Current situation of Bulgarian banking sector and its place in the economy

Generally, financial intermediation in Eastern Europe is very low. Banks are the main financial intermediary institution in Bulgaria, due to the fact that non-banks are still weak plus that the capital market is also underdeveloped. Banking is the dominant sector in Bulgarian financial market with some 35 commercial banks and total assets of about 14bln BGN as of September 2002 (BNB est.); next there is small but growing insurance sector and underdeveloped stock exchange (trading only small number of shares), some undersized pension funds and several finance houses. This leads to the financials sector inability to provide the capital necessarily for businesses to develop. Reason for this is the perception of high risk in the financial market. The root for this problem lies in the fact that the Bulgarian financial market is still recovering from almost half a decade of bank mismanagement and the severe economic crisis in 1996-1997, when the banking sector experienced one of the worldâ€

First, the concentration of the banking sector is considerable. The top seven banks own more than 70% of the total assets and also control the largest market share. This concentration eventually has to lead to mergers in the banking sector. Although, in the recent years this expected bank consolidation is not taking place it is very likely to happen in the future, as the large banks increase the pressure on the small ones and competition gets fiercer in the sector. Many small businesses are not considered credit worthy and the few big borrowers that are creditable become primary area of competition among the big creditors. Small and middle-sized banks will have to concentrate on specific segments and market niches, which are generally overlooked by the large competitors.

In the years to come the banking sector will witness heightened competition and increased emphasis on marketing in an attempt to retain market share and improve profitability. Bulgarian banks can be criticized for their lack of attention to marketing and the customer. However, the current trends show that more and more banks are realizing the advantages of a customer-oriented approach in marketing their products to both individuals and large corporations. In this way determining the future of the Bulgarian banking system.

™s worst financial crises. Nevertheless, in the last five years Bulgaria witnessed quick turn in achieving financial stability, well-regulated financial markets and institutions and implementing concrete economic transformation program. Bulgaria, as a member for accession in the European Union, also has started adapting the legal framework to that of the EU. Adjustment to a currency board environment is also crucial for the financial sector.

Second, the bank sector privatization in Bulgaria has nearly been completed in the last two years with only one major bank that is still state-owned – DSK. The privatization of the banks led to very high share of the baking system being owned by foreign investors (more than 75%). The foreign financial institutions that are investing in the sector are expected to bring the modern know-how of banking management to the Bulgarian financial mar

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