This chapter examines Bosnia and Herzegovina’s ongoing and planned initiatives to implement reform measures aimed at expanding support for businesses and innovative start-ups, as set out in the draft 2025 Reform Agenda. It analyses the frameworks and programmes established to improve access to both traditional bank financing and alternative non-bank financing, with particular attention to early-stage firms. It then reviews the country’s innovation policies and frameworks, assessing the scope for updating and harmonising support for businesses, and considers how these efforts can be reinforced through targeted schemes that foster innovation, especially in the context of the green and digital transitions.
Assessing Bosnia and Herzegovina's Reform Agenda for Private Sector Development
Abstract
Ensuring private sector development requires both access to finance and a supportive environment for innovation. While funding enables businesses to invest in new technologies, scale operations and enhance productivity, a well-developed innovation ecosystem ensures that these investments translate into competitive advantages for the economy. Yet, in Bosnia and Herzegovina, limited access to bank finance for start-ups and early-stage businesses together with an underdeveloped non-bank finance sector constrain businesses’ ability to secure necessary capital. At the same time, gaps in policy and legal frameworks along with compartmentalised institutional structures prevent innovation policies from effectively supporting business growth.
To address these challenges, the draft 2025 Reform Agenda outlined several priorities aimed at improving access to finance for businesses, particularly to innovative start-ups and small and medium-sized enterprises (SMEs). Table 4.1 delineates the two priority measures1 designed to strengthen the frameworks and mechanisms supporting this financial assistance, along with their state of implementation. Overall, Bosnia and Herzegovina has made limited progress in advancing these reform areas, highlighting the need to accelerate harmonisation of SME and entrepreneurship support guidelines and to establish comprehensive innovation frameworks that are aligned between entities.
Source: Draft Reform Agenda for Bosnia and Herzegovina (as of September 2025).
Beyond the measures specified in the Reform Agenda, this chapter considers several related areas that fall outside its direct scope. As summarised in Table 4.2, these areas enrich the analysis by situating reforms within a broader context, signalling issues that warrant further policy focus in support of the Agenda’s overall objectives. There is significant potential to scale up and better target public financial support to underserved business segments to drive the growth of innovative and strategically important sectors. Furthermore, policy efforts to develop robust legal and regulatory frameworks for alternative financing sources remain insufficient. Entity-level support has so far been overly focused on digitalisation, with attention to preparing businesses for the green transition and facilitating their integration into the EU market – particularly in view of the EU’s Carbon Border Adjustment Mechanism (CBAM) – only recently gaining momentum.
In Bosnia and Herzegovina, the financial system is dominated by banks, as they account for more than 90% of total financial sector assets. The banking sector is generally well-capitalised: in 2024, the capital adequacy ratio2 was 19.8% (19.3% in the Federation of Bosnia and Herzegovina (FBiH) and 21.1% in Republika Srpska (RS)),3 which is well above the Basel III minimum requirement of 10.5%.4 The sector is also broadly liquid and profitable. Non-performing loans have declined to 3.2% of the total loan portfolio (FBiH: 3.0%, RS: 3.7%) in 2024—the lowest level since 2008, though still slightly above the Western Balkan average of 3.1%.5
Smaller and early-stage businesses struggle to secure bank financing due to high collateral requirements, incomplete asset registration and a lack of financial skills.
Despite the relative stability and strength of the banking sector, it does not sufficiently meet the financing needs of the private sector. 57% of firms identified access to finance as a key barrier to scaling up—well above the regional average of 40% (RCC, 2023[1]). Access to credit remains uneven, with smaller and younger firms facing higher barriers and borrowing costs, thereby restricting their capacity to invest, grow and compete effectively in the market.
In Bosnia and Herzegovina, a large share of lending continues to flow towards traditional, relatively low-risk segments, such as consumer credit and state-owned enterprises. Banks’ perception of SMEs, and especially start-ups, as high-risk borrowers, combined with challenges in collateral enforcement (which is widely regarded as a lengthy and difficult process), results in a lower share of credit being allocated to SMEs. In 2023, SMEs accounted for only 44.1% of total lending by commercial banks, below the levels seen in comparable EU countries like Latvia (76.0%) and the Slovak Republic (60.5%) (OECD, 2024[2]).6
In this context, high collateral requirements remain a barrier to increasing access to bank financing for smaller businesses.7 In the absence of minimum loan thresholds below which collateral rules could be applied more flexibly, SMEs are often required to provide collateral worth 100% to 200% of the loan amount, which many are unable to meet (OECD, 2024[2]).8 In fact, around 30% of SMEs in Bosnia and Herzegovina report having had at least one loan application rejected (Kicic and Ribic, 2024[3]).
The type of collateral also presents an obstacle. While both entities legally allow secured creditors to enforce rights over non-fixed assets such as securities and movable assets, banks predominantly require real estate or land as collateral, viewing movable assets as less secure. This poses a challenge particularly for startups, who lack such assets and whose most valuable resources are often intangible (e.g. intellectual property, software, brand value), which banks rarely accept as collateral (OECD, 2024[2]). Moreover, the strong emphasis on fixed collateral often means that sole proprietors must secure guarantees against personal property.
The incomplete registration and information systems for assets further constrain lending to businesses. The cadastre, which tracks real estate and land ownership, is managed separately at the entity level, whereas registration for other assets is handled at the state level. Ownership registration for pledges on fixed and movable (non-fixed) assets remains incomplete: less than 50% of movable assets are documented, while fixed asset registration ranges between 75% and 99%. This issue is particularly acute for SMEs, which often lack the time and resources to navigate the asset registration process. Registering assets can take 7 to 14 days, and valuing movable assets is often costly. In practice, many SMEs end up registering only their fixed assets (OECD, 2024[2]).
A general lack of financial literacy skills also constrains enterprises’ ability to access bank financing. Small businesses struggle with record-keeping and financial planning, leading to incomplete or informal financial documentation. Indeed, banks in Bosnia and Herzegovina note a clear segmentation among businesses, with these smaller businesses often unable to provide the necessary documentation—such as financial statements, tax returns and business plans—limiting their ability to meet lending criteria.
Several public support mechanisms are in place, facilitating businesses’ access to credit, but there is room to scale them up and simplify application and approval processes.
Some targeted policy schemes have been introduced to ease enterprises’ access to financing, although evidence of their use and effectiveness is limited. Notably, guarantee funds have been established to enhance credit access for businesses. In RS, the government has implemented an entity-wide guarantee fund, alongside two additional funds within local development agencies in Banja Luka and Prijedor. In the FBiH, the Development Bank of FBiH serves as the entity-level fund, with five other guarantee funds operating at the cantonal level.9 The Brčko District has introduced a Development Guarantee Fund to foster SME growth.
However, these instruments likely operate below their potential, especially once post-COVID support was fully phased out. In 2024, the Development Bank of FBiH issued 116 guarantees worth BAM 36.4 million (EUR 18.6 million), a sharp decline from 2023, when 307 guarantees totalling BAM 93.5 million (EUR 47.8 million) were issued.10 In RS, the Guarantee Fund has issued a total of 617 guarantees worth BAM 115 million (EUR 58.8 million) since its establishment in 2010—less than the volume issued by FBiH in just two years of operation (2023-24).
Stakeholder consultations revealed that businesses often find the application processes for guarantee schemes cumbersome and lacking transparency, and many perceive political connections as influencing access to these funds. Moreover, across both entities, many potential beneficiaries reported either being unaware of the available funds or having experienced difficulties in applying.
Dedicated public credit lines can play an important role in selectively filling financing gaps for SMEs, particularly when commercial banks are unwilling or unable to lend due to perceived risks or insufficient collateral. Such credit lines are available in both entities. In RS, the Investment Development Bank offers lines supporting start-ups11 for fixed and working capital, with interest rates ranging from 3% to 4.9% for amounts between BAM 5 000 (EUR 2 550) and BAM 500 000 (EUR 256 000), depending on the type of investment (Investment and Development Bank of Republika Srpska, 2025[4]). In the FBiH, the Development Bank provides credit lines with a fixed 2.5% interest rate targeting key sectors and areas of focus, alongside long-term loans for micro-enterprises and craftsmen at 4.6% interest (Development Bank of FBiH, n.d.[5]).
However, limited data available on the number of beneficiaries and the distribution of funds make it difficult to assess the overall reach and effectiveness of these schemes. Evaluation reports nonetheless highlight implementation shortcomings that have constrained uptake. For example, a recent report found that SMEs in both entities were discouraged from utilising dedicated credit lines due to unfavourable loan conditions, lengthy approval processes and extensive documentation requirements (World Bank, 2025[6]). Complementing the public initiatives, several donor-funded programmes, some of which are highlighted in Table 4.3, have been implemented to expand access to finance for businesses.
