FINANCIAL NON-DEPOSIT INTERMEDIATION INSTITUTIONS IN

THE REPUBLIC OF CROATIA

Bojana, Olgić Draženović

University of Rijeka, Faculty of Economics Rijeka,
Croatia E-mail: bolgic@inet.hr

Zdenko, Prohaska
University of Rijeka, Faculty of Economics Rijeka,
Croatia E-mail: zdenko.prohaska@ri.t-com.hr

Stella, Suljić
University of Rijeka, Faculty of Economics Rijeka,
Croatia E-mail: stella.suljic@efri.hr

ABSTRACT
Institutional investors are increasingly becoming more important participants
in global financial markets, including emerging market economies. The
significance of institutional investors in transition countries is even greater in
relation to the underdeveloped local capital markets and in the light of their
considerable growth potential. Therefore, it seemed reasonable to
investigate the most important financial institutions in the Croatia.
The structure of the bank based financial sector in the Republic of Croatia is
characterised by the growing relevance of the non-deposit financial
institutions, especially after the start of the pension reform in 2002.
Nevertheless, the banking sector is still dominant and bank loans represent
the most important source of exterior financing the economy.
The main result of our research will be that Croatia has to encourage
development of financial sector and domestic capital market in order to
enhance Croatian economy and to enable the higher rates of
macroeconomic growth.
Keywords: capital market, Croatia, deposit financial institutions, financial
sector, non-deposit financial institutions

1 INTRODUCTION
Financial system can be defined as mix of financial instruments, institutions
and markets. Financial systems channel household and foreign savings to
the corporate sector and allocate investment funds among firms. They allow
intertemporal smoothing of consumption by households and expenditures by
firms. These channels are the sources which connect financial development
and financial structure with macroeconomic growth. Financial development
involves the establishment and expansion of institutions, instruments and
markets that support investment and growth process.
A country’s financial system can be characterized market-based as opposed
to bank-based. Different studies and approaches reveal that financial
development is important for economic growth, whereas the role of financial
structure is unclear. A conclusion whether market-based or bank-based
system were favourable for economic growth could not be drawn.
Nevertheless, in the literature prevailed “financial services view”, with the
emphasis the important role of well-functioning financial system. Specifically,
the central question is the overall quantity and quality of these financial
services, and not specific organization of the financial. The division between
banks and markets in providing these services is of secondary importance
(Levine 2002; Beck, Levine 2004). The emphasis is on the creation of better
functioning banks and markets rather than on the type of financial structure.
Hence, it is very important for the economy to take measures for developing
both banking market and capital market. Furthermore, in times of crises in
either system, the other system can perform the function of the spare wheel.
Sophisticated and well-developed financial system makes national economy
much more resistant to asymmetric shocks. Parallel development of capital
market with the banking industry progress can result in benefits for the
economy and investors, arising from the competitiveness and lower
transaction costs.
The structure of financial system in developed countries varies and depends
mainly of investors tradition, while post-transition economies remain heavily
bank-based oriented.
One of the intentions of this paper is to give a general overview of the
financial system structure in the Republic of Croatia. Although Croatian
financial system is bank-based, there is evident rapid development of non-
banking financial intermediaries. This process also has a positive impact for
the domestic capital market growth and development especially in years that
precede the financial crises.

2 THE FINANCIAL SYSTEM IN THE REPUBLIC OF CROATIA

Development of the Croatian financial system since Croatian independence
until today, was determined by a number of events and processes: the
adoption of legislative framework, a comprehensive privatization process,
restructuring of the banking system, the reform of the payment system, the
liberalization of the foreign exchange operations, issuing public debt on
domestic financial market, pension reform, global financial crisis and many
others.
Despite all these changes and ensuring other institutional and legal
prerequisites, domestic financial system is stil underdeveloped as compared
with financial systems in developed market economies.
Banks are the most important financial institutions, despite slower growth
rates comparing to other financial intermediaries. Moreover, Croatian
economy is still mostly financed by conventional bank loans or in larger
amounts, syndicated loans.
The non-deposit financial intermediaries comprises over a quarter of the
domestic market due to rapidly growing pension funds, turbulent
development of open-end investment funds and stable insurance market.
Concerning general common features of all these segments, it can be
concluded that they are predominantly foreign-owned, highly concentrated
and profitable.
The most important institutional characteristics of the Croatian financial
system are:
1. Bank-based financial system,
2. Growing influence of non-bank financial intermediaries,
3. Conglomerisation of financial system,
4. Underdeveloped and illiquid capital market.
The first two fundamental characteristics of financial system in Croatia are
confirmed by the data in table 1.
Table 1. Relative Importance of Financial Intermediaries in total Croatian
financial system assets (end of period, in %)

