Singidunum Journal of Applied Science 2012 Vol 9 No 2 by Singidunum University

Vol. 9 No. 2

www.jou rnal. singidunum . ac . rs

Vol. 9 No. 2 Publisher: Singidunum University

Editorial Board: Professor Milovan Stanišić, Singidunum University Emeritus Slobodan Unković, Singidunum University Professor Alexandar Angelus, Lincoln University Professor Michail Brodsky, Lincoln University Professor Krunoslav Čačić, Singidunum University Professor Francesco Frangialli, UNWTO Professor Gunther Friedl, Technische Universität München Professor Karl Ennsfellner, IMC University of Applied Sciences, Krems Professor Verka Jovanović, Singidunum University Professor Milan Milosavljević, Singidunum University Professor Olivera Nikolić, Singidunum University Professor Budimir Stakić, Singidunum University Professor Mladen Veinović, Singidunum University Professor Jovan Popesku, Singidunum University Professor Zoran Jeremić, Singidunum University Associate Professor Christine Juen, Austrian agency for international mobility and cooperation in education, science and research, Wien Associate Professor Anders Steene, Södertörn University, Stockholm/Hudinge Associate Professor Miriam Jankalová, University of Žilina Associate Professor Bálint Molnár, Corvinus University of Budapest Associate Professor Vesna Spasić, Singidunum University Associate Professor Goranka Knežević, Singidunum University Assistant Professor Konstadinos Kutsikos, University of the Aegean, Chios Assistant Professor Theodoros Stavrinoudis, University of the Aegean, Chios Assistant Professor Patrick Ulrich, University of Bamberg Assistant Professor Marcin Staniewski, University of Finance and Management, Warsaw Assistant Professor Nemanja Stanišić, Singidunum University ISSN: 2217-8090

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CONTENTS

1-8

9 - 13

Role of social media in Serbia Uloga društvenih medija u Srbiji Ivan Bauer 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 environment Forenzička istraga "trojanske odbrane" u virtuelnom okruženju Gojko Grubor, Nebojša Ivaniš

21 - 26

The effects of cross-border tourist purchases on retail performance Efekti prekograničnih kupovina turista na performanse u maloprodaji Radojko Lukić

27 - 32

Estimating the monetary policy reaction function in Egypt Procena funkcije reakcije monetarne politike Egipta Hany M. Elshamy

III

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 companies Analiza efikasnosti kapitala u kompanijama u Srbiji Nemanja Stanišić, Tijana Radojević, Vule Mizdraković, Nenad Stanić

50 - 62

Implementation of Basel II standards in commercial banks in B&H Primena standarda iz Bazel II sporazuma u poslovnim bankama u BIH Radomir Šalić

63 - 73

Formal Approach to a Web Information System Based on Story Algebra Formalni 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 Macedonia Pravni okvir slobode veroipovesti u Republici Makedoniji Saša Dukoski, Svetlana Veljanovska

80 - 83

Instructions for authors

Singidunum journal 2012, 9 (2): 1-8 ISSN 2217-8090 UDK 32.019.5(497.11) Original paper/Originalni naučni rad

ROLE OF SOCIAL MEDIA IN SERBIA Ivan Bauer* Singidunum University, Faculty of Economics, Finance and Administration 43 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 customers. 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 technologies 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 aforementioned 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 different 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.

INTRODUCTION The main characteristic of the XXI century is the technological revolution in the field of communication driven by breakthrough in the areas of mobile telecommunication and broadband in* E-mail: ibauer@fefa.edu.rs

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

ternet.These telecommunication accomplishments have made new communication techniques possible among people, all the time and in every place. Unfortunately, new possibilities have brought new challenges, as well. New means of communication which, almost immediately, have become very popular and 1

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

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 communication very difficult for marketers in the XXI century. The only acceptable solution (for both parties) is reaching consensus among marketers and customers 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 commercial 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 getting more and more keen on finding new ways to avoid all kind of commercial information they get exposed to throughout the day. Therefore, traditional 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 surrounding cannot be controlled. In order to solve this problem, marketers must change their perception 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 conversations 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 conversations, 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 context, 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 discussing 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 Company’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 internet service than e-mail, ◆◆ social web is approaching 75% of internet users 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 unanimous: ◆◆ 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 customers and brands. However, social media have its shortcomings. Unlike traditional media where communication is

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

controlled by marketers, social media interaction is “Starfish model” (Evans, 2008). Namely,this model (see Figure 1) puts a participant (customer) at the uncontrollable. Social web has been built on concenter of undergoing “social activities”,where he is versations, but those discussions, according to Evabout to make a conversion as a result of interaction ans (2008, p.132), “do not belong to marketers, but with, or exposure to the surrounding social media instead belong to someone else.” That someone else ecosystem,which is divided into three main categois neither “Big brother”, nor some defined person/ ries: group – simply, the social web does not belong to anyone particular and it belongs to everyone. The ◆◆ Social platforms, message that marketer creates stops belonging to ◆◆ Social content, and him the minute it leaves his hands because in social ◆◆ Social interactions. media, unlike traditional media, content is continiSocial platforms include social networks (Faceously recreated (redone) beyond anybody’s control. What companies can control is experience customers have had with their porducts/services, as well as companies’ behaviour on the social web. Essence replaces form – messages are less important, relationship with customers and customers’ 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 marketers, considering numerous possi- Figure 1. Starfish model of social media Source: Evans, D. (2008) bilities, as well as risks that social media presence (or absence) genbook, MySpace, LinkedIn etc.), white-label social erates.What calls for caution of marketers not very networks (e-communities, forums...) and wikis inclined to risk is: (Wikipedia and similar collaborative, collective ◆◆ unknown and hostile environment, platforms that drive consensus around ideas). ◆◆ absence of reliable metrics, and Everything created and shared by social media users (no matter if they are companies or custom◆◆ still more or less predictable results of tradiers), and then put into circulation on the social web, tional media marketing campaigns. represents social content. Photos, blogs, microblogs Even though “magic formula”, which will forever (Twitter), audio and video podcast, ratings and reunite marketers and social media, has still not been views, all belong to this group. discovered, more and more companies are workSocial interactions make sense of the growing ing on it very thoroughly. More than three -fourths quantity of social information which is threatening of Fortune 1000 companies use some kind of social to overload consumers in one moment. In order to media marketing, and their number, as well as activprevent that, social media users have social interacity volume grow every day. tions at their disposal, which helps them organize In order to make social media marketing pro(social) information they want to gather. grams planning much easier, it is recommended to split social media channels into functional groups. THE CURRENT SITUATION IN SERBIA 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 In order to assess current state of social media convenient way of dividing social media into groups marketing in Serbia and (try to) predict its future is the proposition given by Robert Scoble, called the development, a research study has been conducted. 3

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As a research method, the author used independently developed questionnaire. When choosing participating companies, the author’s main focus was on their leadership and/or management leadership 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 attempted 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: χ2 =∑

( f o − f t )2 ft

(1)

where fo represents obesrved frequencies2, and ft represents 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 statistically significant difference between observed and theoretical frequencies. Vice versa, if summary is less than 0.05 (p-value < 0.05), we can say that statistically 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, social and other factors. The first important indicator of the Serbian social media marketing situation, in comparison to global tendencies analized in this paper, has been one of the most significant indicators of “social” behaviour – following active participation in the discussions 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 companies, 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 giving very strong consideration to entering diverse social 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 speaking, 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 characterized 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 impressive. One of the interesting questions posed to the interviewed parties refers to the ways in which they grade results of their Facebook marketing campaigns. The results have shown almost equal dispersion 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 properly 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 accordance with the results of Ipsos Strategic Marketing (2011) study which shows that 51% of Serbian Facebook users join fan clubs/groups. Another extremely 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 interviewed companies have used this marketing tech5 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.

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

nique, just to mention some of the examples: “It’s One of the determinants of “social behaivour” is a degree of integration of social media markettime for gifts” (“Vreme je za poklone”) by Telecom ing techniques. Serbian marketers, participants in Serbia, “Leasing calculator” by VB Leasing Serbia, the study, do integrate their social media marketing “Loan settled and money in the pocket” (“Dug sit i techniques8 in majority of the cases, 77% of them, pare na broju”) by Societe General Bank Serbia, etc. to be precise. Information that might be very helpTwitter is no longer the „privilege“ of the marful in assessing the attitude of Serbian marketers keteers from the developed countries. Almost 40% towards social media marketing is the percentage of the interviewed Serbian companies follow their of companies having social media marketing as an competitors on Twitter. This data tells us that modintegral part of their overall marketing budget, and, ern marketing techniques in developing countries, even more helpful, percentage of companies planin this case Serbia, are converging towards global ning to increase investments in social media martrends in the area. Aprroximately 83% of companies keting in the following year (see Table 1). The data participating in the survey said that they use Twitgathered in the survey tells us that almost half of the ter – 52% of them do it passively, by observing, and interviewed companies have social media marketing 31% actively, by tweeting. 13% of the interviewed budget, while majority (almost two thirds) of the companies tweet on regular basis, which signifies companies even plan to increase their social media that they post tweets at least once a day. Some 43% marketing budget spendings in the years to come. of company tweets are often answered by audience, which means that companies’ target group recognizes the value of the tweets. Retweets increase in the years are, as expected, more rare – “only” 29% of for this year to come company tweets get retweeted. Even though budget this may not look as such a good result, it 47,83% 60,87% actually is, because retweeting is not something that tweeters like doing. When they useful extremely important importance for retweet something, it means that they find it marketing mix very valuable and/or their source respectful. 60,87% 34,78% Almost half of the companies (43,5%), Table 1: Importance of Social Media marketing taking part in the interview and being prepared for this paper, have presented their companies on Wikipedia, which is not a very bad Another information which is very important for result for a country postitioned not so high on the assessing the attitude towards social media marketglobal telecommunication technology development ing among Serbian marketers comes as an answer list. Nevertheless, it remains inexplicable why othto a simple question: “Do you consider social media ers have not done the same thing when it is a very marketing: extremely important, useful or irrelevant simple task which can do a lot for the promotion of part of marketing mix?” Results showed that Serbian leaders see social media marketing as a very importhe company and its values in social media, and in tant part of marketing mix (see Table 1). the virtual world, in general. Statistically significant difference between results Even though LinkedIn assumes a very high posifrom the survey gathered from production compation on the preffered social media list among Sernies and companies that provide services has been bian leaders, they tend to use it more as a vehicle notified in a small amount of cases. The most nofor self-promotion than as a social media marketing table example is the use of Facebook fan club and/ tool. That conclusion can be drawn from the followor group as a social media marketing tool. The coning results: clusion arising from this analysis is that production ◆◆ only 10% of the interviewed companies have companies are more dedicated to creating fan club recruited candidates for vacant positions in pages and/or groups on Facebook than companies their companies through means provided by that provide services. Further analysis has shown LinkedIn, that production companies put more effort into up◆◆ whereas 29% of Serbian leaders take active dating content on regular basis in their fan clubs/ participation in LinkedIn’s “Answers” section 8 which shouldn’t be confused with the integration of social trying to improve their professional image. media marketing and traditional marketing techniques. 5

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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 reaching 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 Serbian social media marketing situation, it can be said that the presence of Serbian companies in social media 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 notified 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 professor Christine Moorman from the Duke University’s Fuqua School of Business, putting them into the Serbian context: Serbian “marketers think social media marketing is here to stay and will play an increasingly important role in their work in acquiring and retaining 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 focus 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 techniques tells us that social media marketing in Serbia is, at the moment, dominant in the phase of testing. However, encouraging results that have shown major commitment to increase social media marketing budgets in the years to come, promise not only a better future for social media marketing practitioners in 9

especially during financial crisis.

the nearest future, but also further growth of importance of social media marketing for overall marketing programs in the Serbian companies. In order to promote the continuing growth of importance 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 promises 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 behalf, 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 participating 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 marketing communication. Only proactive approach by all interested parties can guarantee forecasted bright future for the social media marketing in Serbia.