Way forward
Develop tailored policy measures to increase bank lending to SMEs, particularly to start-ups and other underserved segments. Banks do not adequately cater to start-ups and firms with limited tangible assets, especially those operating in the technology and service sectors. Consequently, they could be incentivised to offer accessible loan products, such as those with flexible repayment schedules and lower collateral demands, through targeted policy measures. These may include expanding public credit guarantee schemes to share credit risk; offering performance-based incentives such as tax benefits, co-financing or preferential regulatory treatment (e.g. lower risk-weighting for SME loans); and/or introducing public or donor-backed subsidies to help offset expected losses on lower-collateral lending.
Reorient public financial support to high-impact areas. Given limited public resources and low overall uptake, existing guarantee schemes can be more effectively targeted to address the financing needs of the start-ups and aligned with key policy objectives, such as enhancing digitalisation and innovation, while ensuring clear criteria and impact monitoring. Experience from OECD countries can be helpful in designing such targeted schemes: for instance, Germany’s ERP Start-up Loan illustrates that partial risk guarantees and accessible lending channels can be effectively combined to support early-stage firms (Box 4.1).
The ERP Start-up Loan offered by Germany’s public development bank KfW is a flagship programme designed to support entrepreneurs, start-ups, and young companies by improving access to affordable finance. The loan can be used for a wide range of purposes, including investments in physical capital (such as land, buildings, construction costs and machinery), as well as personnel and marketing expenses.
Eligible applicants include businesses with fewer than 250 employees and either an annual turnover of less than EUR 40 million or total assets below EUR 43 million. Entrepreneurs can apply for KfW loans of up to EUR 125 000 (of which up to EUR 50 000 may be used for operating resources) through their regular commercial banks. A key feature of the programme is that KfW assumes 80% of the default risk, significantly lowering the barrier to credit access for new firms. Notably, start-ups remain eligible to apply for the loan up to five years after founding, ensuring continued support during the early growth phase.
Sources: (KfW, 2025[11]; KfW, n.d.[12]).
Improve the accessibility and awareness of guarantee mechanisms. In both entities, authorities would benefit from simplifying and digitalising application and approval procedures, while ensuring that selection criteria are standardised, transparent and free from perceived favouritism. Moreover, implementing targeted communication campaigns by working closely with business associations and chambers of commerce would increase the awareness of these instruments and provide support potential beneficiaries throughout the application process.
Expand opportunities to improve financial literacy and business management skills among entrepreneurs and businesses. Tailored initiatives should focus on helping individuals and businesses understand financial statements and creditworthiness assessments as well as how to prepare comprehensive business plans. Additionally, they should offer guidance on engaging effectively with banks and financial institutions, while also demonstrating how digital tools can be leveraged for improved financial management. Establishing business clinics or advisory services at the local level and partnering with banks and chambers of commerce to offer hands-on training would be practical ways that would contribute to improving businesses’ access to finance.
Non-bank finance can play a vital role in bridging the bank financing gap by expanding financial inclusion and providing businesses with the capital needed to drive innovation and growth. Yet, despite some progress in recent years to strengthen legislation promoting alternative sources of finance for firms, the sector largely remains underdeveloped.
Robust microfinance sector plays a central role in supporting self-employed individuals, particularly women.
Microfinance represents a practical entry point for expanding non-bank financing in Bosnia and Herzegovina. With relatively modest infrastructure and regulatory requirements, and often backed by donor support, it can enhance financial inclusion by providing small-scale loans to those typically excluded from traditional banking, particularly self-employed individuals and micro-enterprises.
Bosnia and Herzegovina has one of the most developed microfinance sectors in the Western Balkans, with 27 microfinance institutions (MFIs)—including both non-profit microcredit foundations and for-profit microcredit businesses—operating as of 2022, up from 18 in 2013 (OECD, 2024[2]). These institutions have a broad presence, operating through 746 offices and employing nearly 2 500 staff members, primarily in field offices, ensuring widespread accessibility across the country (Kicic and Ribic, 2024[3]). In 2023, MFI loans accounted for 2.56% of GDP, the second highest share in the region.12 The sector is supported by a relatively robust legal framework, with harmonised legislation across both entities. While RS and the FBiH each have their own Laws on Microcredit Organisations, these apply only to for-profit microcredit businesses, leaving non-profit foundations outside the scope of regulation.
However, microfinance is not a viable option for most enterprises, as it primarily serves individual entrepreneurs and households, with only 3% of clients being businesses (i.e. limited liability companies) (Kicic and Ribic, 2024[3]).13 The lending cap of BAM 50 000 (EUR 25 532) is often insufficient to meet the financing needs of most SMEs (OECD, 2024[2]). Moreover, interest rates remain prohibitively high: in 2023, the average effective interest rate in the microfinance sector reached 22.3% in RS and 22.9% in the FBiH—more than five times higher than the average bank lending rate to the private sector (4.1%) (World Bank, 2025[13]; Blagovčanin, 2024[14]). These elevated rates largely reflect the higher operational costs, smaller loan sizes and greater credit risks associated with microloans (compared to traditional bank lending).
Yet, microfinance can still play a role in improving access to finance, particularly for women entrepreneurs, who face barriers in accessing traditional bank loans. This challenge is closely linked to structural inequalities in asset ownership. The most recent data show that women account for only 38% of registered landowners in Bosnia and Herzegovina. Even among those who do own land or real estate, just 27% are registered as sole owners, limiting their ability to use property independently as collateral (Ramić and Mezetović Međić, 2023[15]).
Against this backdrop, the microfinance sector in Bosnia and Herzegovina has emerged as an important channel for women’s access to finance, with between 40 and 45% of its funds allocated to women (European Microfinance Network, 2025[16]; Kicic and Ribic, 2024[3]). Individual MFIs also often prioritise female clients through tailored outreach and specialised products and services. For example, the Mi-Bospo Microcredit Foundation, originally established to serve only women, continues to offer gender-sensitive loan products and marketing campaigns to promote female entrepreneurship. Similarly, MCF Mikra focuses largely on serving women, aiming to foster self-employment and support the development of micro-enterprises.14 Both institutions maintain predominantly women client bases, with women accounting for 59% of Mi-Bospo’s clients and 68% of Mikra’s (FinDev Gateway, 2023[17]; Microfinance Centre, 2022[18]).
Leasing and factoring remain underutilised as alternative sources of financing.
Leasing and factoring represent important forms of alternative, asset-based financing that can help address some of the key structural barriers in Bosnia and Herzegovina’s financial system. Unlike traditional bank lending, these instruments rely on the value of underlying assets, such as leased equipment or accounts receivable, rather than the overall creditworthiness of the borrower, making them particularly relevant for businesses with limited access to conventional finance.
Leasing, or the renting of an asset for a given period (rather than outright purchase), is not widely used in the country. In 2024, four leasing companies, all registered in FBiH, were active15 and reported BAM 314 million (EUR 160 million) in new leasing contracts, marking a 60% increase compared with 2019. (Banking Agency of the Federation of Bosnia and Herzegovina, 2025[19]; Banking Agency of the Federation of Bosnia and Herzegovina, 2020[20]). Despite this growth, leasing still represents only 0.66% of GDP, below the EU average of 2.05%.16 The leasing market’s expansion is constrained by several factors, including the application of a 17% VAT on financial leases and the requirement for double supervision for firms operating in both entities, which raises compliance costs and reduces competitiveness. Encouragingly, both RS and the FBiH have proposed reforms to exempt interest calculated under financial leasing contracts from VAT to help stimulate market growth.
Factoring, a financing tool that can help SMEs address liquidity challenges by selling their accounts receivable (invoices) to a third party at a discount for immediate cash, is still at an early stage of development, although steps are being taken to improve the enabling environment. In RS, the adoption of a dedicated Law on Factoring in 2020, followed by implementing bylaws in 2021, has laid the foundation for a clearer and more supportive regulatory framework. At the time of writing, the FBiH was still preparing amendments to its own legislation.17 Ongoing reforms to the legislative framework will be needed to support the gradual expansion of factoring activities, which accounted for 0.27% of GDP in 2023 (versus 11.9% in the EU) (FCI, 2024[21]).