Financial institution 2000 2002 2004 2006 2008 2010 2013

Banks 87.0 85.0 81.5 75.5 76.3 77.8 73.3
Open-end investment funds 0.2 1.4 1.6 4.0 2.0 2.7 2.4
Closed-end investment funds
3.0 1.6 0.4 0.6 0.4 0.4 0.3
Special types of investment
funds 2.4 1.2 0.8 0.1
Insurance companies 6.8 5.7 5.2 4.9 5.3 6.2 6.4
Housing savings banks 0.4 1.1 1.8 1.5 1.4 1.4 1.4
Mandatory pension funds 1.1 2.9 3.9 4.7 7.3 10.7
Voluntary pension funds 0.1 0.2 0.4 0.5
Savings and loan associations 0.9 0.6 0.5 0.4
Credit unions 0.03 0.03 0.03
Leasing companies 1.7 3.6 6.0 6.7 7.2 5.6 3.6
Factoring companies 1.3 1.1 1.5
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: author’s calculation (www.hanfa.hr; www.hnb.hr; www.huo.hr)
The share of banks in total financial system is very high and accounts for
over two-thirds of the financial system, while the share of other
intermediaries individually does not exceed 11%. Banks face greater
competition from other financial institutions with important remark about
significant ownership relationship between banks or their parent companies
with a majority of other financial institutions. The three largest banking
groups dominate pension and investment funds market, infiltrate in the area
of insurance market and capital market and thus creating a problem of
formal or informal financial groups. This implies increased responsibility of
regulatory and supervisory institutions (CNBs and HANFA) and also the
need for harmonization of legislative and revision of all regulations that
should protect service users.
Apart from banks, other important financial intermediaries are mandatory
pension funds and insurance companies. It can be recognized that the most
volatile ones are open-end investment funds that have responded strongly to
the financial crises and downsizing of the domestic capital market.
Global financial crises slowed down the process of rapid growth in the non-
banking sector and reinvigorating of bank-based system. Trend alleviates
the pension funds due to allocations momentum of mandatory monthly
contribution of resources. All other financial institutions have been faced with
increased investors caution and shattered confidence because of the
recession and the ongoing financial crises. These negative influences were
especially referred to the open-end funds, which reduced their importance in
financial system by the highest extent. Hence, long-standing domination of
the banks has been slightly threatened only in the years prior the financial
crises which accent the necessity for further encouraging the development of
long-term voluntary savings through non-bank institutional investors.
 Table 2. Financial Market Structure in 2007 and 2013

Assets % of total Number of

(in mill. of HRK) assets institutions
2007 2013 2007 2013 2007 2013
Banks 345.1 72.7 33 332
397.9 73.3
Open-end investment funds 30.1 6.3 100 108
13.2 2.4
Closed-end investment funds 3.7 0.8 9 4
1.4 0.3
Insurance companies 23.2 4.8 25 27
34.5 6.4
Housing savings banks 6.4 1.3 5 5
7.6 1.4
Mandatory pension funds 21 4.4 4 4
58.2 10.7
Voluntary pension funds 0.8 0.2 18 22
2.7 0.5
Savings and loan associations 1.3 0.3 104 -
- -
Credit unions 1
- - - 4
Leasing companies 30.3 19.7 6.4 3.6 25 23
Factoring companies 4.2 7.9 0.9 1.5 12 14
Total 466.1 543.1 100.0 100.00 335 244

Notes: 1 – estimated assets < 0,1 bill. Kn; 2 - include one savings bank

Source: author’s calculation (www.hanfa.hr; www.hnb.hr)