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

uloga društvenih medija u srbiji

Rezime: Vreme jednosmernih marketing komunikacija polako prolazi i tehnike tradicionalnog 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) budućem 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 tehnologija 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, sagledavanju značaja primene i perspektivama tehnika marketingana u društvenim medijima u Srbiji. Za ostvarenje postavljenih ciljeva korišćeni su različiti istraživački metodi – od posmatranja i metode studije slučaja do ankete i intervjua.

Ključne reči: marketing u društvenim medijima, tradicionalni marketing, integrisane marketing komunikacije, društveni mediji, perspektive. Received: 12.04.2012 Correction: 18.06.2012 Accepted: 20.09.2012

Singidunum journal 2012, 9 (2): 9-13 ISSN 2217-8090 UDK 005.346:336.71 Original paper/Originalni naučni rad

Customer Orientation and Business Performance in Community Banks: A five year comparison John Fitzgerald1, Gerald Sullivan1, Borivoje Đokić1,* Keiser University 1500 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 diminishing 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 orientation 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 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 level not enjoyed by their competitors, allows for their survival today.

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 equities. In addition, the financial regulators are demanding that capital be increased thus putting pressure to * E-mail: boris.djokic@gmail.com

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

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 customer 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. 9

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Prior to 2006, studies have shown an inconsistent relationship between market orientation and enhanced business performance. Numerous researchers 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 relationship between two of the three factors and levels of profitability, while other studies concluded there was no relationship. This has led the authors to conclude 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 diminishing 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 relationship to their business performance had changed. The findings of the study will provide insight into current banking perceptions and provide an overview of those changes from 2006 to 2011.

Problem and its Background For the purposes of this study market orientation is defined by Narver and Slater (1990). From an extensive review of the literature, Narver and Slater (1990) inferred that there are three behavioral 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 profitability. 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 orientation 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 10

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” (Narver and Slater, 1990, p. 22). This study examines the relationship between market orientation, its three behavioral components and enhanced business performance, as measured by return on assets in the community banking segment of the commercial banking industry. The investigators looked at the three behavioral components of market orientation. These are: customer orientation, competitor orientation and inter-functional coordination. Based on these components of customer orientation four hypotheses were developed. H1 There is a positive and significant relationship between market orientation and return on assets. 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 return 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 reducing 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 directories published by the various state bankers’ associations. 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

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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.

-10

-25%

Tn.

181

139

-17

122

-33%

Va.

-9

-28%

Total by State

1008

695

-77

618

-39%

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

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

Questionnaire Design and Scaling

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

A self-administered modified twenty question Narver and Slater (1990) customer orientation surAnalysis vey instrument was utilized for the study. The questionnaire used a scale of 1 to 7, where 1 represented In 2006, descriptive statistics and other statis“not at all” and 7 represented “to an extreme extent”. tics were analyzed, which comprised several steps. Additionally, interviewees were asked a matrix of Strong linear correlations were found between open ended questions about their respective banks market orientation and return on assets in the scale total assets, total capital, and profit after taxes for a range surrounding 4.5. In 2011, this number was three year period. These figures were obtained or dereduced to 4.0 on a 7 point scale. 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 compensation 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 questionnaires resulted in 17.5% response rate. A total of 816 of the same survey questionnaires were sent in 2011 via US Postal Service first class mail with the same direc- Customer orientation comparison 2006 to 2011 11

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Results

Customer Orientation The 2006 results indicated that beyond a certain point, the additional investment in customer orientation 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 considerable (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 customer 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 dilution of earnings and ownership that this option affords. Second, the bank can increase its retained earnings (i.e. its capital accounts), by generating more earnings via operational efficiencies and effectiveness. This can be accomplished by driving away those customers whose total banking relationships are either not profitable or are minimally profitable. This reduction in customer accounts to be serviced allows for a reduction in staffing levels, along with all other expenses 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 leverage, 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 business 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 survey show no positive relationship between competi12

tor orientations and enhance business performance. This is possible because banks and bankers are more concerned with an internal orientation and less concerned with the external environment as it relates to competing banks. Anecdotally, on several of the returned Survey Instruments, the responding executive 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 Discipline and enhance business performance. This consistency of the findings would seem to be even more evident as the internal Inter-functional capabilities 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 combining of corporate cultures, software systems, human 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 orientation in the 2006 time frame, were better positioned 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 orientation and its determinants: An empirical analysis. European Journal of Marketing. 33 (11/12), 1003-1037. Chang, T.Z., Chen, S.J. (1998) Market orientation, service quality and business profitability: A conceptual model and empirical evidence. The Journal of Services Marketing.

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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 Methods. 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) Corporate culture, customer orientation, and innovativeness in Japanese firms: A quadrad analysis. Journal of Marketing. 57 (1), 23-27. Federal Deposit Insurance Corporation (2003) A Statistical Profile of the United States Banking Industry. Washington, D.C.: Federal Deposit Insurance Corporation. Greenley, G.E. (1995) Market orientation and company performance: Empirical evidence from UK Companies. British Journal of Management. 6 (1), 1-13. Han, J., Kim, N., Srivastava, R. (1998). Market orientation 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 Academy of Business. 11 (1), 297-303. Jaworski, B.J., Kohli, A.K. (1993) Market orientation: Antecedents 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

Fitzgerald J., et al.  Customer orientation and business performance

of its antecedents and impact on performance. Journal of Marketing. 69 (2), 24-41. Kohli, A.K., Jaworski, B.J. (1990) Market orientation: The construct, research propositions, and managerial implications. Journal of Marketing. 54 (2), 1-18. McNaughton, R.B., Osborne, P., Imrie, B.C. (2002) Market-oriented value creation in service firms. European Journal of Marketing. 36 (9/10), 990-1002. Narver, J.C., Slater, S.F. (1990) The effect of a market orientation on business profitability. Journal of Marketing. 54 (4), 20-35. Noble, C., Sinha, R., Kumar, A. (2002) Market orientation and alternative strategic orientations: A longitudinal 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, customer relationship management, customer knowledge management and business performance. Management 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 influence 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 environment moderate the market orientation performance relationship? Journal of Marketing. 58 (1), 46-55. Sullivan, G., Fitzgerald, J., Đokić, B. (2011) Market orientation and business performance: The point of diminishing return in community banks. Singidunum revija. 8 (2), 01-04.

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 performanse 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. Received: 12.03.2012. Correction: 14.04.2012. Accepted: 08.08.2012.

Singidunum journal 2012, 9 (2): 14-20 ISSN 2217-8090 UDK 343.983:004.056.53 Original paper/Originalni naučni rad

FORENSIC INVESTIGATION OF "TROJAN DEFENSE" IN VIRTUAL ENVIRONMENT Gojko Grubor1,*, Nebojša Ivaniš1 Singidunum University, Department for Informatics and Computing 32 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 information 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.

INTRODUCTION In this paper we tested the case of forensic analysis 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 Computing (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 without 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 establishing good communication between service providers 14

* E-mail: ggrubor@singidunum.ac.rs

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

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 enable easier monitoring of resources in the CC. Authentication 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 malicious 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 sophisticated malware has been generated on Internet in 2011.

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EXPERIMENTAL VERIFICATION OF “TROJAN DEFENSE” IN VM-I

Grubor G., Ivaniš N.  Forensic investigation

Anatomy and trends of Trojan attacks.

Each malware is written in a specific programming language, and the code adjusts to the attack Figure 1 shows the experimental environment. scenario. The attacker considers which method to The physical host is running the VMs which are use for distributing malware to the user. The most domain members. The OSs used in the experiment common scenario is deception by social engineerare Microsoft Windows 7, Microsoft Server 2008 R2 ing. For instance, in an attack scenario, the attacker and Linux. Two physical machines are used with makes a copy of a popular website where he offers the installed Microsoft and Linux OSs. They are not a free branded anti-virus application. Unknowdomain members, and their role is to conduct the ingly, by downloading the application, the user attacks. The domain can be accessed via VPN2 chaninstalls Trojan key logger or a downloader to his nels from the outside. The CA server acts as a root computer. Then, using the root kit technique that certification authority, thus issuing certificates to its conceals the presence of a Trojan, he can attack by subordinate CA servers. Afterwards, the two suboropening the back door. The attacker gets diverse dinate CA servers takeover the roles - role. The role information from the zombified computer, such of TMG Fore Front 20103server is to record the flow as user’s passwords, recording keystrokes (keyloof network traffic as well as a firewall. There is a test gger) or downloading the new malware from the site on the Web server which can be accessed over infected web sites (downloader). Trojan’s program the HTTPS security protocol. The Exchange 2010 code sends the collected information in a form of server holds the electronic mailboxes for messages. an e-mail message or a file to the attacker. DF can Sending, receiving and controlling the mailbox is use the tracking of the e-mail’s path as evidence. possible in two ways: through the Outlook Web AcWith the collected info (username and password), cess, with direct access to the Web site, or through the attacker begins to attack the targeted computer. installing the Outlook application from the MS OfHe escalates privileges to administrator rights. The fice package. attack begins by connecting Trojan’s server component, installed on the victim’s computer, and its client component on the attacker’s computer. In the majority of cases, applications for the attack are written for Linux OS. The stolen user’s identity (user name and password) is used to access the attacked computer. By running certain services, the attacker takes control of the attacked, now the zombified computer. He performs a variety of illegal actions (spam, DoS and Figure 1. Environment for the experimental verification of anti- forensic activity DDoS attacks, extortion of money, etc.) as well 2 VPN - virtual private network – protected channel that is as activities the computer owners are unaware of. used to connect users from remote locations to intranet Many of the Botnet networks are based on zombiand local networks. 3 TMG - Forefront Threat Management Gateway 2010 – sucfied computers, numbering up to 2.4 million of corcessor to ISA Server, has the role of a protector of the inrupt computers, as recorded in China. The attackers ternal network, as well as monitoring of the entire package use publicly available user information. flow into and out of the network with analysis capability. 15

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Grubor G., Ivaniš N.  Forensic investigation

Anatomy of Backdoor. IRCBot.Dorkbot. A Trojan attack According to research conducted by “Bit Defender” 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\filename”. It implements itself in multiple layers of (the) encrypted data. Ntdll.dll file checks whether the attacked computer’s OS is 32-bit or 64-bit, and then generates crc32 table. The crc32table is used for decoding, 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 characters, 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 commands, 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@network_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 _module_file_name_”. Http Send Request A/Http Send Request W option seeks information in the URL string. The goal is to download the login information of some computers to specific sites. First string searches the URL, 16

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 controlled 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 (Figure 2), recorded eicar.zip file during the computer monitoring, the process of monitoring communications between the users of these two machines began. 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 communication. The computer that monitors and receives this file is the destination machine and its IP address is 192.168.99.50. Relying on this information,

Singidunum J 2012  9 (2) 14-20

one can see that they are on the same network domain, 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 timings 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 information, i.e. he can identify and prove the existence of

Grubor G., Ivaniš N.  Forensic investigation

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 Figure 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 Sharkforensic tool recorded the used protocol and that it can perform filtering of the entire traffic. For instance, it can separate only the TCP communication.

