Singidunum Journal of Applied Science 2012 Vol 9 No 2

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Vol. 9 No. 2

Publisher:Singidunum University

Editorial Board:Professor Milovan Stanišić, Singidunum UniversityEmeritus Slobodan Unković, Singidunum UniversityProfessor Alexandar Angelus, Lincoln UniversityProfessor Michail Brodsky, Lincoln UniversityProfessor Krunoslav Čačić, Singidunum UniversityProfessor Francesco Frangialli, UNWTOProfessor Gunther Friedl, Technische Universität MünchenProfessor Karl Ennsfellner, IMC University of Applied Sciences, KremsProfessor Verka Jovanović, Singidunum UniversityProfessor Milan Milosavljević, Singidunum UniversityProfessor Olivera Nikolić, Singidunum UniversityProfessor Budimir Stakić, Singidunum UniversityProfessor Mladen Veinović, Singidunum UniversityProfessor Jovan Popesku, Singidunum UniversityProfessor Zoran Jeremić, Singidunum UniversityAssociate Professor Christine Juen, Austrian agency for international mobility and cooperation in education, science and research, Wien Associate Professor Anders Steene, Södertörn University, Stockholm/HudingeAssociate Professor Miriam Jankalová, University of ŽilinaAssociate Professor Bálint Molnár, Corvinus University of BudapestAssociate Professor Vesna Spasić, Singidunum UniversityAssociate Professor Goranka Knežević, Singidunum UniversityAssistant Professor Konstadinos Kutsikos, University of the Aegean, ChiosAssistant Professor Theodoros Stavrinoudis, University of the Aegean, ChiosAssistant Professor Patrick Ulrich, University of BambergAssistant Professor Marcin Staniewski, University of Finance and Management, WarsawAssistant Professor Nemanja Stanišić, Singidunum University

Editor-in-Chief:Professor Milovan Stanišić, Singidunum University

Deputy Editor:Professor Verka Jovanović, Singidunum University

Managing Editor:Assistant Professor Svetlana Stanišić Stojić,Singidunum University

Production Editor:Assistant Professor Gordana Dobrijević,Singidunum University

Prepress:Novak Njeguš

Design:Aleksandar Mihajlović

ISSN: 2217-8090

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CONTENTS

1 - 8 Role of social media in SerbiaUloga društvenih medija u SrbijiIvan Bauer

9 - 13 Customer Orientation and Business Performance in Community Banks: A five year comparison.Orijentacija ka potrošaču i poslovne performanse lokalnih privatnih banaka u razdoblju od 2006. do 2011. John Fitzgerald, Gerald Sullivan, Borivoje Đokić

14 - 20 Forensic investigation of "trojan defense" in virtual environmentForenzička istraga "trojanske odbrane" u virtuelnom okruženjuGojko Grubor, Nebojša Ivaniš

21 - 26 The effects of cross-border tourist purchases on retail performanceEfekti prekograničnih kupovina turista na performanse u maloprodajiRadojko Lukić

27 - 32 Estimating the monetary policy reaction function in EgyptProcena funkcije reakcije monetarne politike EgiptaHany M. Elshamy

IV

33 - 40 The process of risk management in financial business.Proces upravljanja rizikom u finansijskom poslovanju. Danica Žigić, Miroljub Hadžić

41 - 49 Capital efficiency analysis of serbian companiesAnaliza efikasnosti kapitala u kompanijama u SrbijiNemanja Stanišić, Tijana Radojević, Vule Mizdraković, Nenad Stanić

50 - 62 Implementation of Basel II standards in commercial banks in B&HPrimena standarda iz Bazel II sporazuma u poslovnim bankama u BIHRadomir Šalić

63 - 73 Formal Approach to a Web Information System Based on Story AlgebraFormalni pristup veb informacionim sistemima zasnovan na “algebri priče”Bálint Molnár, András Benczúr, Ádám Tarcsi

74 - 79 Legal framework of freedom of religion in the Republic of MacedoniaPravni okvir slobode veroipovesti u Republici MakedonijiSaša Dukoski, Svetlana Veljanovska

80 - 83 Instructions for authors

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ROLE OF SOCIAL MEDIA IN SERBIA

Ivan Bauer*

Singidunum University, Faculty of Economics, Finance and Administration43 Bulevar Vojvode Mišića Street, Belgrade, Serbia

Abstract: The era of one-way marketing communication is slowly coming to an end and traditional marketing techniques are being replaced by modern techniques which have two-way communication with incorporated target groups. This happens most frequently with explicit approval given by custom-ers. Traditional-to-digital media shift was mainly driven by technological breakthroughs which have made communication possible “anywhere”. “Big screen” (television) has been replaced by “little screen” (mobile phone), while newspapers, radio, libraries, cinemas and tête-à-tête communication have been replaced by computers, Internet, and, eventually, the social media. Marketers’ primary task has always been to be in the same place as their consumers, which is why they have been forced to adjust their techniques to modern times and circumstances. A newly arisen marketing technique, which stands out particularly for its present and expected future importance, is Social Media marketing.Marketers around the world have recognized Social Media marketing as an important part of their marketing communication portfolio. Although marketing experts in small markets recognize the importance of new tech-nologies and marketing techniques, they are facing severe problems in their implementation, most frequently, due to inferior technical capabilities, as well as different cultural and educational barriers.The aim of this paper is to highlight the global importance of the afore-mentioned technique, as well as to assess the position of Serbia in terms of its implementation at the present time, and where we can expect it to be tomorrow. Obtaining answers to these questions creates foundation and space for further future analyses, together with the rise in implementation of marketing techniques in social media in Serbia. Also, it provides more information about understanding and implementation, as well as about dif-ferent perceptions of the importance of implementation and about various perspectives concerning marketing techniques in social media in Serbia. In order to accomplish those objectives, diverse research methods have been used – from observation and case study method to interviews and surveys.

Key words: Social Media marketing, traditional marketing, integrated marketing communication, social media, perspectives.

SingidUnUM joUrnAl 2012, 9 (2): 1-8

ISSN 2217-8090

UDK 32.019.5(497.11)

Original paper/Originalni naučni rad

* E-mail: [email protected]

INTRODUCTION

The main characteristic of the XXI century is the technological revolution in the field of com-munication driven by breakthrough in the areas of mobile telecommunication and broadband in-

ternet.These telecommunication accomplishments have made new communication techniques possible among people, all the time and in every place. Un-fortunately, new possibilities have brought new chal-lenges, as well. New means of communication which, almost immediately, have become very popular and

2

widely accepted, are recognized by customers as an integral part of their personal space. Therefore, the task marketers face, with the aim of reaching their target groups, is very delicate and should be approached with great attention. On the one hand, marketers have attained new, different possibilities for communicating with their customers, which can not be ignored. On the other hand, customers’ “protective” attitude towards their personal space and their clear wish (and need) to have (absolute) control over their space, makes this communica-tion very difficult for marketers in the XXI century. The only acceptable solution (for both parties) is reaching consensus among marketers and custom-ers about what is acceptable and what is not, and creating “communication partnership”, which will bring satisfaction and benefits to both parties.

THEORETICAL BACKGROUND

Marketing “micro-space” looks more and more like a chaotic system in which modern customers get bombarded with unacceptable quantity of commer-cial messages.As a result, two new phenomena have emerged– marketing overload and ad avoidance. Marketing overload is related to the fact that our brains are not capable of processing such amount of (commercial) information we are receiving every day. As a logical consequence, consumers are get-ting more and more keen on finding new ways to avoid all kind of commercial information they get exposed to throughout the day. Therefore, tradi-tional ways (traditional marketing) of addressing the public are doomed to extinction or, at least, to slow “death”. Emergence of social media has given marketers the opportunity to connect with their customers in a new, more sincere and open way. Problem that marketers/companies have to face in social media is that information flow in a new sur-rounding cannot be controlled. In order to solve this problem, marketers must change their percep-tion of the world and their way of thinking, since in the modern world brands are not what companies think they are, but what people say they are! And people (customers) are going to communicate their opinion urbi et orbi – on a social web1, of course. The choice not to participate in these conversa-tions is simply unacceptable since it will give boost to the “enemies” of the brand (“brand detractors” in the social media language) and make them look

1 social web = social media.

like they are right. Taking part in such conversa-tions, on the other hand, not only gives marketers benefits of redirecting conversations in the desired direction, but also demonstrates company’s interest in customers’ opinions, which customers know how to appreciate. If we put the famous statement given by Sam Walton, Wal-Mart founder: “If you have a question, go to the store. Your customers have the answer.” (Evans, 2008, p.260) into the modern con-text, by paraphrasing it, we get the very essence of social media communication and its importance: ”If you have a question, go to the social web. Your customers have the answer and they have been dis-cussing it (for quite some time)!”

The fact that the social media popularity growth has a very steep upward curve is more or less known even to a marketing layman. What is less known and less expected, is that relative participation of “senior” population (35+) grows, while relative participation of “juniors” declines, according to The Nielsen Com-pany’s recent study (2009). This data makes other information coming from the same study more than logical:

◆ social media is the fastest growing internet segment,

◆ social media has become more popular inter-net service than e-mail,

◆ social web is approaching 75% of internet us-ers that use social media,

◆ social media represents more than 10% of the overall internet traffic,

◆ quantity of time spent on social media is growing at incredible pace – for example, in December 2007. – December 2008. period, growth pace reached 63% (for Facebook that number is much greater – 566%!).

The customers’ attitude towards companies / brands’ participation in social media is almost unani-mous:

◆ 93% of customers expect companies/brands to, at least, participate in social media,

◆ 85% of customers feel that their presence should be in a form of constant interaction with customers, and the most improtant

◆ 56% of customers say that companies can expect to be rewarded for this interaction by creating a stronger relationship among cus-tomers and brands.

However, social media have its shortcomings. Unlike traditional media where communication is

SINGIDUNUM J 2012 9 (2) 1-8Bauer I. Role of social media

3

controlled by marketers, social media interaction is uncontrollable. Social web has been built on con-versations, but those discussions, according to Ev-ans (2008, p.132), “do not belong to marketers, but instead belong to someone else.” That someone else is neither “Big brother”, nor some defined person/group – simply, the social web does not belong to anyone particular and it belongs to everyone. The message that marketer creates stops belonging to him the minute it leaves his hands because in social media, unlike traditional media, content is contini-ously recreated (redone) beyond anybody’s control. What companies can control is ex-perience customers have had with their porducts/services, as well as companies’ behaviour on the so-cial web. Essence replaces form – messages are less important, re-lationship with customers and cus-tomers’ experience are much more important! Therefore, it is not easy to sell (and it should not be sold) the idea of using social media as a marketing tool just because they are new and “trendy”. The use of social web for marketing purposes represents a challenge for market-ers, considering numerous possi-bilities, as well as risks that social media presence (or absence) gen-erates.What calls for caution of marketers not very inclined to risk is:

◆ unknown and hostile environment, ◆ absence of reliable metrics, and ◆ still more or less predictable results of tradi-

tional media marketing campaigns.Even though “magic formula”, which will forever

unite marketers and social media, has still not been discovered, more and more companies are work-ing on it very thoroughly. More than three -fourths of Fortune 1000 companies use some kind of social media marketing, and their number, as well as activ-ity volume grow every day.

In order to make social media marketing pro-grams planning much easier, it is recommended to split social media channels into functional groups. This can give us an extra benefit of having “ready containers” prepared to catch new social media channels and content formats as they emerge. A very convenient way of dividing social media into groups is the proposition given by Robert Scoble, called the

“Starfish model” (Evans, 2008). Namely,this model (see Figure 1) puts a participant (customer) at the center of undergoing “social activities”,where he is about to make a conversion as a result of interaction with, or exposure to the surrounding social media ecosystem,which is divided into three main catego-ries:

◆ Social platforms, ◆ Social content, and ◆ Social interactions.

Social platforms include social networks (Face-

book, MySpace, LinkedIn etc.), white-label social networks (e-communities, forums...) and wikis (Wikipedia and similar collaborative, collective platforms that drive consensus around ideas).

Everything created and shared by social media users (no matter if they are companies or custom-ers), and then put into circulation on the social web, represents social content. Photos, blogs, microblogs (Twitter), audio and video podcast, ratings and re-views, all belong to this group.

Social interactions make sense of the growing quantity of social information which is threatening to overload consumers in one moment. In order to prevent that, social media users have social interac-tions at their disposal, which helps them organize (social) information they want to gather.

THE CURRENT SITUATION IN SERBIA

In order to assess current state of social media marketing in Serbia and (try to) predict its future development, a research study has been conducted.


Figure 1. Starfish model of social media Source: Evans, D. (2008)

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As a research method, the author used indepen-dently developed questionnaire. When choosing participating companies, the author’s main focus was on their leadership and/or management lead-ership skills. Selected companies were divided in two groups: production companies and companies providing diverse services. The division, which served as a vehicle for statisical analysis, has at-tempted to determine whether or not there has been a statistical diference in using social media marketing techniques between these two groups of companies. χ2 test has been a logical choice for this type of analysis:

o t

t

( f f )f−

χ =∑2

2

(1)

where fo represents obesrved frequencies2, and ft rep-resents theoretical frequencies3. If summary of the equation is greater than or equal to 0.05 (p-value ≥ 0.05), then we can conclude that there is no statis-tically significant difference between observed and theoretical frequencies. Vice versa, if summary is less than 0.05 (p-value < 0.05), we can say that statisti-cally significant difference exists.

The most popular social media in Serbia, among Serbian leaders, is Facebook, followed by YouTube and LinkedIn- the result which has been expected because of Facebooks’ extreme popularity among general public (currently, there are around 2,5 million Facebook accounts in Serbia). The above mentioned statistics is consistent with findings of the two comprehensive studies previously done in Serbia by Ipsos Strategic Marketing (2011) and Universal McCann (2010). Though it might be more logical to see Twitter, SlideShare or blogs on this list (instead of YouTube), it is obvious that specific social media’s local popularity is affected by their global popularity4, but also by different cultural, so-cial and other factors.

The first important indicator of the Serbian so-cial media marketing situation, in comparison to global tendencies analized in this paper, has been one of the most significant indicators of “social” be-haviour – following active participation in the dis-cussions of interest for the company. The result is more than encouraging – more than 70% of Serbian important companies use this technique, mostly by

2 frequencies which are the result of the research.3 expected frequencies.4 in specific groups.

following/participating in discussions on Facebook, Twitter and LinkedIn. Among the interviewed com-panies, 43% of them have answered that they plan to spread their presence across social media in the future. Most often they have mentioned Twitter and blogs as the next social media marketing tools they plan to incorporate in their integrated marketing programme. Obviously, Serbian companies are giv-ing very strong consideration to entering diverse so-cial media marketing fields, following, in that way, footsteps of their colleagues from the developed countries.

If we analize particular social media marketing techniques5, we can see that, as expected, Facebook marketing is the most popular and relatively speak-ing, widely accepted marketing technique among Serbian leading companies. Almost two thirds of the interviewed companies have Facebook marketing in their marketing portfolios, which can be character-ized as a very good result, especially when we take into consideration the fact6 that marketing presence of Serbian companies in social media is not very im-pressive. One of the interesting questions posed to the interviewed parties refers to the ways in which they grade results of their Facebook marketing cam-paigns. The results have shown almost equal disper-sion of the given answers : bad, satisfactory, good, very good.This indicates that Serbian marketers, like their colleagues from the developed countries, have problems with insufficient and improperly verified metrics, which corresponds very well with global tendencies of trying to establish adequate metrics so that social media marketing results can be prop-erly measured and assessed. The two most popular Facebook marketing techniques are, as expected, fan clubs and Facebook groups which are used7 by more than half of the interviewed companies. This represents a very good and encouraging result for Serbian marketers, especially because it is in ac-cordance with the results of Ipsos Strategic Market-ing (2011) study which shows that 51% of Serbian Facebook users join fan clubs/groups. Another ex-tremely popular Facebook marketing technique, used by participants in this survey, is the creation of branded Facebook applications/games, which is one of the most “social” marketing techniques among Facebook marketing tools. More than 40% of the in-terviewed companies have used this marketing tech-

5 we’ll do that only for those which are not completely insignificant in Serbia.

6 the result of this study, as well.7 as a marketing technique.


5

nique, just to mention some of the examples: “It’s time for gifts” (“Vreme je za poklone”) by Telecom Serbia, “Leasing calculator” by VB Leasing Serbia, “Loan settled and money in the pocket” (“Dug sit i pare na broju”) by Societe General Bank Serbia, etc.

Twitter is no longer the „privilege“ of the mar-keteers from the developed countries. Almost 40% of the interviewed Serbian companies follow their competitors on Twitter. This data tells us that mod-ern marketing techniques in developing countries, in this case Serbia, are converging towards global trends in the area. Aprroximately 83% of companies participating in the survey said that they use Twit-ter – 52% of them do it passively, by observing, and 31% actively, by tweeting. 13% of the interviewed companies tweet on regular basis, which signifies that they post tweets at least once a day. Some 43% of company tweets are often answered by audience, which means that companies’ target group recognizes the value of the tweets. Retweets are, as expected, more rare – “only” 29% of company tweets get retweeted. Even though this may not look as such a good result, it actually is, because retweeting is not some-thing that tweeters like doing. When they retweet something, it means that they find it very valuable and/or their source respectful.

Almost half of the companies (43,5%), taking part in the interview and being pre-pared for this paper, have presented their companies on Wikipedia, which is not a very bad result for a country postitioned not so high on the global telecommunication technology development list. Nevertheless, it remains inexplicable why oth-ers have not done the same thing when it is a very simple task which can do a lot for the promotion of the company and its values in social media, and in the virtual world, in general.

Even though LinkedIn assumes a very high posi-tion on the preffered social media list among Ser-bian leaders, they tend to use it more as a vehicle for self-promotion than as a social media marketing tool. That conclusion can be drawn from the follow-ing results:

◆ only 10% of the interviewed companies have recruited candidates for vacant positions in their companies through means provided by LinkedIn,

◆ whereas 29% of Serbian leaders take active participation in LinkedIn’s “Answers” section trying to improve their professional image.

One of the determinants of “social behaivour” is a degree of integration of social media market-ing techniques. Serbian marketers, participants in the study, do integrate their social media marketing techniques8 in majority of the cases, 77% of them, to be precise. Information that might be very help-ful in assessing the attitude of Serbian marketers towards social media marketing is the percentage of companies having social media marketing as an integral part of their overall marketing budget, and, even more helpful, percentage of companies plan-ning to increase investments in social media mar-keting in the following year (see Table 1). The data gathered in the survey tells us that almost half of the interviewed companies have social media marketing budget, while majority (almost two thirds) of the companies even plan to increase their social media marketing budget spendings in the years to come.

Another information which is very important for assessing the attitude towards social media market-ing among Serbian marketers comes as an answer to a simple question: “Do you consider social media marketing: extremely important, useful or irrelevant part of marketing mix?” Results showed that Serbian leaders see social media marketing as a very impor-tant part of marketing mix (see Table 1).

Statistically significant difference between results from the survey gathered from production compa-nies and companies that provide services has been notified in a small amount of cases. The most no-table example is the use of Facebook fan club and/or group as a social media marketing tool. The con-clusion arising from this analysis is that production companies are more dedicated to creating fan club pages and/or groups on Facebook than companies that provide services. Further analysis has shown that production companies put more effort into up-dating content on regular basis in their fan clubs/8 which shouldn’t be confused with the integration of social

media marketing and traditional marketing techniques.

budgetfor this year increase in the years

to come

47,83% 60,87%

importance for marketing mix

useful extremely important

60,87% 34,78%

Table 1: Importance of Social Media marketing


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groups, as well. This result has come as a big surprise since creation and updating of Facebook group/fan club does not represent a difficult task – maybe it’s time consuming, but, even that, not too much, and it certainly is very easy to implement and, what is more important9, it is free. On the other hand, this social media marketing technique is very efficient in reach-ing companies’ target group – therefore, it should be present in any companies’ marketing portfolio.

Gathering all the information and summarizing it in the final conclusion regarding the current Ser-bian social media marketing situation, it can be said that the presence of Serbian companies in social me-dia has an upward-oriented curve, with the present state characterized as “presence in majority of cases”. As a trend that has been observed, it has been noti-fied that volume of presence in social media is not big, which reminds us most of the “testing” phase of social media presence, which was to determine its marketing potential.

CONCLUSION: PERSPECTIVES

As a form of conclusion regarding the current state of social media marketing and its perspectives in Serbia, we can paraphrase the words of profes-sor Christine Moorman from the Duke University’s Fuqua School of Business, putting them into the Ser-bian context: Serbian “marketers think social media marketing is here to stay and will play an increasing-ly important role in their work in acquiring and re-taining customers in the future.” (Porterfield, 2010) Increasingly growing number of social media users in Serbia, especially the number of Facebook users, has contributed to the growing level of perception of the importance of social media as a marketing tool among the leading companies in Serbia. The survey analysis has determined that Serbian marketers fo-cus on the most popular social media – Facebook, which represents the only logical outcome when we take into consideration the fact that Facebook is, by far, the most popular social media in Serbia, in terms of number of accounts (almost 2.5 million) and relatively in comparison to other social media. The fact that the majority of the interviewed Serbian marketers use simpler social media marketing tech-niques tells us that social media marketing in Serbia is, at the moment, dominant in the phase of testing. However, encouraging results that have shown ma-jor commitment to increase social media marketing budgets in the years to come, promise not only a bet-ter future for social media marketing practitioners in 9 especially during financial crisis.

the nearest future, but also further growth of impor-tance of social media marketing for overall market-ing programs in the Serbian companies.

In order to promote the continuing growth of im-portance of social media and social media marketing techniques, all interested parties – the government, marketers and social media users must give their contribution. The government is to fullfil its prom-ises regarding the increase of broadband internet penetration level (Vlada Republike Srbije, 2009), and take more proactive role in the increase of nation’s computer literacy. Serbian companies, on their be-half, should invest larger portion of their marketing funds in education of marketing departments, which would lead to the increased use of more sophisticated social media marketing techniques and in the overall use of these techniques, in general. By actively par-ticipating in the two aforementioned processess and by using feedback mechanism,social media users may give a significant contribution to:

◆ further development of social media in Serbia, ◆ social media behaviour rules defining, and ◆ overall improvement of social media market-

ing communication.Only proactive approach by all interested parties

can guarantee forecasted bright future for the social media marketing in Serbia.

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Vlada Republike Srbije (2009) Strategija razvoja široko-pojasnog pristupa u Republici Srbiji do 2012. godine. Beograd: Narodna skupština Republike Srbije [onli-ne]. Available from: http://www.ratel.rs/upload/edi-tor_files/File/Strategija%20i%20akcioni%20plan%20razvoj%20sirokopojasnog%20pristupa.pdf [accessed 1 December 2011 ]. (in Serbian)

Vlada Republike Srbije (2010) Strategija razvoja infor-macionog društva u Republici Srbiji do 2020. godi-ne. Beograd: Narodna skupština Republike Srbije [online]. Available from: http://www.ratel.rs/upload/documents/razno/Strategija%20razvoja%20informa-cionog%20drustva.pdf [accessed 1 December 2011]. (in Serbian)

Weber, L. (2009) Marketing to the Social Web: How Digital Customer Communities Build Your Business. Hoboken, N.J. : Wiley.

Zarrella, D. (2010) The social media marketing book. Sebas-topol, Canada : O'Reilly.


8

Received: 12.04.2012 Correction: 18.06.2012

Accepted: 20.09.2012

ULOGA DRUšTVENIH MEDIjA U SRBIjI

Rezime: Vreme jednosmernih marketing komunikacija polako prolazi i tehnike tradi-cionalnog marketinga zamenjuju moderne tehnike koje imaju inkorporiranu dvosmernu komunikaciju sa ciljnom grupom, najčešće uz izričitu dozvolu sagovornika. Tom pomeranju od tradicionanih ka digitalnim medijima umnogome su doprineli i tehnološki prodori koji su omogućili komunikaciju ljudima bilo gde da se nalaze. Veliki ekran (televiziju) zamenio je mali (mobilni telefon), a novine, radio, biblioteke, bioskope i tĕt-a-tĕt komunikaciju zamenili su kompjuteri, internet i na kraju društveni mediji. Zadatak marketara uvek je bio da se nalaze tamo gde i njihovi potrošači, te su tako oni bili prinuđeni da svoje tehnike prilagođavaju novim vremenima i okolnostima. Novonastala marketinška tehnika koja se izdvaja, po svom sadašnjem i (očekivanom) bu-dućem značaju, je marketing u društvenim medijima.Marketing u društvenim medijima sve više biva prepoznat od strane marketara širom planete kao vrlo važan deo portfolija tehnika marketing komunikacija. Mada i marketing lideri na manjim tržištima prepoznaju značaj novih teh-nologija i marketinških tehnika, oni se suočavaju sa problemima u njihovoj implementaciji, najčešće zbog lošijih tehničkih mogućnosti, kao i zbog prisustva različitih kulturnih i obrazovnih barijera.Ovaj rad pokušava da ukaže na globalni značaj ove tehnike i da istraži gde se Srbija nalazi u njenoj primeni danas, a gde možemo da očekujemo da će se nalaziti sutra. Dobijanje odgovora na ova pitanja stvara osnov i otvara prostor za dalje analize u budućnosti, kako bude rasla primena tehnika marketinga u društvenim medijima kod nas, ali i daje sliku o razumevanju, primeni, sagle-davanju značaja primene i perspektivama tehnika marketingana u društvenim medijima u Srbiji. Za ostvarenje postavljenih ciljeva korišćeni su različiti istra-živački metodi – od posmatranja i metode studije slučaja do ankete i intervjua.

Ključne reči: marketing u društvenim medijima, tradicionalni marketing, integrisane marketingkomunikacije, društveni mediji, perspektive.


9

INTRODUCTION

These are interesting days for bankers and their banks. Customers are demanding ever more at lesser cost. Competition is coming from all points on the financial services compass. Shareholders are seeking increased returns on their investment in bank equi-ties. In addition, the financial regulators are demand-ing that capital be increased thus putting pressure to

increase earnings. Additionally, consolidation is at a rapid pace either through their own direction or at the discretion of the Federal and State regulatory authorities. It is into this fray that the authors of this article journeyed to determine at what point custom-er orientation and being influenced by competitors detracted from the ability of a bank to maximize its profitability, as measured by Return on Assets, and thus meet the requirements and demands of the shareholders and the financial regulators.

CUSTOMER ORIENTATION AND BUSINESS PERFORMANCE IN COMMUNITy BANKS: A FIVE yEAR COMPARISON

john Fitzgerald1, Gerald Sullivan1, Borivoje Đokić1,*

Keiser University1500 Northwest 49th Street, Fort Lauderdale, Florida, USA

Abstract: Prior studies involving the influence of market orientation on enhanced business performance have shown mixed results. The purpose of the 2011 study was to determine if over the five year period since the 2006 study, the market orientation of community banks in relationship to their business performance had changed. The authors theorized that this inconsistency may be caused by the investment in a market orientation having a di-minishing returns when measuring enhanced business performance. To this end authors surveyed community oriented commercial banks in six states. The authors used the responses of the individual bank’s CEOP as a proxy for the senior management measure of a commitment of market orientation. They used audited numbers from audited financial statements submitted by the individual banks to their governmental regulators to compute a return on assets which was used as the measure of business performance. The result of the study concluded that there was indeed a point of diminishing return on assets when investing in marketing ori-entation and identified such a point using a seven pint scale. The point of diminishing return was also identified for each of three components of market orientation using the same scale. It appeared that those banks who tended to control their customer orientation in the 2006 time frame, were better positioned to be successful in the stressed economic times. The participating banks corporate culture, relative to the value of a por-tion of its customer base that was unprofitable or marginally profitable, and the bank’s willingness to move away from these customers, and their propensity to show profit level not enjoyed by their competitors, allows for their survival today.

Key words: diminishing return on assets,customer orinetation,community bank performance,marketing orientation,competitor orinetation.


ISSN 2217-8090

UDK 005.346:336.71



10

Prior to 2006, studies have shown an inconsist-ent relationship between market orientation and en-hanced business performance. Numerous research-ers have addressed this issue with mixed results. (Jaworski and Kohli, 1993; Narver and Slater, 1990; Desphandé et al. 1993; Avlonitis and Gounaris, 1999; Chang and Chen, 1998; McNaughton et al. 2002). Some studies showed a slightly positive relation-ship between two of the three factors and levels of profitability, while other studies concluded there was no relationship. This has led the authors to con-clude that perhaps there was a point of diminishing returns when it came to customer orientation and concerns over competitive factors. To the knowledge of the authors, no research has been conducted to investigate at what point, if any, there is a diminish-ing return on an investment in market orientation. In the attempt to better understand the relationships between the factors of a customer and competitive orientations and profitability, the authors conducted two studies of the community banking industry in 2006 and 2011.

PURPOSE OF THE STUDy

The purpose of the 2011 study was to determine if, over the five year period since the 2006 study, the marketing orientation of community banks in rela-tionship to their business performance had changed. The findings of the study will provide insight into current banking perceptions and provide an over-view of those changes from 2006 to 2011.

PROBLEM AND ITS BACKGROUND

For the purposes of this study market orienta-tion is defined by Narver and Slater (1990). From an extensive review of the literature, Narver and Slater (1990) inferred that there are three behav-ioral components and two decision criteria that comprise market orientation. The three behavioral components are customer orientation, competitor orientation and inter-functional discipline. The two decision criteria are long term focus and profitabil-ity. The authors define customer orientation as “the sufficient understanding of one’s target buyers to be able to create superior value for them continuously” (Narver and Slater, 1990, p. 21). Competitor orien-tation is defined as the “seller’s understanding of the short-term strengths and weaknesses and long-term capabilities and strategies of both the key current

and key potential competitors” (Narver and Slater, 1990, p. 21). Inter-functional discipline is defined as “the coordinated utilization of company resources in creating superior value for target customers” (Narv-er and Slater, 1990, p. 22). This study examines the relationship between market orientation, its three behavioral components and enhanced business per-formance, as measured by return on assets in the community banking segment of the commercial banking industry.

The investigators looked at the three behavio-ral components of market orientation. These are: customer orientation, competitor orientation and inter-functional coordination. Based on these com-ponents of customer orientation four hypotheses were developed.H1 There is a positive and significant relationship

between market orientation and return on as-sets.

H2 There is a positive and significant relationship between customer orientation and the return on assets.

H3 There is a positive and significant relationship between competitor orientation and the return on assets.