Although in 2013 bank possess most of the assets and have the greatest
share of assets in GDPs, the relevance of other financial intermediaries is
expanding. Banks are almost three times smaller in number than investment
funds, and there are roughly as many banks as insurance companies and
mandatory pension funds. It can be concluded that there are a relatively
large number of non-deposit institutions that still have a small share in the
total assets of the financial system and low share of the Croatian GDPs.
By the 2007, Croatian companies, financial institutions and government were
increasingly financed by issuing securities which resulted with the
improvement of institutional investor’s development and strong growth of
domestic capital market. However, seven years later one can tell that
activities in domestic capital market are significantly reduced and in addition,
traditional banking financing become even more significant. Although
pension system reform created a great demand for shares and debt
securities, the ongoing problem is lack of high quality financial instruments
and their low liquidity. One of the possibilities for improving the domestic
capital market in the near future is in strategic alliances with exchanges in
the region.
3 Deposit financial institutions in Croatia
The deposit sector in Croatian consists of several types of institutions:
commercial banks, housing savings banks, the most recent - credit unions
and savings banks1, and a special state institution – the Croatian Bank for
Reconstruction and Development.
Croatian banking system can be marked as universal and not specialised.
The usual deposit-credit transactions are still the most important, but growth
of interest income is declining. The share of profits from interest is reduced
in favor in favor of earnings from various fees, brokerage and business
consulting services and different types of non-banking operations (under the
condition of obtaining CNBs approval).
Despite the dominant share of banks in total financial system, these
institutions achive a slower growth rate than others. Dynamics of Croatian
banking assets and banking depth ratio (asset/GDPs) are presented in the
table 3.

1
The savings and loan co-operatives were obliged to transform during 2007 either to
savings banks or to credit unions. These institutions were the most numerous of all
financial institutions but they also had a smallest share (after voluntary pension
funds) in the total asset of the Croatian financial system in the period before 2007.
 Table 3. Assets of Croatian banking system in the period of 1996-2013
Total assets
Year Growth rate (%) Assets/GDP (%)
(bill. Kn)
1996 73.9 68.4
1997 94.1 27.3 76.0
1998 96.8 2.9 70.3
1999 93.5 -3.4 66.0
2000 111.8 19.6 63.3
2001 148.4 32.7 73.3
2002 174.1 17.3 83.6
2003 204.1 17.2 89.9
2004 229.3 12.4 93.4
2005 260.3 13.5 98.5
2006 304.6 17.0 106.4
2007 345.1 13.3 109.8
2008 370.1 7.2 108.2
2009 378.4 2.2 113.6
2010 391.1 3.4 116.9
2011 406.9 4.0 123.8
2012 399.9 -1.7 122.2
2013 397.9 -0.5 121.7
Source: author’s calculation (www.cnb.hr, www.dzs.hr)
Croatian banking system assets in absolute figures continued to grow,
although the growth from the 2002 slows down, especially when compared
compared to other institutions. The only exception of these positive figures
can be recognized in 1999 because of the banking crises and in two last
years due to financial crises. From the 2004 bank assets grew at
significantly slower pace, as a result of the CNBs restrictive policy and
measures aimed at curbing banks credit expansion. Slowdown in asset
growth continues after 2008 as a result of worsening economic situation in
the country and the environment. In this period, asset growth rate achieved
the lowest level in the last 15 years. Negative economic trends reflected in
the low level of lending due to reluctance by banks to increase credit risk
exposure as well as weaker demand for credit. Nevertheless, the share of
bank assets in the national gross domestic product is continuously
increasing, which further underscores the disproportional economic power of
banks and the national economy.
The basic characteristics of Croatian banking system can be summarized as
(Buterin, Olgić Draženović 2007):
1. Decreasing in the number of banks due to a consolidation process
after 1998 i.e. second banking crises in Croatia. The number of
banks decreased after 1998 as a result of consolidation, take-overs
and the bankruptcy of some banks. At the end of the 2013 the
 banking market comprised 29 commercial banks (and 5 housing
savings banks, 1 savings bank and 26 credit unions).
2. Internationalized a private ownership of Croatian banking system.
Although 14 of the total number of banks remained under majority
domestic ownership foreign persons control 90% of total banking
assets.
3. High market concentration indicates a high degree of oligopolistic
behaviour. At the end of 2013, the two largest banks hold 43.4% of
total assets and the four largest banks hold 66.8% of the market.
4. Increasing non-interest income in the bank income structure and
growth of nontraditional banking services.
5. High but declining interest margins indicators.
6. Prevalence of universal banking. Croatian banks are statutorily
authorized to offer a wide range of financial services.
7. Oligopolistic market structure of banking products and services.
8. High liquidity of Croatian banking sector.