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 physical computers (Figure 1) to attack from the outside and through social engineering, passing malware

on the VM. The study found that Trojans were delivered 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. 17

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Grubor G., Ivaniš N.  Forensic investigation

“Trojan defense” by VM owner was proved and DF’s deception was prevented. The attacker uses physical computers (Figure 1) to attack from the outside and through social engineering, passing malware on the VM. The study found that the Trojans were delivered through pictures infected with malware attached 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 forensic 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 becomes 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 information 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 corrupt 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 physical 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 experimentally verified. The greatest risk is in insufficient user’s awareness of the nature and degree of modern malware sophistication. In order to enable effective protection, it is necessary to update the antivirus (AVP) on a daily basis and scan regularly the computer using AVP based on digital signature and heuristic checks of the familiar malware. Ports, previously closed by the AVP, should not be opened, which is a basic measure of protection that many users ignore. 18

This could happen when some third party (site, application ...) asks the user to open a port to download, 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 validity 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 opportunity to gather information from social networks and mimic close friends, relatives, acquaintances, thus committing fraud and crime (for example - distribution 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 portable 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 development of pictures located in a shopping mall.

CONCLUSION The conducted experimental research and analysis verify the fact that the abuse and anti-forensic activities 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 account 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 programming, because the current malware is written in a

Singidunum J 2012  9 (2) 14-20

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 cooperation 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 evidence 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 investigations in the virtual environment can make a significant 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 forensics: 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.esecurityplanet.com/prevention/article.php/3694711/ AntiForensic-Methods-Used-by-Jihadist-Web-Sites. htm [accessed 12 August 2012].

Grubor G., Ivaniš N.  Forensic investigation

Cloud Security Alliance (2009) Security Guidance for Critical Areas of Focus in Cloud Computing V2.1. [online]. Available from: https://cloudsecurityalliance.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 zaštite distribuiranog računarstva. 6. naučni skup sa međunarodnim 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-middle_attack [accessed 2 September 2012]. Mather, T., Kumaraswamy, S., Latif, S. (2009) Cloud security and privacy: an enterprise perspective on risks and compliance. Farnham : O’Reilly. Milosavljević, M., Grubor, G. (2009) Digitalna forenzika računarskih sistema. Belgrade: Singidunum University. (in Serbian) Milosavljević, M., Grubor, G. (2009) Istraga kompjuterskog kriminala : metodološko-tehnološke osnove. Belgrade: Singidunum University. (in Serbian) Security response. Symantec [online] Available from: http://www.symantec.com/security_response/writeup.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/virusencyclopedia/ [accessed 20 September 2012].

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Grubor G., Ivaniš N.  Forensic investigation

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 socijalnog 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 korišćenja 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. Received: 06.09.2012. Correction: 08.10.2012. Accepted: 12.10.2012.

Singidunum journal 2012, 9 (2): 21-26 ISSN 2217-8090 UDK 338.488.3:339.378.2 Review paper/Pregleni nauÄ?ni rad

THE EFFECTS OF CROSS-BORDER TOURIST PURCHASES ON RETAIL PERFORMANCE Radojko LukiÄ&#x2021;* University of Belgrade, Faculty of Economics 6 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 characteristics, 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, exchange 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.

Introduction With all the foregoing in mind, the primary objective of this study is to survey the literature on the given subject and analyze all aspects of the empirical 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 increasingly 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 economic sizes. For such reasons, the concept of crossborder 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; LukiÄ&#x2021;, 2011). * E-mail: rlukic@ekof.bg.ac.rs

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

Relying on the analysis of the relevant literature and empirical data, this paper seeks to envisage the complex problems of cross-border shopping; primarily, by observing the impact it has on the performance 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 relying on different perspectives, such as cross-border shopping trend, factors that influence the development of cross-border shopping, cross-border shopping 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-border trade as a factor of tourism development, etc. 21

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Lukić R.  The effects of cross-border tourist

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 shopping represents an increasingly important factor for the performance of retail companies, mostly due to the price differentiation and rising poverty of customers 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 hypotheses is review of relevant literature.

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

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 triggers 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, motivational, customer characteristics (micro factors) affect cross-border shopping. Figure 1 presents the analytical model of cross-border purchases. The economic and cultural significance of crossborder shopping in tourism is immense. There are

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Trip Duration:

Lukić R.  The effects of cross-border tourist

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)

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

Factors affecting the purchase as a motive for the journey

The study, relying on the example of cross-border purchases of US-Canada, found that the key motive for tourists was price differentiation; 10% exchange rate appreciation raises the average crossborder 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 differentiated favorable prices, directing them towards other more favorable cross-border retail segments (Chandra, 2011).

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-

Figure 2 - Factors affecting the purchase as a motive for the journey Source: Tömöri, M. (2010) 23

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Lukić R.  The effects of cross-border tourist

Segment

Turnover 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)

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. Length of stay

Reason / motivation for cross-border shopping

one or more nights

same day returns

pleasure

pleasure and economic

economic Figure 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 country 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 belonging to this category. Analysis of the meaning of other fields in the table is similar. During a visit to the United States, Chinese tourists are very interested in purchasing different products, 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. Purchases 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 shoppers in Hong Kong. It certainly has some implica24

tions on strategic operations of global retailers (LIoyd 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.

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Year Till Date Sep 2011 Merchandise

Lukić R.  The effects of cross-border tourist

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)

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%

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

According to the market and financial characteristics, 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 treated as a separate target segment of the retail market. Determinants of cross-border purchases are various. 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-border shopping, it is the online channel that is becoming more and more important. This is quite understandable if we take into consideration a number of advantages it provides compared to other marketing channels of cross-border shopping (price transparency, shopping in any currency during the day and from anywhere, etc.). By keeping the potential customers fully informed, barriers to online cross-border shopping have been reduced to a great extent.Cross-border shopping is one of the multiple 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 effective management of cross-border shopping via the strong control of influential factors, the overall performance of retail companies that render a service to cross-border shoppers can be improved significantly.

References Chandra, A., Head, K., Tappata, M. (2011) Consumer Arbitrage 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-institut.de/download/Shoppingtourismus_short_engl. pdf[accessed 17 March 2012 ].

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Lukić R.  The effects of cross-border tourist

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 motivation 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 CrossBorder Shopping: An Empirical Study. Journal of Hospitality & Tourism Research. 29 (1), 110-133. Leal, A., López-Laborda, J., Rodrigo, F. (2010) Cross-Border Shopping: A Survey. International Advances in Economic 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 maloprodaji. Belgrade: Faculty of Economics, University of Belgrade. (in Serbian) Patrick, P., Florian, S. (2011) Determinants of cross border 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 Tourism Destination. International Business Research Conference [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 ecommerce 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) Online 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 Research. 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.

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 doprinose sve bržem razvoju prekogranične kupovine su brojni, poput diferenciranja cena, kvaliteta, pogodnosti, demografskih i socijalnih karakteristika, 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 pozitivan uticaj na ukupne performanse nacionalne ekonomije.

Ključne reči:

diferenciranje cena, faktori, kupci-turisti, performance. Received: 26.05.2012. Correction: 01.07.2012. Accepted: 03.10.2012.

Singidunum journal 2012, 9 (2): 27-32 ISSN 2217-8090 UDK 338.23:336.74(32) Original paper/Originalni naučni rad

Estimating the Monetary Policy Reaction 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.

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. After 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 * E-mail: hany.elshamy@bue.edu.eg

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

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 increased financial wealth may enhance the consumption and investment spending due to the wealth effect and the balance-sheet effect (Hsieh, 2006). Between July 2004 and March 2005, the government 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, 27

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Elshamy H.  Estimating the monetary policy

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 concerning 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 initiated in 1991, Egypt has relaxed many price controls, reduced subsidies and inflation, cut taxes, and

partially liberalized trade and investment. Manufacturing 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. Agriculture, 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 maintaining a steady increase of GDP and the annual growth rate. The Government of Egypt tamed inflation, bringing it down from double-digit to a single digit. Currently, GDP is rising smartly by 7% per annum due to the successful diversification. Gross domestic product (GDP) per capita based on Purchasing Power 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 capita 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, 2001-2008 Source: Ministry of Economic Development

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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 achieving multiple objectives simultaneously, which were conflicting in several instances (Al-Mashat and Billmeier , 2008). These objectives included attaining high economic growth while maintaining low inflation and preserving a stable exchange rate. The multiplicity of objectives in the presence of increasing capital mobility (which manifested primarily as inflows) made the conduct of an independent monetary 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 operational 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 quantitative and price instruments at different points in time to achieve its multiple objectives, leading to a lack of consistency in monetary management. These instruments 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 quantitative measures adopted by the CBE at various junctures are likely to have played a more important role in the transmission mechanism when compared to price instruments, mainly interest rates. In addition, 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

Elshamy H.  Estimating the monetary policy

instruments as they are expected to be the most effective tool for conducting monetary policy. In addition, inflation targeting relies on a well-functioning and competitive banking system (Al-Mashat and Billmeier, 2008). Only in these circumstances can the interest rate channel become strong and, thus, the most convenient mechanism since the exchange rate channel cannot be relied upon actively. Under IT, the exchange rate is abandoned as the nominal anchor and replaced by an explicit price-stability objective. Being easy to interpret and communicate to the public, interest-rate decisions and the interest rate transmission channel have become important. SchmidtHebbel 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 monetary policy reaction function for Egypt for the period 1970-2007. Moreover, one of the main objectives 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 function 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:

rt = b0 + b1π t + b2 y t , b1 > 0, b2 > 0

(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 relatively 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 inflation is below its target or when the output is below its potential level. Following Taylor (1993) and Chadha et al. (2004), I empirically analysed the role of the exchange rate as the next step. Here, the simple Taylor rule was extended so that it included the exchange rate as an additional explanatory variable as follows: 29

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Elshamy H.  Estimating the monetary policy

rt = b0 + b1π t + b2 y t + b3 et , b1 > 0, b2 > 0, b3 < 0 (2)

In this augmented rule, et represents the real effective 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 Statistics (IFS). I calculate the output gap in the following way. Firstly, I regress the output on a constant and a time trend.

ln(Yt ) = α + β × time + u t

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). ^

ln(Yt * ) = α + β × time

Empirical Results Simple Taylor Rule First of all, I conducted the co-integration analysis. Table 1 shows the results of (ADF) tests in the first difference based upon the Mackinnon p values- at various lag lengths. The preferred lag length is based upon the Akaike information Criterion (AIC). These indicate that co-integration is generally accepted. ADF figures show the Mackinnon approx pvalue Table1 shows the estimation results. As is evident from this table, the output coefficient is estimated to be positive (0.026) and statistically significant at 1% level. The inflation rate coefficient is estimated to be positive (0.212) and statistically significant at 5% level. 30

(4) ^

Where (Yt* ) 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:

 Y − Yt *  Y − Yt *  ≅ 100 × t y t = 100 × (ln(Yt ) − ln(Yt * ) = 100 × 1 + t Yt  Yt 

As a preliminary analysis, I carried out the Augmented Dickey-Fuller (ADF) tests for the output gap, interest rates, inflation rates, and the real effective 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 variable with a unit root.