In the FBiH, factoring services are offered exclusively by three commercial banks. In 2024, a total of 234 contracts were signed, worth BAM 152.4 million (EUR 77.9 million), down from 351 contracts valued at BAM 175.8 million back in 2019 (Banking Agency of the Federation of Bosnia and Herzegovina, 2025[19]; Banking Agency of the Federation of Bosnia and Herzegovina, 2020[20]). In RS, two new licenses were issued for factoring activities in 2024, bringing the total number of eligible factoring companies to five. In 2024, a total of 203 contracts were signed, worth BAM 17.3 million (EUR 8.9 million), representing a 20% increase in volume compared to the previous year.
The factoring market faces notable hurdles, such as the limited development of independent factoring companies, which are subject to overly stringent regulation by banking authorities despite not accepting deposits. Additionally, inconsistencies in legislation further constrain growth: while the Laws on Factoring permits financing of receivables for up to 180 days, other legal provisions impose more restrictive limits in practice.18 This contradiction restricts the scope of eligible receivables, while weak law enforcement further discourages uptake.
Capital markets are underdeveloped and fragmented, failing to diversify financial sources.
Functioning capital markets, comprised of both stock and bond markets, require strong legal and supervisory frameworks, along with robust institutional capacity and sustained investor confidence. As such, despite their potential to diversify financing sources, capital markets currently constitute only a small part of the overall financial system.
Both entities operate their own stock exchanges: the Sarajevo Stock Exchange in the FBiH and the Banja Luka Stock Exchange in RS. In 2023, total turnover on the Sarajevo Stock Exchange reached BAM 785.7 million (EUR 402 million), while trading on the Banja Luka Stock Exchange was slightly lower, at BAM 736.1 million (EUR 376 million). Market capitalisation remains low, estimated at around 22.0% of GDP in the FBiH and 30.6% in RS in 2024 (Figure 4.2).19 Although the small size of the economy—particularly given the presence of two separate exchanges—constrains the stock market’s potential, liquidity levels also remain low relative to comparable EU markets.
Percentage of GDP
Note: To calculate the figures for both the FBiH and RS, each entity’s market capitalisation as of December was divided by its respective annual GDP.
Percentage of total market capitalisation value
Notes: EU-11 economies denote Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia. To calculate the turnover ratios in both entities, the turnover of total securities was divided by the market capitalisation in December of each year.
Meanwhile, the corporate bond market has generally been shallow and illiquid in both entities, although recent developments indicate a gradual increase in activity, particularly in RS. In May 2025, Prijedorputevi, a road builder and operator company, listed BAM 4 million (EUR 2 million) worth of corporate bonds on the Banja Luka stock exchange, the largest recent issue in Bosnia and Herzegovina.
Shortcomings in the legal frameworks of both entities prevent further development.20 While existing legal frameworks permit the issuance of various securities (e.g. treasury securities, municipal bonds, corporate bonds, zero-coupon bonds) and require comprehensive disclosure of terms, they also introduce barriers. For example, the obligation to publish a full prospectus for all bond issues, including private placements, add complexity and cost to the process, posing a particular burden for smaller or private offerings and discouraging issuers, thus limiting market activity. Trading is further restricted by rules that limit bond transactions to brokers, preventing institutional investors from trading directly and thereby reducing market liquidity.
Market growth is additionally constrained by the frequent issuance of short-term, budget-driven government bonds, particularly in RS. They absorb the limited available liquidity and crowd out corporate bonds by offering a lower risk alternative for investors. The absence of a regular government bond issuance calendar and an official yield curve reduces market transparency, making it harder for companies to plan their financing activities. In this context, targeted measures to encourage corporate bond issuance, such as subsidies or legislation allowing the issuance of tailored bonds for SMEs’ needs, also do not exist (OECD, 2024[2]).
Fragmented regulations and gaps in the legal framework have largely hindered the development of private equity.
Given the underdeveloped state of stock market, private equity, including business angel investing and venture capital (VC), can serve as an alternative to ease access to finance for businesses, especially early-stage ventures.
However, one of the key barriers to the development of private equity is the absence of a robust and cohesive regulatory framework. At the entity level, private equity is governed by a patchwork of different laws,21 which often creates inconsistencies and legal uncertainty for investors. Another constraint across both entities is the absence of clear legal definitions tailored to the specific features of private equity. Key terms remain undefined in existing legislation—for instance “start-ups” in the FBiH and “angel investing/investor” in both entities—leading to divergent interpretations among domestic and international investors.
In the FBiH, equity financing falls under the Law on Investment Funds, which does not explicitly cover VC or angel investing. The entity has not yet adopted legislation on alternative investment funds (AIFs) nor amended existing laws to accommodate private equity instruments. Additionally, only legally recognised qualified investors are permitted to establish and manage investment funds, effectively preventing members of the diaspora from creating and operating local investment vehicles. This restriction reduces opportunities to attract external capital and foster a more dynamic private equity market.
In contrast, RS has made some progress in reforming its regulatory environment. In 2022, the entity amended its Law on Investment Funds to allow for the creation of AIFs. Previously, such funds were restricted to publicly traded securities and were subject to stringent requirements regarding prospectuses, fund management and internal controls. The reform introduced a dedicated legal framework for AIFs, including VC funds, enabling more flexible capital allocation and aiming to attract a broader and more diverse investor base. Yet, despite this advancement, full alignment with EU regulations, namely the Alternative Investment Fund Managers Directive (AIFMD), has not yet been achieved. Moreover, gaps remain in investor protection and transparency, limiting the potential to attract investment from EU capital market (OECD, 2024[2]).
The use of angel investing and venture capital is extremely rare, constraining access to early-stage financing.
Angel investing and VC ecosystems are virtually non-existent in Bosnia and Herzegovina. Beyond regulatory constraints, market and institutional gaps continue to hinder the development and availability of these financing instruments.
Business angel investing has the potential to play a role in the economy’s early-stage financing landscape by helping bridge the gap between initial funding (typically sourced from personal networks or retained earnings) and later-stage VC (USAID, 2024[27]). This role is particularly important given that few banks offer loans tailored to the needs of start-ups. A recent survey found that most start-ups in the country seek funding between EUR 100 000 and EUR 1 million—beyond what traditional financial providers might be willing to offer (USAID, 2024[27]).
Yet, angel investing has yet to gain meaningful momentum, with earlier efforts to establish active investor groups in 2010 and 2014 failing to sustain activity or generate notable investment. In recent years, there have been some modest developments, including the establishment of the Bosnia and Herzegovina Business Angel Network in 2022 and the launch of Vrbas Capital in 2023, though neither has so far resulted in actual investments realised. Progress was further set back in early 2025 by the departure of USAID, which had been supporting the development of the business angel ecosystem.
Similar to angel investing, the VC ecosystem is still in its nascent stages. Available data show extremely low levels of VC investment, amounting to just EUR 2.6 million in 2024—seed funding for only a single company—compared to significantly higher levels in peer economies such as Bulgaria (EUR 56.8 million) and Croatia (EUR 115.3 million) (Dealroom, 2025[28]).22 In the absence of an enabling legal framework, no domestic VC funds are officially registered, limiting investment activity to a small number of foreign funds backing companies operating in Bosnia and Herzegovina. One notable attempt to fill this gap was BH TechLab, a platform launched by BH Telecom to support early-stage startups.
Beyond the aforementioned shortcomings of regulatory frameworks, several perceptions surrounding the private equity landscape present significant barriers. A survey of entrepreneurs and business owners identified the primary obstacle as a general aversion to shared ownership (Kozarević and Amra, 2016[29]). Indeed, the local business culture, often observed in emerging economies where family businesses dominate, favours maintaining full control, which makes the concept of shared ownership less appealing to entrepreneurs. Another major barrier highlighted by respondents was a limited understanding of the motives, expertise and operational structures that underpin private equity investments. This knowledge gap is exacerbated by the scarcity of literature and professional resources in the local languages that offer comprehensive coverage of such investments.
Despite the situation, the unique context of Bosnia and Herzegovina presents a valuable opportunity to strengthen the private equity ecosystem by tapping into the largely underutilised potential of diaspora financing. In 2024, over 1.6 million people from Bosnia and Herzegovina were living abroad, representing approximately 34% of the total population (United Nations, 2024[30]). While donor initiatives, including the now-discontinued USAID’s Diaspora Invest project, have attempted to connect start-ups with diaspora investors, a more systematic, government-backed approach is lacking.
Moreover, barriers to non-resident investment, particularly in start-ups, remain. The absence of modern, internationally recognised early-stage financing instruments, such as Simple Agreements for Future Equity (SAFEs)23 and convertible notes, limits flexibility and discourages participation. Moreover, diaspora investors face burdensome procedures, including in-person submission of original documents, notarisation, and the requirement to obtain apostille certifications for foreign documents. These processes are often costly and time-consuming. The slow pace of digitalisation within public administration and the judiciary further compounds these challenges, creating a difficult environment for cross-border investment (see Business Registration and Licensing chapter for more details).