4 NON-DEPOSIT FINANCIAL INSTITUTIONS IN CROATIA

In Croatia there are present various types of non-banking financial
institutions. By the figures of relative importance of financial intermediaries
(Table 1), the three most important non-bank financial institutions in Croatian
financial system are investment funds, mandatory pension funds and
insurance companies.2
Comparing the relevance of mentioned financial institutions for Croatian
economy, chart 1 clearly states that mandatory pension funds are the most
propulsive non-deposit intermediaries in Croatia. Starting from 2003, they
recorded immense increase in the total assets and only seven years later
leaving other intermediaries (excluding banks) far behind. Hence, pension
reform was the strongest trigger for the development of non-bank
intermediation in Croatia. However, that great additional demand for
securities wasn’ nearly contributed to the development of domestic capital
market.

2
Leasing companies took the second place with a share of 6.2%. However, this significant
share and rapid growth is a result of Croatian central bank monetary restrictions considering
regulation of credit activities and acquiring the necessary liquidity of banks in the period
before the 2007. Majority of these institutions have tight connections with banks, because
banks are establishers of leasing companies with main goal of giving up part of their credit
activities to less regulated and supervised leasing institutions (legal framework for leasing
was set up in 2006).
Open-end investment funds were shown to be very sensitive to instability
and shocks from the environment, i.e. financial crises caused dramatic
decline in their value and to date they didn’t regained investor’s confidence.
Moreover, they have one of the largest decreases in assets of all European
countries. Insurance companies are institutional investors who have a
steady and slow growth despite unfavorable business conditions.
Chart 1. Non-deposit financial institutions in Croatia (assets/GDP
ratio)
20
18
16
14
12
10
8
6
4
2
0
2000 2001 2003 2005 2007 2009 2011 2013

Open-end investment funds Mandatory pension funds

Insurance companies

Source: author’s calculation (www.hanfa.hr; www.hnb.hr)

5.1. Investment funds

Start of investment fund industry development in Croatia in 1997 was based

on registration of first open-end investment fund of total assets 6.7 million
Kn. Next phase in investment funds development started with the Coupon
Privatization Program with main purpose to significantly accelerate the
transfer of assets to the private sector and to accelerate the development of
capital market. For this purpose, seven privatisation investment funds were
created. By the end of 2002 they were turned into closed-end investment
funds or holding companies.
In the following years, the largest increase considering the number of funds
and assets of newly founded investment funds was recorded for open-end
investment funds. Main reasons for dominance of open-end investment
funds in Croatian fund industry are twofold. First, it is simplier to enter or exit
an open-end fund from the investors point of view. The closed-end funds do
not enable shares to be withdrawn, and the market value of shares may be
considerably lower than the current net worth (Kidwell et. al., 2003). Second,
abanks are predominantly founders of investment funds in order to expand
their range of services and to meet the demands of the market.
Dynamic development of open-end investment funds market in Croatia is
shown by the data in the following chart.

Chart 2. Open-end investment funds assets in Croatia in the period

from 2000-2013 (in bill. Kn)

30 10

25
8

20
6
15
4
10

2
5

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets Assets/GDPs

Source: author’s calculation (www.hanfa.hr; www.dzs.hr)

There is lot of potential for further development of Croatian fund industry

considering its influence in developed EU countries. Dynamic development
of these institutional investors in the Republic of Croatia represents the data
gathered in Table 4.
Table 4. Open-end investment funds in Croatia in the period from 1997-2013