H4 There is a positive and significant relationship between inter-functional coordination and re-turn on assets.

POPULATION

The surveyed population consisted of CEOs of community banks in several southeastern states. The homogeneity of the sample was a plus in re-ducing the impact of extraneous factors. Also, the time frame selected for the 2006, study precluded the current economic turmoil and was considered by the authors to be a period of normal economic activity. The 2011 time frame for the second study is in the midst of an economic downturn of severe proportions.

Community banks and savings associations in Florida, Georgia, Tennessee, North Carolina and Virginia comprised the study population in 2006. A total of 926 institutions were selected from the di-rectories published by the various state bankers’ as-sociations. In 2011 Community banks and savings associations in Florida, Georgia, Tennessee, North Carolina, Virginia, and Alabama comprised the study population. A total of 695 institutions were selected from the 2010 directories published by the

SINGIDUNUM J 2012 9 (2) 9-13Fitzgerald J., et al. Customer orientation and business performance

11

same state bankers associations. Below is a compari-son of the number of banks surveyed in each state in 2006 and 2011.

QUESTIONNAIRE DESIGN AND SCALING

A self-administered modified twenty question Narver and Slater (1990) customer orientation sur-vey instrument was utilized for the study. The ques-tionnaire used a scale of 1 to 7, where 1 represented “not at all” and 7 represented “to an extreme extent”. Additionally, interviewees were asked a matrix of open ended questions about their respective banks total assets, total capital, and profit after taxes for a three year period. These figures were obtained or de-rived from audited financial reports filed with each of the bank’s appropriate governmental regulators.

A total of 926 survey questionnaires were sent in 2006 via US Postal Service first class mail with a cover letter and a stamped self-addressed return envelope. No com-pensation or inducement was offered to the survey participants. A total of 221 survey questionnaires were returned. Of the 221 questionnaires returned 40 lacked data and 19 were from banks that suffered financial losses during the time frame studied, which eliminated these questionnaires from the study. The remaining 162 usable question-naires resulted in 17.5% response rate.

A total of 816 of the same survey ques-tionnaires were sent in 2011 via US Postal Service first class mail with the same direc-

tions and self addressed return envelope. The same states were surveyed in 2006 and 2011. Alabama was added due to the diminishing number of com-munity banks in the states previously surveyed. Eighty-eight surveys were returned due to no longer in business. A total of 116 usable surveys were re-turned. The response rate was 16%.

ANALySIS

In 2006, descriptive statistics and other statis-tics were analyzed, which comprised several steps. Strong linear correlations were found between market orientation and return on assets in the scale range surrounding 4.5. In 2011, this number was reduced to 4.0 on a 7 point scale.

2006 2011 Returned Mail or No Longer in Business Total Percent Change from

2006 to Present

Florida 246 167 -19 148 -40%

Ga. 408 243 -22 221 -46%

N.C. 92 79 -10 69 -25%

Tn. 181 139 -17 122 -33%

Va. 81 67 -9 58 -28%

Total by State 1008 695 -77 618 -39%

Comparison of the Number of Community Banks by State 2006 and 2011

Customer orientation comparison 2006 to 2011


12

RESULTS

Customer Orientation

The 2006 results indicated that beyond a certain point, the additional investment in customer orien-tation yielded a negative return. This point, for the banks that participated in both the 2006 and 2011 studies was 4.5 on a 7 point scale, which equated to a “more than moderate (4.0)”, but “less than consid-erable (5.0)” In summary, an investment beyond a “more than moderate level” yielded a negative return.

The 2011 study indicated the same basic results, however the level of customer orientation decline to 4.0 on the same 7 point scale. This decline in custom-er orientation during these stressful economic times could be the result of a number of factors.

Bank regulatory authorities are pressing banks to improve their capital ratios. This can be done in three ways. First, the bank can issue equity. However in this environment of reduced stock prices most banks, and their shareholders, have little desire to incur the dilu-tion of earnings and ownership that this option af-fords.

Second, the bank can increase its retained earn-ings (i.e. its capital accounts), by generating more earnings via operational efficiencies and effectiveness. This can be accomplished by driving away those cus-tomers whose total banking relationships are either not profitable or are minimally profitable. This reduc-tion in customer accounts to be serviced allows for a reduction in staffing levels, along with all other ex-penses associated with servicing those accounts that do not meet profitability standards.

And third, the reduction in customers means that their deposit accounts are moved to other financial institutions, thus reducing the degree of financial lev-erage, which is tantamount to improving the capital position of the bank in question.

The combination of the second and third points, thus reflect the findings of the 2006 study that showed beyond a certain point of customer service the busi-ness performance declines. Those banks that survive today, i.e. to participate in the 2011 study, are not only profitable, to some degree or another, but are also able to address the concerns regarding capital expressed by the bank regulatory authorities.

Competitor Orientation

The 2006 findings and the results of the 2011 sur-vey show no positive relationship between competi-

tor orientations and enhance business performance. This is possible because banks and bankers are more concerned with an internal orientation and less con-cerned with the external environment as it relates to competing banks. Anecdotally, on several of the returned Survey Instruments, the responding ex-ecutive noted that there was limited concern about competitors as the bank in question was “trying to survive”.

Inter-functional Discipline

As in the 2006 study, the 2011 study found no positive relationship between Inter-functional Dis-cipline and enhance business performance. This consistency of the findings would seem to be even more evident as the internal Inter-functional ca-pabilities of the bank would be stressed to an even great extent by two factors. The first factor would the staffing reductions noted earlier in the paper. The second factor is the distinct possibility that some of the banks included in the study population, may have absorbed “problem” banks at the request of the FDIC and other bank regulators. The com-bining of corporate cultures, software systems, hu-man resource departments, etc would surely seem to have a negative impact upon Inter-functional Discipline within the bank.

CONCLUSION

It appears to the authors of this study that those banks who tended to control their customer ori-entation in the 2006 time frame, were better posi-tioned to be successful in these stressed economic times. The participating bank’s corporate culture, relative to the value of a portion of its customer base that was unprofitable or marginally profitable, and the bank’s willingness to move away from these customers, and their propensity to show profit levels not enjoyed by their competitors, allows for their survival today.

REFERENCES

Avlonitis, G. J., Gounaris, S. P. (1999) Marketing orien-tation and its determinants: An empirical analysis. European Journal of Marketing. 33 (11/12), 1003-1037.

Chang, T.Z., Chen, S.J. (1998) Market orientation, ser-vice quality and business profitability: A conceptual model and empirical evidence. The Journal of Ser-vices Marketing.


13

Consuegra, D., Molina, A., Esteban, A. (2008) Market driving in retail banking. International Journal of Bank Marketing. 26 (4), 260-274.

Cooper, D., Schindler, P. (2008) Business Research Meth-ods. 10th ed. Boston: McGraw-Hill Irwin.

Diamantopoulos, A., Hart, S. (1993) Linking Market Orientation and Company Performance: Preliminary work on Kohli and Jaworski’s Framework. Journal of Strategic Marketing. 1 (2), 93-121.

Deshpandé, R., Farley, J.U., Webster, F.E. (1993) Corpo-rate culture, customer orientation, and innovative-ness in Japanese firms: A quadrad analysis. Journal of Marketing. 57 (1), 23-27.

Federal Deposit Insurance Corporation (2003) A Sta-tistical Profile of the United States Banking Industry. Washington, D.C.: Federal Deposit Insurance Cor-poration.

Greenley, G.E. (1995) Market orientation and company performance: Empirical evidence from UK Compa-nies. British Journal of Management. 6 (1), 1-13.

Han, J., Kim, N., Srivastava, R. (1998). Market orienta-tion and organizational performance: Is innovation a missing link? Journal of Marketing. 62 (10), 30-45.

Ho, Y., Huang, C. (2007) Market orientation strategies and business performance: Evidence from Taiwan’s life insurance industry. Journal of American Acad-emy of Business. 11 (1), 297-303.

Jaworski, B.J., Kohli, A.K. (1993) Market orientation: An-tecedents and consequences. Journal of Marketing. 57 (3), 53-70.

Jones, J. P. (1995) The effect of a market orientation on small business performance. Ft. Lauderdale, FL: Nova Southeastern University.

Kirca, A., Jayachandran, S., Bearden, W. (2005) Market orientation: A meta-analytic review and assessment

of its antecedents and impact on performance. Jour-nal of Marketing. 69 (2), 24-41.

Kohli, A.K., Jaworski, B.J. (1990) Market orientation: The construct, research propositions, and managerial im-plications. Journal of Marketing. 54 (2), 1-18.

McNaughton, R.B., Osborne, P., Imrie, B.C. (2002) Mar-ket-oriented value creation in service firms. Euro-pean Journal of Marketing. 36 (9/10), 990-1002.

Narver, J.C., Slater, S.F. (1990) The effect of a market ori-entation on business profitability. Journal of Market-ing. 54 (4), 20-35.

Noble, C., Sinha, R., Kumar, A. (2002) Market orien-tation and alternative strategic orientations: A lon-gitudinal assessment of performance implications. Journal of Marketing. 66 (4), 25-39.

Qi, L, Wang, D. Wang, X., Zhang, F. (2008) Research on the relationship among market orientation, custom-er relationship management, customer knowledge management and business performance. Manage-ment Science and Engineering. 2 (1), 31-38.

Ruekert, R. (1992) Developing a marketing orientation: An organization strategy perspective. International Journal of Research in Marketing, 9 (3), 225-245.

Signaw, J.A., Brown, G., Widing, R.E. (1994) The influ-ence of the market orientation of the firm on sales force behavior and attitudes. Journal of Marketing Research. 31 (1), 106-116.

Slater, S., Narver, J. (1994) Does Competitive environ-ment moderate the market orientation performance relationship? Journal of Marketing. 58 (1), 46-55.

Sullivan, G., Fitzgerald, J., Đokić, B. (2011) Market ori-entation and business performance: The point of di-minishing return in community banks. Singidunum revija. 8 (2), 01-04.

received: 12.03.2012.Correction: 14.04.2012.

Accepted: 08.08.2012.

Orijentacija Ka pOtrOšaču i pOslOvne perfOrmanse LOKALNIH PRIVATNIH BANAKA U RAzDOBLjU OD 2006. DO 2011.

Rezime:

Ranija istraživanja o uticaju tržišne orijentacije na poboljšanje poslovne perfor-manse su imala različite rezultate. Autori rada smatraju da je do te nedoslednosti došlo zbog toga što investiranje u tržišnu orijentaciju ima tačku smanjenja stope prinosa pri merenju poboljšanih performansi.Zbog toga su autori rada istražili manje lokalne privatne banke (community banks) u pet država SAD. Autori su koristili odgovore pojedinih direktora banaka kao meru posvećenosti viših menadžera tržišnoj orijentaciji. Koristili su cifre iz revizijskih finansijskih izveštaja koje su banke slale u poresku upravu radi računanja poreza na prihode, to je bilo upotrebljeno kao mera poslovnog uspeha. Rezultati istraživanja pokazuju da zaista postoji moment smanjenja stope prinosa pri investiranju u tržišnu orijentaciju, kojeg su autori identifikovali uz upotrebu skale sa sedam nivoa. Tačka smanjenja stope prinosa je takođe identfikovana za svaku od tri komponente tržišne orijentacije uz upotrebu iste skale.

Ključne reči: smanjena stopa prinosa,klijentska orijentacija,učinak lokalnih privatnih banaka,tržišna orinetacija,konkurenta orijentacija.


14

FORENSIC INVESTIGATION OF "TROjAN DEFENSE" IN VIRTUAL ENVIRONMENT

Gojko Grubor1,*, Nebojša Ivaniš1

1Singidunum University, department for informatics and Computing32 danijelova Street, Belgrade, Serbia

Abstract: This paper presents an example of a malware attack on a virtual computer. Human factor and social engineering techniques are believed to play a major role in malware attacks. Insufficient education of the user regarding the information safety facilitates further action of the attacker. The attacker writes the malware code if necessary - as a key logger, downloader, etc. Every attack includes good preparation, port scanning, collecting infor-mation about antivirus software and target computer usage, considering the scenario of the attack, and choosing the best timing and method of the attack. The paper discusses anti-forensic role of Trojans in a corrupt virtual computer from which the abuse was committed, without the owner’s knowledge. Furthermore, the paper provides more information about the experimental verification of forensic activities aimed to prove the so called “Trojan Defense” in virtual environments.

Key words: malwere,Trojan, Trojan defense, cloud computing, virtual machines.


ISSN 2217-8090

UDK 343.983:004.056.53



INTRODUCTION

In this paper we tested the case of forensic analy-sis of a zombified virtual machine (VM). There is hardly any forensic analysis of actual cases of attacks on the VM within the published literature, probably due to the fact that the phenomenon of VM attack has not still become the standard in the world of computer crime (Grubor et al. 2010; Mather et al. 2009). Virtualization of both server and hardware parts represents the basis for modern Cloud Com-puting (CC) systems (Barrett and Kipper, 2010). The CC system becomes a challenge not only for the new sophisticated types of abuse, but also for digital forensics (DF) (Lillard et al. 2010). It is well known that numerous anti-forensic activities can remove typical forensic clues and leave the computer with-out any apparent evidence. However, some clues that could be detected by modern forensic tools (Milosavljević and Grubor, 2009), always remain in a VM. The fight of digital forensics (DF) against the attacker’s anti forensic activities requires establish-ing good communication between service providers

in order to monitor the system. Also, it is known that most of the malware present on the Internet1is written for Microsoft Oss. The centralized system of information protection is necessary in order to en-able easier monitoring of resources in the CC. Au-thentication and access of one computer to another generates a vast amount of information. Intrusion into someone’s computer is not easy to perform, but it is not unachievable. A typical attacker uses Linux operating system (OS) and specific tools for mali-cious hacker attacks, out of which mainly Trojans for long-term exploitation. However, the details of preparation for the attack and overtaking of VM’s are not the subject of this paper and can be further found and analyzed in the literature (Veinović and Ivaniš, 2011). Once he opens the backdoor and takes control of the VM, the attacker has the ability to use the remote desktop access. The DF’s task is to look for the evidence and prove or dispute the “Trojan defense” of the owner of the computer, that is, the victim of Trojan attacks (Grubor et al. 2010).1 The Help Net Security News: About 85 million new sophis-

ticated malware has been generated on Internet in 2011.

15

EXPERIMENTAL VERIFICATION OF “TROjAN DEFENSE” IN VM-I

Figure 1 shows the experimental environment. The physical host is running the VMs which are domain members. The OSs used in the experiment are Microsoft Windows 7, Microsoft Server 2008 R2 and Linux. Two physical machines are used with the installed Microsoft and Linux OSs. They are not domain members, and their role is to conduct the attacks. The domain can be accessed via VPN2 chan-nels from the outside. The CA server acts as a root certification authority, thus issuing certificates to its subordinate CA servers. Afterwards, the two subor-dinate CA servers takeover the roles - role. The role of TMG Fore Front 20103server is to record the flow of network traffic as well as a firewall. There is a test site on the Web server which can be accessed over the HTTPS security protocol. The Exchange 2010 server holds the electronic mailboxes for messages. Sending, receiving and controlling the mailbox is possible in two ways: through the Outlook Web Ac-cess, with direct access to the Web site, or through installing the Outlook application from the MS Of-fice package.

2 VPN - virtual private network – protected channel that is used to connect users from remote locations to intranet and local networks.

3 TMG - Forefront Threat Management Gateway 2010 – suc-cessor to ISA Server, has the role of a protector of the in-ternal network, as well as monitoring of the entire package flow into and out of the network with analysis capability.

anatomy and trends of trojan attacks.

Each malware is written in a specific program-ming language, and the code adjusts to the attack scenario. The attacker considers which method to use for distributing malware to the user. The most common scenario is deception by social engineer-ing. For instance, in an attack scenario, the attacker makes a copy of a popular website where he offers a free branded anti-virus application. Unknow-ingly, by downloading the application, the user installs Trojan key logger or a downloader to his computer. Then, using the root kit technique that conceals the presence of a Trojan, he can attack by opening the back door. The attacker gets diverse information from the zombified computer, such as user’s passwords, recording keystrokes (keylo-gger) or downloading the new malware from the infected web sites (downloader). Trojan’s program code sends the collected information in a form of an e-mail message or a file to the attacker. DF can use the tracking of the e-mail’s path as evidence. With the collected info (username and password), the attacker begins to attack the targeted computer. He escalates privileges to administrator rights. The

attack begins by connect-ing Trojan’s server com-ponent, installed on the victim’s computer, and its client component on the attacker’s computer. In the majority of cases, applications for the at-tack are written for Linux OS. The stolen user’s identity (user name and password) is used to ac-cess the attacked com-puter. By running cer-tain services, the attacker takes control of the at-tacked, now the zombi-fied computer. He per-forms a variety of illegal actions (spam, DoS and DDoS attacks, extortion of money, etc.) as well

as activities the computer owners are unaware of. Many of the Botnet networks are based on zombi-fied computers, numbering up to 2.4 million of cor-rupt computers, as recorded in China. The attackers use publicly available user information.

Figure 1. Environment for the experimental verification of anti- forensic activity

SINGIDUNUM J 2012 9 (2) 14-20Grubor G., Ivaniš N. Forensic investigation

16

Anatomy of Backdoor. IRCBot.Dorkbot. A trojan attack

According to research conducted by “Bit Defend-er” company in May 2011, the number of attacks has increased by 83% when compared to other malware on the Internet. The technical characteristics of the aforementioned Trojan, which was discovered on May 5, 2011, are mediocre spreading, loss and small size (from ~ 118KB). Its method of spreading is via instant messaging using MS MSN or USB devices. The typical symptoms include the increased HTTP traffic, presence of hidden files in the file, while the filename is always generated by randomly chosen characters, and the presence of the following value in log files “HKEY_CURRENT_USER\Software\\Microsoft\\Windows\\CurrentVersion\\Run\file-name”.

It implements itself in multiple layers of (the) encrypted data. Ntdll.dll file checks whether the at-tacked computer’s OS is 32-bit or 64-bit, and then generates crc32 table. The crc32table is used for de-coding, and it consists of a structure, which contains information about the encrypted string, the string length and the hash function. Then, it enrolls in any open OS processes. Options Delete File A/Delete File W, Move File A/ Move File W, Create File A, Send are intercepted in the code and the information is taken from the buffer. In case the parameter value in the buffer is null or its length is less than 6 charac-ters, the download and interception of information from the buffer are executed. Otherwise, the buffer is copied; FTP or POP3 protocols are checked. So, if the buffer carries information that begins with “user” or “pass”, the information is sent to a local variable. The distinction between these protocols is made by checking the existing specific FTP com-mands, such as “CWD”, “PDW”, “FEAT”, “TYPE”, “PASV”. After making a decision, a message is sent:1. For FTP, if “ftp grab” state is mapped on: “lenght_message.ftplog.ftp://user/password@net-

work_address:hostshort p=_curent_module_file_name_ “

2. For POP3 if “pop grab” state is mapped on: “lenght_message.poplog.pop3://user/password@

network_address: hostshort p = _curent _mod-ule_file_name_”. Http Send Request A/Http Send Request W op-

tion seeks information in the URL string. The goal is to download the login information of some com-puters to specific sites. First string searches the URL,

the other represents optional information, and the third collects the name of the target server, as shown in the following example:

“*google.*/*Service Login Auth*” and “*service=YouTube*” (target “YouTube”)”*google.*/*Service Login Auth*” and “*Password=*” (target “Gmail”).

When a pair is found, the search for username and password continues. Such data is recorded as a string, which makes it easier for the attacker to easily collect all the data necessary for the attack. Information is sent, if the filtering requirements are fulfilled, namely: “cPanel”, “WHM”, “WHCMS”, “Directadmin”. DF is confronted with a difficult task of discovering the evidence. The reason for this is the so called “Trojan defense”. There is a dilemma, when the zombified computer is found, whether the computer is really corrupted, or the attacker has actually committed a crime from that computer. Therefore, finding and opening the source code root kit and the Trojan is very important, as previously described. Also, it is essential to establish running services, processes, and see if they can be associated with the installation of the root kit and the Trojan.

Forensic investigation experiment of a zombified VM

An attack on a VM was executed under the con-trolled experiment. While monitoring the network traffic by using WireShark forensic tool, it was noted that certain content was copied from one location to another. In particular, one client transferred a file to another client, which in this case simulated a virus (or Trojan). This activity was recorded and the follow-up began. When a forensic tool (Fig-ure 2), recorded eicar.zip file during the computer monitoring, the process of monitoring communica-tions between the users of these two machines be-gan. Eicar file is sort of a control virus that should alert the antivirus software and check the level of OS protection, without doing it any harm. Figure 2 shows that a demand for copying the file has been made, and that the attack came from the IP address 192.168.99.118, which has been identified by the forensic tool as the source of this commu-nication. The computer that monitors and receives this file is the destination machine and its IP ad-dress is 192.168.99.50. Relying on this information,


17

one can see that they are on the same network do-main, as well as in some of the internal networks. The time when the original computer initiated the copy request can be seen. All the information from the source and destination computers is relevant for the forensic investigation, so that DF would know where to direct the investigation and track the tim-ings which show when some activity occurred. In Figure 2, you can see the entire communication - from the time when the copy request was issued from the source to the destination machine. DF may use the binary inscription from eicar.zip as informa-tion, i.e. he can identify and prove the existence of

a malicious file using a hard drive from the tested computer, with the assistance of the hexadecimal editor. Path to the computer file, or more precisely, the place where it will be copied, can be seen in Fig-ure 2. This is important information that will reduce the DF’s investigation time, and prevent the suspect from manipulating or applying the anti-forensic activity on the file - evidence that is incriminating at this point. Figure 2 also shows that Wire Shark-forensic tool recorded the used protocol and that it can perform filtering of the entire traffic. For in-stance, it can separate only the TCP communica-tion.

Figure 2.

Forensic investigation of the zombified VM was carried out in experimental verification and the evidence to incriminate the attacker was found, i.e. “Trojan defense” by VM owner was proved and DF’s deception was prevented. The attacker uses physi-cal computers (Figure 1) to attack from the outside and through social engineering, passing malware

on the VM. The study found that Trojans were de-livered through pictures infected with malware and attached to an e-mail.. After that, the attacker starts copying the Trojans to VM.

Forensic investigation of a zombified VM was carried out in experimental verification and the evidence to incriminate the attacker was found, i.e.


18

“Trojan defense” by VM owner was proved and DF’s deception was prevented. The attacker uses physi-cal computers (Figure 1) to attack from the outside and through social engineering, passing malware on the VM. The study found that the Trojans were de-livered through pictures infected with malware at-tached to an e-mail. Unknowingly, by downloading the attachment, the curious user runs malware, thus enabling the attacker to open the rear door. After that, the attacker starts copying the Trojans to the VM. Such activity is recorded by the WireShark fo-rensic tool, as shown in Figure 2. The information about IP addresses is taken from the hexadecimal and binary inscriptions from Trojans called “eicar”. The Trojan file is in the form of a zipped file. After DF accessed the corrupt VM, the “eicar” file was found, whose binary values were compared to those in Figure 2. The identity was proved and the file be-comes digital evidence. By opening the Trojan’s source code, paths used to send information to the attacker were found. By comparing the downloaded information taken from the file with the informa-tion from the monitoring, it was determined that it is the same computer. The attacker tried to defend himself by removing the evidence, deleting the file from the zombified computer, but all data was saved owing to the functionality and the structure of the virtual hard disk of the corrupted machine. The cor-rupt VM has infected all VMs in the domain with malware that spread through the Internet. The host remained uninfected. Further investigation revealed that the attacker entered domain from the physi-cal machine by stealing the username and password through social engineering.

Protective measures

Examples of malware attacks are diverse. Few more possible attacks on the VMs have been ex-perimentally verified. The greatest risk is in insuf-ficient user’s awareness of the nature and degree of modern malware sophistication. In order to enable effective protection, it is necessary to update the an-tivirus (AVP) on a daily basis and scan regularly the computer using AVP based on digital signature and heuristic checks of the familiar malware. Ports, pre-viously closed by the AVP, should not be opened, which is a basic measure of protection that many users ignore.

This could happen when some third party (site, application ...) asks the user to open a port to down-load, for example, some multimedia content from the Internet. The next protective measure is to check the authenticity of the advertiser on the Internet that offers free applications from expensive branded manufacturers in the promo period, because in most cases, the malware distribution and the attack stand behind such offer. With the use of an electronic mail, one should always check the authenticity and valid-ity of the sender before downloading. The reason for that is the wide availability of social networks such as Twitter, Facebook etc. The attacker has the opportu-nity to gather information from social networks and mimic close friends, relatives, acquaintances, thus committing fraud and crime (for example - distribu-tion of malware). It is also recommended to scan all removable media connected to the computer. One should bear this in mind when using one’s own port-able media on public computers. Special attention should be paid to computers that are available to large numbers of people, computers that are used in public sectors or those located in companies’ sectors which are used by a large number of users, without any arranged or implemented system of protection and security.

Into such computers, the attackers usually insert malware that could be transferred to any portable media. When the media is connected to an infected public computer, it will download malware and it will automatically become “infected”. An example for that could be a photo station for quick develop-ment of pictures located in a shopping mall.

CONCLUSION

The conducted experimental research and analy-sis verify the fact that the abuse and anti-forensic ac-tivities in the virtual environment cannot always be controlled, but can be prevented. When they occur, they can cause a huge material and moral damage to an individual and the society in general.

The absolute safety in the virtual environment cannot be provided. Hence, we must take into ac-count the human factor. In this paper, we have experimentally proved that it is possible to fight against malware in the CC. It is necessary to be conversant with the following: design and program-ming, because the current malware is written in a


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sophisticated code; network engineering, because malware spreads through both public and private networks; web programming, since it is placed on sites in a form of traps; digital forensics, in order to discover the evidence and, finally, the constitution and the laws of the country in order to apply the laws on individuals that violate it. Good coopera-tion between the DF and CC provider is needed, as well as uninterrupted monitoring of delivery quality of CC services. The importance of virtualization as a tool for forensic investigation is that a VM can be used to simulate a malware attack, because all malware remains in the VM, while the physical machine - the host, is completely safe. Therefore, the forensic investigation and presentation of evi-dence can be simplified. Also, it is easier to prove and reconstruct the attack in the court. By creating a number of independent VMs in CC, DF is able to use them as workstations and the evidence can be placed on virtual hard disks. The CC environment allows DF to avoid carrying removable media for storing evidence, devices, workstations, etc., in the field. It is enough for them to have a mini-notebook or any device that has an internet connection, and upon authentication on the VM via remote desktop; they can access their “virtual” workstation. Thus, they are given the possibility to transfer the data and evidence to virtual hard discs. Any new knowledge and solutions in the field of digital forensic investi-gations in the virtual environment can make a sig-nificant contribution to solving the potential cases of computer crime in the CC environment.

REFERENCES

Anti-forensic tehniques. Wiki [online]. Available from: http://www.forensicswiki.org/wiki/Anti-forensic_techniques [accessed 6 August 2012].

Barrett, D., Kipper, G. (2010) Virtualization and foren-sics: a digital forensic investigator’s guide to virtual environments. Burlington, MA: Elsevier.

Carr, J. (2007) AntiForensic methods used by Jihadist web sites [online]. Available from: http://www.es-ecurityplanet.com/prevention/article.php/3694711/AntiForensic-Methods-Used-by-Jihadist-Web-Sites.htm [accessed 12 August 2012].

Cloud Security Alliance (2009) Security Guidance for Critical Areas of Focus in Cloud Computing V2.1. [online]. Available from: https://cloudsecurityalli-ance.org/csaguide.pdf [accessed 5 September 2012].

Denial of service attack. Wikipedia [online]. Available from: http://en.wikipedia.org/wiki/Denial-of-service_attack [accessed 17 July 2012].

Grubor, G., Njeguš, A., Ivaniš, N. (2011) Glavni faktori uticaja virtuelizacije tipa I na forenzičku istragu. 8. naučni skup sa međunarodnim učešćem Sinergija 2011. 25 March 2011 Bijeljina. Bijeljina: Sinergija University, 55-63. (in Serbian)

Grubor, G., Njeguš, A., Ristić, N. (2010) Paradigma zašti-te distribuiranog računarstva. 6. naučni skup sa me-đunarodnim učešćem Sinergija 2010. 19 March 2010 Bijeljina. Bijeljina: Sinergija University, 176-184. (in Serbian)

Lillard, T., et al. (2010) Digital forensics for network, Internet, and cloud computing: a forensic evidence guide for moving targets and data. Rockland, Mass.; Oxford: Syngress.

Man in the middle attack. Wikipedia [online]. Available from: http://en.wikipedia.org/wiki/Man-in-the-mid-dle_attack [accessed 2 September 2012].

Mather, T., Kumaraswamy, S., Latif, S. (2009) Cloud se-curity and privacy: an enterprise perspective on risks and compliance. Farnham : O’Reilly.

Milosavljević, M., Grubor, G. (2009) Digitalna forenzika računarskih sistema. Belgrade: Singidunum Univer-sity. (in Serbian)

Milosavljević, M., Grubor, G. (2009) Istraga kompjuter-skog kriminala : metodološko-tehnološke osnove. Bel-grade: Singidunum University. (in Serbian)

Security response. Symantec [online] Available from: http://www.symantec.com/security_response/write-up.jsp?docid=2005-081910-3934-99 [accessed 5 July 2012].

Veinović, M., Ivaniš, N. (2011) Zloupotreba sertifikata u servisu elektronske pošte. Singidunum revija. 8 (2), 79-86. (in Serbian)

Virus encyclopedia. Bitdefender [online] Available from: http://www.bitdefender.com/resourcecenter/virus-encyclopedia/ [accessed 20 September 2012].


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received: 06.09.2012.

Correction: 08.10.2012.

Accepted: 12.10.2012.

fOrenZičKa istraGa „trOjansKe ODBrane“ u virtuelnOm OKruŽenju

Rezime: U ovom radu prikazan je primer napada malverom na virtuelni računar. U napadu malvera veliku ulogu igraju greška ljudskog faktora i tehnike socijal-nog inženjeringa.Nedovoljna edukacija korisnika o bezbednosti informacija, olakšava dalje delovanje napadača.Napadač piše kôd malvera po potrebi – kao keylogger, downloader itd.Svaki napad uključuje dobru pripremu, skeniranje portova, prikupljanje informacije o antivirusnim softverima i načinu kori-šćenja ciljnog računara, razmatranje scenarija napada, izbor prilike i metoda napada. U radu je razmatrana antiforenzička uloga trojanca u korumpiranom virtuelnom računaru sa kojeg je izvršena zloupotreba, bez znanja vlasnika. Opisana je eksperimentalna verifikacija forenzičkih aktivnosti za dokazivanje tzv. „trojanske odbrane“ u virtuelnom okruženju.