(3)

(5)

Table 2 shows the dynamic Simple Taylor function by using the Error Correction Mechanism (ECM). It indicates a positive relationship between the interest rate and both the output gap and inflation 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 hetroscedasticity and the Jarque-Bera test for normality).

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 effective exchange rate is estimated to be negative (0.212) and statistically significant at 10% level.

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

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

Table 2 shows the dynamics of the open-economy Taylor function. It indicates a positive relationship 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. 31

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Conclusions

This paper empirically analyses the Egyptian monetary policy reaction function by implementing 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 coefficients 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 appropriately to internal supply-demand gaps, external 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 transmission mechanism in Egypt. Review of Middle East Economics and Finance. 4 (3), 32-82. Cecchetti, S.G. (2008) Money, banking, and financial markets. 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. European Economic Review. 42 (6), 1033-1067. Fendel, R., Frenkel, M. (2006) Five years of single European 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 Economics. 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/documents/conference08/day2/.../iklaga.pdf [accessed 5 June 2012]. Inoue, T., Hamori, S. (2009) An emprical analysis of the monetary policy reaction function in India. Institute 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 inflationtargeting countries. Central Bank of Chile Working 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 practice. Carnegie-Rochester Conference Series on Public Policy. 39, 195-214.

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 kratkak 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 predznaci 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. Received: 03.07.2012. Correction: 08.09.2012. Accepted: 15.09.2012.

Singidunum journal 2012, 9 (2): 33-40 ISSN 2217-8090 UDK 005.334:336.71 Original paper/Originalni naučni rad

THE PROCESS OF RISK MANAGEMENT IN FINANCIAL BUSINESS. Danica Žigić1,*, Miroljub Hadžić2 Beohemija, 290 Kumodraska Street, Belgrade, Serbia 2 Singidunum University, Department for Business Economics, 32 Danijelova Street, Belgrade, Serbia 1

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 hopefully, 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.

Introduction Risk management can be described as cost optimization 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 maximize profits; ◆◆ To Operate effectively in risky environments; ◆◆ To coordinate operations within the legal framework. * E-mail: danica_zigic_26_2005@yahoo.com

Key words: risk management, banking, financial business.

Risk management is an ongoing and constantly developing process (Barjaktarović, 2009), which runs through organizational strategy and the implementation of this strategy. Every business entity develops its own internal guidelines for risk management, which are approved 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. 33

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Risk identification is the phase in the risk management in which, apart from the refinements of risk in the overall risk classification system and the definition of the entity, cause-effect relationships of individual risks are determined. It should be noted that risk identification is engaged in perception. Basic classification of risk related to the operation 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 commercial 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 experts determine the potential loss and probability of loss. Gap analysis consists of risk identification, risk description and risk assessment. Risk analysis includes risk identification, risk description 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 defining priorities for the regulation of risk and makes it possible to rank each risk identified by its assigned relative importance. Evaluation of risk is important for the decision -making process regarding the significance of risk for the business entity, and whether a certain risk should be regulated or accepted. Furthermore, it is important that the company establishes 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 34

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 management 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 retention 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 operational 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 simulation of exposure, ◆◆ Measuring the market risk, model and simulation of exposure, ◆◆ VaR, historical simulation, Monte Carlo simulation, ◆◆ „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 Controls, 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.

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NEW REQUIREMENTS FOR BANKING BUSINESS Bank performances in the global market are becoming increasingly risky, suggesting a need for the well-developed risk management. Risk is immanent in the banking business and it represents the accompanying consequence of market forces. Such increasing 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 without 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 international norms and standards related to the obligation of banks to provide an adequate amount of capital assets 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, Switzerland, Japan), founded the Basel Committee on banking supervision in 1975 (It is a committee of officials 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 assumed capital, the Basel Control Committee published 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.

Žigić D., Hadžić M.  The process of risk management

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. Conceived on the idea to increase the sensitivity of the guiding financial institutions at risk, the new agreement provides a more complex approach to determining minimum capital requirements in view: ◆◆ More comprehensive treatment of risk; ◆◆ More sophisticated instruments for risk measurement 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 national 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 increase 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 organization, 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 equivalents – 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 35

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by employing the appropriate business policies, 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 management, 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 responsibilities, the type of risk management procedures demanding that the bank itself defines and constitutes everything else in this legal framework. The Banking Act (the Law on Banks) also requires that the bank should have an adequate IT system (software support), the system of internal control and treasury operations system. Accordingly, these three sub-systems should be set up to perform their functions separately from the business 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 operations and to manage those risks. The bank is also obliged to establish an organizational unit – sector - responsible merely for risk management. Risk management is influenced by the size and organizational structure of the bank, its business strategy, the scope of activities and types of operations performed. The Bank prescribes, in its own regulations, procedures for the identification, measurement 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 decisionmaking process based on the adequate risk analysis and trends at the bank, which through using the data from external databases enable the exchange of experience and best practices and determine the size of the limits. These are the basis for calculating capital costs and consolidated reporting to the top management. 36

Contemporary models of risk management at the bank rely on the management structure presented. 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 economies 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 measures 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 deposits 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 banking sector decreased from 31.3 thousand and stabilized at 29.9 thousands employees. After a modest increase in assets, crediting and capital in 2010, during the first half of 2011,the total assets decreased by 2%, credit volume decreased by 2% in nominal

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terms, while capital increased by 4%. The struc115.106 million RSD, and in 2010 recorded an inture of new credit lines got somewhat worsened, as crease amounting to 150.566 million RSD. Slight banks placed financial sources mainly to the state decrease was recorded in 2011 amounting to 148.774 and public companies. Credit lines in default (more million RSD. than 90 days) increased to 19% (from 17% in 2010). The total assets within the Balance sheet in 2010. The Capital adequacy decreased in the mid of 2011 grew up to 50.611 million RSD or 24.7% compared and stabilized at 20%. Profitability increased comto the previous year. The Loans and advances inpared to the same period in 2010 and total profit creased by 35.460 million RSD, or 30.8%. As of 31st of Serbian banks amounted to 178 million Euros. December 2010, the total loans and advances (econThere were signals of modest economic recovery at omy, population, and banks and financial hubs or the end of 2009 and in 2010 (GDP increased 1% in organizations) amounted to 150.566 million RSD, 2010, Staistical office RS), but the fears of repeat rerepresenting 58.8% of the total Balance sheet assets. cession are present from the second quarter of 2011. In 2010. the position of the cash and cash equivKomercijalna Banka has announced the results alents decreased by 24.3%, due to the revised reguachieved in the first nine months of 2011, showing lations on mandatory reserves of the NBS. The most a continuing trend of growth in profitability of the significant increase recorded in the previous year banking institution. was related to investment in securities. Finally, the Komercijalna Banka has announced pre-tax profit total amount of funds placed in a risk-free governof just under 3 billion, an increase of about 50 percent ment securities amounted to 18 billion RSD. In compared to the same period last year. The largest 2010, the planned capital increase carried out in bank that operates under government control has subsidiaries amounted to EUR 30 million. Namely, increased the efficiency, especially in the main busiit was placed into Commercial Bank, Budva, Monness area. Interest income amounted to 13.3 billion etenegro 10 million and Commercial Bank, Banja (growth of 18.2 per cent), while fee and commission Luka, Republika Srpska 20 million EUR. In the income amounted to 3.7 billion (growth of 15.6 per structure of assets, we note that the cash and cash cent). The total income from these items amounted equivalents recorded a decline in 2011 compared to to 10.4 billion RSD and was 29.4 percent higher 2010 by 20.08%, and by as much as 39.52% comcompared to the first three quarters of 2010. pared to 2009. In 2011, the callable deposits and loans recorded an increase of 17.12% compared to Total assets of banks at end of September the 2010, and 9.5% compared to 2009. The claims amounted to 258.8 billion, which represents an for interest, fees, changes in fair value of derivatives increase of 1.1 % from the beginning of the year and other receivables increased by 18.9% compared There were no major dramatic shifts in the balto 2011 and 2011 increased by 50.4% compared to ance sheet items , and positions in loans and de2009 and 2011. posits were insignificantly lower than in the first nine months last year and amounted to 148.8 billion dinars. Komercijalna Banka, Belgrade realized 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 business was more successful in the current than in the past year. Total assets in 2011 (up to 30th September) 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 Figure 1. A comparison between interest income, expense and net given loans and deposits amounted to interest income during 2009-2010. 37

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Žigić D., Hadžić M.  The process of risk management

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 under 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 2. Interest income for 2010 by sector

Figure 3. Interest expanse by sector in 2010.

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 compared 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. 38

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.

Singidunum J 2012  9 (2)  33-40

Žigić D., Hadžić M.  The process of risk management

ASSETS

31 September. 2011.

2010.

2009.

1 1.

Cash and cash equivalents

16.562.088

20.724.645

27.387.157

Callable deposits and loans

51.086.075

43.615.232.

46,651,225

Interest, fees and sale of loans and deposits

1.408.716

1.185.242

936.866

Loans and advances

148.774.729

150.566.311

115.106.246

Securities (excluding treasury)

21.301.395

18.267.497

566.509

5.788.066

5.286.005

2.703.423

Other placements

2.079.983

2.308.011

2.272.876

Intangible assets

505.780

467.547

326.526

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

109.217

12.