Registered OIF Assets

Total Assets
share in
Year assets (in growt OIF
Pubblic Private GDP
bill kn) h rate Total venture
offer offer (%)
capital
1997 6.7 1 1 - - <0.01
1998 2.9 -56.8 4 4 - - <0.01
1999 23.9 724.1 5 5 - - 0.02
2000 168.8 606.3 10 10 - - 0.1
2001 1,306.6 674.1 14 14 - - 0.7
2002 2,462.9 88.5 27 27 - - 1.2
2003 2,941.8 19.4 37 37 - - 1.3
2004 4,527.7 53.9 41 41 - - 1.8
2005 8,834.5 95.1 56 56 - - 3.3
2006 16,038.9 81.6 72 62 9 1 5.6
2007 30,056.2 87.4 100 83 16 1 9.6
2008 9,890.2 -67.1 126 98 26 2 2.9
2009 12,034.9 21.7 130 103 25 2 3.6
2010 13,674.4 13.6 131 101 23 7 4.1
2011 11,928.9 12.8 126 101 18 7 3.6
2012 12,962.9 8.7 121 96 18 7 3.9
2013 13,257.1 2.3 108 86 15 4 4.1

Source: author’s calculation (www.hanfa.hr;ww.dzs.hr).

At the end of 2007, there was rapid (exponential) growth of investment funds
assets because of the bull financial market in Croatia as well as in the other
countries. Also, this period was determined by the high inflow of capital due
to number of IPO-s and issuing government and municipal bonds in
domestic capital market. Demand for investments in open-end funds
reduced with the begging of the financial crisis as heightened economical
risks and increased investor caution. In 2008, assets of open-end investment
funds have reduced 67.1% and their significance for the national economy
was strongly reduced. Owing to the financial crisis, a decrease in equity
funds’ assets and a rise in management expenses, the consolidation of the
investment fund market continued into 2013 (HANFA 2012).
There are only 15 open-end funds with a private offer and 4 venture capital
funds. Venture capital funds are the least developed non-deposit financial
institutions in Croatia due to numeorous reasons, i.e. late establisment of
legal framework for venture capital (2005) and unfavorable tax and legal
environment (Švaljek, S. 2008), which negativelly effects the formation and
development of high potential and innovative companies.
According to the structure of investment, the most numerous among
domestic funds in 2013 are equity funds (30), followed by money funds (21),
and mixed funds (12), bonds (8) and others (7). Chart 3 shows the
importance of certain types of funds with regard to investment policy
(HANFA 2013).

Chart 3. Open-end investment funds net assets by the investment

structure in Croatia in the 2000-2013 period (in bill. kn)

30000

25000

20000

15000

10000

5000

0
M2o0n0e0y 2001 2002Bo20n0d3 2004 200B5al2a0n0c6ed2007 2008 E2q00u9ity2010 2011
P2r0iv1a2te2o01ff3eri

Source: author’s calculation, HANFA 2013.

In the first years of open-end funds development and in the period of
financial crises, money funds prevailed with more than 50% of market share,
in the terms of asset. Demand for equity and balanced funds significantly
increased in 2006 and 2007, due to fast market growth and their consequent
good performances (even domestic capital market still was shallow, illiquid
and generally underdeveloped). In the last six years, as a result of increased
investor’s version to a risk, a significant amount of resources again is
poured in money funds, but also significant part of resources were pointed to
bank deposits or simply come out of the system. In 2013, money funds take
a leadership position by assets under management (9.8 billion), followed by
equity (1.9 billion) and balanced (0.8 billion) funds.
Continuation of the fund’s conservative and passive investment strategy can
be observed from their investment structure before and after the financial
crises, as shown in chart 4. In the last few years, investment funds assets
were mainly consisted of domestic assets (approx. 70%), while foreign
investments have been made in countries of the region. On the domestic
capital market, funds investments are focused primarly in short-term
securities and deposits.

Chart 4. Investment structure of open-end investment funds (public

offering) in Croatia for the period 2006-2013 (in %)

2013

2012

2011

2010

2009

2008

2007

2006

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Equities+GDR Government and municipal bonds Deposits and short-term securities Other

Source: author’s calculation, HANFA 2013.

In the years before the financial crisis, high yields and marketing activities
have resulted in a general increase in investment culture in the Croatian
financial market and people's interest in investing in the fund industry.
However, given the high correlation between capital market with the crisis
developments in global financial markets, domestic assets of investment
funds in the first year of the crisis, has lost more than 60% of the market
value. In the coming years, there was slightly market recovery. Still, that still
has not reached even half of the maximum value realized. Funds industry in
Croatia have proved to be the least resistant to external shocks and
developments in the domestic and international capital markets.