Ključne reči: malver, trojanac, trojanska odbrana, cloud computing, virtuelna mašina.


21

tHe effects Of crOss-BOrDer tOurist PURCHASES ON RETAIL PERFORMANCE

radojko lukić*

University of Belgrade, Faculty of Economics6 Kamenicka Street, Belgrade, Serbia

Abstract: One of the major novelties in modern retail that is gaining more and more prominence is the concept of cross-border shopping. Factors affecting the rapid development of cross-border shopping are numerous, such as price differentiation, quality, convenience, demographic and social characteris-tics, good organizational structure developed in modern retail and many others. Among the influencing factors, the role of price differentiation of goods and services is very important and it is also affected by numerous factors. Those are: value added tax, profit margins, operating costs, ex-change rates, inflation, differentiation of organizational structure in retail, the application of advanced information and communication technology and others. Cross-border shopping is, in itself, very important influential factor for the development of tourism, target retail market, performance of retail companies and living standard. Altogether, this has a positive effect on the overall performance of the national economy.

Key words: price differentiation, factors, travel buyers, performance.


ISSN 2217-8090

UDK 338.488.3:339.378.2

Review paper/pregleni naučni rad


INTRODUCTION

With all the foregoing in mind, the primary ob-jective of this study is to survey the literature on the given subject and analyze all aspects of the empiri-cal data relevant for understanding the impact of cross-border shopping on retail performance. This should provide the basis for global improvement of the overall performance of retail companies that also render a service to cross-border shoppers.

Cross-border shopping has recently become in-creasingly important as an economic category, which is quite understandable when one takes into account the fact that it affects the development of tourism, the conquest of new retail markets, tax revenues, the performance of retail companies and other eco-nomic sizes. For such reasons, the concept of cross-border purchases has been intensively researched in both theory and practice (Leal et al. 2009; Leal et al. 2010; Gopinath et al. 2011; Hsu, 2011; Patrick, 2011; Singh, 2011; Lukić, 2011).

Relying on the analysis of the relevant literature and empirical data, this paper seeks to envisage the complex problems of cross-border shopping; pri-marily, by observing the impact it has on the per-formance of retail companies that render a service to cross-border shoppers. This should represent a basis for more efficient performance management of cross-border purchases of goods and services, which is seen as a particular target segment of the retail market.

An abundant amount of literature is dedicated to studying the problems of efficiency of cross-border purchases. Namely, this issue can be examined by re-lying on different perspectives, such as cross-border shopping trend, factors that influence the develop-ment of cross-border shopping, cross-border shop-ping motives, marketing channels of cross-border shopping, the structure of cross-border purchases by countries, regions and product categories, the effects of cross-border purchases on tax revenue, cross-bor-der trade as a factor of tourism development, etc.

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This paper examines all these aspects of the subject matter in the context of the impact cross-border shopping on retail performance.

The issue of cross-border purchases, considering the complexity, can be explored through a variety of hypotheses. Relying on the clearly defined objective, the hypothesis (H1) – that the cross-border shop-ping represents an increasingly important factor for the performance of retail companies, mostly due to the price differentiation and rising poverty of cus-tomers in many countries - is particularly tested in this paper. Related to this, the hypothesis (H2) is examined – the impact of the effective cross-border purchase management (general and online) on the performance of retail companies (Suchánek, 2010; The European Consumer Centers’ Network, 2011).

Method that is primarily used to prove these hy-potheses is review of relevant literature.

In order to verify them, original empirical data collected from various sources (articles, statistics, publications) are analyzed as well.

crOss-BOrDer sHOppinG: an ANALyTICAL MODEL

Purchasing has recently become one of the major "enjoying" activities for many tourists. Moreover, we could say it represents the primary motive that trig-gers many tourists to visit some destinations.

There are various macro- and micro-analytical factors influencing the behavior of tourists. Market (macro-factors) and socio-economic, motivation-al, customer characteristics (micro factors) affect cross-border shopping. Figure 1 presents the ana-lytical model of cross-border purchases.

The economic and cultural significance of cross-border shopping in tourism is immense. There are

Figure 1 - Cross-Border Shopping: An Analytical Model Source: Lau et al. (2005)

SINGIDUNUM J 2012 9 (2) 21-26Lukić R. The effects of cross-border tourist

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numerous reasons for cross-border shopping of tourists. They are illustrated in Table 1.

The study, relying on the example of cross-bor-der purchases of US-Canada, found that the key motive for tourists was price differentiation; 10% exchange rate appreciation raises the average cross-border welfare by 2.1%. Distance greatly restricts cross-border shopping, with the assumed cost of $ 0.9 per mile. If these costs are considerable they can deter tourists - customers from using the dif-ferentiated favorable prices, directing them towards other more favorable cross-border retail segments (Chandra, 2011).

FACTORS AFFECTING THE PURCHASE AS A MOTIVE FOR THE jOURNEy

Mass consumption and tourism are very essential factors of economic growth in many countries. This is demonstrated by a number of empirical studies conducted (Tömöri, 2010). Numerous factors - such as the motive for the journey - influence buying, as it can be seen from Figure 2.

Cross-border shopping represents one of the most significant factors for the development of tourism in certain foreign countries (Timothy and Butler, 1995). It is also the determinant of the in-

Trip duration: Same day Overnight

residence of Travellers: U.S. Canada U.S. Canada

Business Affairs 7.5 7.4 7.6 7.5

Visit friends / relatives 15.2 8.8 22.8 22.2

Pleasure or personal trip 43.1 53.2 62.3 64.6

Commuting to work 2.3 6.0 - -

Other 21.1 15.4 7.2 5.5

Not stated 10.8 9.2 0.1 0.2

Total Respondents ('000s) 304 445 226 264

Table 1 - Reasons for Crossing the Border, 1990-2010 (percent) Source: Chandra, A. (2011)

Figure 2 - Factors affecting the purchase as a motive for the journeySource: Tömöri, M. (2010)


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creased retail sales. Data in Table 2 clearly point that, in the reporting period, sales generated by tourists increased in German retailing.

In principle, cross-border shopping can be seen as an economic or tourist activity, as described in Figure 3.

SegmentTurnover segment in retail commerce generated by

tourists 2004 (Bill. €)

Touristic turnover in retail commerce 2010 (Bill. €)

One-day tourists in total (Customers coming from very far) 9.2 10.3 -11.0

... among which: german one-day-tourists 7.5 8.1 - 8.6

... among which: one-day foreign tourists 1.7 2.2 - 2.4

Visitors requesting accommodation total 3.3 4.1 - 4.6

... among which: germans 2.5 3.0 - 3.4

... among which: Foreign tourists 0.8 1.1 - 1.2

Sum 12.5 14.4 - 15.6

Table 2 - Estimated retail sales potential of Germany on the basis of cross-border shopping, 2010.

Source: Friedrich and Sattler (2005)

Length of stay

one or more nights same day returns

reason / motivation for cross-border shopping

pleasure 1 3

pleasure and economic 2 4

economic 5 6Figure 3 - A hypothetical model of cross-border customer Source: Tömöri, M. (2010)

The meaning of certain fields on a given image is clear in itself. For instance, the field 1 represents cross-border customers who stay in a foreign coun-try for at least one night and who are motivated by pleasure. The field 6 includes economic motives of cross-border buyers who return home the same day, which is why they cannot be treated as tourists be-longing to this category. Analysis of the meaning of other fields in the table is similar.

During a visit to the United States, Chinese tour-ists are very interested in purchasing different prod-ucts, from watches and jewellery to the footwear and healthy food. They believe that the American products have the same quality but lower prices compared to the similar products at home. Pur-chases done by the respective tourists are certainly facilitated by the acceptance of Chinese credit cards in American stores (Xu and McGehee, 2012).

In any case, the local buyers and foreign tourists as customers have different perceptions of values in the same country. It is confirmed by the results of the two customer groups - local and tourist shop-pers in Hong Kong. It certainly has some implica-

tions on strategic operations of global retailers (LI-oyd et al. 2011).

Duty-free sHOps

Foreign tourists make considerable purchases in duty-free shops located on the borders. Prices in those shops are much lower than in other shops. They, therefore record a significant increase in sales and financial performance. Thus, for example, the airport retailer Dubai Duty Free (one of the largest in the world) had an increase of 16.4% in sales in late September 2011 compared to the same period in 2010 (Peter and Anandkumar, 2011). Especially perfumes, jewellery and alcohol are sold in these stores (Table 3).

GROSS MARGIN

High gross margin is typical for duty-free shops as an indicator of profitability - performance, which covers operating expenses while the rest is profit.


25

Table 4 illustrates the rate of gross margin (gross profit) and net margin (net profit) for the leading retailer that renders a service to tourists - Dufry's HY.

2011 2010

gross profit 58.0% 57.0%

Net Earnings 4.8% 4.8%

Table 4 - Dufry Group HY- Gross Profit and Net EarningsSource: Peter and Anandkumar (2011).

According to the market and financial character-istics, duty free shops are highly profitable. The data presented speak in favor of this: in the coming years, the estimated rate of net margin of the duty free business in Turkey of Net Holding company will be high: 2010 - 14.0% 2011 -14.0%, 2012 - 14.0%, 2013 - 13.0%, 2014 - 13.0 %, 2015 - 13.0%, 2020 - 13.0%, 2021 - 13.0% and 2024 - 13.0% (Net Holding, Oyak Securitiea Estimates).

In principle, on the basis of all the characteristics, it can be concluded that the cross-border shopping is highly profitable, which is quite understandable when one takes into account the fact that foreign buyers - mostly tourists, purchase goods with high gross margin characteristics.

CONCLUSION

The dynamics of cross-border purchases is being more and more pronounced. It is increasingly treat-ed as a separate target segment of the retail market. Determinants of cross-border purchases are vari-ous. In addition to price differentiation, the role of

the brand is also becoming more significant. These are the prerequisites for more efficient management of cross-border shopping as a determinant of the overall performance of global retailers.

Concerning the types of channels of cross-bor-der shopping, it is the online channel that is becom-ing more and more important. This is quite under-standable if we take into consideration a number of advantages it provides compared to other mar-keting channels of cross-border shopping (price transparency, shopping in any currency during the day and from anywhere, etc.). By keeping the po-tential customers fully informed, barriers to online cross-border shopping have been reduced to a great extent.Cross-border shopping is one of the multi-ple influential factors. It affects the development of retail formats structure, tourism, tax revenue, the living standards of cross-border customers and the performance of retail companies. Through effec-tive management of cross-border shopping via the strong control of influential factors, the overall per-formance of retail companies that render a service to cross-border shoppers can be improved signifi-cantly.

REFERENCES

Chandra, A., Head, K., Tappata, M. (2011) Consumer Ar-bitrage a Porous Border. London : Centre for Economic Policy Research.

Friedrich, W., Sattler, K. (2005) Shopping Tourism in Germany: Impulses in the development of tourism and retail commerce in Germany. Köln: Institut für Sozialforschung. Available from: http://www.isg-in-stitut.de/download/Shoppingtourismus_short_engl.pdf[accessed 17 March 2012 ].

Year Till Date Sep 2011

Merchandise AED Millions Chare

Perfumes 548 14.5%

Gold 432 11.4%

Electronics 296 7.8%

Cosmetics 229 6.1%

Confectionery 284 7.5%

Others 1,991 52.7

Total 3,780 100.0%

Table 3 - Dubai Duty Free - Sales by Merchandise Category Source: Peter and Anandkumar (2011)


26

Gopinath, G., et al. (2011) International Prices, Costs, and Markup Differences. American Economic Review. 101 (6), 2450-2486.

Hsu, C.H., Chen, C.H. (2011) Analyzing the purchase mo-tivation of online shopping for health food. African Journal of Business Management. 5 (12), 4699-4703.

Lau, H.f., Sin, L.Y. m., Chan, K.K.C. (2005) Chinese Cross-Border Shopping: An Empirical Study. Journal of Hos-pitality & Tourism Research. 29 (1), 110-133.

Leal, A., López-Laborda, J., Rodrigo, F. (2010) Cross-Bor-der Shopping: A Survey. International Advances in Eco-nomic research. 16 (2), 135-148.

Leal, A., López-Laborda, J., Rodrigo, F. (2009) Prices, taxes and automotive fuel cross-border shopping. Energy Economics. 31 (2), 225-234.

LIoyd, A.E., Yip, L.S.C., Luk, S.T.K. (2011) An examination of the differences in retail service evaluation between domestic and tourist shoppers in Hong Kong. Tourism Management. 32 (3), 520-533.

Lukić, R. (2011) Evaluacija poslovnih performansi u malo-prodaji. Belgrade: Faculty of Economics, University of Belgrade. (in Serbian)

Patrick, P., Florian, S. (2011) Determinants of cross bor-der shopping in the border region of the Netherlands, Belgium and Germany: theory and empirical results. European Journal of Management. 11 (4), 12-22.

Peter, S., Anandkumar, V. (2011) A study on the sources of competitive advantage of Dubai as a Shopping Tour-ism Destination. International Business Research Con-ference [online]. Available from: http: // wbiconpro.com/510-Sangeeto.pdf [accessed 17 May 2012].

Singh, K. (2011) Cross-Border Shopping: Implications for State Fiscal Competition in Multiple Tax Instruments. Thesis, (PhD). University of Kentucky.

Suchánek, P. (2010) Business intelligence as a support of e-commerce systems in connection with decision making and cross-border online shopping. Journal of Applied Economic Sciences. 5 (1), 94-102.

The European Consumer Centres' Network (2011) On-line cross-border mystery shopping - state of the e-union [online]. Available from: http://ec.europa.eu/consumers/ecc/docs/mystery_shopping_report_en.pdf [accessed 25 May 2012].

Timothy, D.J., Butler, R.W. (1995) Cross-Border Shopping A North American Perspective. Annals of Tourism Re-search. 22 (1), 16-34.

Tömöri, M. (2010) Investigating Shopping Tourism Along the Borders of Hungary: A Theoretical Perspective. GeoJournal of Tourism and Geosites. 6 (2), 202-210.

Xu, Y., McGehee, N.G. (2012) Shopping behavior of Chinese tourists visiting the United States: Letting the shoppers do the talking. Tourism Management. 33 (2), 427-430.

received: 26.05.2012.


Accepted: 03.10.2012.

efeKti preKOGraničniH KupOvina turista na perfOrmanse u malOprODaji

Rezime: Jedna od glavnih tvorevina u savremenoj maloprodaji koja postaje sve zastupljenija jeste koncept prekogranične kupovine. Faktori koji dopri-nose sve bržem razvoju prekogranične kupovine su brojni, poput dife-renciranja cena, kvaliteta, pogodnosti, demografskih i socijalnih karak-teristika, dobre organizacione structure u modernoj maloprodaji kao i mnogih drugih. Među faktorima koji imaju uticaj, uloga diferenciranja cene robe i usluga je veoma bitna i na nju takođe utiču brojni faktori, poput poreza na dodatu vrednost, marže profita, operativnih troškova, inflacije, diferenciranja organizacione strukture u maloprodaji, primene naprednih informacionih i komunikacijskih tehnologija kao i mnogih drugih. Prekogranične kupovine same po sebi predstavljaju bitan faktor koji utiče na razvoj turizma, ciljano maloprodajno tržište, performanse maloprodajnih kompanija, i životni standard. Sve zajedno, to ima pozi-tivan uticaj na ukupne performanse nacionalne ekonomije.

Ključne reči: diferenciranje cena, faktori, kupci-turisti, performance.


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INTRODUCTION

Egypt has experienced challenges and made some progress in pursuing economic growth. Since 1983, except for 1991 and 1993, its economic growth rate has been above 3.00%. The annual growth rate of 4.18% in 2004 suggests that Egypt’s macroeconomic conditions were favourable. Its inflation rates were in the double-digit range during the 1980s and early 1990s.

During the period 1997-2003, inflation rates dropped to below 5%. However, the inflation rate of 11.26% in 2004 has caused some concerns. Af-ter 1992, the authorities pursued fiscal discipline by controlling the ratio of government deficit spending to GDP to below 3.00%. One area that could dampen economic growth is the relatively high interest rate level, such as the discount rate of 10.00%, and the lending rate of 13.38% in 2004. The pound-to-US dollar exchange rate was stable during the 1990s.

To switch from the pegging of its pound to the U.S. dollar, to a flexible exchange rate regime in year

2000, the pound-to-USD exchange rate rose from 3.69 in 2000 to 6.13 in 2004. In the financial sector, the stock price index went up from 63.80 in 1997 to 199.23 in 2004 or 212.27%. This implies that the in-creased financial wealth may enhance the consump-tion and investment spending due to the wealth ef-fect and the balance-sheet effect (Hsieh, 2006).

Between July 2004 and March 2005, the govern-ment was engaged in economic reforms in order to (1) create a foreign exchange inter-bank market, (2) cut tariffs and eliminate surcharges and fees for imports and create qualified industrial zones, (3) raise prices of electricity and fuels, modify income tax law to simplify tax codes and reduce tax rates, (4) pursue bank reforms through mergers, sales of joint ventures, raise capitalization to 500 million, and resolution of non-performing loans (NPLs), (5) privatize most state-owned enterprises including 17 non-financial firms, and (6) others (Hsieh, 2006).

The monetary policy reaction function shows the relationship between the real interest rate set by the central bank and the level of inflation (Cecchetti,

ESTIMATING THE MONETARy POLICyREACTION FUNCTION IN EGyPT

Hany M. Elshamy*

The British University in Egypt (BUE),El-Shorouk City, Cairo Governorate, Egypt

Abstract: This paper estimates the Egyptian monetary policy reaction function, by applying the Taylor (1993) rule and its open-economy version which employs co-integration analysis to estimate Taylor’s function in the long run. Also, this analysis is concerned with measuring this function in the short run by employing the Error Correction Mechanism (ECM). The analysis relies on the annual data obtained from the International Financial Statistics (IFS) published by the IMF for the period 1970-2007. When the simple Taylor rule was estimated for Egypt, the output gap and inflation coefficients were statistically significant, and their signs were found to be consistent with theoretical rationale. When the open-economy Taylor rule was estimated, the coefficients of the output gap, inflation and exchange rate had statistical significance with the expected signs. Therefore, the inflation rate has played an important role in conducting the Egyptian monetary policy.

Key words: monetary policy reaction function, Taylor rule, Egypt.


ISSN 2217-8090

UDK 338.23:336.74(32)



28

2008). Taylor (1993) showed in his seminal work a policy rule by which the Federal Reserve adjusts the policy rate in response to the lagged inflation and the real GDP gap. Taylor found that this rule described the actual policy performance in the late of 1980s and early 1990s.

Since 1993, several studies have applied and developed Taylor rule to examine the policies of the central banks in the developed countries such as Clarida et al. (1998) and Fendel and Frenkel (2006). However, there have been few studies about the monetary policy rules in Egypt and developing countries.

This paper is organized as follows. Section 1 provides a brief background information concern-ing the Egyptian economy and conduct of monetary policy by the Central Bank of Egypt (CBE). Section 2 outlines some relevant information concerning the methodology. Section 3 presents the estimation results while the last section gives the conclusions.

A BRIEF BACKGROUND OF THE ECONOMy AND CONDUCT OF MONETARy POLICy IN EGyPT

Background of the egyptian economy

Under comprehensive economic reforms ini-tiated in 1991, Egypt has relaxed many price con-trols, reduced subsidies and inflation, cut taxes, and

partially liberalized trade and investment. Manu-facturing has become less dominated by the public sector, especially in heavy industries. A process of public sector reform and privatization has started to enhance opportunities for the private sector. Ag-riculture, mainly in private hands, has been largely deregulated, with the exception of cotton and sugar production. Construction, non-financial services, and domestic wholesale and retail trades are largely private. All this has greatly contributed to maintain-ing a steady increase of GDP and the annual growth rate.

The Government of Egypt tamed inflation, bring-ing it down from double-digit to a single digit. Cur-rently, GDP is rising smartly by 7% per annum due to the successful diversification. Gross domestic product (GDP) per capita based on Purchasing Pow-er Parity (PPP) increased fourfold between 1981 and 2006, from US$ 1355 in 1981, to US$ 2525 in 1991, to US$ 3686 in 2001 and to an estimated US$ 4535 in 2006. Based on the national currency, GDP per cap-ita at constant 1999 prices increased from EGP 411 in 1981, to EGP 2098 in 1991, to EGP 5493 in 2001 and to EGP 8708 in 2006. Relying on the current US$ prices, GDP per capita increased from US$ 587 in 1981, to US$ 869 in 1991, to US$ 1461 in 2001 and to an estimated US$ 1518 (which translates to less than US$ 130 per month) in 2006. According to the World Bank Country Classification, Egypt has been promoted from the low income category to the lower middle income category.

Figure 1 GDP Growth rate, Inflation and Unemployment rate in Egypt, 2001-2008Source: Ministry of Economic Development

SINGIDUNUM J 2012 9 (2) 27-32Elshamy H. Estimating the monetary policy

29

Figure 1 shows some recent data about the GDP growth rate, inflation rate and unemployment rate in Egypt for the period 2001-2009. Namely, the GDP growth rate rose from 3.5 in 2001 to 7.2 in 2008. On the other hand, both the inflation rate and the unemployment rate have also increased during the same period.

Conduct of Monetary policy in Egypt

Since the conclusion of the stabilization program in 1996, the CBE has been concerned with achiev-ing multiple objectives simultaneously, which were conflicting in several instances (Al-Mashat and Billmeier , 2008). These objectives included attain-ing high economic growth while maintaining low inflation and preserving a stable exchange rate. The multiplicity of objectives in the presence of increas-ing capital mobility (which manifested primarily as inflows) made the conduct of an independent mon-etary policy virtually impossible, and clouded the measurement of the monetary policy stance during that period (1996–2005).

During the period 1996- 2005, the CBE’s op-erational targets were excess reserves of banks, and given the strong link between monetary aggregates and inflation, growth in M2 was the intermediate target. In its toolkit, the CBE used various quantita-tive and price instruments at different points in time to achieve its multiple objectives, leading to a lack of consistency in monetary management. These instru-ments included reserve requirements, government securities, repo and reverse repo operations, and the CBE’s discount rate. The structure of the banking sector made the linking of the policy decisions to macroeconomic outcomes more complicated.

Until very recently, the dominance of the state in the banking sector tended to create rigidities in the interest rate structure. Therefore, the quantita-tive measures adopted by the CBE at various junc-tures are likely to have played a more important role in the transmission mechanism when compared to price instruments, mainly interest rates. In addi-tion, the exchange rate was the key nominal anchor and policies were geared to maintain its stability vis-à-vis the U.S. dollar, which in turn theoretically supported price stability (as long as low inflation prevailed in the United States). As shown in the empirics, the exchange rate channel of monetary transmission was more effective than the interest rate channel (Al-Asraj, 2004). Under the inflation targeting regime, central banks commonly use price

instruments as they are expected to be the most ef-fective tool for conducting monetary policy. In ad-dition, inflation targeting relies on a well-function-ing and competitive banking system (Al-Mashat and Billmeier, 2008).

Only in these circumstances can the interest rate channel become strong and, thus, the most conveni-ent mechanism since the exchange rate channel can-not be relied upon actively. Under IT, the exchange rate is abandoned as the nominal anchor and re-placed by an explicit price-stability objective. Being easy to interpret and communicate to the public, interest-rate decisions and the interest rate trans-mission channel have become important. Schmidt-Hebbel and Tapia (2002) argue that central banks need to thoroughly understand the intensity and lags with which their policy interest rate impacts the economy, and in particular, the dynamics of their policy objectives.

METHODOLOGy

The aim of this paper is to estimate the mon-etary policy reaction function for Egypt for the period 1970-2007. Moreover, one of the main ob-jectives of this paper is to estimate empirically a Taylor - type monetary policy reaction function in Egypt, during the period 1970-2007. I have also been particularly interested in measuring this func-tion in the short run by using the Error Correction Mechanism(ECM). Namely, I I will start with the simple Taylor rule. The simple Taylor rule is shown as follows:

0,0, 21210 >>++= bbybbbr ttt π (1)

Where rt is the nominal interest rate at time t, πt is the inflation rate at time t, and yt is the output gap at time t, according to the rule, both b1 and b2 should be positive. That is, the rule indicates a rela-tively high interest rate when the inflation is above its target or when the output is above its potential level, and a relatively low interest rate when the in-flation is below its target or when the output is be-low its potential level.

Following Taylor (1993) and Chadha et al. (2004), I empirically analysed the role of the ex-change rate as the next step. Here, the simple Tay-lor rule was extended so that it included the ex-change rate as an additional explanatory variable as follows:


30

0,0,0, 3213210 <>>+++= bbbebybbbr tttt π (2)

In this augmented rule, et represents the real ef-fective exchange rate at time t, and its coefficient is expected to have a negative sign. This indicates a relatively high interest rate when the real exchange rate depreciates and a relatively low interest rate when the real exchange rate appreciates.

This paper uses annual data from the period 1970- 2007. The data source for the interest rate is the Central Bank of Egypt (CBE) and the rest of data is collected from the International Financial Statis-tics (IFS).

I calculate the output gap in the following way. Firstly, I regress the output on a constant and a time trend.

tt utimeY +×+= βα)ln( (3)

When Yt is the output at time t, time is the time trend, and ut is the error term with mean 0 and finite variance. The potential output is described as the predicted value of Equation (3).

timeYt ×+=^^

* )ln( βα (4)

Where )( *tY is the potential output,

^α and

^β are

estimates of α and β. I then calculate the output gap as the deviation of output from its potential level as follows:

t

tt

t

ttttt Y

YYY

YYYYy

*** 1001100))ln()(ln(100

−×≅

−+×=−×= (5)

As a preliminary analysis, I carried out the Aug-mented Dickey-Fuller (ADF) tests for the output gap, interest rates, inflation rates, and the real ef-fective exchange rate. As a result, the level of each variable was found not to have a unit root. Thus, I can say that each variable is a non-stationary vari-able with a unit root.

EMPIRICAL RESULTS

Simple Taylor Rule

First of all, I conducted the co-integration analy-sis. Table 1 shows the results of (ADF) tests in the first difference based upon the Mackinnon p val-ues- at various lag lengths. The preferred lag length is based upon the Akaike information Criterion (AIC). These indicate that co-integration is gener-ally accepted.

ADF figures show the Mackinnon approx p-value

Table1 shows the estimation results. As is evi-dent from this table, the output coefficient is esti-mated to be positive (0.026) and statistically sig-nificant at 1% level. The inflation rate coefficient is estimated to be positive (0.212) and statistically significant at 5% level.

Table 2 shows the dynamic Simple Taylor func-tion by using the Error Correction Mechanism (ECM). It indicates a positive relationship between the interest rate and both the output gap and infla-tion rate. Most importantly, of course, the lagged error is negative and significant. This confirms the acceptance of the long-run relationship; which is further validated provided there are no problems with any of the diagnostic tests presented ( the AR (1) test for the first order residual autocorrelation, the ARCH(1) test for autogressive conditional het-roscedasticity and the Jarque-Bera test for normal-ity).

Open-economy Taylor Rule

The Egyptian monetary policy reaction function will be next analysed by applying the Taylor rule augmented with the exchange rate. Table 1 shows the results of the co-integration. As it is evident from the table, the output coefficient is estimated to be positive (0.022) and statistically significant at 1% level. The inflation rate coefficient is estimated to be positive (0.215) and statistically significant at 5% level. It is noted that the coefficient of the real effec-tive exchange rate is estimated to be negative (0.212) and statistically significant at 10% level.


31

Table 2 shows the dynamics of the open-econo-my Taylor function. It indicates a positive relation-ship between the interest rate and both the output gap and inflation rate. As expected, there is a nega-

tive relationship between the interest rate and the exchange rate. Most importantly, of course, the lagged error is negative and significant.

Table 1 - Long run simple Taylor rule and Open-economy

Table 2 - Short run simple Taylor rule and Open-economy


32

CONCLUSIONS

This paper empirically analyses the Egyptian monetary policy reaction function by implement-ing the simple Taylor rule and its open –economy version which employs both long run and short run analysis (ECM). The analysis uses annual data from the period 1970 - 2007.

When the simple Taylor rule was estimated for Egypt, the output gap and inflation coefficients were statistically significant, and their signs were found to be consistent with theoretical rationale. When the open-economy Taylor rule was estimated, the coef-ficients of the output gap, inflation and exchange rate had statistical significance with the expected signs.

The aforementioned information implies that the Central Bank of Egypt (CBE) could respond ap-propriately to internal supply-demand gaps, exter-nal competitiveness and changes in price level.

REFERENCES

Al-Asraj, H. (2004) Monetary performance in Egypt between 1997 and 2003. Egyptian Economists' 24th Conference. (in Arabic)

Al-Mashat, R., Billmeier, A. (2008) The monetary trans-mission mechanism in Egypt. Review of Middle East Economics and Finance. 4 (3), 32-82.

Cecchetti, S.G. (2008) Money, banking, and financial mar-kets. 2nd ed. Boston; London: McGraw-Hill Irwin.

Chadha, J.S., Sarno, L., Valente, G. (2004) Monetary policy rules, asset prices, and exchange rate. IMF Staff Paper. 51 (3), 529-552.

Clarida, R., Gali, J., Gertler, M. (1998) Monetary policy rule in practice: Some international evidence. Euro-pean Economic Review. 42 (6), 1033-1067.

Fendel, R., Frenkel, M. (2006) Five years of single Eu-ropean monetary policy in practice: Is the ECB rule-based? Contemporary Economic Policy. 24 (1), 106-115.

Hsieh, W. (2006) Application of the monetary policy reaction function to output fluctuations for Egypt. International Research Journal of Finance and Eco-nomics. 1, 57-61.

Iklaga, F. (2009) Estimating a monetary policy reaction function for the central bank of Nigeria [online]. Available at: http://www.africametrics.org/docu-ments/conference08/day2/.../iklaga.pdf [accessed 5 June 2012].

Inoue, T., Hamori, S. (2009) An emprical analysis of the monetary policy reaction function in India. In-stitute of Developing Economies. IDE Discussion Paper No. 200 [online]. Available at: https://ir.ide.go.jb [accessed 23 June2012].

