Strengthening capital markets in Bosnia and Herzegovina

1. The role of capital markets in private sector development

Capital markets support economic growth by enabling businesses to access the necessary funding for investment, expansion and innovation. By mobilising savings and channelling them into productive activities, they provide companies with long-term financing instruments that facilitate structural transformation and underpin sustainable development.

Their contribution to economic growth is particularly evident in the financing of innovation, which in turn drives competitiveness (OECD, 2025[1]). Developing and commercialising new technologies requires substantial upfront investment, often characterised by high risk and long time horizons that exceed the appetite of traditional bank lending. In contrast, capital markets can mobilise large-scale funding from a broad and diverse investor base, making them especially well-suited to support ambitious, innovation-driven ventures.

Beyond innovation, well-developed capital markets also enhance the resilience of firms and the broader economy. In the aftermath of the 2008 financial crisis, access to capital market-based financing enabled many businesses to withstand temporary shocks and meet their obligations to employees, creditors and suppliers. A similar dynamic emerged during the COVID-19 pandemic, when capital markets played a critical role in alleviating liquidity pressures and minimising defaults and bankruptcies. In 2020, global corporate bond issuance reached a record USD 2.9 trillion; moreover, during the third quarter, public equity markets experienced a surge in capital-raising activity compared to the previous five-year average (OECD, 2021[2]). These episodes underscore the stabilising function of capital markets during periods of systemic stress.

The capital market landscape can be broadly categorised into several key segments and financing instruments (outlined in Table 1).

Table 1. Overview of capital market instruments

Public equity
Listed securities	Common and preferred stocks admitted to trading on regulated exchanges. These require rigorous adherence to international financial reporting standards (IFRS/GAAP).
	Common stock Standard equity ownership in a publicly traded company that provides voting rights and residual claim on profits. Common shareholders participate in company growth through price appreciation and dividends but are last in priority in liquidation.	Preferred stock Hybrid equity instrument that typically pays a fixed dividend and has priority over common stock in dividend payments and liquidation. Preferred shareholders usually do not have voting rights but receive more stable income characteristics
Private equity
Institutional private equity	Large-scale capital pools managed by firms to acquire significant stakes in private companies, often involving operational restructuring or leveraged buyouts.
Venture capital (VC)	Institutional seed-to-late-stage financing provided to high-potential startups. VC firms typically invest pooled third-party funds in exchange for minority equity.
Angel investing	Early-stage capital provided by high-net-worth "accredited investors" using personal funds. This often bridges the gap between pre-seed funding and formal institutional VC rounds.
Corporate debt
Corporate bonds	Fixed-income securities issued under a bond indenture, representing a contractual debt obligation with specified maturity and coupon rates.
Sustainable finance	Thematic debt instruments (green, social or sustainability-linked bonds) where proceeds are contractually earmarked for projects with verified ESG impacts
Private credit	Institutional debt capital provided by non-bank investors to private companies through directly negotiated loan agreements, typically involving illiquid, non-traded instruments structured outside public debt markets.
Syndicated loans	Large corporate loan facilities arranged by one or more lead banks and distributed among a group of participating lenders to finance sizeable transactions such as acquisitions, refinancing, or capital expenditures.

Source: Adapted from (OECD, 2024[3]; OECD, 2015[4]).

Public equity markets have expanded markedly in recent years. Between 2017 and 2023, global market capitalisation increased from USD 84 trillion to USD 117 trillion, while the number of listed companies rose from approximately 41 000 to over 42 500 (OECD, n.d.[5]). Moreover, the same period witnessed the expansion of dedicated growth market segments, which are typically used by smaller and early-stage enterprises. Between 2019 and 2023, initial public offerings (IPOs) on growth markets significantly outpaced those on main markets (OECD, 2025[6]). Ownership structures also vary: while the public sector holds, on average, around 10% of listed equity globally, this share rises to approximately 31% in emerging market and developing economies (EMDEs). Conversely, institutional investors account for roughly 47% of equity ownership globally but only around 12% in EMDEs (OECD, 2025[6]).