Way forward
Improve the regulatory treatment of leasing by eliminating VAT on the interest component of financial leases. The application of VAT to the interest payments creates a competitive disadvantage for leasing companies, raising the cost of leasing by nearly 20% compared to equivalent bank financing—for example, turning a 5% interest rate into an effective rate of 6%. Removing this tax would help level the playing field between leasing companies and banks, support the development of the non-bank finance sector and ultimately improve access to finance for SMEs.
Simplify and streamline the legal framework for factoring. To ease the regulatory burden on factoring companies, the legislation should be revised to simplify registration and licensing requirements for all non-bank financial companies providing factoring. Reforms should also address overregulation by the banking agencies and eliminate any legal or regulatory limits on the maturity of receivables that factoring companies may purchase.
Continue efforts to strengthen capital markets. While the relatively small size of Bosnia and Herzegovina’s economy may limit the development of a highly advanced capital market, there is still room for progress. Namely, both entities are encouraged to modernise and align their legislation with EU standards and international best practices, removing legal ambiguities to facilitate compliance and cross-border investment. Special attention can also be given to adjusting primary market procedures, regulations, and fees to better accommodate small-cap firms and SMEs, ensuring that equity and debt instruments become a more viable financing option.
To support this process, a task force composed of representatives from the Securities Commissions, Ministries of Finance, banking authorities, regulatory agencies, and stock exchanges can be established to co-ordinate legislative reforms and policy development. Another potential avenue for strengthening these markets could involve regional co-operation with neighbouring economies to facilitate cross-border capital market integration (see Box 4.2).
Like Bosnia and Herzegovina, the Baltic economies have a large SME sector, yet their domestic capital markets are not currently structured to meet the financing needs of these firms, which have traditionally relied on bank lending. Access to capital market, particularly equity financing through IPOs, is often perceived by SMEs, especially small- and mid-cap companies, as too complicated or costly and is therefore rarely pursued.
To help address this financing gap, the European Bank for Reconstruction and Development (EBRD), with support from the European Commission’s DG REFORM, is working to establish a regional Capital Markets Development Accelerator Fund (CMDAF) across Estonia, Latvia and Lithuania. The CMDAF supports pre-IPO and growth-oriented SMEs by improving their access to equity financing through local growth markets. It also aims to improve liquidity in secondary markets and expand the variety of investment opportunities available to domestic investors.
The Baltic example underscores the value of regional collaboration in overcoming structural constraints, such as small market size, that inhibit the development of capital markets. In the Western Balkans—where individual economies also face limitations in market depth and investor base—cross-border initiatives such as the CMDAF could offer a pathway to collectively develop capital market infrastructure and improve access to alternative sources of finance for SMEs.
Source: (EBRD, n.d.[31]).
Revise legal frameworks to explicitly recognise standard early-stage investment instruments, such as convertible notes and SAFEs. This not only would offer businesses in Bosnia and Herzegovina a more flexible way of raising capital, but would also increase certainty and confidence of investors, thereby expanding the scalability and accessibility of early-stage finance.
Introduce definitions for key terms and align with international definitions the legal frameworks for alternative financial instruments. Clear legal definitions for key terms like “startups” and “angel investing” would provide greater clarity for both business owners and investors, potentially enabling the development of a more vibrant angel investment sector. Both entities and Brčko District could consider amending their existing Laws on Companies to include these definitions, or the state-level government could consider developing new legislation to formalise this terminology (Box 4.3). In either case, the competent ministries or agencies across all levels of government should co-ordinate to ensure consistency in these definitions.
In May 2023, Portugal enacted Law 21/2023, which provides clear and structured definitions for both "startups" and "business angels.”
Definition of “startup”: A startup, under this law, is a legal entity that meets the following conditions:
Operational duration: The company has been in operation for less than 10 years.
Size: It employs fewer than 250 workers.
Annual turnover: Its annual turnover does not exceed 50 million euros.
Independence: The company does not result from a transformation or split of a large company and has no majority direct or indirect shareholding by a large company in its capital.
Presence in Portugal: The company has its headquarters or a permanent representation in Portugal, or at least 25 employees in Portugal.
Innovation and growth potential: The company meets at least one of the following criteria:
Innovative company with high growth potential, with a business model, products, or services that are innovative, as defined by Ordinance No. 195/2018 or recognized by the National Innovation Agency (ANI) for its research and development activities.
Completed at least one venture capital financing round from a legally authorised entity for venture capital investment or from business angels certified by the Agency for Competitiveness and Innovation.
Received investment from Banco Português de Fomento or funds managed by it, or from its subsidiaries.
Definition of “business angel”: A business angel is defined as an individual who makes investments in startups, contributing to their financial capacity, market knowledge, and expertise. However, legal entities may also qualify as business angels if they meet specific conditions.
Note: The conditions legal entities must meet to become business angels include: being majority-owned and managed by a qualifying individual angel investor, maintaining an investment policy focused on acquiring equity or similar financial instruments in high-growth-potential companies, operating as SMEs that invest exclusively in other SMEs, securing at least 15% of their capital from the associated individual business angel, and being legally established and authorised to operate within the country.
Source: (Government of Portugal, 2023[32]).
Develop financial incentives and other measures to encourage angel investment. Direct government co-financing of private business angel networks is generally not preferred, as it can risk market distortion and requires specialised expertise. Instead, tax incentives have proven effective in stimulating angel investment, particularly among less experienced investors (Denes et al., 2020[33]). Romania serves as a good practice example, as it has introduced several tax breaks for business angels (Box 4.4).
Partner with donors and international partners to develop targeted private equity programmes for early-stage financing. In tandem with improving the legal and regulatory framework, collaboration with partners can also help to address the gap in early-stage financing, by providing financial resources, technical assistance and expertise to support the development of both angel investing and venture capital ecosystems.
Promote crowdfunding as an alternative source of early-stage finance for startups and early-stage SMEs. In the absence of a well-developed public and private equity markets, crowdfunding can help bridge financing gaps. Key actions to support crowdfunding include: developing a dedicated legal framework; establishing platforms to educate entrepreneurs and investors; promoting success stories to raise awareness; and supporting the creation of an official, regulated crowdfunding platform.
Romania has introduced a dedicated legal framework to encourage angel investment in SMEs, recognising the critical role that private investors play in financing early-stage companies with high growth potential.
Namely, the Law on Angel Investing allows any individual to invest in an SME under specific conditions:
the company must be a limited liability company;
the investor must not have a prior connection to the company;
the value of the investment must fall between EUR 3 000 and EUR 200 000; and
the angel investor’s shareholding cannot exceed 49% of the company’s capital.
To compensate for the high risks typically associated with early-stage investments, the Romanian framework introduces a set of tax incentives. Angel investors are exempt from income tax on dividends for a period of three years following the acquisition of shares. Additionally, they are exempt from capital gains tax on the sale of shares, provided that the shares are held for at least three years.
This approach is highly relevant for Bosnia and Herzegovina, where a specific legal status for angel investors does not yet exist and where administrative barriers—particularly for diaspora investors—can discourage participation in early-stage financing. Romania’s experience demonstrates that a clear legal and fiscal framework can effectively mobilise private capital for innovation and entrepreneurship..
Source: (Government of Romania, 2015[34]).
Without a supportive legal, regulatory and policy framework to foster innovation, particularly in sectors where Bosnia and Herzegovina holds competitive advantages, increased financing may be of little value and fail to trigger innovative activities.
Innovation policy is highly fragmented and outdated, failing to leverage economies of scale.
Responsibility for innovation policy development and implementation primarily lies at the entity or cantonal level. Both RS and the Brčko District manage their own policies independently; in the FBiH, responsibility falls to each of the ten cantons, leaving the FBiH government to serve largely in a co-ordinating role. The decentralised approach, especially observed in the FBiH, has led to compartmentalised and differing policy design as well as small-scale, isolated initiatives that fail to leverage the economies of scale offered at the national scale (OECD, 2024[2]).
At the national level, there is currently no strategic direction, either through a new strategy or action plan, to ensure coherence in innovation policy and related initiatives. The Strategy for Scientific Research, which covers only a portion of the innovation policy landscape, expired in 2022, and no action plan was ever developed to support its implementation. Plans to establish a working group to draft a new strategic framework for scientific research and intergovernmental co-ordination remain pending.