Schmidt-Hebbel, K., Tapia, M. (2002) Monetary policy implementation and results in twenty inflation-targeting countries. Central Bank of Chile Work-ing Papers No. 166 [online]. Available from: http://www.bcentral.cl/eng/studies/working-papers/pdf/dtbc166.pdf [accessed 2 July 2012].

Taylor, J. (1993) Discretion versus policy rules in prac-tice. Carnegie-Rochester Conference Series on Public Policy. 39, 195-214.

received: 03.07.2012.


Accepted: 15.09.2012.

PROCENA FUNKCIjE REAKCIjE MONETARNE POLITIKE EGIPTA

Rezime: Ovaj rad se bavi procenom funkcije reakcije monetarne politike Egipta, služeći se Tejlorovim pravilom (1993) i njegovom verzijom u otvorenoj privredi koja primenjuje kointegracionu analizu kako bi se izvršila procena Tejlorove funkcije na duže staze.Takođe, ova analiza je usmerena i ka proceni ove funkcije za krat-kak vremenski period korišćenjem mehanizma za ispravljanje grešaka (ECM). Analiza se oslanja na godišnje podatke dobijene od Međunarodne finasijske statistike (IFS) koju obljavljuje Međunarodni monetarni fond (MMF) za period 1970-2007. Kada je izvršena procena jednostavnog Tejlorovog pravila za Egipat, koeficijenti proizvodnog jaza i inflacije su bili statistički značajni, a njihovi pred-znaci u skladu sa teorijskim obrazloženjem. Kada je izvršena procena Tejlorovog pravila u otvorenoj privredi, koeficijenti proizvodnog jaza, inflacije i kursa su bili statistički značajni i imali su očekivane predznake. Stoga, možemo reći da je stopa inflacije odigrala bitnu ulogu u sprovođenju monetarne politike Egipta.

Ključne reči: funkcija reakcije monetarne politike,Tejlorovo pravilo,Egipat.


33

THE PROCESS OF RISK MANAGEMENT IN FINANCIAL BUSINESS.

Danica Žigić1,*, miroljub Hadžić2

1 Beohemija, 290 Kumodraska Street, Belgrade, Serbia2 Singidunum University, Department for Business Economics,32 danijelova Street, Belgrade, Serbia

Abstract: Risk management has become one of the most important management functions within banks and financial institutions. Its role is even more important during the current world economic crisis, with the aim of saving assets and preserving future profit. Serbian banks have recently started to introduce overall risk management function in line with Basel II agreement and take care of all sorts of risks. During recent years, a higher level of risk has been present in crisis circumstances, which means that Serbian banks have to be more careful than before. There have been clear signs of deterioration of the structure of banking assets, but hope-fully, this negative trend was stopped. At the same time, one can point out that domestic banks are in better position compared to the banks in countries within the region.

Key words: risk management, banking, financial business.


ISSN 2217-8090

UDK 005.334:336.71



INTRODUCTION

Risk management can be described as cost op-timization of risk management conducted in such a way so as not to harm anyone Risk management includes business philosophy, culture and climate of the organization, as well as some business functions of financial institutions. It represents the central part of strategic management and corporate management of any commercial entity (Barjaktarović, 2009).

The focus of efficient risk management is on identifying and mitigating risk. The main objectives of risk management are, as follows:

◆ The ability of the business entity to survive after loss and to achieve growth and maxi-mize profits;

◆ To Operate effectively in risky environments; ◆ To coordinate operations within the legal fra-

mework.

Risk management is an ongoing and constantly developing process (Barjaktarović, 2009), which runs through organizational strategy and the im-plementation of this strategy.

Every business entity develops its own inter-nal guidelines for risk management, which are ap-proved and adopted by the authorities responsible for management of the economic entity.

The risk management process consists of six steps (Barjaktarović, 2009):1. Definition of objectives – risk management

program, which precisely decides what business entity expects from the program. The primary objective is to preserve operating effectiveness of the business entity. The secondary objective is to ensure the primary protection of employees from injury.

2. Risk identification – Risk manager must detect risks to which Company’s business is exposed.

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Risk identification is the phase in the risk man-agement in which, apart from the refinements of risk in the overall risk classification system and the definition of the entity, cause-effect re-lationships of individual risks are determined. It should be noted that risk identification is en-gaged in perception.

Basic classification of risk related to the opera-tion of the business entity includes:

◆ a critical risk – leading to the bankruptcy of the economic entity,

◆ an important risk – threatening the liquidity of the business entity, but negative effects can be abstracted (either by loans of commerci-al banks, or by increasing the effort for the collection of overdue debts of the debtor), and

◆ Insignificant risk – its effects do not affect significantly operations of the entity i.e. do not threaten the liquidity and solvency of the entity.

3. Risk assessment - is the overall process of risk analysis and risk assessment. The company ex-perts determine the potential loss and probabil-ity of loss. Gap analysis consists of risk identifi-cation, risk description and risk assessment. Risk analysis includes risk identification, risk descrip-tion and evaluation of risk.

Results of risk analysis can be used for obtaining the risk profile that assesses the significance of each risk and provides a range of tools for defin-ing priorities for the regulation of risk and makes it possible to rank each risk identified by its as-signed relative importance.

Evaluation of risk is important for the decision -making process regarding the significance of risk for the business entity, and whether a cer-tain risk should be regulated or accepted. Fur-thermore, it is important that the company es-tablishes a system of internal and external risk reporting on the existence of risk.

4. Consideration of alternatives and selection of resources for risk management – it includes two solutions: risk financing and alignment of available assets included for the regulation of losses arising from risks that remain after the application of risk control techniques.

There are several methods for managing risk, as follows (Barjaktarović, 2009): methods for risk control, risk avoidance methods, risk reduction

methods, risk financing methods, risk retention methods and risk transfer methods.

Having in mind the above mentioned facts, one can conclude that the basic rules for risk man-agement are (Barjaktarović, 2009):

◆ Do not risk more than you can afford to lose, ◆ Bear in mind the randomness ◆ Do not risk a lot for a little.

5. Decision implementation – decision to apply administrative procedures related to the reten-tion or transfer of risk with or without reserves, that is, formation of financial funds (reserves).

6. Evaluation and re-examination – is a constant function of risk management, which involves continuous evaluation and correction of op-erational risk management, given that the risk changes over time, that is, it disappears or the new one appears. Errors can also occur while managing risk and they should be corrected.

IT SOLUTIONS FOR RISK ANALySIS AND RISK CONTROL

The software for risk management allows you: an integrated view of risk which economic entity undertakes, monitoring profitability in relation to the risk policy of the economic entity, a regulatory body reporting and measuring the risk in business. The software components for managing risk are (Barjaktarović, 2009):

◆ Credit risk measurement, model and simula-tion of exposure,

◆ Measuring the market risk, model and simu-lation of exposure,

◆ VaR, historical simulation, Monte Carlo si-mulation,

◆ „Greek“calculators of risk (beta, delta, gama, etc.),

◆ Modeling and scenario generation, ◆ Test of extreme events.

A well-known software solution for worldwide risk management is GRC – Governance Risk Con-trols, which completely covers the main stage in risk management.

If we consider the banking practice in Serbia, IT solutions for risk management are more developed in banks where the foreign capital prevails. Such banks usually use a group of software solutions and models, the outsource software solutions. In the case of less developed local banks, risk management comes down to the use of Excel.

SINGIDUNUM J 2012 9 (2) 33-40Žigić D., Hadžić M. The process of risk management

35

NEW REQUIREMENTS FOR BANKING BUSINESS

Bank performances in the global market are be-coming increasingly risky, suggesting a need for the well-developed risk management. Risk is immanent in the banking business and it represents the accom-panying consequence of market forces. Such increas-ing risk is related to the process of globalization of the banking business.

An audit function of banks is organized to secure that the banks pay their obligations and to originally make a set of rules banks are required to adhere to their business. Those rules reflect the obligation of banks that they have to hold a certain amount of assets as fully liquid.

In addition, there is a rule in line with Basel I agreement that the bank has to fulfill a minimum capital reserve requirement to its risk assets.

This disparity has proved to be an acute problem when the banks of Japan began with very aggressive lending activities in the international market with-out taking into account the amount of their capital. Banks in other developed countries have considered this competition as destructive and dangerous, so they launched the initiative to establish internation-al norms and standards related to the obligation of banks to provide an adequate amount of capital as-sets at risk.

After a series of banking crisis including the bankruptcy of Herstatt Bank in Germany, central banks and supervisory authorities of the developed countries (USA, Canada, UK, France, Germany, Italy, the Netherlands, Luxembourg, Belgium, Swit-zerland, Japan), founded the Basel Committee on banking supervision in 1975 (It is a committee of of-ficials from central banks and supervisors who meet every three months at the Bank for International Settlements in Basel.). In order to ensure equality of Member States in assessing the adequate risks as-sumed capital, the Basel Control Committee pub-lished The Basel Agreement I in 1988. Under this Agreement, the banks with international operations in countries of „the Group of 10“ were obliged to have their own capital of at least 8% of assets. This is a minimum, and national regulatory bodies have the right to establish higher levels of capital adequacy.

Volatility of financial markets and their dynamic development have emphasized the need for more sophisticated risk measurement approaches over the past ten years.

Banking risks as a whole, and therefore credit risks, have become more complex, and some large and internationally active banks have developed their own methods for risk management.

The proposal of the new Basel Agreement, the Basel Agreement II, was released in early 2001. Con-ceived on the idea to increase the sensitivity of the guiding financial institutions at risk, the new agree-ment provides a more complex approach to deter-mining minimum capital requirements in view:

◆ More comprehensive treatment of risk; ◆ More sophisticated instruments for risk mea-

surement in light of a number of methods for measuring risk;

◆ More incentives for banks to improve their internal risk measurement methods;

◆ More significant and broader roles of na-tional supervisory institutions in terms of intensifying the dialogue with the banks in the development of internal risk assessment methods and controls required;

◆ Higher transparency of financial institutions as an essential prerequisite for the improved financial discipline.

The main objective of Basel Agreement II is to in-crease the sensitivity to risk, that is, to correlate the height of the required capital with the amount of risk.

STRATEGIC MANAGEMENT OF BANKING RISK

The bank should have the ability to review the likelihood that risk event does not modify or affect the operations of the bank and its consequences if it happens. The bank is obliged to establish an or-ganization, human resources and sufficient reserve funds in order to cope with the risk successfully.

The function of the Risk management sector is to maintain risk within the adequate action framework and it is essential to provide:

◆ Reliable information and accurate reports about the treats, the occurrence or the effect of risk;

◆ Measuring the effects of risk in cash equiva-lents – expressed through the reduction of bank wages or through damages applied to the bank assets;

◆ Appropriate strategies, plans and programs to prevent and combat the effects of each risk


36

by employing the appropriate business poli-cies, procedures and standards.

Experience in banking business shows that the common shortcomings in risk management of the bank are as follows: too aggressive activity of the Board of directors, disunited or inattentive board of directors, the negative impact of insiders or man-agement, the risk management sector dependence on the Executive Board and more.

OPERATIONALIzATION OF RISK MANAGEMENT IN SERBIAN BANKING SECTOR

A complete risk management system is set up by the Law on Banks, which defines the basics of the system – the risk, the authorities and their respon-sibilities, the type of risk management procedures demanding that the bank itself defines and consti-tutes everything else in this legal framework.

The Banking Act (the Law on Banks) also re-quires that the bank should have an adequate IT system (software support), the system of internal control and treasury operations system. Accord-ingly, these three sub-systems should be set up to perform their functions separately from the busi-ness functions and separately for the purposes of risk management.

The Bank is obliged to identify, to measure and assess the risks to which it is exposed in its opera-tions and to manage those risks. The bank is also obliged to establish an organizational unit – sec-tor - responsible merely for risk management. Risk management is influenced by the size and organi-zational structure of the bank, its business strat-egy, the scope of activities and types of operations performed. The Bank prescribes, in its own regula-tions, procedures for the identification, measure-ment and assessment, as well as risk management (Hadžić, 2009).

Standards and activities that exceed the level lines of business are in the focus of the corporate function. Consequently, it enables the decision-making process based on the adequate risk analy-sis and trends at the bank, which through using the data from external databases enable the ex-change of experience and best practices and deter-mine the size of the limits. These are the basis for calculating capital costs and consolidated reporting to the top management.

Contemporary models of risk management at the bank rely on the management structure pre-sented. It is about the control flow between two levels (Barjaktarović, 2009):

◆ top-down – from management to employees – the direct perpetrators of transactions,

◆ down-top feedback from employees to the top management of the bank.

Hereby, the whole management structure of the bank is involved in the daily decision-making, which is something required by the very nature of risks the bank is exposed to.

THE CASE: RISK MANAGEMENT OF KOMERCIjALNA BANKA A.D., BELGRADE

The world economic crisis started to influence negatively Serbian economy at the end of 2008. The banking sector in Serbia was developing fast in the period prior to crisis and was in somewhat better shape compared to other transition econo-mies within the region. Capital adequacy of Serbian banks was 28% and credit recovery was more than 90% on average. In order to ease monetary policy, National bank of Serbia introduced a set of meas-ures together with the Government. Firstly, liquid position of the whole banking sector was improved. Secondly, NBS concluded the so - called Vienna agreement with banks with the prevailing foreign capital, by which Serbian exposure would stay as it was before crisis. Thirdly, the set of legal changes was enacted in order to secure foreign exchange deposits (the guaranteed amount of deposits was put from 3 thousands up to 50 thousands Euro) and the tax duties related to capital gains from de-posits were annulled. Fourthly, the Government introduced incentives by which interest rate was subsidized for credit lines, for companies for liquid assets, for investments in non fixed assets and for citizens. Fifthly, the Stand - By agreement with IMF supported RSD stability (2.7 billion Euros and 1.1 billion Euros, the current arrangement).

Worsening economic conditions in Serbian banking sector led to slowing growth and in 2011 to stagnation. Number of employees within the bank-ing sector decreased from 31.3 thousand and stabi-lized at 29.9 thousands employees. After a modest increase in assets, crediting and capital in 2010, dur-ing the first half of 2011,the total assets decreased by 2%, credit volume decreased by 2% in nominal


37

terms, while capital increased by 4%. The struc-ture of new credit lines got somewhat worsened, as banks placed financial sources mainly to the state and public companies. Credit lines in default (more than 90 days) increased to 19% (from 17% in 2010).The Capital adequacy decreased in the mid of 2011 and stabilized at 20%. Profitability increased com-pared to the same period in 2010 and total profit of Serbian banks amounted to 178 million Euros. There were signals of modest economic recovery at the end of 2009 and in 2010 (GDP increased 1% in 2010, Staistical office RS), but the fears of repeat re-cession are present from the second quarter of 2011.

Komercijalna Banka has announced the results achieved in the first nine months of 2011, showing a continuing trend of growth in profitability of the banking institution.

Komercijalna Banka has announced pre-tax profit of just under 3 billion, an increase of about 50 percent compared to the same period last year. The largest bank that operates under government control has increased the efficiency, especially in the main busi-ness area. Interest income amounted to 13.3 billion (growth of 18.2 per cent), while fee and commission income amounted to 3.7 billion (growth of 15.6 per cent). The total income from these items amounted to 10.4 billion RSD and was 29.4 percent higher compared to the first three quarters of 2010.

Total assets of banks at end of September amounted to 258.8 billion, which represents an increase of 1.1 % from the beginning of the year There were no major dramatic shifts in the bal-ance sheet items , and positions in loans and de-posits were insignificantly lower than in the first nine months last year and amounted to 148.8 bil-lion dinars.

Komercijalna Banka, Belgrade real-ized profit from operations in the first quarter of 2011 amounting to 895.129 RSD. In the same period last year it achieved a higher operating profit in the business for 269.813 RSD. Relying on this we can conclude that the busi-ness was more successful in the current than in the past year.

Total assets in 2011 (up to 30th Sep-tember) increased by 1.14% compared to the previous year amounting to 258.805 thousand RSD, and by 26.08% compared to the year 2009. In 2009, the given loans and deposits amounted to

115.106 million RSD, and in 2010 recorded an in-crease amounting to 150.566 million RSD. Slight decrease was recorded in 2011 amounting to 148.774 million RSD.

The total assets within the Balance sheet in 2010. grew up to 50.611 million RSD or 24.7% compared to the previous year. The Loans and advances in-creased by 35.460 million RSD, or 30.8%. As of 31st December 2010, the total loans and advances (econ-omy, population, and banks and financial hubs or organizations) amounted to 150.566 million RSD, representing 58.8% of the total Balance sheet assets.

In 2010. the position of the cash and cash equiv-alents decreased by 24.3%, due to the revised regu-lations on mandatory reserves of the NBS. The most significant increase recorded in the previous year was related to investment in securities. Finally, the total amount of funds placed in a risk-free govern-ment securities amounted to 18 billion RSD. In 2010, the planned capital increase carried out in subsidiaries amounted to EUR 30 million. Namely, it was placed into Commercial Bank, Budva, Mon-etenegro 10 million and Commercial Bank, Banja Luka, Republika Srpska 20 million EUR. In the structure of assets, we note that the cash and cash equivalents recorded a decline in 2011 compared to 2010 by 20.08%, and by as much as 39.52% com-pared to 2009. In 2011, the callable deposits and loans recorded an increase of 17.12% compared to the 2010, and 9.5% compared to 2009. The claims for interest, fees, changes in fair value of derivatives and other receivables increased by 18.9% compared to 2011 and 2011 increased by 50.4% compared to 2009 and 2011.

Figure 1. A comparison between interest income, expense and net interest income during 2009-2010.


38

2009 2010

Interest income 14.713.932 15.520.261

interest expense 8.379.834 8.082.778

Net interest income 6.334.099 7.437.483

Table 1. Data related to , expense and net interest income during 2009-2010.

The net interest income of the Bank in 2010 amounted to 7.437 million RSD, representing an increase of 17.4% compared to the previous year. The revenues have been increasing interest for 806.3 million RSD, or 5.5%, while the expenses on

deposit rates fell by 297.1 million RSD, or by 3.5%. Reducing expenditure on a new deposit rates has been achieved as a result of collecting deposits un-der more favorable market conditions, despite the growth in deposits. In 2010, the Bank carried out optimization of the structure of deposits from the standpoint of price and maturity. In the structure of interest income, the largest share has revenue from loan interest for enterprises (8.073 million RSD, or 53.0%), while the total interest expenditures refer to the largest share of deposit interest for citizens (5.298 million RSD or 65.6%), which for the most part relates to foreign currency savings deposits of citizens.

Figure 3. Interest expanse by sector in 2010.

Figure 2. Interest income for 2010 by sector

When analyzing investments we used Cover –ratio, which is equal to the ratio correction value and gross investments. We calculate the three dates:

◆ September 12, 2011 -was 8.61% ◆ October 12, 2011 -amounted to 7.49% ◆ November 9,2011- amounted to 7.38%

Impaired loans amounted to 142.695.379 (in thousands) in 2010 and recorded an increase com-pared to 2009 when they amounted to 85546.197(in thousands). Impaired loans are related to bad loans, which are rated with 4 and 5 ratings.

In contrast to the observation of the auditor’s report on the Structure of assets, we can note that in 2010 a drop in loans which are not impaired was recorded, compared to 2009.

If we compare the Coverage Ratio Commercial Bank with an average in the branch and the branch leader (Banca Intesa), the industry average is 8.5% and Intesa has 6.9% Coverage Ratio as of September 30, 2011. This shows that the structure of assets is better than limit but less than the branch leaders. It is important to note that the bank estimates using different methodologies.


39

Komercijalna banka achieved in 2011 a net profit of 3.5 billion which is 39.4 percent higher than a year before, the data from the unaudited financial state-ments for the previous financial year. The main busi-ness of the bank has greatly contributed to the in-crease in profitability: profit from interest increased by 32.5 percent to $ 9.9 billion, while income from fees and commissions rose by 13.6 percent to 4.4 bil-ion.

The main business of the bank has greatly con-tributed to the increased profitability: profit from in-terest increased by 32.5 percent to $ 9.9 billion, while income from fees and commissions rose by 13.6 per-cent from 2010 to 1.3 billion dinars last year.

A major contribution to a good end result of the bank comes from small negative exchange rate differ-ences, resulting from enormous expenditures in 2010 in the amount of 7.4 billion.

Assets of commercial banks on the last day in 2011 amounted to 275.5 billion representing a growth of 7.7 percent since the beginning of the year.

The budget for 2012 which provides for the re-capitalization of commercialization of commercial banks amounted to 11.572 billion.

There is a deadline by which the state should show the intent in terms of the ownership of the bank. So far, however, there have been no intentions concern-ing its sale.

If the state does not exercise the right of the re-capitalization, the financial institutions would have a 51.64 percent stake. With this recapitalization, bank reserves and strengthens its leading position.

The Bank’s second-largest balance sheet total amounts to 259 billion dinars, which makes 10.2 percent of the market share. Komercijalna Banka is among the top five regarding the amount of profit before tax.

When it comes to the dilemma of whether the state should have a majority share in the banks, there are a lot of controversies.

“In general, in good times, the state should with-draw from the banking system and should not con-stitute unfair competition to private banks. However, in adverse conditions, private banks often show no understanding for the needs of the economy and re-duce their lending activity. It should be noted, that our experience with state banks was quite bad, where most of them went bankrupt, “says economist Fabris (2012).

CONCLUSIONS

Risk management function has become the most important management function in recent years. Its importance is especially evident within worsen-ing conditions for financial business as a result of the current economic crisis. The primary objective

ASSETS 31 September. 2011. 2010. 2009.

1 2 3 4 5

1. Cash and cash equivalents 16.562.088 20.724.645 27.387.157

2. Callable deposits and loans 51.086.075 43.615.232. 46,651,225

3. Interest, fees and sale of loans and deposits 1.408.716 1.185.242 936.866

4. Loans and advances 148.774.729 150.566.311 115.106.246

5. Securities (excluding treasury) 21.301.395 18.267.497 566.509

6. Shares 5.788.066 5.286.005 2.703.423

7. Other placements 2.079.983 2.308.011 2.272.876

8. intangible assets 505.780 467.547 326.526

9. Fixed assets and investment property 7.529.878 6.820.704 7.057.487

10. Assets held for sale 101.040 735.432 104.898

11. deferred tax assets 48.903 0 109.217

12. Other assets 3.619.168 5.351.683 2.034.792

TOTAL ASSETS 258.805.821 255.868.309 205.257.221

Table 2. Balance sheet, Komercijalna banka ad, Belgrade


40

of risk management is to preserve assets of the fi-nancial institution and secure the projected profit. Nowadays, international authorities and national regulatory institutions have started introducing high level requirements related to risk management in the banking sector. Banks themselves have developed a wide range of instruments in order to improve the analysis and cope more efficiently with increasing risks. During the current economic crisis, Serbian banks face slowing growth and stagnation of over-all activities, as well as worsening performances and increasing risks. Komercijalna Banka a.d, Belgrade successfully copes with those problems and due to its adequate risk management organization and pro-cess it has improved its efficiency and position on the domestic market.

REFERENCES

Barjaktarović, L. (2009) Upravljanje rizikom. Belgrade: Singidunum University. (in Serbian)

Cronhy, M., Galai, D., Mark, R. (2001) Risk Management. New York; London: McGraw-Hill.

Cvetinović, M. (2008) Upravljanje rizicima u finansij-skom poslovanju. Belgrade: Singidunum University. (in Serbian)

Fabris, N. (2012) Država dokapitulizuje Komercijalnu banku sa 11 milijardi dinara. Gde investirati [onli-ne]. Available from: http://www.gdeinvestirati.com/banke/vesti/6630-drzava-dokapitalizuje-komercijal-nu-banku-sa-11-mld-dinara [accessed 2 June 2012]. (in Serbian)

Frenkel, M., Hommel, U., Rudolf, M. (2005) Risk ma-nagement : challenge and opportunity. 2nd. ed. Berlin: Springer.

Guiso, L., Paiella, M. (2003) Risk Aversion Wealth and Background Risk. Journal of the European Economic Association. 6 (6), 1109-1150.

Hadžić, M. (2009) Bankarstvo. Belgrade: Singidunum University. (in Serbian)

Krstić, B., Marinković, S. (1998) Finansijski rizici u ban-karstvu. Jugoslovensko bankarstvo. 27 (5/6), 3-11. (in Serbian)

Kupper, E.F. (1999) Risk management in Banking [onli-ne]. Available from: http://www.ppge.ufrgs.br/gia-como/arquivos/esp207/kupper-1999.pdf [accessed 6 June 2012].

Scheck, G. (2002) Risk Management and Value Creation in Financial Institution. New York; Chichester: Wiley.

Stephanou, C., Mendoza, J.C. (2005) Credit Risk manage-ment Under Basel II: An Overview and Implemen-tation issues for Developing Countries. World Bank Policy Research Working Paper 3556 [online]. Ava-ilable from: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2006/01/10/000112742_20060110171251/Rendered/PDF/wps35560correc-ted.pdf [accessed 25 August 2012].

Van Greuning, H., Brajović-Bratanović, S. (2003) Ana-lyzing and managing Banking Risk. 2nd ed. Wash-ington, D.C.: World Bank.

Van Greuning, H., Brajović-Bratanović, S. (2006) Analiza i upravljanje bankovnim rizicima: pristupi za ocjenu organizacije upravljanja rizicima i izloženosti finan-cijskom riziku. 2. izd. Zagreb: Mate. (in Croatian)

Vunjak, N. (2005) Finansijski menadžment: Poslovne fi-nansije. Bečej: Proleter; Subotica: Faculty of Econo-mics, University of Novi Sad; Podgorica: Unireks. (in Serbian)

received: 06.06.2012.


Accepted: 10.10.2012.

PROCES UPRAVLjANjA RIzIKOM U FINANSIjSKOM POSLOVANjU

Rezime: Upravljanje rizikom je postala jedna od najvažnijih upravljačkih funkcija u bankama i finansijskim institucijama. Njena uloga je još izraženija to-kom trajanja ekonomske krize i ima za cilj da se sačuvaju sredstva i bu-dući profit. Banke u Srbiji su nedavno počele da uvode opštu upravljačku funkciju koja je u skladu sa Basel II sporazumom kao i da vode računa o različitim vrstama rizika.Tokom proteklih godina zabeležen je sve veći nivo rizika u kriznim situacijama, što predstavlja upozorenje za banke u Srbiji da budu dosta opreznije. Postojali su jasni znaci koji ukazuju na pogoršanje strukture bankovnih sredstava, ali je na svu sreću ovaj nega-tivni trend zaustavljen. U isto vreme, možemo istaći da se domaće banke nalaze u boljem položaju u odnosu na banke u zemljama u regionu.

Ključne reči: upravljanje rizikom, bankarstvo, finansijsko poslovanje.


41

CAPITAL EFFICIENCy ANALySIS OF SERBIAN COMPANIES

nemanja stanišić,1,* tijana radojević1,vule mizdraković1, nenad stanić1

1Singidunum University, Department for Business Economics,32 danijelova Street, Belgrade, Serbia

Abstract: The purpose of this paper is to give some insight into the level of capital adequacy and the efficiency of its use in companies in the Republic of Serbia. As no similar research has yet been conducted in this manner, we believe that certain benchmark in this field is necessary when analysing company’s financial performance. In order to do so, financial statements for 53,996 companies have been examined and the main financial indica-tors have been calculated. Results indicate that total negative equity of sound companies is double in comparison to those in bankruptcy. General market conditions resulted in significant decrease of Return on Equity (ROE) and total revenue in the last four years (2008-2011). In the same period of time, private companies with small number of owners such as limited liability companies, general partnerships, and limited partner-ships overperformed in comparison to other legal forms. In addition, indebted companies create much higher negative results than the sound ones create positive ones.

Key words: financial indicators, bankruptcy, legal forms.


ISSN 2217-8090

UDK 005.52:005.332.4



INTRODUCTION

The world economy has experienced constant growth over the last few decades. This is primarily the consequence of availability of a large amount of capital that has been invested. The relative ease of capital acquisition resulted in a decrease in interest rates. The rise of consumption was unsupported, as general wealth seemed bigger than it actually was. The creation of several asset bubbles followed, thus indicating the change in capital availability. Nu-merous authors have considered the role of rapid growth of emerging markets during these events and pointed out that their government’s deficits contributed significantly to it (Dobbs et al. 2011). Regarding the deficit of the Republic of Serbia, it equalled EUR 14.7 billion in 2000, but it slowly de-creased to 8.8 in 2007 and 2008. However, it reached a peak of EUR 14.7 billion in the third quarter of 2011. There seems to have been a high demand for

capital in the Republic of Serbia, which will prob-ably increase in the years to follow as a result of the general market conditions. It will be useful to get a better insight into capitalization of Serbian compa-nies since their performance contributes to the gen-eral wealth and level of investment, either on micro or macro level. Traditional belief that the increase of company’s assets (capital) is the only sign of wealth is a common mistake. The size of the company can-not be viewed as the performance measure merely on the basis of the firm’s capital structure decisions while expanding its asset volume. This means that the performance of the invested capital is also essen-tial. (Muzir, 2011). Taking into consideration that competitiveness of business of domestic companies is on undesirable level, it can be presumed that the efficiency of use of the invested capital is also on the low level (Stanisavljev et al. 2012). The main goal of this paper is to provide additional information as to whether the capitalization of Serbian companies is

42

sufficient and whether the capital is utilised in the efficient manner. The paper is structured in the fol-lowing manner: we will first present the technique of selection of companies comprising research sample; after that, we will present methodology and implementation of the selected statistical methods; the final part of this paper we will present research results.

RESEARCH SAMPLE AND METHODOLOGy

In order to provide credible and adequate infor-mation, the use of a large sample of companies from all areas within the Republic of Serbia was com-pulsory. The research sample consisted of 53,996 companies that have complete annual financial statements that are publicly accessible. Financial statements for accounting periods of 2008, 2009, 2010 and 2011 have been acquired and analysed, for every company. Financial reports have been taken from the national agency with its basic function being registration of entities and tracking of their business activities on the territory of the Republic of Serbia.

Regarding the research methodology, main fi-nancial indicators have been calculated in order to grasp the reality of the current level of capital em-ployment and its efficiency. Most commonly used and well-known financial indicators are Return on Equity (ROE) and Debt to Equity Ratio, and the focus will subsequently be on these two indicators. Additional statistical methods will be implemented in order to deepen the analysis of capital adequacy and efficiency.