Other assets

3.619.168

5.351.683

2.034.792

258.805.821

255.868.309

205.257.221

TOTAL ASSETS Table 2. Balance sheet, Komercijalna banka ad, Belgrade

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 statements for the previous financial year. The main business of the bank has greatly contributed to the increase 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 bilion. The main business of the bank has greatly contributed to the increased profitability: profit from interest increased by 32.5 percent to $ 9.9 billion, while income from fees and commissions rose by 13.6 percent 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 differences, 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 recapitalization 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 concerning its sale.

If the state does not exercise the right of the recapitalization, 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 withdraw from the banking system and should not constitute unfair competition to private banks. However, in adverse conditions, private banks often show no understanding for the needs of the economy and reduce 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 worsening conditions for financial business as a result of the current economic crisis. The primary objective 39

Singidunum J 2012  9 (2)  33-40

Žigić D., Hadžić M.  The process of risk management

of risk management is to preserve assets of the financial 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 overall 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 process 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 finansijskom poslovanju. Belgrade: Singidunum University. (in Serbian) Fabris, N. (2012) Država dokapitulizuje Komercijalnu banku sa 11 milijardi dinara. Gde investirati [online]. Available from: http://www.gdeinvestirati.com/ banke/vesti/6630-drzava-dokapitalizuje-komercijalnu-banku-sa-11-mld-dinara [accessed 2 June 2012]. (in Serbian) Frenkel, M., Hommel, U., Rudolf, M. (2005) Risk management : 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 bankarstvu. Jugoslovensko bankarstvo. 27 (5/6), 3-11. (in Serbian) Kupper, E.F. (1999) Risk management in Banking [online]. Available from: http://www.ppge.ufrgs.br/giacomo/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 management Under Basel II: An Overview and Implementation issues for Developing Countries. World Bank Policy Research Working Paper 3556 [online]. Available from: http://www-wds.worldbank.org/servlet/ WDSContentServer/WDSP/IB/2006/01/10/00011274 2_20060110171251/Rendered/PDF/wps35560corrected.pdf [accessed 25 August 2012]. Van Greuning, H., Brajović-Bratanović, S. (2003) Analyzing and managing Banking Risk. 2nd ed. Washington, D.C.: World Bank. Van Greuning, H., Brajović-Bratanović, S. (2006) Analiza i upravljanje bankovnim rizicima: pristupi za ocjenu organizacije upravljanja rizicima i izloženosti financijskom riziku. 2. izd. Zagreb: Mate. (in Croatian) Vunjak, N. (2005) Finansijski menadžment: Poslovne finansije. Bečej: Proleter; Subotica: Faculty of Economics, University of Novi Sad; Podgorica: Unireks. (in Serbian)

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 tokom trajanja ekonomske krize i ima za cilj da se sačuvaju sredstva i budući 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 negativni 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. Received: 06.06.2012. Correction: 09.08.2012. Accepted: 10.10.2012.

Singidunum journal 2012, 9 (2): 41-49 ISSN 2217-8090 UDK 005.52:005.332.4 Original paper/Originalni naučni rad

CAPITAL EFFICIENCY ANALYSIS OF SERBIAN COMPANIES Nemanja Stanišić,1,* Tijana Radojević1, Vule Mizdraković1, Nenad Stanić1 Singidunum 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 indicators 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 partnerships overperformed in comparison to other legal forms. In addition, indebted companies create much higher negative results than the sound ones create positive ones.

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. Numerous 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 decreased 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 * E-mail: nstanisic@singidunum.ac.rs

Key words: financial indicators, bankruptcy, legal forms.

capital in the Republic of Serbia, which will probably 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 companies since their performance contributes to the general 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 cannot 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 essential. (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 41

Singidunum J 2012  9 (2)  41-49

Stanišić N. et al.  Capital efficiency analysis

sufficient and whether the capital is utilised in the efficient manner. The paper is structured in the following 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 information, the use of a large sample of companies from all areas within the Republic of Serbia was compulsory. 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 financial indicators have been calculated in order to grasp the reality of the current level of capital employment 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 calculated in order to determine the magnitude and direction 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 presented. This coefficient could be calculated either by using a statistical software package, or in the following manner (Myers and Well, 2003):

ρ = 1−

6∑di2 n(n2 − 1)

(1)

where, di = xi - yi and n is the sample size, whereas raw scores Xi and Yi are converted to ranks xi and yi. 42

Additionally, in order to test the significance of the correlation of asymmetric data, the non-parametric 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 normal 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 obstacle. 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 indicating whether there is an agreement between the evaluators or not. Kendall’s W makes no assumptions regarding the nature of the probability distribution, and therefore can be used for any number of distinct outcomes (Kendall and Babington, 1939). This coefficient is calculated in the following manner: 12S W= 2 3 (2) m (n − n) where, n

(

= S ∑ Ri − R i =1

= R

)

1 m(n + 1), 2 m

Ri = ∑ri , j j =1

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 approaches zero, ROE tends to +- infinity. Therefore, in order to visualize our sample data, we performed an outlier exclusion procedure with cut points established 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

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-

Stanišić N. et al.  Capital efficiency analysis

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 removed, distribution of ROE in both years (2011 and 2008) is still far from normal. In 2011, the distribution 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 companies 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. 43

Singidunum J 2012  9 (2)  41-49

Stanišić N. et al.  Capital efficiency analysis

Using related-samples Friedman’s two-way analysis of variance by ranks, we found a statistically significant difference in return on equity depending on the observed period, χ 32 = 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 coefficient of concordance of .08 indicated rather strong difference between the years. Area (major cities)

Belgrade

Novi Sad

Nis

Remaining area of the country

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 remarkably for companies located in Belgrade (from 19.89% in 2008 to 7.88% in 2011) than for companies located 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 assumption 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 medians 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 significantly inefficient compared to the limited liability companies, partnerships and limited partnerships. This is primarily due to the difference in the number of owners, and therefore the efficiency of 44

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

Stanišić N. et al.  Capital efficiency analysis

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

If the company underperforms for a longer period 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 equity 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

Legal form No Yes No Cooperative Negative equity 2011 Yes No General partnership Negative equity 2011 Yes No Limited liability companies Negative equity 2011 Yes No Limited partnership Negative equity 2011 Yes No Other Negative equity 2011 Yes No Publicly traded corporation Negative equity 2011 Yes No State owned Negative equity 2011 Yes No Total Negative equity 2011 Yes Table 2. Net result of companies with negative equity in 2011. Closely held corporation

Negative equity 2011

Net result 2011 Bankruptcy, restructuring or liquidation No Yes Sum Count Sum Count 23,122,375 136 -504,309 7 -3,653,543 27 -1,294,515 10 1,253,042 957 -72,921 28 -986,731 286 -455,300 55 925,836 1,068 -9,950 54 -109,781 393 -88,788 58 202,749,460 35,572 -40,07,123 983 -83,808,999 10,206 -35,075,007 1,405 48,602 175 -2,425 6 -16,771 66 -3,886 13 2,309,221 177 626,750 16 -620,058 35 -995,404 23 56,529,192 879 -9,882,043 176 -12,289,192 174 -38,774,730 276 -1,872,082 448 -691,562 68 -2,440,287 58 -6,216,360 161 285,065,646 39,412 -14,543,583 1,338 -103,925,362 11,245 -82,903,990 2,001 45

Singidunum J 2012  9 (2)  41-49

Stanišić N. et al.  Capital efficiency analysis

billion, compared to RSD 83 billion of net loss generated by companies involved in bankruptcy. In the Republic of Serbia, legal criteria for filing for bankruptcy 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

ROE change %

Net margin change %

Debt ratio change %

Revenue change %

Number of employees change %

Median

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

.08

.13

-.05

68.8%

31.2%

70.2%

29.8%

Legal form

Bankruptcy

Yes

Negative equity 2011 No

Yes

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

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 companies with small number of owners (limited liability companies, general partnerships and limited partnerships) 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 operate and presented the data in the following table. You may notice that indebtedness increased the most in the following sectors: energy; accommodation, restaurants and bars and healthcare and social care; while the greatest decrease of ROE has involved the following sectors: construction; professional services and publishing, information and communication. Moreover, it would be interesting 46

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 analysing 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 (restructuring and liquidation) are positively correlated. There also seems to be a correlation between income and indebtedness. Table 6 shows the correlation between the level of indebtedness (debt to total assets) and cumulative results. The latter is calculated 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

ROE change %

Sector

Net margin change %

Debt ratio change %

Revenue change %

Number of employees change %

Median Median Median Median Median

Accommodation, restaurants and bars Agriculture forestry and fishing

-4.88

-1.59

-2.38

-.23

Automotive parts

-8.99

Stanišić N. et al.  Capital efficiency analysis

Negative equity 2011

BRL Bankruptcy

Restructuring

Liquidation

Yes

Row Total Row Total Row Total Row Total Row Total N% N% N% N% N%

.06 -13.88

-.18

4.6%

1.5%

4.0%

58.1%

41.9%

.01

1.57

.00

6.6%

.7%

2.1%

76.5%

23.5%

-1.14

.01 -21.57

.00

1.2%

.1%

3.4%

78.5%

21.5%

-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%

-.07

-.45

.06

32.44

.00

.8%

6.2%

.8%

73.1%

26.9%

Financial services and holding 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%

77.9%

22.1%

-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%

-9.28

-.91

.01 -15.72

.00

2.1%

.1%

3.4%

74.8%

25.2%

Construction

Energy

Professional services

Wholesale

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

Cumulative result is inversely proportional to the degree of indebtedness; this is especially true for large companies. Moreover, the intensity of correlation 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 negative 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. 47

Singidunum J 2012  9 (2)  41-49

Stanišić N. et al.  Capital efficiency analysis

Debt ratio 2008

Net equity Cumulative earnings 2008 2008-2011

Median

Revenue change %

Median

Net margin Net margin 2008 change %

Median

Row Total N % Bankruptcy

Restructuring

Liquidation

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%

-717

-579.5

-31.44

-.1147

1.83

5.9%

1.2%

6.0%

Debt ratio more than 1

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.

ConclusionS The findings of this research show that the capitalization of companies in the Republic of Serbia is on somewhat low level, where almost one- third of the companies from the sample have negative equity. 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 48

companies, partnerships and limited partnerships. Likewise, there is an increase of general indebtedness 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 conclusion that, although companies within the Republic of Serbia have sufficient capital, the already invested capital is used inefficiently, thus destroying the invested value, which leads to further de-capitalisation, and ultimately to bankruptcy.

Singidunum J 2012  9 (2)  41-49

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 Assumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Association. 34 (200), 675-701.

Stanišić N. et al.  Capital efficiency analysis

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 Statistical 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.

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) prilikom 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 stabilnim 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. Received: 25.08.2012. Correction: 10.09.2012. Accepted: 13.10.2012.

Singidunum journal 2012, 9 (2): 50-62 ISSN 2217-8090 UDK 005.334:336.71(497.6) Original paper/Originalni naučni rad

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 recommendations 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 regulation (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.