5.2. Pension funds

Pension reform started in 2001 when seven (mandatory) funds were formed
to attract participants. 3 Since then, pension funds assets were growing
3
Croatian pension reform exist in the form of a «three pillar» system. The «pay-as-
you-go» public pension system is complemented by two privately-managed pillars –
one mandatory (the second pillar) and one voluntary (the third pillar).
These pension funds have no legal personality, i.e. it is separate assets managed by
pension companies and established for the purpose of collecting monetary assets
through contributions of pension fund members and investing those assets in order
to ensure balance between return and security.
rapidly. The relative importance of pension funds in the total assets of
domestic financial system amounted to 7.3% (mandatory and voluntary
pension funds).
Mandatory pension funds are the most propulsive financial institutions in the
Republic of Croatia due to a steady rise of monthly payed contribution. With
current assets under management of 58.2 HRK billion, these institutions are
very important institutional investors in both Croatia and in the region.
Because of their size, they have strenght to impact on developments in the
domestic capital market.
The three (of four) mandatory pension companies are foreign owned. In
terms of share in the assets under management, only 15% of total assets i
sin domestic ownership.

Table 5. Mandatory Funds in Croatia from 2001-2013

Number Total
Assets/
of Number of assets Growth Member
GDP
pension members (in rate net assets
(in %)
funds mill.
kn)
2001 7 217,502 - - - -
2002 7 983,310 2,036.9 - 2.072 1.0
2003 4 1,070,932 4,677.3 129.6 4.368 2.1
2004 4 1,170,092 7,913.2 69.2 6.763 3.2
2005 4 1,248,931 11,714.2 48.0 9.380 4.4
2006 4 1,322,010 15,919.4 35.9 12.042 5.5
2007 4 1,395,693 21,011.9 32.0 15.048 6.6
2008 4 1,475,729 22,590.9 7.5 15.308 6.5
2009 4 1,522,149 29,264.6 29.5 19.226 8.9
2010 4 1,561,454 36,328.1 24.1 23.265 11.2
2011 4 1,604,336 41,067.1 13.1 25.597 12.5
2012 4 1,652,802 51,133.7 24.5 30.937 15.6
2013 4 1,702,218 58,237.7 13.8 34.212 17.8

Source: author’s calculation (www.hanfa.hr;www.dzs.hr)

According to the data presented in Table 7, funds have gathered a lot of
members and their contributions, as well as total assets are growing rapidly.
Yet growth is slowing due to attained size and raised resources. By the end
of 2013 pension funds reached a size of assets under management that
exceed 17% of GDPs. Compared to the previous years, they achieved
growth at much slower rate (13.8%) with the exception of the 2008 when
growth was reduced by more than four times.
Mandatory pension companies are obliged to invest fund assets according to
the very strict legislation, taking into account the prescribed investment
limitations and ensuring the quality and profitability of the entire portfolio,
while maintaining an adequate liquidity level and mitigating risks (HANFA
2012).
The current composition of pension funds portfolios indicates a conservative
and passive investment strategy. This is in accordance with the definition of
these in accordance of these institutional investors as conservative ones
with a long investment horizon. The majority of assets (almost 90% in 2013)
are invested in the securities of domestic issuers, whereby the largest
component is domestic public debt (government bonds %). In this way,
pension funds have became more risky because they are too attached to the
financial position of the state and overly exposed to the risk of the bond
market (government bonds).
Hence, there is a need to direct a regulatory framework towards the
liberalization of investment and solid risk management control. In the long
term, the role of legal investment limits should be reduced and replaced with
the affirmation of the prudence rules which are focused on the regulation
and supervision of quality risk management (Šonje, 2005, pp. 20)
The main problems of pension funds performing their business today are as
follows (Prohaska, Olgić Draženović 2003):
a) Their size related to the whole market (huge demand for “blue chip”
securities where only a few listings (shares and bonds) in the first
quotation on the stock exchanges are available,
b) Existence of conservative investment restrictions, especially in foreign
securities to prevent portfolio losses,
c) They are exposed to currency risk since most of government bonds 4 are
indexed in foreign currencies (mainly in Euro) while the pension
payments are to be paid in domestic currency,
d) A problem of poor financial literacy and insufficient saving for retirement. 5

The presence of pension funds has undoubtedly had a crucial influence on

the development of financial markets, and especially the capital market.