The Spearman’s Rho correlation will be calculat-ed in order to determine the magnitude and direc-tion of the correlation between debt to total assets ratio and total revenue, the two variables that are not normally distributed, as it will be later present-ed. This coefficient could be calculated either by us-ing a statistical software package, or in the following manner (Myers and Well, 2003):

ρ = −−

∑ 2

2

61

( 1)id

n n (1)

where,

di = xi - yi

and n is the sample size, whereas raw scores Xi and Yi are converted to ranks xi and yi.

Additionally, in order to test the significance of the correlation of asymmetric data, the non-para-metric statistical test (Friedman’s two-way analysis of variance by ranks test) will be used. This tool is applied when the data are sufficiently extensive, such as social and economic data, and where nor-mal distribution is more likely to be the exception than the rule (Friedman, 1939). Each set of values could be arranged or ranked instead of the original quantitative values in order to overcome this obsta-cle. In that way, ordinary analysis of variance and assumptions of normality could be avoided.

Kendall's coefficient of concordance will be used for normalisation of statistics of Friedman test. This coefficient ranges from 0 to 1, thus indi-cating whether there is an agreement between the evaluators or not. Kendall’s W makes no assump-tions regarding the nature of the probability distri-bution, and therefore can be used for any number of distinct outcomes (Kendall and Babington, 1939). This coefficient is calculated in the following man-ner:

=−2 3

12( )

SWm n n

(2)

where,

( )=

= −∑2

1

n

ii

S R R

= +1 ( 1),2

mR n

==∑ ,

1

m

i i jj

R r

and n is total objects, m number of judges and ri,j is given rank (Kendall and Babington, 1939).

RESULTS

RETURN ON EQUITy

For the purpose of calculating ROE (return on equity), companies with negative equity (13,246) have been excluded from the analysis. Additional consideration is related to the mathematical feature of ratio numbers. As the book value of equity ap-proaches zero, ROE tends to +- infinity. Therefore, in order to visualize our sample data, we performed an outlier exclusion procedure with cut points es-tablished at -1 and 1. A total of 3,890 items was considered an outlier, so ROE values at the end of 2011 (36,860) along with the corresponding values

SINGIDUNUM J 2012 9 (2) 41-49

Stanišić N. et al. Capital efficiency analysis

43

at the end of 2008 (40,883 - different accounts for companies in which equity turned negative during the observed three - year - period) were used as rele-

vant data. The results are presented in the histogram graphs that follow.

Figure 1. ROE distribution in 2008.

Figure 2. ROE distribution in 2011.

As can be seen, even with the outliers being re-moved, distribution of ROE in both years (2011 and 2008) is still far from normal. In 2011, the distribu-tion was highly leptokurtic with a kurtosis of 3.04 (SE = 0.02) and had a slight positive skew of 0.08 (SE = 0.01). In 2008, it had the corresponding kurtosis value of 1.21 (SE = 0.02) and a slight positive skew of 0.18 (SE = 0.01).

◆ Financial crisis made it difficult for the com-panies to earn excess returns (see difference in mean, kurtosis and skewness values);

◆ Psychological aspect makes companies, which de facto have minor negative financial result, eager to use accounting standards with the aim of breaking even;

◆ Corporate income tax deferral is lucrative even in countries like Serbia where corporate income tax rate is as low as 10%.

Lack of data for companies with negative equity, most of which also have negative net result, makes the data asymmetric. Due to this reason, we have applied nonparametric test in data analysis.

SINGIDUNUM J 2012 9 (2) 41-49


44

Using related-samples Friedman’s two-way analy-sis of variance by ranks, we found a statistically sig-nificant difference in return on equity depending on the observed period, 2

3χ = 9,185.73, p < 0.01. Average

ranks are as follows: year 2011- 2.16, year 2010 - 2.33, year 2009 - 2.49, year 2008 - 3.02. Kendall’s coeffi-cient of concordance of .08 indicated rather strong difference between the years.

Area (major cities)

Belgrade Novi Sad Nis Remaining area of the country

Median Median Median Median

ROE 2008 .1989 .1838 .1252 .1284

ROE 2011 .0788 .0812 .0567 .0655

ROE change % -.11 -.09 -.07 -.06

Revenue change % -.15 -.19 -.12 -.09

Table 1. Median values of ROE according to geographic area.

As can be seen in Table 1, the highest decrease of ROE was in the capital city of the Republic of Serbia. The value of median ROE dropped more remarka-bly for companies located in Belgrade (from 19.89% in 2008 to 7.88% in 2011) than for companies lo-cated outside of Belgrade (from 12.34% in 2008 to 6.55% in 2011). Even though the highest reduction of revenue was in Novi Sad, which leads to the as-sumption that Belgrade attracts higher amount of capital, efficiency of its use is lower than it used to be. Nevertheless, companies located in the capital still have had somewhat higher returns. Further-

more, we have calculated that the average change of ROE median in 2011 was cc. -.7. If we compare this result to Europe’s median change of cc. +.03 for the same period, we can comprehend the current level of efficiency of capital use in the Republic of Serbia (The Data Page, 2012).

As will be pointed out in chapters that follow, company’s legal form plays an important role in the analysis of its performance. Therefore, ROE medi-ans have been analysed with respect to the legal form of the company.

Figure 3. ROE median values depending on legal forms of sample companies.

It can be noticed that corporations are signifi-cantly inefficient compared to the limited liabil-ity companies, partnerships and limited partner-ships. This is primarily due to the difference in the number of owners, and therefore the efficiency of

quality control. Histogram of median values for legal forms is to be presented next. Connecting lines between the legal forms with no statistically significant difference in median value of ROE are coloured black.

SINGIDUNUM J 2012 9 (2) 41-49


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If the company underperforms for a longer peri-od of time, its liquidity and solvency are endangered and the company may be declared legally bankrupt.

BANKRUPTCy, RESTRUCTURING AND LIQUIDATION

As has been previously mentioned, almost one third of the sample companies have had negative

equity. According to the traditionally established bankruptcy legislative, these companies should go to bankruptcy (restructuring or liquidation). The following table presents the performance of the companies with negative equity in 2011.

As can be seen from the table above, there is a total of 11,245 companies with the negative equi-ty in the sample which are not legally involved in bankruptcy, reorganization or liquidation. In the aggregate, they have an annual net loss of RSD 103

Figure 4. Histogram of ROE medians depending on company’s legal form.

Legal form

Net result 2011Bankruptcy, restructuring or liquidation

No yesSum Count Sum Count

Closely held corporation negative equity 2011No 23,122,375 136 -504,309 7Yes -3,653,543 27 -1,294,515 10

Cooperative negative equity 2011No 1,253,042 957 -72,921 28Yes -986,731 286 -455,300 55

General partnership negative equity 2011No 925,836 1,068 -9,950 54Yes -109,781 393 -88,788 58

limited liability companies negative equity 2011No 202,749,460 35,572 -40,07,123 983Yes -83,808,999 10,206 -35,075,007 1,405

Limited partnership negative equity 2011No 48,602 175 -2,425 6Yes -16,771 66 -3,886 13

Other negative equity 2011No 2,309,221 177 626,750 16Yes -620,058 35 -995,404 23

Publicly traded corporation negative equity 2011No 56,529,192 879 -9,882,043 176Yes -12,289,192 174 -38,774,730 276

State owned negative equity 2011No -1,872,082 448 -691,562 68Yes -2,440,287 58 -6,216,360 161

Total negative equity 2011No 285,065,646 39,412 -14,543,583 1,338Yes -103,925,362 11,245 -82,903,990 2,001

Table 2. Net result of companies with negative equity in 2011.

SINGIDUNUM J 2012 9 (2) 41-49


46

billion, compared to RSD 83 billion of net loss gen-erated by companies involved in bankruptcy. In the Republic of Serbia, legal criteria for filing for bank-ruptcy are focused on liquidity, not on solvency. As a result, numerous companies make a large amount of losses, but nevertheless avoid legal action.

LEGAL FORMS AND INDUSTRIAL SECTORS

As can be seen from Table 1, there are significant differences in company’s performance depending on the legal form. Therefore, we have calculated the most relevant indicators and analysed differences

Legal form

ROE change

%

Net margin change

%

debt ratio

change %

Rev-enue

change %

Num-ber of em-

ployees change

%

Bankruptcynegative equity

2011

Median Median Median Median MedianNo Yes No Yes

Row N % Row N % Row N % Row N %

Closely held corporation -.03 -.01 .04 -.13 -.20 90.6% 9.4% 79.4% 20.6%

Cooperative -.01 .00 .02 -.15 .00 93.7% 6.3% 74.3% 25.7%

General partnership -.08 -.01 .02 -.09 .00 92.9% 7.1% 71.3% 28.7%

limited liability companies -.09 -.01 .01 -.12 .00 95.0% 5.0% 75.9% 24.1%

Limited partnership -.07 .00 .02 -.13 .00 92.7% 7.3% 69.6% 30.4%

Other .00 -.01 .02 -.12 -.17 84.5% 15.5% 76.9% 23.1%

Publicly traded corporation .00 -.01 .07 -.22 -.33 70.0% 30.0% 70.1% 29.9%

State owned .00 .00 .08 .13 -.05 68.8% 31.2% 70.2% 29.8%

Table 3. Change of main financial indicators in percentage depending on legal form.

between medians across legal forms. Results are presented in the table that follows.

With respect to the legal form, private compa-nies with small number of owners (limited liability companies, general partnerships and limited part-nerships) have had the steepest drop, while state owned, publicly traded and cooperatives appear to be countercyclical. Median net margin of the state owned companies has slightly improved.

The next level of analysis refers to the industrial sector companies belong to. We have categorised the companies based on the sector in which they op-erate and presented the data in the following table.

You may notice that indebtedness increased the most in the following sectors: energy; accom-modation, restaurants and bars and healthcare and social care; while the greatest decrease of ROE has involved the following sectors: construction; pro-fessional services and publishing, information and communication. Moreover, it would be interesting

to examine if there is any correlation between the main financial indicators and debt to equity ratio.

DEBT TO EQUITy RATIO

Debt to equity ratio represents an indicator that is frequently used in bankruptcy prediction models and estimation of company’s solvency. By analys-ing the data presented in the table that follows, we stressed out that companies that perform reasonably well have debt to equity ratio between 0.1 and 0.6. After that point, the increase of debt to equity ratio and companies involved in bankruptcy (restructur-ing and liquidation) are positively correlated.

There also seems to be a correlation between income and indebtedness. Table 6 shows the cor-relation between the level of indebtedness (debt to total assets) and cumulative results. The latter is cal-culated as the sum of financial results in the period 2008 - 2011 and has been categorized by its volume.

SINGIDUNUM J 2012 9 (2) 41-49


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Cumulative result is inversely proportional to the degree of indebtedness; this is especially true for large companies. Moreover, the intensity of correla-tion between these two variables is rather moderate. It should be noted that the variability of cumulative result increases with the rise of indebtedness. This is

because the indebted firms could be more successful or unsuccessful compared to the sound ones, but that does not mean that the level of positive or nega-tive result will be the same. According to the results of the analysis, the loss they incur is much higher than the gain sound companies produce.

Sector

ROE change

%

Net margin change

%

debt ratio

change %

Revenue change

%

number of em-

ployees change

%

BRLnegative equity

2011

Median Median Median Median Median

Bank-ruptcy

Restruc-turing

Liquida-tion

No Yes

Row Total N %

Row Total N %

Row Total N %

Row Total N %

Row Total N %

Accommodation, restau-rants and bars -4.88 -1.59 .06 -13.88 -.18 4.6% 1.5% 4.0% 58.1% 41.9%

Agriculture forestry and fishing -2.38 -.23 .01 1.57 .00 6.6% .7% 2.1% 76.5% 23.5%

Automotive parts -8.99 -1.14 .01 -21.57 .00 1.2% .1% 3.4% 78.5% 21.5%

Construction -11.95 -1.63 .02 -34.37 -.13 3.9% .4% 1.9% 75.6% 24.4%

Culture, arts and leisure -1.52 -.58 .03 -11.06 -.01 .4% .00% 4.0% 61.9% 38.1%

Education and training -7.84 -1.10 .02 9.78 .00 .9% .00% 3.4% 55.5% 44.5%

Energy -.07 -.45 .06 32.44 .00 .8% 6.2% .8% 73.1% 26.9%

Financial services and hold-ing companies -8.91 -6.52 .03 -31.31 .00 2.4% 4.7% 3.4% 80.8% 19.2%

Healthcare and social care -.13 -.06 .09 -5.70 -.05 2.2% 18.5% 3.3% 62.0% 38.0%

Manufacturing -6.03 -1.02 .01 -11.61 -.03 5.2% .9% 2.6% 77.6% 22.4%

Mining -2.43 -1.43 .02 -8.32 -.13 6.4% 3.5% 1.8% 71.9% 28.1%

Miscellaneous services -8.35 -.76 .02 -8.33 .00 1.4% .2% 2.3% 72.0% 28.0%

Multiple or unclassified .00 -.44 .00 -30.62 .00 .0% .00% .00% 77.9% 22.1%

Professional services -11.67 -1.65 .01 -8.68 .00 1.3% .2% 2.4% 78.5% 21.5%

Publishing, information and communication -8.95 -1.37 .02 -8.16 .00 1.3% .2% 2.7% 75.7% 24.3%

Real estate -3.17 -1.05 .02 -20.06 -.11 2.3% .00% 4.5% 65.8% 34.2%

Retail -7.76 -.52 .01 -8.43 .00 2.6% .1% 3.5% 73.6% 26.4%

Transport and warehousing -4.59 -.78 .01 2.26 .00 2.4% .3% 1.7% 78.8% 21.2%

Water and waste processing -.11 .08 .04 19.83 .00 1.8% .2% .8% 87.0% 13.0%

Wholesale -9.28 -.91 .01 -15.72 .00 2.1% .1% 3.4% 74.8% 25.2%

Table 4. Change of main financial indicators in percentage depending on industrial sector.

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48

CONCLUSIONS

The findings of this research show that the capi-talization of companies in the Republic of Serbia is on somewhat low level, where almost one- third of the companies from the sample have negative eq-uity. Average change of ROE median in 2011 was cc. -.7, compared to Europe’s median change of cc. +.03. According to our findings, corporations are significantly inefficient compared to limited liability

companies, partnerships and limited partnerships. Likewise, there is an increase of general indebted-ness in sample companies, with the positive change of debt to equity ratio for cc. +3%. Furthermore, cumulative results are inversely proportional to the degree of indebtedness. This leads to the conclu-sion that, although companies within the Republic of Serbia have sufficient capital, the already invested capital is used inefficiently, thus destroying the in-vested value, which leads to further de-capitalisa-tion, and ultimately to bankruptcy.

Debt ratio 2008

net equity 2008

cumulative earnings

2008-2011

Revenue change %

Net margin 2008

Net margin change % Row Total N %

Median Median Median Median Median Bank-ruptcy

Restruc-turing

liquida-tion

debt ratio between 0 and .1 2,284.5 78.00 -2.76 .0427 -1.93 1.0% .00% 3.3%

debt ratio between .1 and .2 5,978 1,105 -4.13 .0685 -3.38 .9% .3% 2.2%

debt ratio between .2 and .3 5,600.5 1,451.5 -2.10 .0569 -2.56 1.3% .3% 1.7%

debt ratio between .3 and .4 5,583 1,330.5 -4.66 .0452 -2.03 .9% .1% 1.8%

debt ratio between .4 and .5 5,453.5 1,317 -5.74 .0411 -1.78 1.6% .4% 1.8%

debt ratio between .5 and .6 4,474.5 1,247.5 -6.66 .0347 -1.28 2.0% .3% 1.5%

debt ratio between .6 and .7 3,419 944 -8.35 .0280 -1.15 1.9% .3% 1.8%

debt ratio between .7 and .8 2,322 774 -11.24 .0228 -.76 2.3% .4% 1.7%

debt ratio between .8 and .9 1,347 432 -18.15 .0166 -.58 3.1% .3% 2.0%

debt ratio between .9 and 1 440 124.5 -27.52 .0088 -.32 4.8% .4% 2.6%

debt ratio more than 1 -717 -579.5 -31.44 -.1147 1.83 5.9% 1.2% 6.0%

Table 5. Change of main financial indicators in percentage depending on level of debt to equity ratio.

Spearman’s Rho Sig. (2-tailed)

Revenues 2008 < 3733 -.28 .00

3733 <= Revenues 2008 < 22000 -.31 .00

22000 <= Revenues 2008 -.36 .00

All companies -.30 .00

Table 6. Correlation between total result and indebtedness.

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49

REFERENCES

The Data Page. Damodaran Online [online]. Available from: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html [accessed 25 August 2012].

Dobbs, R., Kim, A., Lund, S. (2011) Growth in a Capital Constrained World. McKinsey Quarterly. 2 (1), 82-93.

Friedman, M. (1939) The Use of Ranks to Avoid the As-sumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Associa-tion. 34 (200), 675-701.

Kendall, M., Babington, S. (1939) The Problem of m Rankings. The Annals of Mathematical Statistics. 10 (3), 275-287.

Muzir, E. (2011) Triangle Relationship among Firm Size, Capital Structure Choice and Financial Performance. Journal of Management Research. 11 (2), 87-98.

Myers, J., Well, A. (2003) Research Design and Statisti-cal Analysis. 2nd ed. New Jersey: Lawrence Erlbaum.

Stanisavljev, S., Đorđević, D., Ćoćkalo, D. (2012) Analysis of Competitiveness of Domestic Enterprises on the Global Market. Singidunum Journal. 9 (1), 1-8.

received: 25.08.2012.


Accepted: 13.10.2012.

ANALIzA EFIKASNOSTI KAPITALA U KOMPANIjAMA U SRBIjI

Rezime: Svrha ovog rada je da pruži uvid u nivo adekvatnosti kapitala i efikasnost njegovog korišćenja u kompanijama u Republici Srbiji. S obzirom na to da do sada nije sprovedeno nijedno slično istraživanje na ovaj način, verujemo da je neophodno da postoji određeni benchmark (referentna tačka ili standard uspešnosti) prili-kom ispitivanja finansijskog učinka kompanije.Kako bismo to postigli, ispitali smo finansijske izveštaje u 53,996 kompanija i glavni finansijski pokazatelji su izračunati.Rezultati pokazuju da je ukupan negativni kapital u finansijski stabil-nim kompanijama duplo veći u odnosu na kompanije pod stečajem. Opšti uslovi na tržištu doveli su do značajnog pada u vrednosti prinosa na akcijski kapital (ROE) i ukupnih prihoda tokom protekle četiri godine( 2008-2011). Tokom tog istog perioda, privatne kompanije sa malim brojem vlasnika poput kompanija sa ograničenom odgovornošću, društva sa neograničenom odgovornošću i društva sa ograničenom odgovornošću zabeležile su veći učinak u odnosu na ostale pravne oblike. Takođe, negativni rezulatati koje beleže zadužene kompanije mnogo su veći od pozitivnih rezlutata u finansijski stabilnim kompanijama.

Ključne reči: finansijski pokazatelji, stečaj, pravni oblici.

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50

IMPLEMENTATION OF BASEL II STANDARDS IN COMMERCIAL BANKS IN B&H

radomir šalić*

Sinergija University, raje Baničića Street, Bijeljina, Bosnia and Herzegovina

Abstract: Based on the study of primary and secondary data from the selected sample of commercial banks, a preliminary statement of the state of the banking system in B&H has been made for the purpose of determining the current level of application and making the appropriate recommen-dations concerning the continuation of the implementation of Basel II standards. It has been noted that all banks in the sample give high priority to those standards, that they already have certain knowledge of the area and that they provide constant training to their employees with the aim of enabling full implementation of those standards. It has also been determined that the regulatory authorities in B&H have not done enough on adopting new regulation related to the area and that operating results of the banks are not satisfactory, especially in terms of rate of return and capital adequacy of banks. Thus, it is recommended that the banks in B&H, in addition to their regular activities, collect new sources of funding, especially their own funds or fresh equity since the attraction of other sources does not make much sense without it. Also, the regulatory authorities (banking agencies) should adopt new regula-tion (decrees), and impose the implementation of new standards in the banking industry together with drafting of specific instructions for the application of individual regulation, preparation of different formats of reports (specific layout of forms) and the implementation of standards and instructions in the banks.

Key words: Basel Agreement II, banks, risks, capital,deposits, primary and secondary sources.


ISSN 2217-8090

UDK 005.334:336.71(497.6)



INTRODUCTION

After ten years of the implementation of Basel I standards, Basel II standards were introduced. How-ever, they have still not been fully implemented, which is the case not only in Bosnia and Herzegovi-na, but also in many developed European countries. Basel II standards need to be adjusted to different national markets that are allowed to utilize a certain level of national discretions regarding the manner of implementation. Extensive efforts of both regulato-ry bodies and banks are required for their consistent application. This document is divided into several parts. Namely, the first part pertains to the findings and observations based on the collected primary

and secondary information sources from the banks included in the selected sample. The second part of the document is related to comparison and analy-sis of data stemming from primary and secondary information sources, while the third part contains recommendations for the continuation of the Basel II standards implementation process.

THE OBjECTIVE AND SCOPE OF RESEARCH The objective of this document is to provide

some answers and information on important issues concerning the level of implementation of Basel II standards in the banks in Bosnia and Herzegovina, as well as to offer recommendations for their future

51

implementation. The research is based on the sam-ple comprising nine commercial banks selected in line with the size and geography criteria.

Taking into consideration the size criterion, all sample banks were classified in relation to the size of their assets. Therefore, they were selected as fol-lows: 4 banks with the size of assets of around 200 million or so called small banks, 3 banks with the size of assets of up to BAM 1 billion or the medi-um-sized banks, and 2 banks with the size of assets between BAM 1 and 4 billion or large banks. This number of banks represents less than 1/3 or 30% of all banks in B&H. However, from the perspective of value, the BAM 10.7 billion of assets (30/06/2010) from the sample compared to the BAM 20.5 billion (assets of all banks in Bosnia and Herzegovina as of 30/06/2010), represents more than half (52%) of the banking sector assets in B&H. In terms of the geographical criterion, the sample included: four banks from Sarajevo, three banks from Banja Luka, one bank from Mostar and one bank from Bijelji-na. Other features of the sample banks include: all banks are shareholding companies; one bank has state- owned capital, while others are mostly banks with private capital; five banks have foreign fund-ing capital, while four banks have capital originating from Bosnia and Herzegovina.

FINDINGS AND OBSERVATIONS This paper contains findings and observations

obtained from the analysis of the implementation of Basel II Agreement which was conducted on the basis of collected primary and secondary data from the selected sample.

Primary sources of information

The primary sources of information were col-lected through the questionnaire and the answers provided in it illustrate the assessment of the cur-rent situation, and serve as the basis for the iden-tification of advantages and obstacles in the imple-mentation of Basel II standards. It was completed in direct cooperation with the most senior individuals in the banks with different levels of responsibilities; ranging from heads of departments and directors of different sectors to members and presidents of executive boards. There were 25 questions that are here presented together with the answers in ap-propriate matrices – tables (such as Table 1 and 2).

However, due to limited space, it was not possible to show them all individually, which is why they are represented in aggregate and synthetic form.

Bank Responses High Medium Low Other

I A xII B xIII C XIV D xV E xVI F XVII G xVIII H XIX I x

100% 44.4 55.6Table 1. Management priority towards Basel II

Bank ResponsesExcel-lent

Very good

Good Other

I A x

II B x

III C x

IV D x

V E x

VI F x

VII G x

VIII H x

IX I X

100% 11.11 55.56 33.33Table 2. Level of staff knowledge about Basel II

According to the responses provided in the ques-tionnaire, the majority of the sample banks are giving high priority to Basel II standards and their opinion is that they possess some knowledge and the ap-propriate level of competence. All banks provide training to their employees in the field of the appli-cation of standards, especially for those standards for which they are at the same time experiencing and projecting the largest expenses and the great-est problems. The banks have established special organizational units that are in charge of risk man-agement and they have a relatively high number of employees working in this field.

Regarding the reporting models, it has been no-ticed that the largest banks by assets in B&H or in terms of our sample, the banks that belong to a cer-tain banking group, report to their mother banks, while the smaller banks do not prepare any forms

SINGIDUNUM J 2012 9 (2) 50-62

Šalić R. Implementation of Basel II standards

52

related to Basel II standards, except for the report-ing forms imposed by the regulatory bodies, which include only certain elements of Basel II standards.1 Some banks that are members of banking groups are developing their own application software for Basel II standards and are submitting only the required data to their mother banks, while some other simi-lar banks receive ready-made format and models for reporting as well as the reporting software.

The credit risk is defined by banks as the default risk of the clients who are not able to service their debt regulated by the contract (Chapman, 2006) or they represent it as the counterparty credit risk measured as the probability that the debtor will not be able to pay interests or the principal amount in accordance with the conditions defined in the loan agreement. Since Basel II standards encourage more flexible methods for credit risk measurement and each bank is advised to use the model suitable for its portfolio, risk preferences and its markets, the answers offered in the questionnaire to the sam-ple banks were as follows: Simplified Standardized Approach (SSA), Standardized Approach (SA), Internal Ratings-Based Approach (IRB) and Ad-vanced Internal Ratings-Based Approach (AIRBA). The responses showed that the more advanced ap-proach for credit risk measurement was the lower capital requirements were set with the same or not reduced profitability rate. The majority of the banks use Simplified Standardized Approach and those are mostly smaller banks, while the other banks use Standardized Approach. Initially, none of the banks opted for IRB Approach due to the fact that they are well-informed about all necessary requirements and expenses related to the application of more advanced credit risk measurement approaches. Some authors (Gup, 2004) believe that Basel II is not perfect and that it is very complex for practical implementation. Namely, it contains hundreds of pages describing three methods that can be used for calculation of risk-weighted capital. Advanced IRB method for calculation of capital necessary to cover the risk re-quires large quantities of data and computer models that need to anticipate losses and other relevant fac-tors, and use different methods for calculating capital requirements for loans in order to illustrate different capital needs for the same loan. The costs of imple-menting Base II standards are high and range from around USD 10 million for small up to USD 150 million or even more for large banks. Therefore, the

1 Capital Adequacy Rate in the part of assets at risk in rela-tion to operational risk.

implementation of the Basel Agreement is not sim-ple at all, because the banks in Bosnia and Herzego-vina do not possess knowledge, technical or financial resources to implement it in the short term. Con-sequently, this does not mean that they should not comply with the adopted strategy for the implemen-tation of standards and they should do everything in their power to fully apply the standards in the future. The 2/3 of the sample banks have developed internal methodology for credit risk identification and meas-urement, and those are mostly larger banks, while the smaller banks do not have such methodologies. The same ratio relates to the level of risk categories required for ranking of debtors, whereas the time required for the banks to make risk assessment and the manner of development of the risk assessment model are different. Hence, 1/3 of the banks still do not have time series for collection of unpaid receiva-bles, while the other banks have determined them, and they usually cover the period from 1 to 3 years.

The responses given by the sample banks show that the market risks are not treated in sufficiently high quality manner. Moreover, the number of staff performing this function also supports this conclu-sion since their number amounts to only few per-centages of all employees involved in risk manage-ment. There are different reasons for this including:

◆ The very low level of banks’ investments on financial markets in general, and especially low level of capital market investments , i.e. the market of long-term securities,

◆ Currency board as a type of monetary aut-hority that does not leave a lot of space for currency rate differences, since the foreign currency rate is fixed and the greatest volume of foreign currency transactions is made in EUR, and much lower volume in other nati-onal currencies,

◆ due to the high level of monetary funds of the banks in the Central Bank of Bosnia and Herzegovina (CB mandatory reserves and liquidity reserves) and balances in EUR in the banks abroad; i.e. mostly in the accounts of the mother banks or correspondent banks.

According to the Basel Committee, market risk is the risk of losses in on-balance and off- balance sheet positions arising from movements in market prices. It is limited to the period until the closure of an opened position, and the differences (negative or positive) are higher when the period of their closure (closing of an opened position) is longer. In the past,

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53

market risk was treated in the traditional manner, meaning that there were individual techniques de-veloped for identification, measurement and protec-tion compared to the Basel II approaches that need to provide for measuring and protection, but also to ensure compatibility with other different financial institutions. The market risks are to the greatest ex-tent pertaining to the investment banks or the banks with a large volume of activities related to the trading book, i.e. activities related to the changes in inter-est rates, foreign currency rates and stock market indices. In our example, the offered answers for the issue of the selection of market risk approach were: Standardized Method (SMM) and Internal Model Based Approach (IMA). The Standardized Approach for market risk measurement is used by 56% of the banks in Bosnia and Herzegovina, and the 22.2% is allocated to both the Internal Model and the banks that did not determine the model. The banks that did not select the model are local banks, i.e. the banks with very low level of activities related to financial market and market risks, and they are operating in line with the existing regulation of Banking Agen-cies.2 Around 33% of the sample banks did not de-termine time series for market risk assessment, and other 33% determined the time series between two and three years, and only 22.2% of the banks have formed time series for market risk assessment less than one year.

The operational risk in banks is becoming more and more significant and the damages and nega-tive effects are generally larger. It is relatively new and it evolved due to the development of banking, global business operations, and electronic banking operations, development of financial instruments and derivatives, as well as continuous advancement of information systems. It used to be related exclu-sively to human factor, frauds and thefts, and today it is increasingly the result of the application of ad-vanced computer techniques in combination with the globalization and operations with exotic financial destinations and the inevitable human factor. There-fore, the losses stemming from inadequate manage-ment of operation risks in banks are amounting to billions of US dollars. The usual number of employ-ees working on the operational risk management is 2 per bank, and there is no single bank without an employee in charge of operational risk management. The Basel II standards regulate a number of opera-

2 Decree on Minimum Standards for market risk manage-ment in banks is still not in force.

tional risk management approaches, which were of-fered in the questionnaire: Basic Indicator Approach (BIA), Standardized Approach (SA), Alternative Standardized Approach (ASA) and Advanced Meas-urement Approach (AMA). In terms of operational risk management, the largest number of banks (56%) stated that they use Basic Indicator Approach (BIA) or Standardized Approach (SA). Larger banks or the banks with foreign capital prefer Standardized Ap-proach and potential combination with Advanced Approach, while the smaller, local banks opt for Ba-sic Indicator Approach. Almost the same ratio exists for the preparation of time series required for opera-tional risk assessment.