INTRODUCTION After ten years of the implementation of Basel I standards, Basel II standards were introduced. However, they have still not been fully implemented, which is the case not only in Bosnia and Herzegovina, 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 regulatory 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 50

* E-mail: salic_radomir@yahoo.com

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

and secondary information sources from the banks included in the selected sample. The second part of the document is related to comparison and analysis 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

Singidunum J 2012  9 (2)  50-62

implementation. The research is based on the sample 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 follows: 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 medium-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 Bijeljina. 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 funding 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 collected through the questionnaire and the answers provided in it illustrate the assessment of the current situation, and serve as the basis for the identification of advantages and obstacles in the implementation 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 appropriate matrices – tables (such as Table 1 and 2).

Šalić R.  Implementation of Basel II standards

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

IA x II B x III C X IV D x VE x VI F X VII G x VIII H X IX I x 100% 44.4 55.6 Table 1. Management priority towards Basel II Bank Responses

Excellent

Very good

Good

II B

III C

IV D

VI F

VII G

VIII H IX I

Other

x X

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

According to the responses provided in the questionnaire, 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 appropriate level of competence. All banks provide training to their employees in the field of the application of standards, especially for those standards for which they are at the same time experiencing and projecting the largest expenses and the greatest problems. The banks have established special organizational units that are in charge of risk management and they have a relatively high number of employees working in this field. Regarding the reporting models, it has been noticed that the largest banks by assets in B&H or in terms of our sample, the banks that belong to a certain banking group, report to their mother banks, while the smaller banks do not prepare any forms 51

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Šalić R.  Implementation of Basel II standards

related to Basel II standards, except for the reporting 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 similar 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 sample banks were as follows: Simplified Standardized Approach (SSA), Standardized Approach (SA), Internal Ratings-Based Approach (IRB) and Advanced Internal Ratings-Based Approach (AIRBA). The responses showed that the more advanced approach 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 requires large quantities of data and computer models that need to anticipate losses and other relevant factors, and use different methods for calculating capital requirements for loans in order to illustrate different capital needs for the same loan. The costs of implementing 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 relation to operational risk.

implementation of the Basel Agreement is not simple at all, because the banks in Bosnia and Herzegovina do not possess knowledge, technical or financial resources to implement it in the short term. Consequently, this does not mean that they should not comply with the adopted strategy for the implementation 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 measurement, 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 receivables, 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 conclusion since their number amounts to only few percentages of all employees involved in risk management. 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 authority 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 national 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 offbalance 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,

Singidunum J 2012  9 (2)  50-62

market risk was treated in the traditional manner, meaning that there were individual techniques developed for identification, measurement and protection 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 extent 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 interest 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 Agencies.2 Around 33% of the sample banks did not determine 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 negative 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 exclusively to human factor, frauds and thefts, and today it is increasingly the result of the application of advanced computer techniques in combination with the globalization and operations with exotic financial destinations and the inevitable human factor. Therefore, the losses stemming from inadequate management of operation risks in banks are amounting to billions of US dollars. The usual number of employees 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 opera2 Decree on Minimum Standards for market risk management in banks is still not in force.

Šalić R.  Implementation of Basel II standards

tional risk management approaches, which were offered in the questionnaire: Basic Indicator Approach (BIA), Standardized Approach (SA), Alternative Standardized Approach (ASA) and Advanced Measurement 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 Approach and potential combination with Advanced Approach, while the smaller, local banks opt for Basic Indicator Approach. Almost the same ratio exists for the preparation of time series required for operational 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 liabilities, 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 value 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 Federacije 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 53

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Šalić R.  Implementation of Basel II standards

Description ASSETS (in millions KM)

1. Cash assets

A I

B II

C III

D IV

E V

F VI

G VII

H VIII

I IX

160

242

296

1.140

1.186

3.266

175

278

120

124

296

613

2.132

2.392

6.551

131

138

149

371

2. Tradable securities

3. Placements to banks

4. Loans

137

143

5. Maturity securities

6. Fixed assets

402 31

583 28

7. Other real estate 8. Invest in-non consol Co

9. Other assets

152

10. Minus: Reservations

134

331

-3

169

170

204

212

578

845 1.083 3.497

3.993

10.751

Total (from 1 to 9 – 10)

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 reserves 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 underestimated, because the aforementioned implies that almost all loans are categorized in A and B category, which is unrealistic and impossible. 54

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 different 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 positions, 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 banking 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 return 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 significant profit. The level of investments in securities was also low. However, it increased from one reporting period to another, which is illustrated through its share in assets which was 0.4% as of 30/06/2009, and two

Singidunum J 2012  9 (2)  50-62

Description LAIBILITIES ( mill KM) 1. Deposits

A I

B II

C III

D IV

E V

F VI

119

157

154

429

2. Loans 3. Subordinated debts 4. Other liabilities

Šalić R.  Implementation of Basel II standards

G VII

H VIII

I IX

592

819

2.678

2.805

7.850

159

144

194

660

1.248

132

218

358

5. Total Capital

380

366

1.163

Regular shares

119

239

685

200

124

366

Premium asio Undistributed profit

Capital reserves

Other capital Total (1+5)

1 169

170

204

212

1 578

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 sample banks are at first glance better quality part of the Balance Sheet, especially if deposits are taken into consideration since they represent 73% of liabilities (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 cumulative 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 reduces the capital adequacy rate of those banks, which means they are not going to be in the position to develop 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 secondary 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 subsidiaries, 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 clas55

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Šalić R.  Implementation of Basel II standards

30.06. 31.12. 2009. 2009.

Banks

30.06. 2010. 4/3

5/4

Index

55.5

52.8

54.0

102

44.0

40.5

38.8

III

14.7

18.7

15.5

127

37.7

32.7

28.4

15.6

15.9

14.8

102

13.6

15.1

12.6

111

VII

14.4

15.5

13.9

108

VIII

14.6

15.3

14.8

105

15.0

14.2

14.8

104

Table 5. Capital Afequacy Ratio (CAR)

Chart 1. Capital structure

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 majority of the total or available deposits in Bosnia and Herzegovina.

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 abovementioned 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 direct expenses cannot be neglected as well, and their greatest share is allocated to potential loss reserves that are underestimated and should be much higher. 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 consequences. The profitability indicators are at extremely low level. However, if any of the expenses from the total expenses structure was higher, the profitability indicators would not exist at all, and one would assume that this can easily and promptly occur. According to data from B&H Association of Banks, the achieved profitability ratios at the level of Bosnia 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%. According 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

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.

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Revenues and expenditures (000 KM)

A I

B II

C III

D IV

E V

1. Revenues from interest

5.073

3.236

6.961

6.296

2. Interest expenditures

1.438 1.367

2.333 2.112

3. Net interest income 1-2 4. Operational revenues

Šalić R.  Implementation of Basel II standards

F VI

G VII

H VIII

I IX

18.535

21.274

28.343

93.350

111.315

287

6.335

9.534 12.310 32.496

48.038

108

3.635 1.869

4.628 4.184 12.200 11.740 16.033 60.854

63.277

178

2.506

9.763

4.647

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

5.512 12.092

529

390

505

462

526

5.038

186

633

551

1.209

581

330

479

391

340

4.405

4.961

13.301

7. Loss 8. Taxes 9. Net profit

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

Chart 2. Profitability of banks in B&H

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 Herzegovina and for our sample. However, the fact is that there are banks in B&H that are achieving excellent 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 (questionnaire) and secondary data (business books) of the sample banks:

Ratio between 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

◆◆ the banks that are realizing better business results, higher income and higher profit are the banks that possess larger assets and larger 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 prepared 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 assessment 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 depositors. This is mostly the case because the volume of business operations they are realizing is satisfactory, but with relatively low capital adequacy ratios ranging from 12.6 to 14.8% 57

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Šalić R.  Implementation of Basel II standards

(Table 5). Every subsequent change in the structure of the assets of the banks directed at the decrease of the cash assets and increase of the loans would simply lead to reduction 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, loans). Due to the previously mentioned fact, the small banks are realizing high capital adequacy rates ranging from 28 to 55%. These banks apply totally conservative management approach since they did not use the capital 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 could 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 offbalance positions in their balances (short version), compared 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 banking 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 activity 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 founded them. The cash assets placed on the accounts of correspondent banks are logical and have their purpose. However, the funds that are “lying”6 in the accounts of mother companies from the perspective of an ordinary observer or an external analyst do not make much sense and are not sufficiently transparent in terms of their function or their role. This is a problem of the banks and their supervisory 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 holding highly liquid assets in inappropriate percentages (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 operational 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 larger 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 application software and hardware, and determining time series for the assessment of credit, market 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 concentration 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 basic segments of business operations, i.e. loans, 8 The new decrees of the B&H regulatory bodies for the implementation of Basel II are expected to be prepared and adopted in accordance with the adopted Strategy for introduction 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.

Šalić R.  Implementation of Basel II standards

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 competitive level over certain period of time. It is being calculated in line with the following formula: N

H = ∑ si2

(1) where s is the share of i-th bank on the market, and n is the total number of banks. The indices for our sample are as follows: i =1

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 concentration 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 mismatch 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 investments. 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 disbursing must correspond to the amount and the quality of the loans that a bank has taken.

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Šalić R.  Implementation of Basel II standards

Even if we include capital and long-term subordinated 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 investments are being financed from short-term sources, and as a rule this leads to illiquidity and deterioration of assets classification and to the negative financial result. A) Long-term placements (KM) Long placements

2.924.933

Fixed assets

199.721

Total Longterm placements

3.124.654

B) Long-term sources Long-term deposits

1.781.065

Capital

571.810

Subordinated debts

10.841

Total Longterm 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 realized profit.

RECOMMENDATIONS Bearing in mind the Strategy for the introduction 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 developing their capacities. The recommendations that could lead to faster and more effective implementation of the standards are as follows: 60

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 banking structures in Bosnia and Herzegovina for the development of framework by-laws (decrees) related to all segments of Basel II standards implementation, as well as for drafting of specific instructions for the application of individual regulation, and the preparation of different formats 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 application is postponed for years.12 2. Since some of the sample banks are already applying 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 development 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 assessment, however, the question is what is the quality of those and whether the banks should, once the regulators adopt new regulation, com12 The Decree on Minimum Standards for Market Risk Management in Banks was adopted in May 2008, and its implementation 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 solutions, 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 activities that banks in B&H need to conduct. Actually, 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 financial crisis that is very much evident in our region 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 capital 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 purchase of the domestic banks? What are the results of the banks? Are they really that incompetent that they cannot make profit in the country where the interest rates and commission spreads are much higher than in their countries of origin, 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 nontransparent 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

Šalić R.  Implementation of Basel II standards

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 Herzegovina 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 application 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 acceptance 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 stakeholders in the process, and without them it is impossible 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 regulation (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 document 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 ac61

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tivity that is actually enabling them to reach positive 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_stanju_bankarskog_sistema_RS_30062010_lat.pdf [accessed 29 June 2012]. (in Serbian) Agencija za bankarstvo Federacije Bosne i Hercegovine (2011) Informacija o bankarskom sistemu Federacije Bosne i Hercegovine: stanje 31.12.2010. Sarajevo: Agencija za bankarstvo Federacije BiH [online]. Available from: http://www.fba.ba/images/Publikacije_Banke/Informacija_bank_31122010_bos.pdf [accessed 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 bankama. Beograd: Beogradska berza. (in Serbian) Lukić, R. (2009) Bankarsko računovodstvo. Belgrade: Faculty of Economy. (in Serbian) Mishkin, F.S. (2010) Ekonomija novca, bankarstva i finansijskih tržišta. 8. izd. Zagreb: MATE. (in Croatian) Ranković, J. (2008) Teorija bilansa. 11. izd. Belgrade: Faculty of Economics, University of Belgrade. (in Serbian) 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 financijskom riziku. 2. izd. Zagreb: MATE. (in Croatian) Šalić, R. (2011) Monetarna ekonomija i bankarstvo. Čačak: Visoka poslovna škola strukovnih studija iz Čačka. (in Serbian)

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. Received: 30.06.2012. Correction: 19.07.2012. Accepted: 10.09.2012.