Favorable developments are also reflected in the increased orientation to the

financing of public debt in the country both in foreign currencies and in Kuna.

4
Still, there were several government bonds issues in domestic capital market
indexed in Kn.
5
This is especially apparent among younger population. Less than 10% of newly
employed citizents chose their mandatory pension funds by their own.
Also, during the pre-crisis period, market have emerged corporate and
munucipal bonds and commercial papers, and also a number of IPOs. After
2007, presence of pension funds was almost the only source of securities
demand.
The third pillar of the pension reform refers to a voluntary open and closed
end pension funds. With the share of only 0.5% in the structure of Croatian
financial system they are the smallest institutional investors with marginal
influence on the economy. There are 6 voluntary open-end and 16 closed-
end voluntary funds. Out of the 4 companies for voluntary pension funds
management, only one company is in domestic ownership. Basic
determinants of voluntary pension funds market are shown in the table 6.
Table 6. Voluntary Open-end Funds in Croatia from 2001-2013
Noumbero Total
Number of Growth Member net
f pension assets
members rate assets
funds (mill.
kn)
Voluntary Open-end Funds
2002 1 1,345 3.2 - 2,379,.2
2003 4 8,773 29.6 825 3,374.0
2004 4 30,022 95.7 223 3,187.7
2005 6 51,121 206.3 116 4,035.5
2006 6 75,161 397.3 93 5,285.9
2007 6 103,923 682.8 72 6,570.3
2008 6 127,738 799.7 17 6,260.5
2009 6 146,410 1,144.8 43 12,310.4
2010 6 169,851 1,472.2 29 8,667.6
2011 6 184,125 1,642.1 12 8,924.5
2012 6 190,994 1,987.4 21 10,405.6
2013 6 204,566 2,208.1 11 10,794.1
Voluntary Closed-end Funds

2004 4 1112 1.2 - 1,079.1

2005 8 5336 7.7 542 1,443.0
2006 10 10,633 60.3 683 5,671.0
2007 12 11,943 119.1 98 9,972.4
2008 15 17,285 148.4 25 8,585.5
2009 15 17,733 218.3 47 12,310.4
2010 15 17,618 287.8 32 16,335.6
2011 15 18,155 326.6 14 18,144.4
2012 17 23,146 441.9 35 19,091.9
2013 16 22.691 494,6 12 21.797,2

Source: author’s calculation (www.hanfa.hr;ww.dzs.hr)

In contrast to the mandatory pension funds, voluntary pension market
recorded significantly different results for investors. Their annualized rate of
return since the start of operations ranging from 3.0% to 8.5% or open-end
and from 2.0% to 17.3% for closed-end voluntary pension funds.
Investment strategy in the 2012 increase the proportion of assets invested in
the domestic market (90%), mostly in government bonds (50%). On foreign
markets, investments were primarily related to shares and investment funds.
Considering the number of members in voluntary pension funds, one can tell
that that segment of financial system is none affirmed. This form of savings
affects only 10% of the employed population, largely as a result of non-
encouraging legal solutions (repeal of tax relief), or incentive solutions for
employers. Also, there is evident low level of interest and awareness of the
population for the investment opportunities and saving for old age.

5.3. Insurance companies

The share of insurance companies in the total assets of financial

intermediaries in Croatia continuously growing and by the end of 2013
increased to 6.2% of financial system. With such a steady rise, insurance
sector profiled as the third financial industry in Croatia. Still, Croatian
insurance industry is an early stage of development comparing to developed
countries, but with significant potential for future growth and development
especially in the life insurance segment.
Most of the 27 insurance companies in Croatia are in the foreign ownership.
Nevertheless, companies with majority domestic capital have more than 50%
of the total premium, which is dominated by non-life insurance.
The market is very concentrated, whereby the concentration of insurance
portfolios is far more pronounced in non-life insurance, with a trend of
decreasing concentration. In 2013, the first five insurance companies
covering about 65% of market while the first ten covering more than 83% of
the market. The market share of the largest (domestic) insurance company
is decreasing (from 38% in 2005 to 29% in 2013) due to increased activities
of its existing competitors as well as the establishment of new insurance
companies.
Considering the dominant type of insurance, structure is in favour of non-life
insurance in spite of the much higher growing rates of life insurance
segment (HANFA 2013).