Secondary sources of information

The business books as the secondary source of information from the banks are represented through the balances, Balance Sheet and Profit and Loss Statement, which represent in a way the disclosure of banking information (Ranković, 2008). The Balance Sheet provides information on size and share of the assets (funds) of the sample banks in the overall assets of banks in Bosnia and Herzegovina, the structure of assets and liabili-ties, structure of investments, capital and deposit structure, as well as the application of horizontal and vertical rules of financing. The Profit and Loss Statement includes income, expenses and financial results of banks booked over a certain period and are subject to further disaggregation. Therefore, this document includes and analyses available original data of the sample banks (disclosed to public) for three accounting periods (30/06/2009, 31/12/2009 and 30/06/2010). It also includes information from the reports of the Banking Agency of the Republic of Srpska and the Banking Agency of the Federation of Bosnia and Herzegovina.

assets of the banks

According to the official published data, the val-ue of the assets of banks in Bosnia and Herzegovina, on a cumulative basis in 2010 compared to 2009, decreased by 2% in the Republic of Srpska (Agencija za bankarstvo Republike Srpske, 2011) and by 1% in the Federation B&H (Agencija za bankarstvo Fede-racije Bosne i Hercegovine, 2011). The shrinking of banks’ assets in B&H started in 2008, and continues to the present day. In the Republic of Srpska, the

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descriptionASSETS (in millions KM)

AI

BII

CIII

DIV

EV

FVI

GVII

HVIII

IIX

Σ %

1. Cash assets 62 83 40 57 160 242 296 1.140 1.186 3.266 31

2. Tradable securities 1 2 56 44 175 278 3

3. Placements to banks 12 2 17 2 120 124 19 296 3

4. Loans 81 68 137 143 402 583 613 2.132 2.392 6.551 61

5. Maturity securities 7 131 138 1

6. Fixed assets 7 18 10 11 31 28 31 86 149 371 3

7. Other real estate 7 2 9

8. Invest in-non consol Co 1 1 1 2 1 2 13 21

9. Other assets 3 1 9 7 4 13 8 47 60 152 1

10. Minus: reservations 3 4 10 9 19 25 42 85 134 331 -3

Total (from 1 to 9 – 10) 169 170 204 212 578 845 1.083 3.497 3.993 10.751

Table 3. Balance Sheet of banks as of 30. June 2010.

decrease was the result of deposits reduction (9%) on one side (liabilities) of the balance, and due to that fact the decrease in the funds on the other side of the banks’ balances. The lack of deposits in the sources of funding was replaced by new loans and subordinated debts.

In the assets structure, the greatest changes are related to the investments in loans, investments in securities and potential loss reserves. The loan volume was reduced by approximately 3%, and the loan loss reserves were increased by approximately 0, 4% or for around BAM 42 million. Hence, their trend was opposite to the trend of the loans, which illustrates that there was a double deterioration of the situation in the sector. The logic is that when the loan investments are reduced, the loan loss re-serves are reduced as well. However, this was not the case, and the loan loss reserves have increased due to the increase in the number of bad loans or NPLs (non-performing loans), and this number is still growing. Consequently, this is significantly reducing already very low profitability rate of the B&H banks. On an aggregate basis, the loans of the sample banks amount to BAM 6.5 billion or 61% of the total assets or 94% of the total investments of the banks. The loan loss reserves were at that same period around 3.1%, which is low and insufficient having in mind the existing volume of loans and the fact that the number of so called bad loans (C, D and E) is getting higher. At first glance, it is quite obvious that the loan loss reserves presented in the Balance Sheets of the banks are significantly under-estimated, because the aforementioned implies that almost all loans are categorized in A and B category, which is unrealistic and impossible.

The level of cash in the sample banks’ assets is high and has never been below 30%. The reasons for that could be found in the existing regulation of the B&H Central Bank (mandatory reserves level), increased volume of liquidity reserves and the high level of funds from abroad resulting from differ-ent balances on the accounts at the correspondent banks, but also at mother banks which are placed on the accounts because of the specific needs of the shareholders. Almost the same situation is evident when we look at the individual banks, since the structure of the assets literally consists of two posi-tions, i.e. investments (loans and securities) and cash assets. All other positions in the structure of assets are negligible. Nevertheless, if we want to present them in more detail, we can divide the structure of assets into: cash, securities, and loans, fixed and other assets.

The presented data illustrate to which extent the individual banks are conservative or unwilling to accept the complexity and the challenges of bank-ing business, and that the amounts of the funds held in the accounts in the Central Bank and other banks were higher than the amounts of funds invested in loans and securities. The banks did not get much re-turn on most of these assets since they were getting minimum fees for deposits for keeping the funds in the accounts of the Central Bank and other banks, and more than that, they have actually lost signifi-cant profit.

The level of investments in securities was also low. However, it increased from one reporting pe-riod to another, which is illustrated through its share in assets which was 0.4% as of 30/06/2009, and two

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descriptionLAIBILITIES ( mill KM)

AI

BII

CIII

DIV

EV

FVI

GVII

HVIII

IIX

Σ %

1. Deposits 97 119 157 154 429 592 819 2.678 2.805 7.850 73

2. Loans 2 17 4 68 159 144 194 660 1.248 12

3. Subordinated debts 1 1 10 27 93 132 1

4. other liabilities 4 4 5 3 13 15 27 218 69 358 3

5. Total Capital 68 45 25 50 68 78 83 380 366 1.163 11

Regular shares 60 34 23 43 62 53 52 119 239 685

Premium asio 4 1 8 48 5 66

Undistributed profit 8 11 2 2 14 5 200 124 366

Capital reserves 5 3 26 13 47

Other capital 1 1

Total (1+5) 169 170 204 212 578 845 1.083 3.497 3.993 10.751

Table 4. Balance Sheet of as of 30. June 2010.

accounting periods later (on 30/06/2010) it was 3.9% (2.6 + 1.3) of the total assets of the sample banks. On an individual basis, some banks invested negligible funds to this end, so that they are not even visible, but on the cumulative basis some progress is evident.

The share of fixed assets in the total assets is much larger at small banks than at larger banks, and this did not lead to adequate profit and did not contribute to the success of the banks, especially in the events when the banks had low investments in loans and other activities that are more lucrative for the banks.

Liabilities or the sources of funding of the sam-ple banks are at first glance better quality part of the Balance Sheet, especially if deposits are taken into consideration since they represent 73% of li-abilities (Table 4) and their volume is sufficient not only to cover loan investments, but also investments in securities and fixed assets. Also, if we take into account the fact that the part of the funding sources is held in the accounts of the Central Banks and other banks. This implies that funds in the accounts of the banks are covering the capital and loans from other banks, which also makes sense and justifies the horizontal financing rules.

If capital is a security buffer for a bank against the reduction of its assets (Mishkin, 2010), in cumu-lative terms the sample banks have sufficient capital. However, if we look at the structure of the capital in the banks, it is evident that most of the banks are actually lacking capital and this represents the condition for the future growth of the banks’ assets. Namely, some banks have capital amounts that are at the lower end of the required capital amounts,

and every additional activity aimed at increasing other financing sources (deposits, loans) remains unobserved or with no results.

This means that every new loan investment re-duces the capital adequacy rate of those banks, which means they are not going to be in the position to de-velop and grow in accordance with the intentions of the shareholders and the management unless they increase their capital.

It is obvious that the capital of the sample banks in most of the cases is share capital i.e. the capital stemming from the issue of the shares at the point of the establishment or the purchase of banks at the sec-ondary capital market. Also, some of the banks did not enlarge their capital since the establishment, due to either poor business results or payout of dividends to shareholders from the profit. However, there are some banks that retained all earnings at the banks, and thus managed to increase their capital.

The deposits are “the basis for the development and growth of the banks (Rose, 2003, p.387) and they are providing for most of the “raw material” for the banks’ loans through their network of sub-sidiaries, branches and agencies. Therefore, the commercial banks in B&H have mobilized deposits in local currency as well as in foreign currencies. Throughout the observed period, the commercial banks have maintained or increased their sources of funding, mostly through deposits of the banks abroad (mother banks), the accounts of the Entities’ governments and their institutions, and through citizens’ deposits. The interesting aspect is the fact that the deposits of the private companies are at low level and are declining. The deposits are clas-

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sified into: interest-bearing deposits that account for 90.8% and non-interest bearing deposits which stand for 9.2% of all deposits. The two largest banks in the sample have the largest share in deposits, and at the same time those banks have the largest capital as a result of a great extent of business operations (profit), which enabled them to mobilize the major-ity of the total or available deposits in Bosnia and Herzegovina.

Financial position of banks

The business results of the sample banks are presented in the Balance Sheets for the observed periods, but they are similar and concurrent in the amounts and in the structure, and because of that they are here illustrated only for the period 01/01 to 30/06/2010. In aggregate terms, the Balance Sheet shows that the banking sector can function and make fresh profit, as it was the case during the time, but the question here is whether the profit is sufficient and whether there is a possibility to make it even higher? Most probably yes, but the level of economic activity is still very low and far cry from the pre-war level (before 1992), since there is only a small number of companies that are making larger transactions of funds and that represent large and broad deposit basis of the banks.3

More than two thirds of the total income (69%) consisted of income from accrued interests, while the other part of the income (31%) came from fees for internal and foreign payment transactions. This means that the sample banks made most of their 3 UNIS, Energoinvest and UPI had dozens and hundreds of

thousands of employees up to 1992.

earnings from differences or positive effects of the accrued active and passive interests, i.e. interest spread, and the much smaller part of net income was made from commissions and fees. The above-mentioned income is low and barely sufficient to cover the expenses. Hence, the final result is low profit of around BAM 25 million. The largest part of expenses are operational expenses such as salaries and social contributions, and material expenses in the percentage of around 47% of the total expenses , which demonstrates the traditional labor-intensive nature of the banks. The so -called business and di-rect expenses cannot be neglected as well, and their greatest share is allocated to potential loss reserves that are underestimated and should be much high-er. This example illustrates that if the loss reserves increased, the final result would be much worse, i.e. the bottom line would represent a loss for the banks and this would have additional negative con-sequences.

The profitability indicators are at extremely low level. However, if any of the expenses from the to-tal expenses structure was higher, the profitability indicators would not exist at all, and one would as-sume that this can easily and promptly occur. Ac-cording to data from B&H Association of Banks, the achieved profitability ratios at the level of Bos-nia and Herzegovina in the last couple of years are more than devastating, since the return on average assets (ROAA) of the B&H banks for 2009 was 0.1%, and return on average equity (ROAE) was 0.8%. Ac-cording to the rules of the matrix of optional yield and risk relation (Rose, 2003), the ratio of assets to capital for B&H banks and ratio of assets to equity from the sample is approximately 10:1 (Chart and

Banks30.06.2009.

31.12.2009.

30.06.2010.4/3

index

5/4

1 2 3 4 5 6 7

I A 55.5 52.8 54.0 95 102

II B 44.0 40.5 38.8 92 96

III C 14.7 18.7 15.5 127 83

IV D 37.7 32.7 28.4 87 87

V E 15.6 15.9 14.8 102 93

VI F 13.6 15.1 12.6 111 83

VII G 14.4 15.5 13.9 108 90

VIII H 14.6 15.3 14.8 105 97

IX I 15.0 14.2 14.8 95 104

Table 5. Capital Afequacy Ratio (CAR) Chart 1. Capital structure

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Table 7). Therefore, the yield on assets should be minimum 0.5% ,and in that case the yield on equity should be minimum 5%, , which is far cry from the results achieved in the banking sector in Bosnia and Herzegovina. In addition, this illustrates how bad the financial results of B&H banks are, i.e. the extent to which the B&H banks and the sample banks are unprofitable.

These are cumulative results for Bosnia and Her-zegovina and for our sample. However, the fact is that there are banks in B&H that are achieving ex-cellent financial results, i.e. the banks that meet the requirement of the yield and risk ratio in line with the theoretical rules presented in the previous Table.

ANALySIS OF THE SITUATION

A couple of basic features are evident based on the review and comparison of primary (question-naire) and secondary data (business books) of the sample banks:

◆ the banks that are realizing better business results, higher income and higher profit are the banks that possess larger assets and lar-ger sources of funding (capital, deposits); and those banks are already implementing Basel II standards on consolidated basis. Therefore, at this point in time, they are more prepa-red and more up-to-date in terms of: a) the approaches they use for risk management, b) the duration of the time series for risk asse-ssment and c) development of the model for the assessment of the risk coverage in banks. The larger sample banks are at the same time the banks with high concentration of loans and deposits and with market position that almost represents monopoly, and they are also the most secure banks for their deposi-tors. This is mostly the case because the volu-me of business operations they are realizing is satisfactory, but with relatively low capital adequacy ratios ranging from 12.6 to 14.8%

revenues and expenditures (000 KM)

AI

BII

CIII

DIV

EV

FVI

GVII

HVIII

IIX

Σ

1. Revenues from interest 5.073 3.236 6.961 6.296 18.535 21.274 28.343 93.350 111.315 287

2. interest expenditures 1.438 1.367 2.333 2.112 6.335 9.534 12.310 32.496 48.038 108

3. Net interest income 1-2 3.635 1.869 4.628 4.184 12.200 11.740 16.033 60.854 63.277 178

4. operational revenues 2.506 4.647 9.763 1.777 6.150 12.340 10.636 39.454 37.705 124

5. non interest expenditure 5.612 6.126 13.886 5.499 17.824 19.042 21.157 88.216 100.893 278

6. Profit before tax:3+4-5 529 390 505 462 526 5.038 5.512 12.092 89 25

7. Loss

8. Taxes 52 60 26 71 186 633 551 1.209 8 2

9. net profit 581 330 479 391 340 4.405 4.961 13.301 81 24

Table 6. Profit and loss statement as of 30. June 2010.

Chart 2. Profitability of banks in B&H

ratio be-tween assets

and equity

ROE with ROA (in %)

0,5 1,0 1,5 2,0

5:1 2.5 5.0 7.5 10.0

10:1 5.0 10.0 15.0 20.0

15:1 7.5 15.0 22.5 30.0

20:1 10.0 20.0 30.0 40.0

Table 7. Ratio rules and options

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(Table 5). Every subsequent change in the structure of the assets of the banks directed at the decrease of the cash assets and incre-ase of the loans would simply lead to reduc-tion of capital adequacy ratio to the limit of 12%, which represents an alert for the banks to modify the balances in terms of capital increase, especially the capital base, which is hardly feasible for many banks today.

◆ the small or the smaller sample banks are in much more inferior position regarding the Basel II application compared to the larger sample banks, and except for the capital in the liabilities structure they do not have other significant sources of funding (deposits, lo-ans). Due to the previously mentioned fact, the small banks are realizing high capital adequacy rates ranging from 28 to 55%. The-se banks apply totally conservative manage-ment approach since they did not use the ca-pital they have to increase the volume of the total assets of the banks. How? If the average net capital of small banks is around BAM 48 million4 , then their assets at risk may be around BAM 400 million, and the total assets of the banks should be even higher because the total assets of all sample banks are higher than total risk assets, disregarding the fact that the risk assets of the banks include the off-balance positions as well, and we did not take those positions into consideration at all.5 The level of total assets of (small) banks ranges from BAM 170 to 212 million, which implies that their balances could have been at least 100% higher or even double of the existing amount. Therefore, the fact remains that these banks did not perform good quality operations in terms of the main activity of the banks, i.e. mobilization of the sources, and especially deposits which are essential for the functioning of any bank. Those deposits are placed in other, larger banks, but this does not mean that the division of the deposits co-uld not have been different, i.e. more deposits in the smaller banks, since this would make all other results more favorable and would be

4 With the assumption that: the net capital (NC) is BAM 48.000.000, that CAR = 12%, risk assets (RA) = NC/CAR*100 = BAM 400.000.000 , CAR = NC / RA = 0.12 or 12%

5 The banks in the Federation BiH did not present off-balance positions in their balances (short version), com-pared to RS banks that have included those positions in their forms, therefore, there was no sense to consider those since the balance data would be incomparable.

reflected in higher level of investments, and consequently higher earnings, profits and its distribution. Moreover, the statement of some analysts claiming that “traditional ban-king practices based on deposits mobilization and investments in loans represent only one part of typical banking operations and are at the same time the least profitable (Greuning and Bratanović, 2006, p.2) is not valid for our example of the banking sector in B&H. The deposit mobilization and placement of those into loans definitely represent significant ac-tivity of all B&H banks;

◆ the information that all, and especially the small sample banks, had huge cash assets (compared to their total balances) available at the end of the accounting periods supports the fact that they not only failed to collect new sources, but also to use the existing ones in order to achieve better business results. Additionally, even the large sample banks do not have logical explanation for the fact that they are holding large portion of total funds in the form of cash assets, especially for the amount of funds deposited in the accounts of other banks abroad or in the accounts of mother banks, i.e. the banks that have foun-ded them. The cash assets placed on the acco-unts of correspondent banks are logical and have their purpose. However, the funds that are “lying”6 in the accounts of mother com-panies from the perspective of an ordinary observer or an external analyst do not make much sense and are not sufficiently transpa-rent in terms of their function or their role. This is a problem of the banks and their su-pervisory boards, and audit committees, and in some cases probably the problem of the regulatory bodies.7 Hence, without specific analysis and more information one could not decide on the purpose and logic behind holding of such high amounts of cash assets in general. The issue is that the banks are hol-ding highly liquid assets in inappropriate per-centages (even up to 35%) of the total assets, and by doing so they are provoking damages and unnecessary expenses to themselves,

6 The large part of the cash assets that the local banks keep on the accounts of their mother companies have very low turnover rates and are making low or no profit at all.

7 Regulatory bodies should in addition to formal checks and off-site controls, conduct qualitative control of cash assets and also its balances abroad.

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◆ Risks mostly refer to credit, market and ope-rational risks which need to be continuously identified, quantified and monitored. These activities require the existence of strategies, sound policies, adequate organization, good quality procedures, experienced analysts and the appropriate information-technology support. The sample banks mostly use simple risk measurement approaches, and the lar-ger banks are seriously getting prepared for full implementation of new standards once the legal preconditions have been created8, so they are: developing and improving risk coverage models, introducing new applicati-on software and hardware, and determining time series for the assessment of credit, mar-ket and operational risks. Larger banks are more advanced in this regard, compared to the smaller banks, since they are investing significant amounts into development of information technologies as the future basis for risk management, and over the period of last couple of years they have been collecting data in order to create time series; whereas the smaller banks still do not have any time series for the assessment of any of the risks,

◆ in the selected sample of 9 commercial banks there were certain changes in the assets size, more in the sense of their structure than of its total value, caused by different factors and the market concentration stands out as one of the most important factors. The high degree of concentration, in general, has a negative connotation because the concentration in the banking industry may have an impact on the economic growth, and this depends to the greatest extent on the economic development level of individual countries. Since the con-centration in banking has broader and more complex implications on the efficiency and stability of the overall financial system, the B&H market concentration of the sample banks was prepared based on HHI index9 (Herfindahl–Hirschman Index) for three ba-sic segments of business operations, i.e. loans,

8 The new decrees of the B&H regulatory bodies for the im-plementation of Basel II are expected to be prepared and adopted in accordance with the adopted Strategy for in-troduction of the “International Convergence of Capital Measurement and Capital Standards” Basel II.

9 The most famous indicator of industry concentration is Herfindahl-Hirschman Index (HHI), and it often serves as a starting point for defining other concentration indices.

deposits and total assets of the sample banks (Table 8). The value of the HHI should not be over 1800 units, because if it is higher than that, then it is deemed that some of the banks could apply prices that are higher than com-petitive level over certain period of time. It is being calculated in line with the following formula:

2

1

N

ii

H s=

=∑

(1)

where s is the share of i-th bank on the mar-ket, and n is the total number of banks. The indices for our sample are as follows:

Structure VI/2009 XII/2009 VI/2009

Loans 2821 2661 2608

Deposits 2569 2598 2648

Assets 2747 2683 2640

Table 8. HHI for the period

The previous Table shows that the HHI con-centration indices in this sample are very high and that they are very evident in the sample because there are two large banks being compared with much smaller banks. However, the market concentration indices calculated by the B&H regulatory bodies are also high and above moderate and acceptable levels, but lower than indices in our sample due to different structure of banks.10

◆ some of the sample banks have maturity mi-smatch between assets and financing sources, i.e. between long-term sources and long-term investments. More specifically, when we look at the maturity compliance of B&H banks (e.g. RS banks) as of 30/06/2010, it is obvious that there is a violation of the financing horizontal golden rule,11 i.e. that the long-term financing sources are not covering for long-term inves-tments.

10 According to the RS Banking Agency, the HHI of loans for the same period is 1956 units (above 1800) and in the structure of ten banks there is no single large bank with the size of the banks from our sample.

11 The most important horizontal financing rule for banks is the golden financing rule and in line with it in order not to be at risk of defaulting, the loans that a bank is disburs-ing must correspond to the amount and the quality of the loans that a bank has taken.

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Even if we include capital and long-term subor-dinated debts in the long-term sources, on top of the long-term deposits, the long-term investments are still not fully covered, or are covered with at most around 75.6% of long-term sources (Table 9). This means that there is more intense spill-over of one sources to others, i.e. that the long-term invest-ments are being financed from short-term sources, and as a rule this leads to illiquidity and deteriora-tion of assets classification and to the negative fi-nancial result.

A) Long-term placements (KM) B) Long-term sources

Long place-ments 2.924.933 Long-term

deposits 1.781.065

Fixed assets 199.721 Capital 571.810

Subordinat-ed debts 10.841

Total Long-term place-ments

3.124.654 Total Long-term sources 2.363.716

Coverage of Long-term placements with sources B/A 75.64%

Table 9. Maturity compliance of RS Banks as of 30. June 2010.

If we apply the ratio to our sample, we get to a conclusion that the banks are lacking good quality financing sources, i.e. long-term financing sources and longer term and more stable deposits, long-term credit lines, as well as capital, especially the capital from primary issue of shares and capital from real-ized profit.

RECOMMENDATIONS

Bearing in mind the Strategy for the introduc-tion of “International Convergence on Capital Measurement and Capital Standards” Basel II and the deadlines set in this document, one can state that the banking system in B&H is still in the first phase of the implementation of the Strategy (2009 -2013). Actually, it is in the phase that is ongoing and during which the banks and the regulatory bodies are making gradual adjustments and devel-oping their capacities. The recommendations that could lead to faster and more effective implementa-tion of the standards are as follows:

1. It is necessary to continue with the engagement of the USAID - PARE Project staff in the area of financial and expert assistance to all bank-ing structures in Bosnia and Herzegovina for the development of framework by-laws (decrees) related to all segments of Basel II standards im-plementation, as well as for drafting of specific instructions for the application of individual regulation, and the preparation of different for-mats of reports (specific layout of forms) and the implementation of standards and instructions in the banks, in order to avoid the situations in which the regulation adopted and published are not implementable in practice and whose appli-cation is postponed for years.12

2. Since some of the sample banks are already ap-plying Basel II standards, but on consolidated basis and since they already have appropriate forms for reporting to their mother companies based on EU Directives with the explanations i.e. legal remarks for all forms as a basis for their creation, the recommendation to the regulatory bodies and future authors of the instructions is to create those forms in a similar manner and to adjust them to domestic environment i.e. to exclude the unnecessary columns or the ones for which it is sure that they are not going to be used in the near future13, and to make them more clear and functional.

3. The special problem is the application software that needs to support all mentioned and future reports. However, most of the banks do not have that software, especially those banks that do not have mother companies abroad. Many banks did not even start with the analysis of the problem because they do not have sufficient information on the system or the reasons for software devel-opment or on the predefined information that needs to be obtained from the system. It is not possible to develop software for the small banks since they do not have the information about the format of the reports required by the regulators in the country. Also, the fact is that some banks have internally developed software for risk as-sessment, however, the question is what is the quality of those and whether the banks should, once the regulators adopt new regulation, com-

12 The Decree on Minimum Standards for Market Risk Man-agement in Banks was adopted in May 2008, and its im-plementation was postponed on three occasions and even today it is not being implemented.

13 There are commercial banks that are already filling in the reports for the purpose of consolidated balance, but out of 23 columns they are using 12, and 11 are not being used since there is no need for that.

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pletely or partially abandon their software solu-tions, whether they in general have the data base that is compliant with other software solutions and whether that is going to be more manual or automatic data input processing in order to get appropriate information related to Basel II standards requirements.

4. Besides the abovementioned, there are other ac-tivities that banks in B&H need to conduct. Ac-tually, the banks need to attract new sources of funding because without them they will not be able to maintain the existing level of operations. In addition, special attention should be given to collection of own funds or fresh equity since the attraction of other sources does not make much sense without it. The capital is the benchmark for any future total growth of assets, i.e. the capital adequacy ratio is that benchmark, or the indicator determining what the banks should do and when to do it. Large or larger banks in B&H need capital today since their capital adequacy ratios are low (close to 12%) and if the existing fi-nancial crisis that is very much evident in our re-gion is prolonged, the assets classification of the banks will be deteriorated as well as the financial results, i.e. there will be losses that most of the banks will not be able to cover by the results of the current year, and they will have to reduce capital. This will lead to reduction of the capi-tal portion in the risk assets down to the level that will not be satisfying for the benchmarks determined by the regulatory bodies. The fact is that a number of years after the purchase or the privatization many banks failed to increase their capital even for 1%, which is incomprehensible and deserves strong criticism. The question that one can raise is why privatization or the pur-chase of the domestic banks? What are the re-sults of the banks? Are they really that incompe-tent that they cannot make profit in the country where the interest rates and commission spreads are much higher than in their countries of ori-gin, or whether there are some other reasons behind this? What are the regulators doing and is there a chance for higher transparency in the banks? Consequently, unclear and nontranspar-ent actions of the banks, low level of capital of other banks and underdeveloped financial and banking market in B&H are the explanations for modest total assets of B&H banks. Following the attraction of capital, all B&H banks will have to seek and fight for new, other or somebody else’s

financing sources i.e. for new deposits and new sources of good quality long-term assets. This activity is even more important for smaller banks since they need to provide better quality services and apply more aggressive approach in the banking market in order to fight for different and more beneficial reallocation of deposits. If they are not able to take those steps, they should look around for the merging options in order to save themselves form complete disappearance from the market.

CONCLUSION

The commercial banks in Bosnia and Herzego-vina have definitely accepted international banking standards, but they are not all at the same stage of preparation for their implementation, or at the same level of development at this point in time. However, disregarding that fact, all banks want the applica-tion of new standards and they are all ready, some to a greater extent and some not, to face the new challenges related to capital requirements and risk management in banks. The reasons for wide accept-ance lie in the fact that the standards are introduced as the best practice of the best banks in the world that they are being applied by all EU members and B&H is aspiring to become a member country. Also, most importantly, the standards are offering better quality models for maintaining financial strength and financial stability of each individual bank.

The length of the implementation process for the new standards and the manner in which it will be conducted, i.e. which model a bank will accept, does not depend only on banks, but also on other stake-holders in the process, and without them it is im-possible to start with the implementation process. These stakeholders include legislative or regulatory bodies of the country, firstly the Banking Agencies of both Entities. It is their task to adopt new regula-tion (decrees) and impose the implementation and the application of the new banking standards. It is not clear when the mentioned Agencies will be in position to offer such a document, but that docu-ment or a set of documents need to be offered as soon as possible, because the commercial banks will not have sufficient time or other resources to meet the adopted standards and set deadlines pertaining to the implementation of new standards. This is the case because simultaneously with the introduction of new standards, the banks need do their main ac-

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tivity that is actually enabling them to reach posi-tive business results and to survive in the future, and that is labor and technology intensive process. The sample banks do not have the same human or technology capacities, and therefore, they cannot accept and implement the new banking standards at the same pace.

REFERENCES

Agencija za bankarstvo Republike Srpske (2011) Izvještaj o stanju u bankarskom sektoru Republike Srpske za period od 01.01. do 30.06.2010. Banja Luka: Agencija za bankarstvo Republike Srpske [online]. Available from: http://www.abrs.ba/publikacije/Izvjestaj_o_sta-nju_bankarskog_sistema_RS_30062010_lat.pdf [acce-ssed 29 June 2012]. (in Serbian)

Agencija za bankarstvo Federacije Bosne i Hercegovine (2011) Informacija o bankarskom sistemu Federa-cije Bosne i Hercegovine: stanje 31.12.2010. Saraje-vo: Agencija za bankarstvo Federacije BiH [online]. Available from: http://www.fba.ba/images/Publikaci-je_Banke/Informacija_bank_31122010_bos.pdf [acce-ssed 5 May 2012]. (in Serbian)

Gup, B.E. (2004) The New Basel Capital Accord. New York: Thomson.

Chapman, R.J. (2006) Simple Tools and Techniques for Enterprise Risk Management. Chichester: Wiley.

Đukić, Đ. (2007) Upravljanje rizicima i kapitalom u ban-kama. Beograd: Beogradska berza. (in Serbian)

Lukić, R. (2009) Bankarsko računovodstvo. Belgrade: Fa-culty of Economy. (in Serbian)

Mishkin, F.S. (2010) Ekonomija novca, bankarstva i fi-nansijskih tržišta. 8. izd. Zagreb: MATE. (in Croatian)

Ranković, J. (2008) Teorija bilansa. 11. izd. Belgrade: Fa-culty of Economics, University of Belgrade. (in Ser-bian)

Rodić, J. (1997) Teorija i analiza bilansa. 3. izd. Belgrade: Privrednik. (in Serbian)

Rose, P.S. (2003) Menadžment komercijalnih banaka. 2. izd. Zagreb: MATE. (in Croatian)

Samuels, J.M. (1991) Management of Company Finance. 5th ed. London: Chapman and Hill.

Van Greuning, H., Brajović-Bratanović, S. (2006) Analiza i upravljanje bankovnim rizicima: pristupi za ocjenu organizacije upravljanja rizicima i izloženosti finan-cijskom riziku. 2. izd. Zagreb: MATE. (in Croatian)

Šalić, R. (2011) Monetarna ekonomija i bankarstvo. Čačak: Visoka poslovna škola strukovnih studija iz Čačka. (in Serbian)

received: 30.06.2012.


Accepted: 10.09.2012.