Singidunum journal 2012, 9 (2): 63-73 ISSN 2217-8090 UDK 004.738.1:512 Review paper/Pregledni naučni rad

Formal Approach to a Web Information System Based on Story Algebra Bálint Molnár*,1, András Benczúr1, Ádám Tarcsi1 Eötvös 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 attempts 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 environment. 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.

Introduction The Web Information System (WIS) has become widespread and it incorporates the traditional Information 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 applications for specific functions, information components 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 –structured, semi-structured and unstructured.

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

A business-oriented WIS implicitly or explicitly follows one of the enterprise information system architecture paradigms (Zachman, 1987). The architecture 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 problems, 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.).

* E-mail: molnarba@inf.elte.hu

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Bálint M. et al.  Formal approach to a web information system

◆◆ The first encounter of input data with Information 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 considered as one unit. Some approaches call that perception Business Artifact (Cohn and Hull, 2009; Hull, 2008). However, the similar concepts have been called by various names, including adaptive documents (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 Webservices 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 organization business processes, workflows, activities and tasks. The Business Process Modelling (BPM) realizes this direct mapping between the organizational level services and the information system level services. This direct mapping between the information 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, typical Web Applications and a WIS can be formulated 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 structured, semi-structured as well as unstructured documents (XML-based). The semi-structured documents embodying hypermedia or hypertext documents, play an important 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 information. The form of documents has become the typical layout for the WIS user interfaces using the HTML. 64

As the document-centric flow within business IT environment has become the basis, this phenomenon can be perceived as evolution of the information processing paradigm, shifting from the process-oriented, data intensive application typically represented and designed in object-oriented style to the document-oriented computing. The development of information technology has led to the active semi-structured documents. The documents intended to collect data contain procedures for information processing, as it is required at a given time and at a specific position within the workflow, and thus they demonstrate active behavior. The document-centric approach can be characterized by the document structure, content and behaviour. The business artifact can be regarded as synthesis of the process and document aspects. A business artifact contains all the data and processing requirements 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 artifacts react to organization - level events; 3. Assistance provided for cooperation between “artifacts” and “services”. The adaptive business objects (ABOs) (Nandi and Kumaran, 2005) represent and abstract business entities. 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 displays all possible states of the entity that may occur 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 information from various places. The ABO approach can be considered again as a holistic view, a kind of synthesis 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 business 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 information entity with an associated data model and associated 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 provide a comprehensive and unified set of definitions for these business related notions. The Story Algebra tries to formalize the inherent concurrent characteristic of WIS user interface appearing in the form of document or media types (Schewe and Thalheim, 2004; Thalheim and Düsterhoft, 2001) and to create an environment that can be described by the navigation features of user interfaces together with navigation scenes formulated in scenarios. The end-user and WIS interaction through some document can be grasped as the execution of a particular scene. The SiteLang method uses the concept of media object and media type as its class. The storyboarding provides a tool to express an activity in the form of information exchange between the enduser and a media object. Such a dialogue can be depicted 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 information space sufficient for creation of the story board. ◆◆ Storyboard, a network within the information space, which is represented as a directed graph. Its vertices, the locations in the information 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.

Bálint M. et al.  Formal approach to a web information system

◆◆ ◆◆ ◆◆ ◆◆

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 media object. ◆◆ Media object is a unit of business- and representation functionality, mediating between the customer and database of the WIS. ◆◆ Content represents data or information. ◆◆ Stories are specific scenarios that make possible 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, message exchange and message passing mechanism. The processes should represent a solution for a particular business problem and the processes can be identified with some single scenario when the process 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, database schemas are created describing the data accessed in a process. From a methodological point of view, storyboarding is a particular variant of analysis and synthesis, altogether providing a holistic view. The Story Algebra 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 synthesize 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, 65

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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 architecture (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 information 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 documents happens or by standardized document templates that are quite common in business processes. Different definitions for the document as a technical term can be found in the literature. It usually occurs within these definitions that documents are things or artifacts that are created and used within 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 informal documents containing natural language text, to more formal ones like tables or structures complying 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 cycle, consisting of creation, editing, review, approval, and release processes. For a complete description of documents, different types of information models 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 documents. The documents are represented typically by XML (eXtensible Markup Language), structured by XML Schema and DTD (Document Type Definition) 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. 66

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 containing 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 preconditions that provides the environment to execute a piece of scenarios, stories and consequently processes. This paper attempts to present a document centric 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 examination ◆◆ 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 necessary information is handled by a WIS and it is represented through documents at the user interface level. The business activity consists of two essential parts: firstly, the system and the administration collect 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 automatically by a business activity and data processing providing a superior summation of data. The relationship between the stories, scenarios and documents 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 students, which then governs the business activity re-

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Bálint M. et al.  Formal approach to a web information system

Document type Status- Event

Attributes

An instance

Course Id: String

Course Id: IPM-08irÜVIRE/1

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 Estimated number of students: Integer Number of students signed-in: Integer

Max. Permitted number of students: 40

Created

Estimated number of students: 40 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 Closed for sign in /sign out Open for keying-in grade

Exam type: String

Exam type: Colloquium

Admitted students and scores: List (String, Integer)

Admitted students and scores: …

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

lated to exam preparation. The particular document for a single exam is a derivative of the superior documents 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 connected 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 processes. The processes in a story or scenario can be linked to business tasks. The particular documents that can be considered as a specific view of the virtual document are dynamically created from the virtual, overall document. 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 67

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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 business 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 inferred step-by-step from the conditions belonging to the task. Within Story algebra, an action is directly 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 expression 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 perceived 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_Object_Structure× Data_Items

(1)

Data_Items= List Data_Item

(2)

View_of_Intensional_Document: view_ mapping (Document_Object_Structure× Data_Items → Document_Object_Structure× Data_Items)

(3)

View_of_Intensional_Document ⊆ Intensional_Document

(4)

A specific view of the intensional document is a subset of structure, and the mapping function produces a meaningful structure in the form of DOM and erases the unnecessary symbols while preserving 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). 68

◆◆ Data_Item is a collection of attributes of primitive 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 intensional 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 matches to the status of the actual document. The functionality can be specified by the inputs, outputs, preconditions, and effects of the intensional 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 documents 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 documents and specific views appearing as single document can be represented by hierarchical scenarios. The Story Algebra uses three important concepts and those are story, scenario and scene. The manifestation 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 environment depending on the pre-conditions and related events. Due to the many-to-many relationship between the intensional documents and their views and manifestations in particular situations, the actors and roles lead to a similar many-to-many relationship 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 represented by processes of stories.

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Scenes are interpreted as macro-steps of scenarios (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 interpretation and the opportunities for the behavior of the action. When a course organizer creates a course registration 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 associate 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 conceptual model and logical rules describing the domain restrictions.

Data_Items = List data_item_mapping (9) (Attribute → Attribute_Value) input_items: Event → Document_Struc(10) ture× List (Attribute × Domain) 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_Document= Document_Object_ (4) Structure×Input_Data Input_Data= List Data_Item (5) The data items should correspond by an appropriate mapping to the attributes of conceptual models. The attributes belong to particular domains and are constrained by some (business) rules.

input_items (Course_ Registration)=[document_structure, (11) (Course_identifier, string), , ……)}] create_ Course_Registration (course, (12) semester, type) 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 supertypesubtype relationship is an is-a relationship. Thus, the is-a relationship produces a document hierarchy. 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 document 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

data_item_mapping : Data_Item → Attribute (6) × Domain 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 feature of the input event is that it enforces the start of process in order to generate data items that are necessary 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)

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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)∧¬defin ed(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-condition

currrent_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

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

WIS Architecture and Document and Event Processing

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 approach. Those are the user interface, the conceptual model and internal/physical design. The most recent approaches to system architecture represent disparate architecture artifacts that differ in the sense of

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 chain penetrating through the architecture tiers; ◆◆ The business rules and processes provide the dynamic, operational side appearing in the form of pre-, post condition, processes, including the document and data structure. ◆◆ Stepping through the tiers of architecture results in data transformation 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 instance of the particular event. Figure 1. A view of WIS integrated model 70

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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 described by stories and scenarios and the acts within stories and scenarios can be mapped to processes as depicted in (Schewe and Thalheim, 2004). The algebraic reasoning with the processes can be used to verify 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 content 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 document 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 organization are carried out through workflows making use of documents as information source and transmitter. Moreover, the Internet technology accelerates business processes to be implemented by Webbased applications. From the viewpoint of humancomputer interaction, Web-based document actualizes 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 implemented 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 generic document type and itself generates a document 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 created as D (D1 (Doc_Hierarchy1) … Dk (Doc_Hierarchyk)). 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 associated tasks are mapped to a scene, the actions of tasks are mapped to processes. ◆◆ If D ∊ I_D_T (Doc_Hierarchy) then the preconditions formulated as first order logic statement for a task can be linked to processes with pre-conditions so called guarded processes. The post-conditions of tasks are related to so- called post-guarded processes. 71

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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 formulate the actor/process objectives. The handling of documents, the impact on documents by processes and the final effects on the underlying data structure 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 business’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 information 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 general process algebra and the document centric approach. 2. Formal description of the impact of documents and the related events on WIS 3. Using the architecture approach, a WIS architecture outlined that can be used to perceive 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 documents to the specific ones. 72

The proposed approach yields solutions for formal 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 contained 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 document, the data, and the process involving the business rules and finally the event aspects together. The Story Algebra, or more generally the Process Algebra, provides a descriptive tool that helps capturing changes caused by a document and/or event at the outer interface level. The formal model of documents provides the opportunity for fixing precisely the relationship between the document and data changes as a result of events and the processing requirements at all levels of architecture.

