale. The issue is less the amount of money in the system than the limited range of capital available to companies as they grow. 

The distinction is important because different forms of capital are suited to different stages of growth and different types of risks.

A strong banking sector can still leave a financing gap

Banks account for more than 90% of total financial-sector assets in Bosnia and Herzegovina. The banking sector is not, by conventional measures, weak: in 2024 its capital adequacy ratio was 19.8%, while non-performing loans had fallen to 3.2% of the loan portfolio. Yet 57% of firms identified access to finance as a key barrier to scaling, compared with 40% across the Western Balkans.

The figures point to a mismatch between the strength of the banking sector and the range of financing available to businesses. 

A bank can be well capitalised, liquid and profitable while the financial system around it remains poorly equipped to finance companies whose future potential is much larger than their current balance sheet.

The latest OECD assessment also finds that domestic credit to the private sector fell from around 60% of GDP in 2014 to 48% in 2024. In nominal terms, credit increased, but the economy grew faster than the financial system's ability to deepen credit relative to GDP.

A loan is not the same as growth capital

Consider a hypothetical software company in Sarajevo. It is profitable, has established customers and wants to enter several European markets. Its problem is not surviving the next twelve months. Its problem is financing the next stage of growth.

A bank can reasonably ask about collateral, cash flow, debt-service capacity and downside risk. Those are features of responsible lending.

An equity investor asks a different question: what could this company become if the expansion succeeds?

The bank is primarily underwriting the probability of repayment. The equity investor is accepting the possibility of losing capital in exchange for participation in the company's upside.

The two approaches serve different purposes and are designed for different risks. 

This is the missing layer in much of the Western Balkans: companies can move from founder capital to bank finance, but the ecosystem becomes much thinner when they need substantial risk capital for expansion.

The missing middle is visible in the data

The data illustrate how limited the alternatives to bank finance remain. OECD estimates that market capitalisation in 2024 was about 22.0% of GDP in the Federation of Bosnia and Herzegovina and 30.6% in Republika Srpska. The country has two separate stock exchanges, and the OECD notes that the split institutional architecture divides an already small pool of issuers and investors.

The number of listed companies can also be misleading. In 2025, the two exchanges had 565 listings in total, but the OECD notes that many are a legacy of mass privatisation rather than companies actively using public markets to raise growth capital.

The corporate bond market is similarly shallow. In Republika Srpska, corporate-bond issuance reached BAM 37 million by April 2026, already above the BAM 33.5 million issued during all of 2025. In the Federation, only one corporate bond had been issued on the Sarajevo Stock Exchange by April 2026, worth BAM 50 million. The market remains concentrated and relatively small.

The venture-capital gap is even clearer. Bosnia and Herzegovina recorded just €2.6 million of VC investment in 2024, according to the OECD, and no VC investments were recorded in 2025. For comparison, the OECD reports €56.8 million in Bulgaria and €115.3 million in Croatia in 2024.

Why this matters for companies

A company that cannot find the right form of growth capital has several choices.

It can grow more slowly. It can rely on retained earnings. It can take on more debt than is economically comfortable. It can sell a larger stake earlier than planned. Or it can look for investors outside the region.

The last option can be entirely rational for the entrepreneur. Foreign capital has been and remains important to the development of the Western Balkans.

But there is a difference between attracting foreign capital because it offers the best partner and relying on foreign capital because there is no sufficiently deep domestic alternative.

That difference matters for ownership, strategic decision-making and where future financial returns accrue.

The solution is not to make banks behave like venture capitalists

It would be a mistake to respond by asking banks to take more equity-like risk.

A bank should not be a venture capitalist. Requiring banks to finance companies with uncertain cash flows and limited collateral through conventional debt could weaken the very financial stability that the region needs.

The answer is to build the layers around the banks.

Build a regional growth-capital market

The first priority should be regional scale. The Western Balkans are small and fragmented markets. A fund that can invest across several countries has a much larger addressable market than one confined to a single national ecosystem.

There is already a precedent. The EBRD-backed Enterprise Expansion Fund II has raised €71 million and provides equity, quasi-equity and tailor-made debt to SMEs and mid-caps in Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.

The important lesson is not simply that a €71 million fund exists. It is that one vehicle can provide different forms of capital across borders, matching financing to the needs of growing companies.

Turn institutional savings into long-term capital

The second priority is to build a stronger domestic investor base.

Bosnia and Herzegovina's voluntary pension market is still small. In Republika Srpska, the European Voluntary Pension Fund had nearly 38,000 members and about BAM 53 million in assets in 2025. In the Federation, no voluntary pension fund had yet become operational, according to the OECD.

That is important because long-term institutional investors can provide a patient source of capital that does not depend on the next bank credit cycle.

The objective should not be to force pension funds into risky investments. It should be to create the legal and market conditions under which appropriately diversified long-term investment becomes possible.

Make capital markets easier to use

The third priority is practical rather than ideological.

For smaller companies, issuing a bond or raising equity can be too complex, expensive or administratively demanding. The OECD specifically recommends simplifying corporate-bond issuance procedures for SMEs, improving advisory support and harmonising capital-market frameworks.

This matters even more in a country where the stock-market infrastructure is split between two entities. A small market cannot afford unnecessary fragmentation.

Use public money to create markets, not replace them

The fourth priority is where governments and development institutions can make the biggest difference.

Public capital should be used to reduce the initial risk of building markets: guarantees, co-investment, fund-of-funds structures and targeted incentives can help private investors enter segments that are too small or too new to attract them immediately.

The objective should be crowding in private capital, not creating permanent dependence on public money.

There is one more source of capital: the diaspora

The OECD estimates that more than 1.6 million people from Bosnia and Herzegovina live abroad, equivalent to around 34% of the country's population. The report identifies this diaspora as an underused potential source of investment capital, particularly for private equity and venture financing.

That opportunity should be treated differently from remittances.

The question is not simply how to encourage people abroad to send more money home. It is whether part of the diaspora's financial and professional capital can be connected to investable companies, funds and growth opportunities in the region.

That would turn migration from a purely demographic challenge into at least a partial source of investment capacity.

The European opportunity

The broader European debate is moving in the same direction. The European Commission's Savings and Investments Union strategy is designed to channel more household savings into productive investment and deepen capital markets alongside the banking system. The Commission estimates that around 70% of EU household savings — about €10 trillion — are held in bank deposits.

For the Western Balkans, deeper integration with European capital markets could eventually provide access to a much larger pool of investors. But integration works best when local companies and institutions are capable of using that capital.

That means the Western Balkan region should not wait for EU membership to start building the financial infrastructure of a more mature economy.

From attracting capital to creating capital

For decades, the Western Balkans have rightly focused on attracting foreign direct investment. The next question should be more ambitious:

How do we build enough domestic and regional capital that foreign capital becomes a choice rather than a necessity?

The answer is not to replace banks. It is to build a financial system in which banks are one part of a much broader capital stack: deposits and loans for appropriate risks, venture capital for early growth, private equity for expansion, bonds for mature companies and institutional investors for long-term capital.

The Balkans do not need fewer banks.

They need more of what sits around them.

Because the region's next economic challenge is not simply finding someone willing to lend to its companies. It is building enough capital to finance what those companies could become.