The role of financial reforms and Islamic banking towards the economic recovery of Bosnia and Herzegovina

Abstract

Bosnia and Herzegovina is a new independent State in Southeast Europe. During the 1992 -1995 war, unprecedented destruction of its economy took place. A banking system plays a crucial role in facilitating economic recovery. However, the banking system in Bosnia and Herzegovina is fragmented and undercapitalized. It can improve only if foreign capital is objected. This paper discusses possible contributions that foreign Islamic banks can make in alleviation of economic problems encountered in the process of privatization, the revival of industry, agriculture, the development of real estate and infrastructure, as well as the improvement of standard of living .. We further explore needed reforms of the banking system and the compatibility of Bosnian banking laws with Islamic Shariah. We find that foreign Islamic banks can address the economic problems effectively through the use of the modes of finance at their command. Further, we find that introduction of foreign Islamic banks in Bosnia and Herzegovina would help in process of consolidating of the banking sector and building up public confidence in the banking system. However, foreign Islamic banks may not enter Bosnia and Herzegovina unless the banking environment is made attractive for them.