In RS, businesses’ innovation is primarily incorporated into its Strategy for Development of SMEs 2021-27, which prioritises financial support schemes for SME innovation. The Strategy foresees substantial funding available, including BAM 15 million (EUR 7.7 million) from the RS government as well as BAM 5.2 million (EUR 2.7 million) from donors (Government of Republika Srpska, 2021[35]). Additionally, the government of RS adopted the Draft Law on Innovation Activity in March 2025, which introduces a more robust legal framework for the development and expansion of innovation activity in the entity. RS has also prepared an Action Plan for Innovation in SMEs for the period 2024-27, which will be implemented by Ministry of Economy and Entrepreneurship (European Commission, 2024[36]).
In contrast, the FBiH lacks a dedicated innovation policy framework, with no significant developments in recent years. Indeed, as of September 2024, the government of FBiH had indefinitely suspended its work on drafting its innovation strategy, as the existing working document, originally drafted in 2010, had become outdated and no longer relevant.24 Only four of its ten cantons have regulations addressing research and innovation (R&I) to support innovation. Additionally, each canton has developed its own Development Strategy, with varying emphasis on financing innovation for SMEs, further underscoring the lack of co-ordination in supporting innovation across the FBiH.
Like the FBiH, Brčko District does not have a dedicated innovation strategy. Instead, innovation support is primarily embedded in its Development Strategy 2021-27, which includes a specific measure for promoting business innovation. However, in 2024, the District, with the support of both local and international partners, developed a draft Action Plan for SME Innovation 2024-27 (EDA - Development Agency, 2024[37]). While the plan is not based on a standalone innovation strategy, it aims to serve as an operational tool to implement innovation support measures for SMEs.
Progress in developing a Smart Specialisation Strategy has been hampered by challenges related to governance, co-ordination and capacity.
Bosnia and Herzegovina remains in the early stages of developing its national Smart Specialisation Strategy (S3). The economy launched the process with the establishment of an inter-institutional working group by the Council of Ministers in 2020; this working group, supported by the European Commission’s Joint Research Centre, was meant to oversee the development of the S3.25 In the Decree on Nomination of Working Group for Smart Specialisation Strategy in Bosnia and Herzegovina, adopted by the Council of Ministers in November 2020, the deadline for the strategy was set to be three years (Kutlaca and Zivkovic, 2022[38]).
Despite some progress in establishing the institutional framework, the overall development of the S3 has been slow, resulting in the country missing its three-year deadline. The reasons for the slow pace of progress stem from several challenges, primarily related to governance. Nevertheless, the S3 presents a key opportunity to improve co-ordination across different levels of government, as it is a national-level initiative that could establish a more cohesive institutional framework for innovation (OECD, 2024[2]). The working group's lack of experience in managing complex, cross-sectoral processes impeded early efforts, compounded by unclear mandates and the absence of a national S3 co-ordinator. Furthermore, capacity constraints, including insufficient budget and a lack of dedicated staff, contributed to delays in advancing the strategy (Radovanovic and Bole, 2024[39]).
As of September 2025, while the strategy has yet to be finalised, both the quantitative and qualitative analyses for the S3 have been completed. The qualitative analysis culminated in a report mapping Bosnia and Herzegovina’s economic, scientific and innovation potential at the national level, which will serve as the foundation for the Entrepreneurial Discovery Process (EDP).26 Preparations for planning and financing the EDP are currently underway, with RS having already initiated the process.
Way forward
Reinvigorate efforts to establish a state-level strategic framework for innovation that delineates overarching principles and priorities for the broader innovation ecosystem, including (but not limited to) scientific research. The creation of a dedicated working group, incorporating representatives from all levels of government alongside stakeholders from academia, the private sector and civil society—the so-called “quadruple helix”27—would be key to ensure a co-ordinated, participatory approach. At the entity level, the FBiH should develop a complementary innovation framework, possibly led by the Ministry of Development, Entrepreneurship and Crafts, to guide and harmonise policy formulation in key areas, such as SME innovation, across its cantons.
Foster commitment to shared S3 objectives across all levels of government, by also ensuring the necessary funding required. Following the strategy’s adoption, ensure that all innovation actors across state, entity, canton and Brčko District levels are engaged and committed to the common objectives of the S3. It is vital to strengthen co-ordination mechanisms to support joint planning and implementation and build institutional capacities for monitoring and evaluation. Authorities should estimate the financial resources required for implementing S3 priorities, including investments in research, innovation infrastructure, human capital and support services. They also should explore a mix of domestic public funding, donor support and relevant EU funding, such as the Instrument for Pre-Accession III, to ensure financial sustainability of the strategy (OECD, 2024[2]).
Leverage good practices and peer learning to support S3 development. Engaging with peers in the region (such as Montenegro, Serbia and North Macedonia) or with EU Member States that have more advanced experience in S3 development and implementation can provide valuable insights. To support such collaboration, the European Commission established the Smart Specialisation Community of Practice (S3 CoP), which highlights the importance of peer learning, knowledge exchange and co-ordinated support throughout the S3 process (Box 4.5).
To support the effective design and implementation of S3, the European Commission established the S3 CoP as a central knowledge and information hub. The S3 CoP provides structured guidance to EU Member States and regions throughout the S3 process, from conceptualisation to implementation.
A key component of the S3 CoP is its targeted support activities, which offer tailored technical assistance to address specific challenges in the development or implementation of S3. This demand-driven mechanism allows regional authorities to request Targeted Assignments in areas aligned with their strategic needs, ranging from support to the Entrepreneurial Discovery Process (EDP) to creating synergies with national funding instruments in select priority areas.
One relevant example for Bosnia and Herzegovina is the South-West Oltenia region of Romania, which accessed targeted support to reinforce its EDP. Activities included workshops, interviews and evidence-based reviews to identify practical recommendations, particularly in expanding stakeholder involvement and refining governance structures.
Although Bosnia and Herzegovina is not yet eligible to access these specific support mechanisms, the example highlights the value of structured guidance, peer learning and collaborative networks in building institutional capacity. Engaging with regional and international peers can help reinforce enabling conditions for a coherent, inclusive and actionable S3.
Source: (European Commission, n.d.[40]).
Business support for innovative enterprises varies across entities and cantons, with the RS showing the most progress in enhancing its strategic and legislative framework in this area. However, the differing pace of policy design and implementation across various levels of government risks creating regional disparities in fostering innovation.28
Dedicated financial support schemes for innovation remain limited, although some local and international initiatives have emerged to fill the gap.
As of 2025, few public financial schemes were available to exclusively support innovation and research and development (R&D) in enterprises, though both entities’ action plans for SME innovation envisage the establishment and scale-up of such measures (OECD, 2022[41]).
For several years, RS has been planning to establish an Innovation Fund, which would centralise and manage financial support for innovation activities. The recently adopted Draft Law on Innovation Activities includes provisions for the fund’s creation, stipulating its establishment by 2026 (OECD, 2024[2]). In the absence of such a fund, the Innovation Centre Banja Luka has partly filled the gap by providing facilities and grant support to innovative private sector companies. Additional infrastructure has also been developed: in 2023, RS established the Science and Technology Park, which, once construction is complete, will offer another venue to support start-up innovation (University of Banja Luka, 2024[42]). Beyond these efforts, RS launched a call in 2021 under its Synergy Programme,29 with a total budget of EUR 100 000, to enhance technology transfer and foster collaboration between businesses and academia. However, at the time of writing, there was no available information on the outcomes or impact of the programme, and no new follow-up activities have been announced since this last call.
The FBiH lags behind in terms of institutional mechanisms for providing financial support to innovative businesses, instead having measures predominantly led by international partners or business associations (OECD, 2022[41]). In its Development Strategy 2021-27, the intention to establish an FBiH Fund for Technology Development, Research and Innovation is outlined, yet there has been no progress toward operationalising such a fund. However, one notable initiative is the Intera Technology Park in Mostar, which currently supports more than 40 start-ups, offering a range of support programmes and services.30 The park also plays a key role in connecting start-ups with industry experts, mentors and potential investors through networking and matchmaking activities. It assists startups in accessing funding opportunities, both through its own investment funds and by linking them with local and international investors.
Some support is also available through initiatives funded by international partners (Box 4.6).
To help address gaps in financial support for innovative businesses, particularly SMEs, several donor-funded initiatives have been deployed in Bosnia and Herzegovina.
These projects include:
Challenge to Change (supported by Sweden): This programme has been providing financial assistance to innovative businesses in Bosnia and Herzegovina since 2017. Now in its third phase, the project allocates EUR 3 million over three years to support SMEs engaged in innovative projects, offering co-financing of up to EUR 30 000. With 160 enterprises receiving funding in previous rounds, the project has demonstrated a strong track record of success. In the absence of scalable cross-entity financial support, the Challenge to Change project has played a crucial role in engaging SMEs in research and innovation activities, promoting the development of sustainable solutions for economic growth in Bosnia and Herzegovina.