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Kumaran, S., Liu, R., Wu, F.Y. (2008) On the Duality of Information-Centric and Activity-Centric Models of Business Processes. Lecture Notes in Computer Science. 5074, 32–47. Marini, J. (2002) The Document Object Model: Processing Structured Documents. New York; London: McGrawHill. Molnár, B., Tarcsi, A. (2011) Architecture and System Design Issues of Contemporary Web-based Information Systems. Proceedings of the 5th International Conference on Software, Knowledge Information, Industrial Management and Applications SKIMA, 8-11 September 2011 Benevento. Italy. Nam, C.K., Jang, G.S., Bae, J.H. (2003) An XML-based active document for intelligent web applications. Expert Systems with Applications. 25 (2), 165 176.

Bálint M. et al.  Formal approach to a web information system

Schewe, K.D., Thalheim, B. (2005) Conceptual modelling of web information systems. Data & Knowledge Engineering. 54 (2), 147–188. Schewe, K.D., Thalheim, B. (2004) The Co-design Approach to WIS Development in E-business and Elearning Applications. Lecture Notes in Computer Science. 3307, 181–189. Schewe, K.D., Thalheim, B. (2004) Reasoning About Web Information Systems Using Story Algebras. Lecture Notes in Computer Science. 3255, 54-66. Singh, M.P., Huhns, M.N. (2005) Service-Oriented Computing: semantics, processes, agents. Chichester: Wiley. Thalheim, B., Düsterhoft, A. (2001) SiteLang: conceptual modeling of internet sites. Lecture Notes in Computer Science. 2224, 179–192.

Open Group TOGAF. The Open Group Architecture Framework: TOGAF® Version 9. Available from: http://www.opengroup.org/togaf/ [accessed 4 September 2012 ].

Vechtomova, O., Karamuftuoglu, M. (2008) Lexical cohesion and term proximity in document ranking. Information Processing and Management. 44 (4), 1485–1502.

Schäfer, G. (1988) Functional Analysis of Office Requirements: A Multiperspective Approach. Chichester: Wiley.

Zachman, J.A. (1987) A Framework for Information Systems Architecture. IBM Systems Journal. 26 (3), 276292.

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 polustrukturirana 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. Received: 05.09.2012. Correction: 07.10.2012. Accepted: 15.10.2012.

Singidunum journal 2012, 9 (2): 74-79. ISSN 2217-8090 UDK 342.731(497.7) Review paper/Pregledni naučni rad

LEGAL FRAMEWORK OF FREEDOM OF RELIGION IN THE REPUBLIC OF MACEDONIA Saša Dukoski1, Svetlana Veljanovska*,1 University 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 Constitution, 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 statelegal 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.

International laws and regulations Various international documents regulate human rights. According to numerous legal theoreticians, the right to freedom of religion or belief is perhaps the most essential one, underpinning individual as well as collective philosophy of life. The contents of the Right to freedom of religion 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 Covenant 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. 74

* E-mail: svetlanaveljanoska@hotmail.com

Key words: religion, Freedom of conscience, Constitution, Law, church, religious community.

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 Declaration of Human Rights; ◆◆ Articles 4, 18 and 27 of the International Covenant on Civil and Political Rights; ◆◆ Article 1 of the Declaration on the Elimination of All Forms of Intolerance and of Discrimination Based on Religion or Belief; ◆◆ Article 9 of the European Convention for Protection of Human Rights and Basic Liberties (European Convention for the Protection 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 Macedonia, thus forming an integral part of the national legislation. The overview of the domestic legal framework on freedom of religion or belief and religious demography in the former Yugoslav Republic of Macedonia is best given in the Report of the Special Rapporteur 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 communications 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 inaction, by State actors, non-State actors and international or external factors. There are 31 missions mentioned in the report and they took place from October 1987 to November 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 implementing international human rights standards, including 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 violation of their rights, including abuses committed by non-State actors. Measures should not only consist in prosecuting the perpetrators of such acts and providing compensation to the victims, but also in devising specific preventive action in order to prevent 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

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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 hatred 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 unduly 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 positively assessed, in the part of the Report on Conclusions 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 Repporteur would like to remind the Government of its obligations to remain neutral and non-discriminatory, especially regarding registration procedure“ (Jahangir, 2009).

National regulative The relations between the state and its religious communities and the work of religious communities, i.e. freedom and rights of religion in the Republic 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 Position 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 further legal regulation or more precisely, additional clarification of certain states through law decisions in 1977, 1997 and 2007. 75

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Dukoski S., Veljanovska S.  Legal framework of freedom of religion

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 relations between religious communities and religious groups and the state are regulated by the Constitution of the Republic of Macedonia, the Law on state authorities and Law on churches, religious communities and religious groups. Generally, the freedom of religion in the Republic of Macedonia after it became legally independent from the former Yugoslav federation with the Constitution of the Republic of Macedonia, is guaranteed, in particular in Article 19, which has been supplemented with Amendment 7 from the Constitution 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 establish 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 redefining with the Constitution Amendment VII, which was adopted after the events in 2001. It stipulates the following: 1. Macedonian Orthodox Church as well as the Islamic Religious Community in the Republic of Macedonia, the Catholic Church, the Evangelist-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 Islamic Religious Community in the Republic of Macedonia, the Catholic Church, the Evangelist-Methodist Church, the Jewish Community 76

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 paragraph 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. Therefore, the Law on legal position of church, religious communities and religious groups was adopted in 2007 (Zakon za pravnata položba na crkva, verska zaednica 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: “Religious 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 Macedonia 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 institutions as an optional subject in accordance with the law (Odluka na Ustavniot sud na Republika Makedonija, 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 following: 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 status of a legal entity (Zakon za organizacija na rabota na organite na državnata uprava, 2000). Accordingly, this Commission ensures the legal 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 Commission was later transformed into an independent organ, which changed in a different way in different periods, although it has retained the same role. Thus, from 1951 to 1962, it existed as a Commission for Religious Matters, from 1963 to 1976 as a Republic Commission for Religious Matters, from 1977 to 2000 as a Republic Commission for Relations with Religious Communities, and from 2000 onwards as a Commission for Relations with Religious Communities and Religious Groups. The Commission has a Sector for affairs concerning relations with religious communities and religious groups with two departments: Department for determining legal position of religious 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 observing religious holidays, part of which are public holidays, and the rest are holidays of the Republic

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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 Macedonia include: Christmas, First day of Christmas, January 7 according to the Orthodox calendar; Easter, the second day of Easter according to the Orthodox calendar; 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, Friday 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 Bayram, 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 religious 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 Orthodox Church has approximately 1,300,000 believers, which amounts to 65 % of the country’s population. Less than 2 % of the total population is from other Christian communities, including the Catholic Church (about 7,000 believers), United Methodist Church (about 1,300 believers) and the Seventh - day Adventist Church (about 500 believers). 77

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Dukoski S., Veljanovska S.  Legal framework of freedom of religion

The second biggest community is the Islamic Religious Community of the Republic of Macedonia 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 Relations with Religious Communities and Religious Groups such as churches in the Republic of Macedonia, the following churches have been registered: Macedonian Orthodox Church – Ohrid Archbishopric; Catholic Church in the Republic of Macedonia; Evangelist-Methodist Church in the Republic of Macedonia; Christian Adventist Church (SeventhDay Church of Adventists) in the Republic of Macedonia; Christian Adventists Church in the Republic of Macedonia; Christian Baptist Church „Joyful News“; Evangelist-Congressional Church; New Apostolic 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 Christian 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 Community; 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 Community- 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 tidings; Ehlibejt Bektashi Religious group in Macedonia; Christian Church – Oasis in RM; Ehli Sunnet Vel Dzemat. There is an assumed connection between nationality and religion in the Republic of Macedonia. 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 78

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 Community are dominant both in the field of religious doctrines and the social life in general. However, there are additional 14 churches, 6 religious communities and 7 religious groups in the country, which function more or less successfully and without any obstacles. Nevertheless, if the general assessment of freedom 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, Christianity-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/4565B8A8 CCA245AC99E52A0EE60B3FCD.pdf [accessed 1 September 2012]. (in Macedonian) European Convention for the Protection of Human Rights and Fundamental Freedoms. Council of Europe [online]. Available from: http://conventions.coe.int/Treaty/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 Macedonian) 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. Human Rights Council [online]. Available from: http:// www.sacw.net/IMG/pdf/G0910462.pdf [accessed 9 June 2012]. Murdok, Dž. (2008) Sloboda misli, savesti i veroispovesti: 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]. Available from: http://www.slvesnik.com.mk/Issues/ FC3140F7E810C747B3A8230E9D8E21C9.pdf [accessed 2 September 2012]. (in Macedonian) Parekh, B. (2000) Rethinking Multiculturalism: cultural diversity and political theory. Cambridge, MA: Harvard University Press. UN Declaration on the Elimination of All Forms of Intolerance and of Discrimination Based on Religion or Belief 1981. United Nations [online]. Available from:

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http://www.un.org/documents/ga/res/36/a36r055. htm [accessed 6 September 2012]. UN Universal Declaration of Human Rights. United Nations [online]. Available from: http://www.un.org/ en/documents/udhr/index.shtml [accessed 3 September 2012]. Ustav na Republika Makedonija (1991)Služben vesnik na RM. br. 52/91 [online]. Available from: http://www. slvesnik.com.mk/Issues/2D608B9363555A42AA3D7 A97CD4811DE.pdf [accessed 1 September 2012]. (in Macedonian) Zakon za izmenuvanje na Zakonot za praznicite na Republika Makedonija (2007) Služben vesnik na RM. br. 18/07 [online]. Available from: http://www.slvesnik.com.mk/Issues/0708C07F60F4964493F94F D68E286F61.pdf [accessed 6 September 2012]. (in Macedonian) Zakon za organizacija na rabota na organite na državnata 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.slvesnik.com.mk/Issues/B73B1AE48C6A854D9F63ECE819984E43.pdf [accessed 9 June 2012]. (in Macedonian) Zakon za praznicite na Republika Makedonija (1998) Služben vesnik na RM. br. 21/98 [online]. Available from: http://www.slvesnik.com.mk/Issues/5574FD F10D4E4775ADA85C15530AB507.pdf [accessed 1 September 2012]. (in Macedonian)

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 državno-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. Received: 07.09.2012. Correction: 25.09.2012. Accepted: 05.10.2012.

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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) â&#x20AC;&#x201C; affiliation(s) 4. personal e-mail address(es) 2. Abstract 3. Keywords 4. Text 5. Reference lists 6. 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 authorâ&#x20AC;&#x2122;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 content 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

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 nonstandard 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 development. 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].

Singidunum J 2012

Instructions for authors

◆◆ Online journal article: Stein, D. (2007) The Bottom Line. Sales & Marketing Management. 159 (9), 11-26 [online]. Available 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 manuscript 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:

= NSV

∑ NP k =0

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CIP - Каталогизација у публикацији Народна библиотека Србије, Београд 33

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 1820-8819 ISSN 2217-8090 = Singidunum Journal of Applied Sciences COBISS.SR-ID 188621836