Debt markets have experienced similarly pronounced expansion. Since the 2008 financial crisis, corporate bond markets have grown substantially, with total outstanding amounts increasing 2.5-fold in real terms between 2000 and 2024, from USD 13.6 trillion to USD 35 trillion (OECD, 2025[7]). A notable part of this growth comes from increased issuance by non-financial issuers, whose debt has nearly doubled and currently stands at USD 15.7 trillion. At the same time, issuance has become increasingly concentrated at the lower end of the credit rating scale, with more than half of all investment-grade bonds issued since 2014 rated BBB (i.e. the lowest investment grade rating) (OECD, 2024[8]).

Since 2022, governments have increased programmes that allow retail investors to buy government bonds directly. Through such initiatives, ordinary people invest their own savings in sovereign debt, making it easier to understand how bonds work and how they are traded. Between 2021 and 2024, the share of domestic government bonds held by households in OECD economies roughly doubled, rising from about 5 % to 11 % of total outstanding sovereign debt (OECD, 2025[7]). By lowering informational and operational barriers to bond investing, retail sovereign bond programmes have strengthened investor confidence and financial literacy, thereby supporting broader retail participation in capital markets (OECD, 2025[7]).

Complementing the public equity and corporate debt markets, private equity, specifically venture capital (VC), provides important alternative sources of financing. These instruments supply risk capital to firms that are too young or too risky to access traditional bank lending, especially during early and growth stages. By absorbing higher levels of risk, they enable firms with high growth potential to pursue innovation, scale operations and implement longer-term growth strategies. Indeed, over the past 15 years, VC markets have grown significantly and have become a key source of non-debt financing for start-ups (OECD, 2025[9]).

Angel investment can also help to address early-stage financing gaps. Business angels typically invest in very early-stage firms that may not yet meet the scale or risk thresholds required for VC funding. Although investment amounts are comparatively modest, often ranging between EUR 25 000 and EUR 500 000, their contribution is crucial in supporting product development, business model testing and the establishment of market credibility for nascent firms (OECD/GWEP, 2025[10]). Beyond financial capital, venture capitalists and business angels can generate knowledge spillovers, provide managerial support and facilitate access to professional networks, thereby strengthening broader entrepreneurial ecosystems.

Why are capital markets important for businesses in Bosnia and Herzegovina?

Creating conditions for businesses to use capital markets is crucial for Bosnia and Herzegovina, where the bank-dominated financial system does not adequately meet the financing needs of the private sector, especially small and medium-sized enterprises (SMEs). Banks account for more than 90% of total financial sector assets. However, despite the relative stability and strength of the banking sector, 57% of firms in Bosnia and Herzegovina identified access to finance as a key barrier to scaling up (compared to the regional average of 40%) (RCC, 2023[11]). 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.

Over the last decade, domestic credit to the private sector in Bosnia and Herzegovina has grown slightly, rising from approximately USD 9.5 billion (EUR 8.7 billion) in 2014 to USD 10.3 billion (EUR 9.5 billion) in 2024 (Figure 1). However, when expressed as a share of GDP, this credit has declined, falling from around 60% of GDP in 2014 to 48% in 2024, well below the EU average of 76% in 2024. This reflects lending activity not yet keeping pace with economic growth. Bosnia and Herzegovina's GDP grew at an average annual rate of approximately 3% between 2014 and 2024, nearly double the EU average of 1.7%. Credit has therefore continued to expand in volume, but the bank-dominated financial system is not generating financing at a rate sufficient to meet the economy's growing investment needs.

Figure 1. Domestic credit to the private sector in Bosnia and Herzegovina, USD and share of GDP (2014-2024)

Notes: The left axis corresponds to the bar chart showing domestic credit to the private sector in USD billions; the right axis corresponds to the line charts showing domestic credit to the private sector as a percentage of GDP. WB6 data refers to the unweighted average of all six Western Balkan economies

Sources: (World Bank, 2024[12]; Eurostat, 2024[13]).