SME Competitiveness Support Programme (supported by the EBRD): A loan of EUR 5 million was given to Sparkasse Bank d.d. in Bosnia and Herzegovina, which will then lend these funds to SMEs. The aim is to enhance these businesses’ competitiveness and compliance with EU technical standards. Moreover, the programme seeks to allocate at least 60% of its funds to loans supporting the green transition.
Sources: (OECD, 2024[2]; Vlajcic, 2021[43])
Way forward
Accelerate the development of dedicated innovation funds and infrastructure. In RS, the Ministry of Scientific and Technological Development and Higher Education has already been designated to oversee the fund. In the FBiH, the Federal Ministry of Development, Entrepreneurship and Crafts could serve as a potential implementing institution, although a formal designation has not yet been made. The next steps include identifying and allocating sustainable funding sources, developing a clear portfolio of financial instruments tailored to different stages of innovation and tied to policy objectives and establishing transparent governance and project selection criteria to ensure the fund becomes fully operational and effective. Serbia offers a practical and relevant example from the region (Box 4.7). Moreover, to further strengthen the innovation ecosystem in Bosnia and Herzegovina, both entities need to prioritise the establishment and funding of dedicated innovation infrastructure, such as science and technology parks, incubators and accelerators.
In the Western Balkans, Serbia stands out for its strong innovation performance, ranking highest in the region on the 2024 European Innovation Scoreboard with a score of 69.1% of the EU average—nearly double that of Bosnia and Herzegovina, which scored approximately 36% (European Commission, 2024[44]). A key driver behind Serbia’s success is its well-established institutional framework for innovation, anchored by its dedicated Innovation Fund.
Established in 2011, the Innovation Fund serves as Serbia’s primary institution for supporting innovation activities and financing innovative projects. Since its inception, the Fund has disbursed over EUR 80 million to promote innovation (OECD, 2024[45]). Its core mission is to foster innovation by providing tailored financial, technical, and advisory support to innovative enterprises. Among its programmes is an innovation voucher scheme, which has benefited more than 1 000 SMEs with over EUR 5 million in funding. The Fund places particular emphasis on early-stage innovative entrepreneurship, with SMEs in the information and communication technology (ICT) sector comprising more than half of its beneficiaries in 2022.
Beyond financing, the Fund plays a crucial role in strengthening collaboration between research institutes and the private sector, facilitating the commercialisation of new products and services and building long-term institutional support for innovation through partnerships with international donors.
Note: The European Innovation Scoreboard 2024 assesses five of the Western Balkan economies: Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia.
Map innovation support initiatives and establish publicly accessible platforms that consolidate available funding opportunities at local, national and international levels. It can leverage and connect existing registers, such as the Unified e-Register of Incentives in RS. As the innovation landscape develops and matures in Bosnia and Herzegovina, this platform can consolidate all the information, by including application deadlines, eligibility criteria and contact information. This would make it easier for entrepreneurs, researchers and startups to navigate available resources and increasing the visibility of existing support instruments.
Promote stronger stakeholder co-ordination to align funding with market needs. Strengthening collaboration between government institutions, the private sector, academia, and international donors can help to ensure that innovation and entrepreneurship support measures are better aligned with real market demands. This could be achieved by establishing a dedicated Innovation Council or by convening regular multi-stakeholder roundtables to jointly identify priorities, streamline efforts and improve the effectiveness and targeting of available support. The Council for the Development of SMEs of RS, which acts an advisory body, could inspire such initiatives and help to scale up this approach nation-wide.
To enable private companies in Bosnia and Herzegovina to effectively navigate the twin transitions—critical not only for competitiveness and growth but also for their seamless integration into the EU Single Market—adequate financial and technical support are essential.
Weak public financial support limits the effectiveness of greening initiatives for businesses.
For many businesses, sustainability initiatives represent a net cost rather than an immediate opportunity for savings or growth, leading to scepticism about their viability (OECD, 2024[47]). The absence of financial incentives and support discourage enterprises from prioritising green investments, leaving them on their own to cover investment costs. Indeed, one survey found that 56% of businesses in Bosnia and Herzegovina identified these additional costs as the main barrier to transitioning toward a greener economy (RCC, 2024[48]).
Both entities' strategic frameworks acknowledge the need to scale up technical and financial support for businesses’ uptake of greener practices. Their respective development strategies identify energy efficiency and the use of renewable energy as key areas for intervention.31 These documents also mention concrete financing mechanisms for funding eco-innovation activities, but none have yet been implemented. For instance, in RS, a voucher programme is planned as an interim measure to provide financial support for green innovations in SMEs, with the aim of transitioning to the long-delayed Innovation Fund. Complementing this, the RS Industry Development Strategy reinforces these priorities by emphasising the transition to a green and circular economy and providing support for the adoption of environmental standards.
In practice, support for business sustainability has been partially provided by environmental protection funds in both entities. In 2024, the FBiH Environmental Protection Fund approved approximately BAM 14.5 million (EUR 7.43 million) for 247 applicants. However, the vast majority of these funds were allocated to projects focused on environmental, nature and water protection. Energy efficiency projects, including those targeting businesses, accounted for roughly 15% of the total funds. The overall amount of annual funding has also grown steadily, increasing by nearly 50% since 2020. The RS Fund for Environmental Protection and Energy Efficiency has also allocated relatively modest amounts to businesses. In 2024, according to the information provided by the authorities, the Fund supported 18 companies in the processing industry with a total of BAM 825 840 (EUR 422 260) for energy efficiency and renewable energy projects.
Although calls for proposals are regularly published on the websites of both the funds and the respective governments, transparency remains uneven: the RS fund discloses beneficiary information on its website, whereas the FBiH fund has not issued an annual report since 2016. In the context of insufficient public support, green finance is increasingly provided through financial institutions and international donors. Eight out of 22 banks and five out of 29 microfinance institutions in the economy offer green loans to businesses and entrepreneurs, primarily targeting energy efficiency and renewable energy (Kicic and Ribic, 2024[3]). Donor programmes have also been playing a growing role in enhancing financial support to help firms adopt sustainable and green business practices (Table 4.4).
However, ensuring that businesses make use of available financial schemes requires not only sufficient interest but also a level of awareness of the benefits these schemes can offer. For instance, 59% of businesses has recently reported being unfamiliar with the concept and principles of the circular economy, suggesting that limited knowledge could undermine both willingness and capacity to benefit from financial incentives, even if such schemes were expanded throughout the country (RCC, 2024[48]).
Export-oriented firms face growing pressure to green their operations in anticipation of the EU’s Carbon Border Adjustment Mechanism.
Limited financial support for businesses’ greening efforts is not the only factor impeding businesses’ green transition in Bosnia and Herzegovina. The slow progress on the carbon pricing, such as the lack of a carbon tax or an Emissions Trading System, means that polluting remains relatively inexpensive for businesses, offering little incentives to reduce emissions or invest in greener technologies.
This challenge is particularly pronounced given the country’s heavy reliance on coal, which accounts for over 60% of electricity generation, and the persistence of fossil-fuel subsidies that keep electricity prices artificially low. Between 2018 and 2023, total induced support to all customers, including businesses, through regulated electricity prices amounted to EUR 3.4 billion (OECD, 2025[52]). As the country deepens its integration into the EU Single Market, and with the EU’s Carbon Border Adjustment Mechanism (CBAM) set to take effect in 2026, continued fossil-fuel subsidies will come under increased scrutiny, threatening businesses’ long-term competitiveness.
Firms engaged in energy-intensive exports will be most exposed to this risk: all else equal, sectors such as electricity and metals will face significant cost increases. Even with a phased implementation of the CBAM, Bosnia and Herzegovina is projected to lose BAM 722 million (EUR 369 million) between 2026 and 2030, with the electricity, steel and iron sectors incurring the greatest share of these costs (Spasić, 2023[53]). Most businesses are aware of the upcoming challenge: in a recent survey, 76% of business owners indicated their willingness to invest additional efforts and resources to meet CBAM requirements and reduce carbon emissions by improving their access to cleaner energy sources and making their business models greener and more efficient (Foreign Trade Chamber of Bosnia and Herzegovina, 2024[54]).
Businesses are unprepared to meet regulatory obligations related to green transition.