PRIMENA STANDARDA Iz BAzEL II SPORAzUMA U POSLOVNIM BANKAMA U BIH

Rezime: Na bazi istraživanja i proučavanja primarnih i sekundardnih podataka iz odabranog uzorka poslovnih banaka, urađena je preliminarna konstatacija stanja bankarskog sistema BiH u svrhu saznanja dosadašnjeg nivoa primene i davanja odgovarajućih preporuka za nastavak primene standarda Bazelskog sporazuma 2. Konstatovano je da sve banke iz uzorka visok prioritet daju pomenutim standardima, da već raspolažu sa određenim znanjima iz te oblasti i da kontinirano edukuju zaposlene, upravo za potrebe potpune primene tih standarda. Takođe je konstatovano da regulatorni organi BiH do sada nisu učinili dovoljno na donošenju novih propisa vezanih za tu oblast kao i da poslovni rezultati banaka nisu na zadovoljavajućem nivou, naročito u pogledu stopa profitabilnosti i stopa adekvatnosti kapitala banaka. Zato je preporučeno da banke BiH, pored redovnih aktivnosti treba da prikupljaju nove izvore sredstava, a naročito vlastite, odnosno svež kapital bez kojeg prikupljanje ostalih izvora nema smisla, a regulatorni organi (agencije za bankarstvo) da donesu nova akta (odluke) kojima će se naložiti definitivan početak primene novih standarda u bankarstvu uz izradu konkretnih uputstava za primenu pojedinih akata, sačinjavanje forme izveštavanja (konkretan izgled obrazaca) i implementaciju standarda i uputstava u samim bankama.

Ključne reči: Bazelski sporazum II, banke, rizici, kapital, depoziti, primarni i sekundarni izvori.

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FORMAL APPROACH TO A WEB INFORMATION SySTEM BASED ON STORy ALGEBRA

Bálint Molnár*,1, András Benczúr1, Ádám Tarcsi1 1Eötvös loránd University, Faculty of informatics,

1518 Budapest, POB. 120, Hungary

Abstract: Web Information Systems (WIS) are becoming more and more ubiquitous along with the changes in information technology. There have already been several studies on modeling various aspects of WIS. This paper at-tempts to investigate the most recent paradigms of WIS description taking into account the Web service approaches, Service Oriented Architecture and Cloud computing. One of the modeling and analysis approaches is the Artifact Centric Business Process that unifies both the behavioural and information aspects of business processes carried out in a WIS en-vironment. The information aspect frequently incorporates in the form of unstructured or semi-structured document that indirectly influences the content of the underlying database through several tiers of the given architecture. A business event stimulates a business process along with some set of data and triggers a process at the user interface level. The process initiates a chain of processes that goes through the tiers of architecture until the content of the database is affected. The Story Algebra, or more generally the Process Algebra approach provides a formal framework that promises a formal describing method for modeling precisely the event triggered processes coupled with data in document format.

Key words: Web Information System, Artifact Centric Process andData Modeling, Story Algebra, Process Algebra.


ISSN 2217-8090

UDK 004.738.1:512

Review paper/pregledni naučni rad


INTRODUCTION

The Web Information System (WIS) has become widespread and it incorporates the traditional In-formation System (IS) that previously realized and fulfilled the business requirements through either data-intensive or transaction-intensive systems. WIS consists of a set of interacting components, web ap-plications for specific functions, information com-ponents such as databases as well as other non-web components.

The user interaction side, also known as user interface is dominated by various media types. The business or enterprise related information systems have different document-centric approaches –struc-tured, semi-structured and unstructured.

A business-oriented WIS implicitly or explicitly follows one of the enterprise information system ar-chitecture paradigms (Zachman, 1987). The architec-ture consists of several tiers and views through which the information flows down to the data structure and store and back to the user. The document-centric phenomenon causes theoretical and design prob-lems, both in the static and dynamic aspects of IS.

The Service-oriented Computing (SOC) has made it more clear that the end-user communicates with the service through documents.

The issue raised by the technological development can be summarized as follows:

◆ the emphasis of communication with IS moved from the structured data towards the semi-structured and unstructured data or document format;

Acknowledgements. The Project is supported by the European Union and co-financed by the European Social Fund (grant agreement no. TÁMOP-4.2.2/B-10/1-2010-0030.).

64

◆ The first encounter of input data with Infor-mation System is in the form of services (or processes).

The input data, document and the service that handles it are strongly coupled at logical level, which means that this pair of things can be consid-ered as one unit. Some approaches call that percep-tion Business Artifact (Cohn and Hull, 2009; Hull, 2008). However, the similar concepts have been called by various names, including adaptive docu-ments (ADoc) (Nandi et al. 2003), adaptive business objects (ABO) (Nandi and Kumaran, 2005), and lately business entities (Kumaran et al. 2008).

The paper is organized as follows. In Section 2, we present the literature review. Section 3 outlines our method making use of the previous approaches in a document centric approach. Section 4 provides the summary and conclusions.

BASICS OF STORy ALGEBRA AND BUSINESS ARTIFACTS

The SOC paradigm and the concept of Web-services together yield a suitable style for building collaborative Web information systems (WIS). The advantage of using SOC in the WIS development is that it enables the direct connection to the organi-zation business processes, workflows, activities and tasks. The Business Process Modelling (BPM) real-izes this direct mapping between the organizational level services and the information system level ser-vices. This direct mapping between the informa-tion services of WIS and the business activities and processes can be described by using storyboarding approaches, or more formally, by Story Algebra as a part of the Process Algebra.

The difference between a set of Web pages, typi-cal Web Applications and a WIS can be formulat-ed in the following way: A WIS supports business processes (Business Process Modeling, BPM) and is usually tightly integrated with other IS. WIS can also be viewed as database applications for struc-tured, semi-structured as well as unstructured docu-ments (XML-based).

The semi-structured documents embodying hy-permedia or hypertext documents, play an impor-tant role in the most modern IS as WIS (Bernauer and Schrefl, 2004; Chiu and Bieber, 2001; Nam et al. 2003). Historically, documents have been used in displaying, interchanging, and retaining informa-tion. The form of documents has become the typical layout for the WIS user interfaces using the HTML.

As the document-centric flow within business IT environment has become the basis, this phe-nomenon can be perceived as evolution of the in-formation processing paradigm, shifting from the process-oriented, data intensive application typi-cally represented and designed in object-oriented style to the document-oriented computing. The de-velopment of information technology has led to the active semi-structured documents. The documents intended to collect data contain procedures for in-formation processing, as it is required at a given time and at a specific position within the workflow, and thus they demonstrate active behavior. The doc-ument-centric approach can be characterized by the document structure, content and behaviour.

The business artifact can be regarded as synthe-sis of the process and document aspects. A business artifact contains all the data and processing require-ments that are business-relevant.

The adaptive documents (ADocs) are perceived as “domain artifact” that exhibits state-dependent behavior. Within this context, the domain artifact means the representation tool by which the issue and resolution can be depicted in the problem area. The relevant aspects of ADoc are as follows (Nandi et al. 2003): 1. dynamically changing data environment;2. state-dependent behavior in compliance with

stimulus-response metaphor as the domain arti-facts react to organization - level events;

3. Assistance provided for cooperation between “ar-tifacts” and “services”.The adaptive business objects (ABOs) (Nandi and

Kumaran, 2005) represent and abstract business en-tities. However, the concept of business entity is not defined exactly within this context but it supposedly designates a group of data and business activities. The states in the business entity’s life cycle describe the history of the entity. The state transition of ABO is depicted by a finite state machine (FSM) that dis-plays all possible states of the entity that may oc-cur during its life cycle. The organizational level and external events cause effects and respond with state transition. The data is not held within an ABO, but it uses a data graph that dynamically combines infor-mation from various places. The ABO approach can be considered again as a holistic view, a kind of syn-thesis of process and data side, but in a specific way.

The business artifact is another modelling method that perceives information entities along with pro-

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cessing goals. A business rule regulates which service can be performed, by whom, under what condition, and how artifacts’ states change.

The business services or tasks alter the busi-ness artifact by business rules. In this framework, a business process model is composed of business artifacts, services/tasks, and business rules.

The business entity as a self-contained concept is defined as „A business entity is a dominant infor-mation entity with an associated data model and as-sociated behavior model in the context of a process scope” (Kumaran et al. 2008).

According to some business process modelling approaches, the tasks of business processes have goals and some rules that can be described by algorithms. There are competing theories and concepts that use the following notions: business activity, business process, business service, business function and task. There is an attempt in (Kumaran et al. 2008) to pro-vide a comprehensive and unified set of definitions for these business related notions.

The Story Algebra tries to formalize the inher-ent concurrent characteristic of WIS user interface appearing in the form of document or media types (Schewe and Thalheim, 2004; Thalheim and Düster-hoft, 2001) and to create an environment that can be described by the navigation features of user in-terfaces together with navigation scenes formulated in scenarios.

The end-user and WIS interaction through some document can be grasped as the execution of a par-ticular scene. The SiteLang method uses the concept of media object and media type as its class. The sto-ryboarding provides a tool to express an activity in the form of information exchange between the end-user and a media object. Such a dialogue can be de-picted in an activity diagram (e.g. in UML style).

The concepts of modeling in SiteLang can be summarized as follows:

◆ Story space, the smallest subspace of the in-formation space sufficient for creation of the story board.

◆ Storyboard, a network within the informati-on space, which is represented as a directed graph. Its vertices, the locations in the infor-mation space, are called scenes. Its edges are called transitions, and are labeled with both the action triggering the state change and the data being available at the target scene due to this activity. A scene (a vertex) is labeled with the type of customers being granted access to it.

◆ Scenario is a sub-graph of the story board. ◆ Story is a path within the story board. ◆ Scene is a vertex in the storyboard. ◆ Actor is an end-user, dialogue object, or me-

dia object. ◆ Media object is a unit of business- and repre-

sentation functionality, mediating between the customer and database of the WIS.

◆ Content represents data or information. ◆ Stories are specific scenarios that make po-

ssible the separation of concern in order to further reduce the complexity to be dealt with at once.

In the storyboard, the processes representing the usage of WIS can be described by the actors, mes-sage exchange and message passing mechanism. The processes should represent a solution for a par-ticular business problem and the processes can be identified with some single scenario when the pro-cess contains splits or joins (forks and merges) and maybe loops, if not the process can be considered “only” as a story. The modeled processes can be used to identify the data and operations accessed by the end-user driving the process. For each process, da-tabase schemas are created describing the data ac-cessed in a process.

From a methodological point of view, storyboard-ing is a particular variant of analysis and synthesis, altogether providing a holistic view. The Story Al-gebra that can be used to specify story spaces can be represented as Kleene algebra with tests (KATs) (Schewe and Thalheim, 2004).

COMBINING APPROACHES TO PROVIDE A FORMAL DESCRIPTION

The information objects appear typically in the form of documents at the user interface of WIS dedicated to provide support to business services. The above-mentioned approaches attempt to syn-thesize the data and process aspects. A document can represent a dynamically changing content and structure. The pre- and post-conditions of processes can be formulated in the sense of input data that can be represented partly by the structure and contents of documents. A business event triggers a chain of processes that goes through the tiers of architecture. The most important components of architecture for the first-cut investigation are the user interface level,

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conceptual model and operational or physical data model level. There are several models that business information systems can use to describe the archi-tecture (Zachman, 1987) and to reconcile the most recent architectural styles as e.g. SOA (Molnár and Tarcsi, 2011).

Documents play a vital role in business infor-mation systems as a workflow constituent. Data are generally handled in the form of documents which can contain various data items and which build a unit of information within the business process. The exchange of information between different parties of actors, roles and partners within a business is manifested in the form of documents. The format and the structure of the information contained in documents are typically prescribed, either by the application through which the processing of docu-ments happens or by standardized document tem-plates that are quite common in business processes. Different definitions for the document as a techni-cal term can be found in the literature. It usually occurs within these definitions that documents are things or artifacts that are created and used with-in workflow and business processes. Based on the several competing definitions, a document can be defined as a logical unit of information displaying the product of some business activity. Documents differ widely in form and content, ranging from in-formal documents containing natural language text, to more formal ones like tables or structures com-plying to some rules with well-defined syntax and more or less definite semantics. It needs to be taken into account that each document has its own life cy-cle, consisting of creation, editing, review, approval, and release processes. For a complete description of documents, different types of information mod-els are required, e.g. object models representing the documents themselves (Marini, 2002), relationship models among the documents in the form of some taxonomy, behaviour models depicting the dynamic aspects of documents, content models that show the structure and internal dependencies of various doc-uments. The documents are represented typically by XML (eXtensible Markup Language), structured by XML Schema and DTD (Document Type Defini-tion) and have an object structure shown by DOM (Document Object Model) (Marini, 2002).

The approaches that make use of the concepts such as adaptive business objects (ABOs), business entity, business artifact, attempt to model all aspects of business files and their behaviour in a unified way.

To advance further the modeling of WIS and the recent business-oriented information systems, we attempt to take into account and formalize some aspects of the recent information systems. We can differentiate between the input document contain-ing data and the input event triggering the chain of processes to deal with the document. The input data and the input event define together the set of pre-conditions that provides the environment to execute a piece of scenarios, stories and consequently pro-cesses.

This paper attempts to present a document cen-tric approach that uses the results of the previously mentioned methods.

As a case study, we can make use of a university example that deals with course registration that may demonstrate typical issues at a WIS:

◆ Student registration to a specific course ◆ Admission of students to a course ◆ Closure of the registration period ◆ Student registration to a specific course exa-

mination ◆ Entering the grades for students ◆ Closing the exam sheet ◆ Modifying the exam sheet after closure

A motivating example

A typical business scenario at universities is the preparation for the examination period. The neces-sary information is handled by a WIS and it is rep-resented through documents at the user interface level. The business activity consists of two essential parts: firstly, the system and the administration col-lect the list of students that potentially participate in some of the exams. Then, the documents for the each single exam will be created at a certain point of time so that the students can concurrently modify only the content of a document and some specific data items. The overall list of students belonging to an instance of a specific course is generated auto-matically by a business activity and data processing providing a superior summation of data. The rela-tionship between the stories, scenarios and docu-ments linked to the lists of potential examinees is a hierarchical one.

The specificity of the situation is that there is a document produced before the beginning of the course containing information on the admitted stu-dents, which then governs the business activity re-

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lated to exam preparation. The particular document for a single exam is a derivative of the superior doc-uments in the sense of content as well as structure.

A virtual or intensional document exists at the user interface and conceptual level and it contains semi-structured form of all relevant information.

The manifestation of the particular sample of the virtual document is a document accessible at the Web interface. Such a manifestation, which is con-nected to a business event and coupled to a story/scenario, represents the mapping of business task within a business process. The documents reflect a hierarchical relationship with the virtual docu-

ments; the hierarchical relationship can be coupled to the relation of business tasks within business pro-cesses. The processes in a story or scenario can be linked to business tasks.

The particular documents that can be consid-ered as a specific view of the virtual document are dynamically created from the virtual, overall docu-ment. A particular document as a specific view is strongly coupled to a certain business task.

The business process consists of various tasks. Every task has a goal and reflects the intention of the actor executing the task through some activities (Schäfer, 1988). The actors fulfilling some role have

Document type

Status- Event Attributes An instance

Course Id: String Course Id: IPM-08irÜVIRE/1

Created String Course: Web technologies in IS (MSc)

Course Type: String Course Type: Lecture

Integer Credit:2

Open for sign in/sign out List String Lecturer: X.Y., Z.W.

Closed Designated Time: Time Designated Time: Monday, 08:00-10:00

Designated Room: String Designated Room: Database lab

Max. Permitted number of students:Integer Max. Permitted number of students: 40

Estimated number of students:Integer Estimated number of students: 40

Number of students signed-in:Integer Number of students signed-in: 25

Table 1. Document for registration to a course in a semester

Document type

Status- Event Attributes An instance

Course Id: String Course Id: IPM-08irÜVIRE/1

Created Course: String Course: Web technologies in IS (MSc)

Open for a sign in /sign out Exam type: String Exam type: Colloquium

Closed for sign in /sign out

Admitted students and scores: List (String, Integer) Admitted students and scores: …

Open for keying-in grade Exam date: Date Exam date: 2012-05-20

Saved Exam Time: Time Exam Time: 10:00 PM

Open for extending with examinees Site, room: String Site, room: Database lab

Finalized Max. number of examinees: Integer Max. number of examinees:40

Examiners: String Examiners:X.Y.

Table 2. Document for a specific exam

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the right to start to execute certain tasks by creating events at business and information systems level.

The description of tasks can be composed of goals, variables / attributes, stories. During the busi-ness analysis, the tasks are decomposed into actions. We can map the actions of task to the actions of the story algebra (Schewe and Thalheim, 2004). The pre- and post-conditions for an action can be in-ferred step-by-step from the conditions belonging to the task. Within Story algebra, an action is di-rectly represented by a process. A task description is a tuple (G, Pre, Post, Story) ,an action description is again a tuple (Pre, Proc, Post) where:

◆ G is the formulation of the goal of the task; ◆ Pre and Post is the first order logical expressi-

on of pre- and post-condition; ◆ Story is the associated story within the story

space and a scenario; ◆ Proc is the collection of processes (one or

more) in the associated story. The intensional document of a WIS can be per-

ceived as follows: documents and their behavior, i.e. the related set of tasks and the application logic of performing tasks.

The intensional document may be formalized in the following way:

Intensional_Document: Document_Ob-ject_Structure× Data_Items (1)

Data_Items= List Data_Item (2)

View_of_Intensional_Document: view_mapping (Document_Object_Structure× Data_Items → Document_Object_Struc-ture× Data_Items)

(3)

View_of_Intensional_Document ⊆ In-tensional_Document (4)

A specific view of the intensional document is a subset of structure, and the mapping function pro-duces a meaningful structure in the form of DOM and erases the unnecessary symbols while preserv-ing the structure (Hull, 2008).

An intensional document type (or class) may be defined in the following way

◆ An intensional document type IDT is a tuple (Str, Data_Items, BP, Sc….).

◆ Str is a structure described by DOM and XML (trees or forest).

◆ Data_Item is a collection of attributes of pri-mitive types (such as String, real, integer or document and other ids).

◆ BP is the Business Process linked to the DT. ◆ Sc is the general, top scenario that belongs

to DT and is specified by the Story Algebra processes.

A particular document may be defined with an XML view definition, i.e. is an XQuery expression called a view query (Boag et al. 2011).

A particular document, as a view of an inten-sional document d, represents an instance of an intensional document type that contains the data items as filled in attribute value pairs. The data items represent the actual status of the document (Cohn and Hull, 2009).

The status of the document is strongly coupled to a story within a specific scenario, and moreover to some process or processes that precondition match-es to the status of the actual document.

The functionality can be specified by the inputs, outputs, preconditions, and effects of the intension-al documents in a similar way as a service of WIS. These are together known as the IOPEs of the given functionality provided by the intensional docu-ments and according to the style of OWL-S (Singh and Huhns, 2005).

The business tasks can be mapped to scenarios (Thalheim and Düsterhoft, 2001) and stories. The hierarchical relationship among the virtual docu-ments and specific views appearing as single docu-ment can be represented by hierarchical scenarios.

The Story Algebra uses three important concepts and those are story, scenario and scene. The manifes-tation of a document associated with one or more actors and roles; vice versa the actors and roles can handle one or more documents in a business envi-ronment depending on the pre-conditions and re-lated events. Due to the many-to-many relationship between the intensional documents and their views and manifestations in particular situations, the ac-tors and roles lead to a similar many-to-many rela-tionship among stories, scenes and scenarios. With our document-centric approach, we can interpret the usage of concepts in Story Algebra:

The acts of actors and roles and the behavior of an intensional document can be described with one or more scenarios, as the intensional document and its instances are linked to business processes.

The business processes consist of tasks; the tasks are composed of activities; the activities can be rep-resented by processes of stories.

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Scenes are interpreted as macro-steps of scenar-ios (Nam et al. 2003) so that they can be used as a structuring tool for clustering some logically related tasks and activities.

The actions are elementary component of tasks that have a goal to be achieved.

An action manipulates some interrelated data within a document instance, and the document as an environment defines the context of the interpre-tation and the opportunities for the behavior of the action.

When a course organizer creates a course reg-istration opportunity, he/she keys in the data into some XML/HTML documents. The input data in the form of a document represents the data that will be fed into the system. In fact, the input event is enhanced with identifiers that are necessary to as-sociate the input document, the event and actions/processes. The raw input data/document contains list of data items. The data items can be formally defined by attribute names appearing in the concep-tual model and logical rules describing the domain restrictions.

Input_Document= Document_Object_Structure×Input_Data

(4)

Input_Data= List Data_Item (5)The data items should correspond by an appro-

priate mapping to the attributes of conceptual mod-els. The attributes belong to particular domains and are constrained by some (business) rules.

data_item_mapping : Data_Item → Attribute × Domain (6)

The input event is stimulated by an event from the business environment and it is transformed to a user interface level or information system level event that we consider input event. The decisive fea-ture of the input event is that it enforces the start of process in order to generate data items that are nec-essary for further navigation within a scenario and to insert or modify the content of the conceptual model. The effects of the input event will be carried out under a valid state of the system and will change the actual state

identify_input_event: System_State× Input_Document → Input_Event (7)

Input_Event=Event×Entity_Identifier×Document_Structure×Data_Items

(8)

Data_Items = List data_item_mapping (Attribute → Attribute_Value) (9)

input_items: Event → Document_Struc-ture× List (Attribute × Domain) (10)

The initiation of a course starts with the creation of an intensional document representing the course for a given semester. The instance of the document represents individual courses such as PhD, MSc, BSc, compulsory or optional etc. For a student to register, specific views of course documents appear and a similar way documents and opportunity for examination registration

The pre-conditions of a p process (p∈P set of processes associated to scenes) can be formulated as follows:

◆ Pre conditions - If Course_identifier is not defined - The flow of registration is at the initial

state. ◆ Post-condition

- The involved instances of data items in the document have been altered.

input_items (Course_Registration)=[document_structure, (Course_identifier, string), , ……)}]

(11)

create_ Course_Registration (course, semester, type) (12)

The intensional document represents a document class or a document type. The element of the class is again classes or subtypes. The intensional document is a super type; the subtype documents inherit the attributes of the supertype and a part of the structure (Hull, 2008). The instances of a subtype document appear as single, individual entities. The supertype-subtype relationship is an is-a relationship. Thus, the is-a relationship produces a document hierar-chy. The general “Course registration”, the more specific “Course registration” for a semester, for a certain type (PhD, MSc, BSc etc.), and an instance of “Course registration document for a student” for a given course, semester, type, embody a document type hierarchy. We can associate actors and roles with a document type and its instances. The docu-ment type and actor /role pairs can be mapped to scenes and scenarios.

If the document structure does not play any role in further processing, the effect of the processing goes through the tiers of architecture modifying the content of the conceptual models. The information

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loss that may originate from the mapping of either data items or structure contained in the document could be handled by cohesion (Schewe and Thal-heim, 2004) or proximity values (Vechtomova and Karamuftuoglu, 2008).

WIS Architecture and Document and Event Processing

The pre- and post-condition of processes and relationship with the input document content and event can be described by Story Algebra:

◆ Reasoning about the process cha-in penetrating through the archi-tecture tiers;

◆ The business rules and processes provide the dynamic, operatio-nal side appearing in the form of pre-, post condition, processes, including the document and data structure.

◆ Stepping through the tiers of ar-chitecture results in data transfor-mation from loosely structured (semi- or unstructured) document to rigidly structured data records.

The input event – as can be seen above – can be interpreted as the pair of documents or list of data and the in-stance of the particular event.

The architecture of WIS is a complex structure as we have attempted to outline in Fig. 1 and in (Molnár and Tarcsi, 2011). However, we shall try to restrict our discussion for the sake of simplicity to a clear-cut model Fig. 2.

We restrict ourselves to three architecture tiers in order to outline the problem and proposed ap-proach. Those are the user interface, the conceptual model and internal/physical design. The most recent approaches to system architecture represent dispa-rate architecture artifacts that differ in the sense of

Event Student s makes a registration to a specific course c using the Course_registration_student document

Pre-condition currrent_state(Course_registration_student,initial)∧defined(Course_registration_student.c.identifier)∧¬defined(Course_registration_student.s.identifier)

Task create_ Course_registration_student (c, s, semester, type), set_state (Course_registration_student, created)

Post-condition currrent_state(Course_registration_student,created) ∧ defined(Course_registration_student. s.identifier)

Event Create a course Course_registration document for a course c

Pre-condition currrent_state(Course_registration, initial)

Task Create_new_ Course_registration (c)

Post-condition defined(c. identifier), set_state (c, instantiation_enabled )

Event Create a course Course_registration_student document for a course c, for a semester sem, for a certain type t

Pre-conditioncurrrent_state(Course_registration,instantiation_enabled)∧currrent_state(Course_registration_student.c.identifier,initial)∧¬defined(Course_registration_student.sem.identifier)∧¬defined(Course_registration_student.t.identifier)

Task Create_new_ Course_registration (c, sem, t ), set_state (Course_registration_student, modifiable),

Post-condition currrent_state(Course_registration_student,modifiable)

Table 3. Examples for conditions and processes

Figure 1. A view of WIS integrated model

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Figure 2. A simplified IS architecture

design, implementation method and the architecture building blocks used for constructing the system.

The user interface tier handles the input data and/or document. The potential activities can be de-scribed by stories and scenarios and the acts within stories and scenarios can be mapped to processes as depicted in (Schewe and Thalheim, 2004). The alge-braic reasoning with the processes can be used to ver-ify the design and to provide a mechanism for control at runtime to maintain compliance and security.

We can separate out some basic cases: ◆ the user can modify the data items as the con-

tent of the document representing the static aspect of the user interface. The set of data items can be represented by the simple list or as a structure formalized by regular language.

◆ the user can modify the structure of docu-ment resulting in a more complex processing at conceptual model level that may lead to structural alteration within the model

WIS Semi-Structured Document Viewpoint

Most of Web-based applications are document centric. Most of business processes in an organiza-tion are carried out through workflows making use of documents as information source and transmit-ter. Moreover, the Internet technology accelerates business processes to be implemented by Web-based applications. From the viewpoint of human-computer interaction, Web-based document ac-tualizes the structured and semi-structured data through the computer-user interface of the WIS, and specifies the dialogue between users (clients)

and the WIS. A central part of WIS is the Web pages and Web semi-structured data in the form of XML/HTML documents for the users on the network (Intranet, Extranet, and Internet). Presentations of information to the users and requests for input from the users are the two facets of Web sites from the viewpoint of the WIS. With the documents imple-mented in the extensible markup language (XML), the relationship and information exchange between the Web pages and the associated business processes and knowledge representation are realized.

Formally, the document type hierarchy can be defined recursively:1. The intensional document type I_D_T is the ge-

neric document type and itself generates a docu-ment type hierarchy I_D_T (Doc_Hierarchy).

2. If D is a generic document type representing an intensional document. Let D1 (Doc_Hierarchy1) … Dk (Doc_Hierarchyk). If Di is-a D for all 1 ≤ i ≤ k then a new document type hierarchy can be cre-ated as D (D1 (Doc_Hierarchy1) … Dk (Doc_Hi-erarchyk)).To use the process algebra for reasoning about

WIS, there is a straightforward mapping: ◆ The intensional document type mapped to a

scenario. ◆ If D ∊ I_D_T (Doc_Hierarchy) then the asso-

ciated tasks are mapped to a scene, the acti-ons of tasks are mapped to processes.

◆ If D ∊ I_D_T (Doc_Hierarchy) then the pre-conditions formulated as first order logic sta-tement for a task can be linked to processes with pre-conditions so called guarded proce-sses. The post-conditions of tasks are related to so- called post-guarded processes.

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DISCUSSION

The goal of this paper has been to outline and investigate a formal modelling framework for WIS that is focused on documents and the processes that manipulate them. The documents and the scenarios attached to documents are the entities that can for-mulate the actor/process objectives. The handling of documents, the impact on documents by processes and the final effects on the underlying data struc-ture can be described formally by Process Algebra. As the WIS provides information systems services that are used by business services consequently, the documents are modified through business tasks grounded in business rules. As it is well-known, the underlying database scheme that reflects the busi-ness’s or enterprise’s data structure changes very infrequently. The basic arrangement of business services evolves slowly. However, the documents mirror everyday fluctuations of businesses or the outer environment of WIS. The proposed model consists of scenarios formulated by pProcess algebra and strongly coupled documents. Using the process algebra formalism, the business services, the infor-mation services, the related business rules can be depicted in a unified framework. This approach can handle the control, the data and event viewpoint of information system at the same time.

The contributions of this paper are as follows:1. Combining the story algebra based on gener-

al process algebra and the document centric approach.

2. Formal description of the impact of docu-ments and the related events on WIS

3. Using the architecture approach, a WIS ar-chitecture outlined that can be used to per-ceive the effects realized through documents on single components of WIS.

CONCLUSION

The formalization – proposed in this paper – provides a unified framework to reason about the effects of document. The use of Story Algebra based approach helps to formalize the interaction between actors and WIS through documents. As we have tried to illustrate, the documents are various levels of generalization ranging from intensional docu-ments to the specific ones.

The proposed approach yields solutions for for-mal handling of the raised issue. The security and control requirements can be formulated against a document-centric WIS in the form of constraints. The important business related information is con-tained in documents; the processing requirements and the set of rules are captured in the scenarios of Story Algebra. The proposed method separates the data aspects from the process flow, but it also provides a unified framework to treat the docu-ment, the data, and the process involving the busi-ness rules and finally the event aspects together. The Story Algebra, or more generally the Process Alge-bra, provides a descriptive tool that helps capturing changes caused by a document and/or event at the outer interface level. The formal model of docu-ments provides the opportunity for fixing precisely the relationship between the document and data changes as a result of events and the processing re-quirements at all levels of architecture.

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received: 05.09.2012.


Accepted: 15.10.2012.