Table 7. Insurance companies in Croatia – Premiums and Assets from

2000-2013 (in millions of HRK)
Gross premium No. of
Assets
Life Non-Life Total companies

2000 759.2 3,771.4 4,530.6 8,615.5 27

2001 925.2 4,173.5 5,098.7 9,670.1 25
 2002 1,152.4 4,426.4 5,578.8 11,096.8 26
2003 1,349.9 4,717.0 6,067.0 12,688.6 25
2004 1,569.4 5,057.5 6,626.9 14,406.5 26
2005 1,895.8 5,454.3 7,350.1 16,563.2 25
2006 2,165.1 6,015.1 8,180.2 19,662.8 22
2007 2,482.7 6,082.2 9,064.9 23,245.9 25
2008 2,545.8 7,140.3 9,686.1 25,690.1 30
2009 2,488.7 6,922.7 9,411.4 27,919.6 29
2010 2,443.1 6,787.9 9,231.0 30,969.9 27
2011 2,431.2 6,714.0 9,145.2 31,922.6 28
2012 2,461.2 6,577.3 9,038.5 34,049.9 28
2013 2,538.4 6,538.2 9,076.6 34,510.7 27

Source: www.hanfa.hr
Before the financial crises, the total gross written premiums have grown at
an average annual rate of 9.5% (while the life insurance segment grew twice
as fast). Tax relief for health, life and voluntary pension insurance must have
been one of the strongest factors for the trend of increasing insurance
premiums until 2009. In 2009, the premium for the first time recorded a
negative growth rate of 2.8% (-2.2% for the life insurances and -3.0% for
non-life insurances). Slightly improvements were recorded only in 2013
when total premium recorded a growth thanks to the positive trend in life
insurance.
The insurance companies portfolio is balancing but still, the most of
insurance companies portfolio is founded as car insurance. That insurance is
technically negative in many countries and in Croatia. If premiums for life
insurance should become income deductive, in that way this long term
saving could be invested on the financial market.
The main problems in the insurance industry are similar to those of other
institutions in the financial sector:
a) weak development of portfolio structure (only quarter of life insurance
in total premium),
b) lack of financial education and public awareness of importance for
retirement savings,
c) difficulties with the land register what has a strong impact on the
possibility to invest in mortgages,
d) problems arising with inconsistent legal interpretation between courts
and
 e) a lack of financial instruments in the primary and secondary capital
markets, such as mortgage bonds, which would enable them to diversify
risk more efficiently.
In order to maintain profitability and stability of the insurance system in the
future period, it is expected to keep the quality of the portfolio and to
rationalize the opertaing costs. Insurance market will probbably continue to
grow slowly in general, while in the segment of life and health insurance
results should be much stronger.

5 CONCLUSION
Croatian financial system is heavily bank-oriented and therefore the
development of financial sector is mainly determined by trends in the
banking sector. Banks are the most important financial institutions and bank
loans represent a primary resource of external financing and saving. Hence,
it is necessary to pay special attention to development of non-bank financial
intermediaries and capital market.
It is expected that in the near future, parallel to the strengthening of
economic power, the growth of Croatian financial system will continue.
However, it is not very likely to expect that the size and the degree of
development of the banking sector, and especially the non-banking
intermediaries, in the developed market economies would be reached soon.
One of the specific problems is low investor risk tolerance enhanced with the
lack of tradition and culture of investment in capital market and non-deposit
financial intermediaries. For these reasons, there is a strong need for
adopting and implementing comprehensive national strategy of financial
literacy of population and to raise awareness of the need to save for the old
age.
Croatian bank-centric system of funding does not match the needs of the
economy organized on the principles of market economy. Therefore, the
process of financial intermediation, institutions, forms and available
instruments should be intensified.

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