Achieving compliance with CBAM will also require businesses to improve their collection and reporting of emissions’ data. At present, companies in Bosnia and Herzegovina are not obliged to internally collect or report such data. However, with the introduction of CBAM, they will need to provide accurate emissions information to their buyers; otherwise, EU importers will rely on default values for BiH businesses.
Recently, some ad hoc initiatives have been launched to improve businesses’ readiness to collect emissions data, but their reach remains limited. The FBiH launched a five-year Green Transition Programme in 2024, a key component of which is sector-specific technical assistance for industries impacted by CBAM, aimed at equipping firms with the knowledge and tools needed to comply with regulatory requirements.32 However, the programme’s implementation has yet to begin, and its initial target of reaching just 100 businesses appears modest given the scale of expected CBAM impacts. In RS, the Chamber of Commerce organised 12 workshops throughout 2024 in order to prepare companies for the implementation of the CBAM, including reporting requirements.
However, the green transition will not only be limited to energy-intensive sectors. A 2023 survey of the wood and metal processing industries found that many businesses had already begun exploring material efficiency and circular economy opportunities, anticipating growing demands for resource efficient products and operations (Foreign Trade Chamber of Bosnia and Herzegovina, 2024[55]). While these sectors will not be as impacted by CBAM, they are increasingly affected by broader EU market rules and expectations, such as sustainability standards, eco-design requirements and supply chain due diligence.
Therefore, transition to greener business models, with increased alignment with international/EU green regulations and standards, will play a key role going forward. Yet, for enterprises with a predominantly EU customer base, the absence of aligned regulations and technical standards in Bosnia and Herzegovina constrains export opportunities. One notable example is that the country has yet to transpose the EU’s Eco-Management and Audit Scheme (EMAS) into domestic legislation. In this context, international green certifications become essential for market access and competitiveness. However the BiH Accreditation Institute has yet to accredit certification bodies for key international standards (e.g. ISO 9001, ISO 14001, ISO 22000, ISO 27001, ISO 45001) (Foreign Trade Chamber of Bosnia and Herzegovina, 2024[55]).
Government support to facilitate alignment with the green standards and certifications across both entities and Brčko District also remains so far limited. Non-governmental stakeholders, such as the Foreign Trade Chamber of Bosnia and Herzegovina, have nonetheless emerged as influential players (Center for Energy, Environment and Resources, 2023[56]). Over the past two years, the Chamber has organised more than 65 trainings, providing short-term technical assistance and targeted support for businesses seeking certification. Moreover, with support from the EU and the Government of Germany, the Chamber also launched the Responsible Business Hub in July 2025. The Hub provides free advisory services and expert information to companies, aiming to strengthen their preparedness for alignment with the new requirements of the European Union market, including in the area of environmental protection.33
Digitalisation of businesses is increasingly supported through targeted programmes.
Opportunities to accelerate business digitalisation in Bosnia and Herzegovina have expanded over time, with both entities developing targeted initiatives. The ICT sector has also taken centre stage in these efforts, pioneering the economy’s digital transition efforts.
In the FBiH, the Federal Ministry of Development, Entrepreneurship and Crafts allocates funds to promote digitalisation and technical innovation through its “Supporting the Competitiveness of SMEs” programme, with funding steadily increasing in recent years. In 2022, nearly EUR 1.4 million was allocated to 96 enterprises, while by 2024, this amount had risen six-fold to almost EUR 8.4 million, benefitting 193 enterprises.34 Additional support is planned under the Economic Reform Programme 2024-26, including dedicated loan programmes for ICT sector equipment and infrastructure, as well as for start-ups in the digital economy.
In RS, support for digitalisation is evident through the numerous financial and legal incentives in place. In response to consultations held in 2022 with entrepreneurs and company representatives from the ICT sector on improving the digital business environment, the Ministry of Scientific and Technological Development, Higher Education and Information Society, together with the Ministry of Economy and Entrepreneurship, launched a financial support programme to facilitate the digitalisation of SMEs. Between 2022 and 2024, incentives in the amount of BAM 1.1 million (EUR 570 000) were granted to 66 businesses.35 In 2025, the RS government further strengthened this framework by adopting a new Decree on the Procedure for Granting Incentives for Improving SME Competitiveness, which identifies digitalisation as a key priority. Pursuant to this decree, a public call worth EUR 1 million was launched in July 2025, providing support for SMEs to develop digital strategies and procure software solutions (TREDEA, 2025[57]).
Both entities have also taken steps to develop ecosystems that support digital transformation and innovation. With support from GIZ through the EU4DigitalSME project, four Digital Innovation Hubs (DIHs) have been established—three in the FBiH and one in RS. These hubs endeavour to raise awareness among businesses of the benefits of digitalisation and provide capacity building and technical guidance to help SMEs implement appropriate digital and innovative solutions. In RS, this support is further reinforced by the Centre for Digital Transformation, established by the Chamber of Commerce and Industry, which serves as a one-stop shop offering knowledge transfer, training, consulting and implementation assistance (OECD, 2023[58]). Additionally, several initiatives by international partners are actively supporting businesses to embrace and accelerate the digital transformation (Table 4.5).
In both entities, policies have had a special emphasis on ICT sector, with a strong focus on attracting foreign direct investment. Indeed, it has been among the fastest growing sectors, accounting for 5.2% of gross value added, which neared the EU average of 5.5% in 2022 (Eurostat, 2022[62]). However, the sector has traditionally focused on outsourcing and component-based service provision for EU markets, rather than developing complete, market-ready products or services. As a result, relatively few companies have emerged with fully developed offerings for local or international markets, and the sector’s role in driving the digital transformation of domestic businesses remains limited. Tailored public policies and strategic frameworks aimed at scaling up the ICT sector and leveraging its potential in the country’s broader digital transformation are currently lacking.
Way forward
Proceed with developing and implementing vouchers to support businesses’ greening. Green innovation vouchers are effective because they offer modest funding, making them accessible to enterprises that are just beginning starting their greening efforts or have limited experience with public support. By providing targeted assistance, they can help firms in key sectors such as tourism and manufacturing (both highly relevant in the context of Bosnia and Herzegovina) adopt more sustainable practices.
An innovation voucher scheme targeting product development and green initiatives is planned to be launched in September 2025 by GIZ. It will support over 100 SMEs with vouchers ranging from EUR 5 000 to EUR 15 000 for product development and green innovation. This example, together with best practice cases from several European countries (Box 4.8), demonstrates how such schemes can effectively support business greening and provides valuable lessons for future initiatives by relevant public authorities.
A number of countries have launched targeted support schemes to assist businesses, especially SMEs, in adopting and innovating greener practices. These schemes often take the form of vouchers, financed either by national governments or international partners. Examples include:
Austria: SMEs can access “eco-vouchers” worth up to EUR 12 000 to support initiatives that reduce CO₂ emissions, promote the use of renewable energy, or strengthen climate change adaptation measures.
Ireland: Under Enterprise Ireland’s Green Transition Fund, two primary voucher schemes are offered:
Climate Action voucher: Provides up to EUR 1 800 to help companies draft an initial strategy and action plan focused on sustainability, decarbonisation or circular economy practices.
Innovation voucher: Offers up to EUR 5 000 to support collaboration between SMEs and registered knowledge providers on sustainability or decarbonisation.
Ukraine: The EBRD, in partnership with the EU, has implemented several rounds of the Climate Innovation Vouchers programme. Selected SMEs can receive grants of up to EUR 50 000 to develop green technologies or climate solutions aimed at reducing emissions and enhancing energy efficiency. In 2021 alone, six companies were awarded nearly EUR 240 000 in total.
Continue to expand promotion of green standards among businesses, with a focus on improving access to the EU market. To encourage adoption, governments could provide grants, subsidies, or tax relief to help SMEs cover certification costs. Broader incentives—such as rebates, feed-in tariffs, reduced VAT, or tax holidays for green investments—could further stimulate sustainable practices and attract investment. The Foreign Trade Chamber of Bosnia and Herzegovina could also play a key role by disseminating relevant information, guiding companies through the certification process, and co-ordinating with entity chambers of commerce. A good reference is GIZ’s Green Certification Guide, which offers practical information to wood and metal sector businesses in Bosnia and Herzegovina on relevant certifications, their benefits, application steps, costs, and timeline (Center for Energy, Environment and Resources, 2023[56]).
Implement long-term financial support programmes to facilitate businesses’ transition to green business models. While efforts to support greening are expanding and support programs are featured in strategic frameworks, particularly in RS, domestic financial mechanisms remain insufficiently scaled to back more complex and ambitious projects. Programmes should be designed to cover the full business cycle, combining targeted financial assistance with guidance on project implementation, clear eligibility criteria, and mechanisms to monitor progress and evaluate outcomes. By linking support to measurable results and transparent selection processes, such programmes can more effectively incentivise businesses to adopt sustainable practices.