FORMALNI PRISTUP VEB INFORMACIONIM SISTEMIMA ZasnOvan na “alGeBri priče”Rezime: Veb informacioni sistemi (WIS) sve više dobijaju na značaju usled novina u oblasti informacionih tehnologija. U dosadašnjoj literaturi je sprovedeno nekoliko istraživanja o modelovanju različitih aspekata WIS-a. Cilj ovog rada je da pokuša da istraži najčešće paradigme opisa WIS-a oslanjajući se na veb servise, servisno-orjentisanu arhitekturu i računarstvo u „oblaku“ (Cloud Computing). Jedan od pristupa modelovanju i analizi je poslovni proces orijentisan na dokumenta (Artifact centric business process) koji objedinjuje aspekte informacija i dinamičkog ponašanja procesa koji se odvijaju u WIS okruženju. Informacioni aspekt uključuje nestruktuirana ili polustrukturi-rana dokumenta koja neposredno utiču na sadržinu date baze podataka kroz nekoliko slojeva date arhitekture. Poslovni događaj aktivira poslovni proces podsredstvom nekog skupa podataka i započinje proces na nivou korisničkog interfejsa. Proces inicira lanac procesa koji se kreće kroz slojeve arhitekture sve dok se ne izmeni sadržaj baze podataka. Algebra „priče“ (Story Algebra) ili šire Algebra procesa (Process Algebra) nudi okvir koji daje formalni metod za opisivanje modelovanja tačno onih procesa koji su aktivirani događajima praćenim podacima u dokumentovanom formatu.

Ključne reči: veb informacioni sistem, proces orijentisan na dokumenta, modelovanje podataka, algebra priče, algebra procesa.

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LEGAL FRAMEWORK OF FREEDOM OF RELIGION IN THE REPUBLIC OF MACEDONIA

Saša Dukoski1, Svetlana Veljanovska*,1

1University St. Kliment ohridski, Faculty of law - Kičevo,rudnička Street, Kičevo, republic of Macedonia

Abstract: Guarantee of freedom of religion and its regulation with international and regional legal instruments is undoubtedly the foundation of every modern democracy.However, elaborating freedom of conscience and religion has to be done within the framework of a positive legal system, i.e. Laws and the Con-stitution, which underlie the concept of organizing the state itself. Religious beliefs have been present for millenniums and their beginnings are in the very essence of both humans and communities, and even countries. The Republic of Macedonia along with all other states which were once part of the common Yugoslav federation has two periods of treatment of the issue of religious freedom, i.e. the freedom of conscience and religion.The well-known concept of separation of religious feelings from the state-legal system was practiced in the former common federation. Relying on that concept and upon gaining independence, the Republic of Macedonia has developed a different, primarily symbiotic blend of the state with its two biggest religious communities, thus attempting to deal with this extremely sensitive issue, more or less successfully, which is actually the basic principle of human freedoms.

Key words: religion, Freedom of conscience, Constitution, Law, church, religious community.

SingidUnUM joUrnAl 2012, 9 (2): 74-79.

ISSN 2217-8090

UDK 342.731(497.7)

Review paper/pregledni naučni rad


INTERNATIONAL LAWS AND REGULATIONS

Various international documents regulate hu-man rights. According to numerous legal theoreti-cians, the right to freedom of religion or belief is perhaps the most essential one, underpinning indi-vidual as well as collective philosophy of life.

The contents of the Right to freedom of reli-gion or religious belief are regulated with a large number of covenants, resolutions, protocols, and agreements. The most important of all is the United Nations Universal Declaration of Human Rights, which was adopted in 1948. The International Cov-enant on Civil and Political Rights, adopted in 1966 and the European Convention for the Protection of Human Rights and Fundamental Freedoms are also extremely relevant for this issue.

However, the initial defining of the framework parameters of national jurisdiction elaborates on freedom of religion or belief in the following most important international instruments for regulating human rights, in particular:

◆ Articles 18 and 29 of the Universal Declara-tion of Human Rights;

◆ Articles 4, 18 and 27 of the International Co-venant on Civil and Political Rights;

◆ Article 1 of the Declaration on the Eliminati-on of All Forms of Intolerance and of Discri-mination Based on Religion or Belief;

◆ Article 9 of the European Convention for Protection of Human Rights and Basic Li-berties (European Convention for the Pro-tection of Human Rights and Fundamental Freedoms);

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All these covenants and declarations as well a great number of other similar documents have been ratified by the Parliament of the Republic Macedo-nia, thus forming an integral part of the national legislation.

The overview of the domestic legal framework on freedom of religion or belief and religious demogra-phy in the former Yugoslav Republic of Macedonia is best given in the Report of the Special Rappor-teur on freedom of religion or belief, Asma Jahangir, at the 13th meeting of the Human Rights Council, Agenda item 3. Promotion and protection of all human rights, civil, political, economic, social and cultural rights, including the right to development.

In the present report, the Special Rapporteur on freedom of religion or belief gives an overview of her mandate activities with regard to communica-tions sent to States concerning individual cases, her participation in recent conferences and meetings, country visits undertaken by the Special Rapporteur and further follow-up activities of the mandate.

In addition, the Special Rapporteur discusses early warning signs of discrimination and violence on the grounds or in the name of religion or belief. These early warning signs relate to action, or inac-tion, by State actors, non-State actors and interna-tional or external factors.

There are 31 missions mentioned in the report and they took place from October 1987 to Novem-ber 2009. Among them was the monitoring mission to the Former Yugoslav Republic of Macedonia, which was conducted in April 2009, Report No: A/HRC/13/40/Add.2 (Јаhangir, 2009).

The Points 52 and 53 of the same report state the following regarding the role of the State:

States have the main responsibility for imple-menting international human rights standards, in-cluding the promotion and protection of freedom of religion or belief. On the one hand, States must refrain from violating freedom of religion or belief and, on the other hand, they also have the obligation to protect persons under their jurisdiction from vio-lation of their rights, including abuses committed by non-State actors. Measures should not only con-sist in prosecuting the perpetrators of such acts and providing compensation to the victims, but also in devising specific preventive action in order to pre-vent the recurrence of such acts in future.

The legislative and executive branches should adopt non-discriminatory laws and policies which aim at achieving equality. Domestic legislation must

also be in conformity with article 20, paragraph 2, of the International Covenant on Civil and Political Rights. Indeed, incitement to religious hatred can be an indicator of emerging tensions, and the relevant authorities should find the most effective ways to protect individuals against others’ advocacy of ha-tred and violence. Reagarding that, an independent and impartial judiciary, which examines each case on its own merits, is vital to ensuring that neither religious freedom nor freedom of expression is un-duly restricted. Part of the international documents related to legal regulation of freedom of religion is certainly the Report of the Special Rapporteur on freedom of religion or belief, Asma Jahangir, presented at the 13th meeting of the UN’s Human Rights Council on December 28, 2009, submitted to the General Assembly.

Although freedom of religion was generally posi-tively assessed, in the part of the Report on Conclu-sions and Recommendations, particularly in point 58, it is precisely put: “In terms of inter-religious tensions, both within the Orthodox Church and within the Islamic Community, the Special Rep-porteur would like to remind the Government of its obligations to remain neutral and non-discrimi-natory, especially regarding registration procedure“ (Jahangir, 2009).

NATIONAL REGULATIVE

The relations between the state and its religious communities and the work of religious communi-ties, i.e. freedom and rights of religion in the Re-public of Macedonia, have always been an issue of versatile perception, both during the period of the common Yugoslav state and in the period after gaining its independence.

Immediately after the end of World War II, i.e. in 1946, a Law on prohibition of incitement to and spreading national, racial and religious hatred and contention was adopted. Apart from the national, this law provides religious equality as well, which includes equality of religious communities.

This was followed by the Law on the Legal Posi-tion of Religious Communities adopted in 1953, the Act from 1961 for establishing certain regulations from the Law on the Legal Position of Religious Communities, which were in a way the basis for fur-ther legal regulation or more precisely, additional clarification of certain states through law decisions in 1977, 1997 and 2007.

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All these laws consider the freedom of conscience and religion as a private human matter, putting an emphasis on the concept of separation of religious communities from the state and providing freedom of performing religious rituals and religious rites. Law norms have introduced prohibition of misuse of religion for political reasons, but they have also been quite liberal in providing the possibility for religious communities to be able to acquire and own property as well as to set up religious schools for educating priests.

However, from a normative perspective, the re-lations between religious communities and religious groups and the state are regulated by the Constitu-tion of the Republic of Macedonia, the Law on state authorities and Law on churches, religious commu-nities and religious groups.

Generally, the freedom of religion in the Repub-lic of Macedonia after it became legally independ-ent from the former Yugoslav federation with the Constitution of the Republic of Macedonia, is guar-anteed, in particular in Article 19, which has been supplemented with Amendment 7 from the Con-stitution of the Republic of Macedonia, where it is precisely stated that:

Freedom of religion is guaranteed.Free and public, individually or in a community

with others, expression of religion is guaranteed. Macedonian Orthodox Church, other religious

communities and religious groups are separated from the state and stand equal before the law.

Macedonian Orthodox Church, other religious communities and religious groups are free to es-tablish religious schools and social institutions and charities in accordance with the procedure foreseen by the law (Ustav na Republika Makedonija, 1991).

However, this article has undergone certain re-defining with the Constitution Amendment VII, which was adopted after the events in 2001. It stipu-lates the following:1. Macedonian Orthodox Church as well as the Is-

lamic Religious Community in the Republic of Macedonia, the Catholic Church, the Evange-list-Methodist Church, the Jewish Community and other religious communities and religious groups are separated from the state and stand equal before the law.

2. Macedonian Orthodox Church as well as the Is-lamic Religious Community in the Republic of Macedonia, the Catholic Church, the Evange-list-Methodist Church, the Jewish Community

and other religious communities and religious groups are free to establish religious schools and social institutions and charities in accordance with a procedure foreseen by the law.

3. Point 1 from this amendment replaces para-graph 3 from Article 19, whereas point 2 replaces paragraph 4 from Article 19 of the Constitution of the Republic of Macedonia (Amandmani na Ustavot na Republika Makedonija, 2001).Due to such changes in the Constitution, the law

that was in force at the time had to be changed, and that was the Law on regulating the right of religious communities in the Republic of Macedonia. There-fore, the Law on legal position of church, religious communities and religious groups was adopted in 2007 (Zakon za pravnata položba na crkva, verska zaed-nica i religiozna grupa, 2007).

This law, or more precisely, the Article 2, states the following: “A church, a religious community and a religious group, according to this law, is a voluntary community of physical entities who with their religious belief and sources of their doctrine practice the freedom of religion united by faith and identity expressed through equal performance of religious service, prayers, rites and other religious expressions“.

Article 4 in the existing law stipulates that: “Re-ligious discrimination is not allowed“.

Religious belief does not exemplary the citizen from the obligations he has as a citizen according to the Constitution, the laws and other regulations, unless otherwise specified by the law or some other regulation.

In a procedure following the submitted initiative, the Constitutional court of the Republic of Macedo-nia abolished Articles 27, 28 and 29 from the existing Law with a Decision, which contained an elaborated section on religious education i.e. the opportunity to organize religious education within educational in-stitutions as an optional subject in accordance with the law (Odluka na Ustavniot sud na Republika Make-donija, 2010).

What is extremely important for the defining of legal regulation on a norm about the right to freedom of religion is the Law on organization and work of government authorities which was used for the establishment of a Commission for Relations with Religious Communities and Religious Groups as a separate organ of the government authorities, with the status of a legal entity.

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Article 29 from the Law on organization and work of government authorities stipulates the fol-lowing:1. The Commission for Relations with Religious

Communities and Religious Groups performs all activities related to legal position of religious communities and religious groups, as well as matters related to relations between the state, religious communities and religious groups.

2. The Commission for Relations with Religious Communities and Religious Groups has the sta-tus of a legal entity (Zakon za organizacija na rabota na organite na državnata uprava, 2000).Accordingly, this Commission ensures the le-

gal position of religious communities and religious groups and relations between the state, religious communities and religious groups.

What is interesting is that this kind of work has been practiced throughout the whole period of the existence of the Republic of Macedonia, i.e. both when it was in the common Yugoslav state and after gaining its independence.

As an institution established for religious affairs, the Commission appeared for the first time in the period from 1944 to 1945 as a Religious Council. Later on, from 1945 until 1951, this organ was part of the Secretariat for Internal Affairs. The Com-mission was later transformed into an independent organ, which changed in a different way in differ-ent periods, although it has retained the same role. Thus, from 1951 to 1962, it existed as a Commis-sion for Religious Matters, from 1963 to 1976 as a Republic Commission for Religious Matters, from 1977 to 2000 as a Republic Commission for Rela-tions with Religious Communities, and from 2000 onwards as a Commission for Relations with Reli-gious Communities and Religious Groups.

The Commission has a Sector for affairs con-cerning relations with religious communities and religious groups with two departments:

Department for determining legal position of re-ligious communities and religious groups;

Department for determining relations between the state, religious communities and religious groups;

As a sort of proclaimed principle of religious freedom, another matter to be elaborated on is ob-serving religious holidays, part of which are public holidays, and the rest are holidays of the Republic

of Macedonia. Another category that should also be mentioned here are the so called “Non-working days for believers”.

Public holidays in the Republic of Macedonia, which have explicit national as well as religious nature include: May 24, “Ss. Cyril and Methodius” –Slavic Educators Day; December 8 - “St. Kliment Ohridski Day”.

The group of holidays of the Republic of Macedo-nia include: Christmas, First day of Christmas, Janu-ary 7 according to the Orthodox calendar; Easter, the second day of Easter according to the Orthodox cal-endar; Ramazan Bayrami, the first day of Ramazan Bayrami.”

There is another, much larger group of so called: Non-working days for believers, and they include: the non-working days for Orthodox Christians: Christmas Eve, a day before Christmas; January 19, Theophany (Twelfth night); Good Friday, Fri-day before Easter, August 28, The Assumption of the Blessed Virgin Mary (Great Virgin Mary) and Pentecost, the Friday before Pentecost.

For Muslims, a non-working day is: Kurban Bay-ram, the first day of Kurban Bayram; Yom Kippur, the first day of Yom Kippur is a non-working day for members of the Jewish community;

Christmas Day, the second day of Easter and All Saints’ day according to the Gregorian calendar are non-working days for the Catholics; January 27, St. Sava is a non- working day for members of the Serbian community (Zakon za praznicite na Republika Makedonija, 1998; Zakon za izmenuvanje na Zakonot za praznicite na Republika Makedonija, 2007).

RELIGIOUS COMMUNITIES AND GROUPS REGISTERED IN THE REPUBLIC OF MACEDONIA

According to the register, 15 churches, 7 reli-gious communities and 7 religious groups have been registered in the Republic of Macedonia.

In terms of religious demography, the official census from 2002 shows that the Macedonian Or-thodox Church has approximately 1,300,000 believ-ers, which amounts to 65 % of the country’s popula-tion. Less than 2 % of the total population is from other Christian communities, including the Catho-lic Church (about 7,000 believers), United Method-ist Church (about 1,300 believers) and the Seventh - day Adventist Church (about 500 believers).

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The second biggest community is the Islamic Religious Community of the Republic of Macedo-nia with about 674,000 believers, which means that Muslims amount to approximately one third of the entire population (Jahangir, 2009).

In the register run by the Commission for Re-lations with Religious Communities and Religious Groups such as churches in the Republic of Mac-edonia, the following churches have been registered: Macedonian Orthodox Church – Ohrid Archbish-opric; Catholic Church in the Republic of Macedo-nia; Evangelist-Methodist Church in the Republic of Macedonia; Christian Adventist Church (Seventh-Day Church of Adventists) in the Republic of Mac-edonia; Christian Adventists Church in the Repub-lic of Macedonia; Christian Baptist Church „Joyful News“; Evangelist-Congressional Church; New Ap-ostolic Church of Macedonia; Evangelical Church in the Republic of Macedonia; Christian Center in the Republic of Macedonia; the Church of God in the Republic of Macedonia; God’s voice Chris-tian Church; Christian Church of Good Tidings in the Republic of Macedonia; Apostolic Reformed Church in the Republic of Macedonia; Church of Jesus Christ of Latter-Day Saints in Macedonia;

Religious communities that have been entered into the public register include the following: Islamic Religious Community of the Republic of Macedonia; Jewish Community of the Republic of Macedonia; Jehovah’s Witnesses – Christian Religious Commu-nity; Holy Seat and Crown of the Islamic Erenleric Tarikat Religious Community in Macedonia; Sathya Sai Center – Skopje; Vaishna Religious Community ‘Iskon’ –Macedonia; Great Ancient Christian Com-munity- Universal life.

There are seven religious groups registered in the Republic of Macedonia: Christian Church Word of Hope; Seventh-Day Adventist Reform Movement; Christian movement New Hope; Kaderic religious group- Jennet; Free Evangelical Church – Good tid-ings; Ehlibejt Bektashi Religious group in Macedo-nia; Christian Church – Oasis in RM; Ehli Sunnet Vel Dzemat.

There is an assumed connection between na-tionality and religion in the Republic of Macedo-nia. Namely, the majority of Orthodox believers are ethnic Macedonians, whereas the majority of the Muslims are ethnic Albanians. If you consider this from a constitutional perspective, the majority of Orthodox believers are ethnic Macedonians and most Serbs and Vlachs who live in the Republic of

Macedonia. On the other hand, Muslims are usually Albanians who live in the Republic of Macedonia, as well as the Turkish, Roma and Bosnian people. According to certain census statistics, atheists make up less than 1 % of the population.

CONCLUSION

The Republic of Macedonia is a multi - ethnic, multicultural and multi-religious country which, from a normative-legal aspect, respects religious differences and freedom of religion i.e. belief.

Although nationality and religion are basically two different identities, they often overlap here, thus members of one church or religious community are considered to be members of a certain community i.e. nationality.

According to their capacity and influence, the members of the Orthodox religion, personified through the Macedonian Orthodox church – Ohrid Archbishopric and the Islamic Religious Commu-nity are dominant both in the field of religious doc-trines and the social life in general. However, there are additional 14 churches, 6 religious communities and 7 religious groups in the country, which func-tion more or less successfully and without any ob-stacles.

Nevertheless, if the general assessment of free-dom of religion is positive, the legal system provides framework for freedom of religion and belief. The Republic of Macedonia was monitored during 2009 by the UN Human Rights Council, and an official report was submitted to the General Assembly.

Freedom of religion is currently and is likely to be in the future basically in correlation with the entire relation of the community, in particular the interaction of the relation people-people, Christi-anity-Islam.

REFERENCES

Amandmani na Ustavot na Republika Makedonija (2001) Služben vesnik na RM. br. 91/01 [online]. Available from: http://www.slvesnik.com.mk/Issues/4565B8A8CCA245AC99E52A0EE60B3FCD.pdf [accessed 1 Sep-tember 2012]. (in Macedonian)

European Convention for the Protection of Human Rights and Fundamental Freedoms. Council of Europe [on-line]. Available from: http://conventions.coe.int/Trea-ty/Commun/QueVoulezVous.asp?NT=005&CL=ENG [accessed 21 June 2012 ].

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Frčkoski-Danilov, Lj. (2005) Megunarodno pravo za pravata na čovekot. 2. izd. Skopje: Magor. (in Ma-cedonian)

Frčkoski Danilov, Lj. (2007) Pregovaranje vo konflikti na identiteti. Skopje: Templum. (in Macedonian)

International Covenant on Civil and Political Rights. OHCHR [online]. Available from: http://www2.ohchr.org/english/law/ccpr.htm [accessed 25 August 2012].

Jahangir, A. (2009) Report of the Special Rapporteur on freedom of religion or belief. United Nations. Hu-man Rights Council [online]. Available from: http://www.sacw.net/IMG/pdf/G0910462.pdf [accessed 9 June 2012].

Murdok, Dž. (2008) Sloboda misli, savesti i veroispove-sti: vodič za primenu člana 9 Evropske konvencije o ljudskim pravima : priručnik o ljudskim pravima. Beograd: Savet Evrope, Kancelarija u Beogradu. (in Serbian)

Odluka na Ustavniot sud na Republika Makedonija, U br. 104/2009 od 22 septemvri 2010 godina (2010)Služben vesnik na RM. br. 132/10 [online]. Avail-able from: http://www.slvesnik.com.mk/Issues/FC3140F7E810C747B3A8230E9D8E21C9.pdf [ac-cessed 2 September 2012]. (in Macedonian)

Parekh, B. (2000) Rethinking Multiculturalism: cultural diversity and political theory. Cambridge, MA: Har-vard University Press.

UN Declaration on the Elimination of All Forms of In-tolerance and of Discrimination Based on Religion or Belief 1981. United Nations [online]. Available from:

http://www.un.org/documents/ga/res/36/a36r055.htm [accessed 6 September 2012].

UN Universal Declaration of Human Rights. United Na-tions [online]. Available from: http://www.un.org/en/documents/udhr/index.shtml [accessed 3 Sep-tember 2012].

Ustav na Republika Makedonija (1991)Služben vesnik na RM. br. 52/91 [online]. Available from: http://www.slvesnik.com.mk/Issues/2D608B9363555A42AA3D7A97CD4811DE.pdf [accessed 1 September 2012]. (in Macedonian)

Zakon za izmenuvanje na Zakonot za praznicite na Re-publika Makedonija (2007) Služben vesnik na RM. br. 18/07 [online]. Available from: http://www.sl-vesnik.com.mk/Issues/0708C07F60F4964493F94FD68E286F61.pdf [accessed 6 September 2012]. (in Macedonian)

Zakon za organizacija na rabota na organite na držav-nata uprava (2000) Služben vesnik na RM. br. 58/00 [online]. Available from: http://www.slvesnik.com.mk/Issues/C0C662559E3B4D6481A15690025F729E.pdf [accessed 15 June 2012]. (in Macedonian)

Zakon za pravnata položba na crkva, verska zaednica i religiozna grupa (2007) Služben vesnik na RM. br. 113/07 [online]. Available form: http://www.slve-snik.com.mk/Issues/B73B1AE48C6A854D9F63E-CE819984E43.pdf [accessed 9 June 2012]. (in Ma-cedonian)

Zakon za praznicite na Republika Makedonija (1998)Služben vesnik na RM. br. 21/98 [online]. Available from: http://www.slvesnik.com.mk/Issues/5574FDF10D4E4775ADA85C15530AB507.pdf [accessed 1 September 2012]. (in Macedonian)

received: 07.09.2012. Correction: 25.09.2012.

Accepted: 05.10.2012.

PRAVNI OKVIR SLOBODE VEROISPOVESTI U REPUBLICI MAKEDONIjI

Rezime: Garancija verskih sloboda i njena regulacija u okvirima međunarodnih i regionalnih pravnih instrumenata, bez sumnje je jedan od temelja svake savremene demokratije. Ipak eleboracija slobode savesti i veroispovesti od nesumnjive je važnosti u okvirima njenog tretmana od strane pozitivnog pravnog sistema, odnosno Zakona i Ustava koji su glavni opredeljivači koncepta uređivanja svake države.Verska ubeđenja imaju mileniumski karakter i njihovi počeci utemeljeni su ne samo u ljudska bića,već i i same zajednice pa i u državama. Republika Makedonija kao i ostale države koje proizlaze iz zajedničke Jugoslovenske federacije imaju dva perioda uređenja po pitanjima verskih sloboda, odnosno slobode savesti i veroispovesti.Na bazi opštopoznatog koncepta odvojenosti religioznih osjećaja od držav-no-pravnog sistema, koji je bio praktikovan u bivšoj zajedničkoj federaciji,po osamostaljenjem u Republiku Makedoniju razvija se jedan drukčiji, pre svega simbiotski spoj države sa dvije najveće verske zajednice. Država pokušava,manje ili više uspešno da menagira sa ovim veoma osetljivim pitanjima koje su temeljni princip ljudskih prava i sloboda.

Ključne reči: veroispovest, sloboda savesti, Ustav, Zakon, crkva, verska zajednica.

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INSTRUCTIONS FOR AUTHORS

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Manuscripts should be typed in English (standard British English) with 1.15 spacing in A4 format leaving 2.5 cm for margins. The template is available here. Manuscript elements:

1. Title page with:1. title (and short title)2. name(s) of author(s)3. name and address of workplace(s) – affiliation(s)4. personal e-mail address(es)

2. Abstract3. Keywords4. Text5. Reference lists6. Tables (each on a separate page)7. Figures (each on a separate page).

Each of these elements is detailed below.

1. TITLE PAGE

1.1. Title (and short title) We suggest the title should be relatively short but informative. If a long title is necessary, please

prepare an optional short title.1.2. Name(s) of author(s) A list of all authors of the paper should be prepared. We need full first name and full last name.

Initial(s) for middle name(s) is optional.1.3. Name and address of workplace(s)- affiliation(s) Authors' affiliations should be indicated in this section. Either endnote or footnote are not

recommended.1.4. Corresponding author’s e-mail address One e-mail address is needed. It will be used as the corresponding author's email address in

all contacts with the authors.

2. ABSTRACT

An abstract must accompany every article. It should be a brief summary of the significant items of the main paper. The abstract should give concise information about the content of the core idea of your paper. It should be informative and not only present the general scope of the paper but also indicate the main results and conclusions. The abstract should not normally exceed 200 words. It should not contain literature citations or allusions to the tables or illustrations. All non-standard symbols and abbreviations should be defined. In combination with the title and keywords, the abstract is an indicator of the con-tent of the paper. Authors should remember that online systems rely heavily on the content of titles and abstracts to identify articles in electronic bibliographic databases and search engines. They are therefore requested to take great care in preparing these elements.

3. KEyWORDS

List of keywords proposed by the authors, separated by commas. Up to 5 key terms can be selected. We would suggest to avoid repeating the title.

SINGIDUNUM J 2012 Instructions for authors

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4. TEXT

General rules for writing: ◆ use simple and declarative sentences, avoid long sentences, in which the meaning may be

lost by complicated construction; ◆ be concise, avoid idle words; ◆ make your argumentation complete; use commonly understood terms; define all non-

standard symbols and abbreviations when you introduce them; ◆ Latin words, as well as the names of species, should be in italic, as for example: i.e. or e.g. ◆ explain all acronyms and abbreviations when they first appear in the text.

Generally a standard scientific paper is divided into: ◆ introduction, ◆ main text, ◆ conclusion.

Footnotes/Endnotes/Acknowledgements: We encourage authors to restrict the use of footnotes. If necessary, please make endnotes rather than footnotes. Information concerning research grant support or the assistance of colleagues should appear in a separate Acknowledgements section at the end of the paper, not in a footnote.

5. REFERENCE LIST

A complete reference should give the reader enough information to find the relevant article. Please pay particular attention to spelling, capitalization and punctuation here. Completeness of references is the responsibility of the authors. Please avoid references to unpublished materials, private communication and web pages. The surname of the author and the year of publication appear in parentheses after the citation, for example (Fisher, 2010). If more than one publication by the same author appear in one year, they must be distinguished by an a, b, etc., for example 2001a, 2001b. In case of quoting the actual words of another author, the page number should be provided, e.g. (Hollard, 2010, p.23). If the name naturally occurs in the sentence, only the year is given in parentheses, e.g. “Benoliel (1999) thinks…” If there are two authors, the surnames of both should be given (Fisher and Hollard, 2009). If there are more than two authors, the surname of the first author only should be given, followed by et al. (Wilson et al. 2008). However, full names of all authors should be given in the list of references. The original journal title is to be retained in the case of publications published in any language other than English (please denote the language in parenthesis after the reference in the Reference list).

A complete reference should comprise the following: ◆ Reference to a book:

Mercer, P.A., Smith, G. (1993) Private viewdata in the UK. 2nd ed. London: Longman. ◆ Reference to a contribution in an edited book:

Jones, J.L. (2006) Software development. In: Lawson, F., ed. Annual review of software develop-ment. New York, NJ: Sage, 400-430.

◆ Article in a journal:Stein, D. (2007) The Bottom Line. Sales & Marketing Management. 159 (9), 11-26.

◆ Online sources - a book:Mercer, P.A., Smith, G. (1993) Private viewdata in the UK. 2nd ed. London: Longman. Available from: http://site.ebrary.com [accessed 29 June 2011].


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◆ Online journal article:Stein, D. (2007) The Bottom Line. Sales & Marketing Management. 159 (9), 11-26 [online]. Avail-able from: http://emarketing.com [accessed 10 February 2010].

◆ Web page:Cross, P., Towle, K. (1996) A guide to citing internet sources. Poole: Bournemouth University [online]. Available from: http:/www.bournemouth.ac.uk/servicedepts/lis/LIS_Pub/harvardsystint.html [accessed 10 March 2009].

◆ Web page (no author):Tourism in Serbia. Wikipedia [online]. Available from:http://sr.wikipedia.org/wikiTurizam_u_ Srbiji [accessed 8 July 2010].

◆ Conference paper:Stone, J. (2001) Electronic spyware. 7th International online information meeting, 2-4 January 2001 Manchester. Oxford: New Information, 200-220.If applicable, write the name of the editor of proceedings:Stone, J. (2001) Electronic spyware. In: Gosselin, J.H., ed. 7th International online information meeting, 2-4 January 2001 Manchester. Oxford: New Information, 200-220.

◆ PhD thesis:Silver, V. (2008) Internal Communication. Thesis, (PhD). Singidunum University.

Tables and figures and/or schemes should not be embedded in the manuscript but their position

in the text indicated. In manuscript tables and figures should follow the text, each on a separate page.

6. TABLES

Authors should use tables to achieve concise presentation or where the information cannot be given satisfactorily in other ways. Tables should be prepared with the aid of the Word table function, without vertical lines. The minimum size of the font in the tables should be 10 pt. Tables should not be incorporated as graphical objects. Styles and fonts should match those in the main body of the article. Tables should follow the text on the end of the manuscript and should be numbered consecutively using Arabic numbers and their position in the text should be indicated. Each table should have an explanatory caption which should be as concise as possible.

7. FIGURES

Authors may use line diagrams to illustrate theses from their text. The figures should be clear, easy to read and of good quality. Styles and fonts should match those in the main body of the article. Lettering and lines should be of uniform density and the lines unbroken. Axis labels should be in bold face. Units should be placed next to variables in parentheses. Figures should follow the text on the end of the manu-script and should be numbered consecutively using Arabic numbers and their position in the text should be indicated.

Mathematical equations should be embedded in the text. Complex equations should be prepared with the aid of the Word Equation editor.

All equations must be numbered, Arabic numbers, consecutively in parenthesis at the end of the line, as presented:

n

k kk

NSV NP a=

= ⋅∑0


CIP - Каталогизација у публикацијиНародна библиотека Србије, Београд

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SINGIDUNUM Journal of Applied Sciences : economics, management, tourism, information technology and law / editor-in-chief Milovan Stanišić. - Vol. 9, No. 1 (2012)- . - Belgrade (Danijelova 32) : Singidunum University, 2012- (Loznica : Mladost grup). -28 cm

Dva puta godišnje. - Je nastavak: Singidunum revija = ISSN 1820-8819ISSN 2217-8090 = Singidunum Journal of Applied SciencesCOBISS.SR-ID 188621836