The slower growth of domestic credit relative to GDP partly reflects Bosnia and Herzegovina’s efforts to reduce previously elevated levels of non-performing loans (NPLs). While notable progress has been made in recent years, the NPL ratio in Bosnia and Herzegovina (3.8% in 2023) remains above that of the EU (2.3%) (Figure 2). Maintaining momentum on NPL reduction remains important: elevated ratios can constrain credit supply by weighing on banks’ balance sheets and limiting their risk appetite. Over time, this may also affect the broader development of capital markets, as reduced financial intermediation capacity can weaken investor confidence and restrict the financial sector’s ability to support diversified financing.

Figure 2. Bank non-performing loans in Bosnia and Herzegovina (2014-2023)

Percentage of total outstanding loans

Note: WB6 data refers to the unweighted average of all six Western Balkan economies

Sources: (IMF, 2025[14]); data for Serbia from (National Bank of Serbia, 2024[15])

Challenges in accessing external finance are most acute for SMEs, which account for 99.2% of all enterprises in Bosnia and Herzegovina and represent a growing share of economic activity. In 2024, SMEs represented 70.7% of employment in the private sector, reflecting a slight increase since 2020; employment growth was especially pronounced among small enterprises, whose share rose by 1.2 percentage points over the same period. Meanwhile, SMEs also generated 69% of value added by all businesses in 2024, marking a 4-percentage point increase compared to 2020 (Figure 3).

Figure 3. Business demography indicators in Bosnia and Herzegovina (2020, 2024)

Notes: Data do not include unincorporated enterprises. Value added is calculated at factoring cost. 2024 data are preliminary. Enterprise size classifications follow the EU definition: small enterprises employ fewer than 50 persons, medium-sized enterprises employ 50–249 persons, and large enterprises employ 250 or more persons.

Source: (Agency for Statistics of Bosnia and Herzegovina, 2025[16]).

Despite their central role in the economy, SMEs exhibit a persistent productivity gap relative to large firms, in line with global trends. Small enterprises generate approximately 12% less value added per employee than larger enterprises (Figure 4). Sectoral data indicate that SMEs are overrepresented in lower value-added activities, while large firms are more prevalent in higher-productivity, capital-intensive industries (Agency for Statistics of Bosnia and Herzegovina, 2025[16]). For example, 31% of all SMEs in Bosnia and Herzegovina operate in wholesale and retail trade, compared to 23% of large firms.

However, the productivity differential cannot be explained by sectoral composition alone. It also reflects financing constraints, as limited access to long-term capital restricts SMEs’ ability to invest in productivity-enhancing assets, including machinery, digital technologies, innovation and workforce upskilling. This, in turn, constrains their capacity to move up the value chain.

Figure 4. Turnover and value added per person employed (BAM) by size of enterprise, 2024

Note: 2024 data are preliminary

Source: (Agency for Statistics of Bosnia and Herzegovina, 2025[16]).

In the context of integration into the EU Single Market, access to finance constitutes a core competitiveness requirement for SMEs in Bosnia and Herzegovina. Without adequate financing to invest in cleaner technologies, energy efficiency and emissions monitoring systems, export-oriented firms risk reduced price competitiveness under the EU’s Carbon Border Adjustment Mechanism (CBAM) and, consequently, potential exclusion from EU supply chains. The economic implications are substantial: the introduction of CBAM is expected to generate losses for businesses in Bosnia and Herzegovina ranging between BAM 722 million and BAM 3.17 billion (EUR 369 million to EUR 1.62 billion) (Spasić, 2025[17]). These risks reflect the country’s carbon-intensive production structure. Per capita CO₂ emissions exceed both the EU and Western Balkan averages by 20% and 43%, respectively, while emissions per unit of GDP are nearly three times higher than the EU average (World Bank, 2025[18]; OECD, 2025[19]). Heavy reliance on coal-fired power generation further increases firms’ exposure to transition costs, particularly those in energy-intensive manufacturing sectors.