Introduce carbon pricing mechanisms and revisit fossil fuel subsidies to incentivise the green transition of businesses. To ensure the financial and technical public support programmes are effective and widely adopted, carbon pricing mechanisms should be introduced. Bosnia and Herzegovina will also need to revisit fossil fuel subsidies and better align fuel excise taxes with EU standards. Current subsidies distort market signals by encouraging pollution-intensive and inefficient industries, while potentially diverting labour and capital away from more productive sectors (OECD, 2025[66]). Moreover, revenues generated from carbon pricing and the reduction of fossil fuel subsidies could free up significant public resources, which could then be redirected towards investments in green technologies, sustainable business practices and broader decarbonisation.
Continue advancing the development of DIHs to accelerate businesses’ digital transformation. Although DIHs can play a crucial role in supporting local firms by offering mentorship, technical support and resources, progress in establishing and expanding these hubs has been slow and remains heavily reliant on donor support. Development efforts could be strengthened by building on existing infrastructure and partnerships, such as the Innovation Centre in RS and the Intera Technology Park in the FBiH. At the same time, it is essential to ensure that existing DIHs, namely DIH IDEMO in Banja Luka and Digital Storm DIH in Sarajevo, are equipped with the necessary expertise and financial resources to provide tailored, high-quality services to SMEs.
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← 1. The third priority area under this component, “Improve the regulatory impact assessment in process of drafting regulations to cover the impact on SMEs, in accordance with competences,” was excluded due to the lack of relevance to the chapter.
← 2. The capital adequacy ratio refers to a measurement of a bank's available capital expressed as a percentage of the bank's risk-weighted credit exposures.
← 3. Data provided by colleagues from the Banking Agency of the Federation of Bosnia and Herzegovina.
← 4. The Basel framework, composed of three agreements (Basel I, II and III), serves as the international regulatory framework for banks. For an overview of the framework, as well as deeper insights into what is outlined in Basel III, please see: https://www.consilium.europa.eu/en/policies/basel-iii/.
← 5. The regional average is based on data from 2023.
← 6. These data points are from 2022.
← 7. The lending requirements are determined at the entity level by the Federation Banking Agency (in FBiH) and the Banking Agency of Republika Srpska (RS). For the case of the Brčko District, it legislates within the state legal framework and has the discretion to adopt certain entity laws and use entity institutions for implementation.
← 8. However, firms with more substantial fixed assets—especially in sectors like metal and wood processing—may benefit from lower requirements, closer to 100%. Similarly, long-established clients tend to receive more favourable terms, while startups face the greatest challenges, reaching or exceeding 200% of the loan value.
← 9. The five guarantee funds are: the Guarantee Fund within the North East Regional Development Agency, the Guarantee Fund within the Sarajevo Regional Development Agency, the Guarantee Fund of Canton Zenica-Doboj, the Guarantee Fund of Canton Una-Sana and the Guarantee Fund within the Development Agency Link Mostar.
← 10. The database on the website of the Development Bank of FBiH is only available in the local language. See: https://rbfbih.ba/baza-podataka-garancijskog-fonda/.
← 11. In this context, start-ups refer to businesses which have been registered and operating for fewer than five years.
← 12. Of the four economies with data available through the IMF’s Financial Access Survey Database, Bosnia and Herzegovina reported the second highest rate of MFI loans as a share of GDP. Data were not available for North Macedonia or Serbia.
← 13. MFIs in Bosnia and Herzegovina overwhelmingly serve individuals (including micro-entrepreneurs and sole proprietorships), rather than businesses in the country. For more on the client base of these MFIs, please see: https://www.ilo.org/sites/default/files/2024-05/A%20system%20analysis%20of%20the%20financial%20market%20in%20Bosnia%20and%20Herzegovina.pdf.
← 14. Targeted donor support has also helped scale such efforts to support women entrepreneurs and women-led businesses. Between 2018 and 2024, the Council of Europe Development Bank provided EUR 6 million in loans to MI-BOSPO to support the growth of women-led small businesses. More recently, in May 2025, the International Finance Corporation (IFC) committed EUR 20 million in financing to Mikrofin d.o.o. Banja Luka, with at least 50% earmarked for women-owned MSMEs (CEB, 2023[69]; IFC, 2025[68]).
← 15. These companies are registered in the FBiH but have branch offices in RS.
← 16. The 0.66% figure for Bosnia and Herzegovina was calculated by dividing the turnover reported in the 2024 Banking Agency of the FBiH report by the country’s GDP (converted to euros; see: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=BA). For the EU average, data were drawn from Leaseurope’s annual statistics (see: https://www.leaseurope.org/data-research/annual-statistics), with the average subsequently calculated by the OECD team. The EU average is from 2023, as more recent data were unavailable.
← 17. Similar to RS, the FBiH also has its own Law on Factoring.
← 18. For example, in the FBiH, the Law on Financial Operations imposes a limit of just 60 days. In RS,
← 19. This activity was predominantly driven by government debt instruments, which accounted for 77.5% of the total volume.
← 20. While little progress has been made in strengthening the capital market legal framework in the FBiH, RS has initiated steps to improve its securities market. These include amendments to the Law on the Securities Market, aimed at simplifying the capital-raising process and increasing flexibility for companies issuing public securities. Additionally, the Republika Srpska Securities Commission (RSSC) is drafting a new Capital Market Act to further harmonise regulations with the EU acquis. If adopted, this could positively impact market activity and begin to address fundamental issues such as liquidity and investor confidence.
← 21. These laws include, but are not limited to, the Laws on Investment Funds, Laws on Securities, Laws on Foreign Exchange Operations. For a more complete list, see: (USAID, 2024[27]).
← 22. These figures have been converted from their original values in USD.
← 23. Simple Agreement for Future Equity (SAGE) is an agreement where an investor provides funding to a startup in exchange for the right to obtain shares in the company at a later date.
← 24. This decision by the government of FBiH was made through Conclusion No. V. 1259/2021 (dated 29.07.2021). This information came from government stakeholders who completed qualitative questionnaires used as part of data collection phase of the Western Balkans Competitiveness Outlook assessment process.
← 25. While Bosnia and Herzegovina has opted for a national S3 strategy, the entities play a significant role in the design process. As such, the working group included representatives appointed from relevant ministries at the state level, as well as from the governments of RS, the FBiH, and Brčko District. For more, see: https://www.oecd.org/en/publications/western-balkans-competitiveness-outlook-2024-bosnia-and-herzegovina_82e0432e-en/full-report/component-10.html#chapter-d1e11205-f0dce6d58c.
← 26. This process brings together government, business, academia, and civil society to identify and refine priority research and innovation domains that could give the region a competitive edge.
← 27. This quadruple helix refers to interactions between stakeholders across the (i) public sector, (ii) private sector, (iii) civil society and (iv) academia. It is a key component of S3 governance, one of the key enabling criteria for smart specialisation strategies. For more, see: https://ec.europa.eu/regional_policy/policy/communities-and-networks/s3-community-of-practice/s3_governance_en.
← 28. The state-level government initiated the development of draft strategic guidelines for 2021–27, aimed at creating an overarching framework for SMEs and entrepreneurship. Although support for innovative enterprises was not included in these guidelines, the initiative sought to ensure greater consistency in support, particularly in areas such as improving access to external markets. These guidelines were never formally adopted; however, the intention to prepare them is still reflected in the Economic Reform Programme 2025–27 (Government of Bosnia and Herzegovina, 2025[67]).
← 29. The Synergy programme was launched by the Ministry of Scientific and Technological Development, Higher Education, and Information Society of RS, initiated by the entity’s Union of Employers’ Associations.
← 30. Such topics include, but are not limited to, business development, marketing strategies, intellectual property rights and accessing funding opportunities.
← 31. These are RS’s Strategy for Development of SMEs 2021-27 and FBiH’s Development Strategy 2021-27.
← 32. The initiative aims to support at least 100 companies in the metal, wood, textile, construction and plastics sectors through business transformation, circular economy adoption and improved access to green financing.
← 33. The Hub was established as part of the EU Private Sector Development Initiative in Bosnia and Herzegovina, implemented by the GIZ and the OECD. More information on the Hub can be found here: https://digigreen.ba/en/eu-and-germany-support-the-launch-of-the-responsible-business-hub-rbh-bih
← 34. Data provided through consultations with colleagues from the government of the FBiH.
← 35. Data provided through consultations with colleagues from the government of RS.