Western Balkans Competitiveness Outlook 2024: Montenegro

4. Access to finance

Abstract

Access to finance is crucial for developing the private sector in all economies. This chapter, along with three sub-dimensions, explores the necessity for businesses to be able to access financing sources to start up, grow, diversify and ultimately contribute to overall competitiveness. The first sub-dimension, bank financing framework, assesses the regulatory framework of bank financing, including the quality of banking industry legal framework, registration and information systems and the policies making bank finance inclusive. The second sub-dimension, access to alternative financing sources, focuses on the various means that businesses can get financing, encompassing access to capital markets, private equity as well as factoring and leasing. The third sub-dimension, digital finance, delves into the effects of digital solutions on payment services and the emergence of new avenues for business finance.

Key findings

Montenegro has substantially improved its access to finance score since the 2018 Competitiveness Outlook – from 2.4 to 3.0 (Table 4.1). Notably, the economy has implemented measures to enhance the capital market and align banking regulation more closely with international standards.

Table 4.1. Montenegro’s scores for access to finance

Dimension	Sub-dimension	2018 score	2021 score	2024 score	2024 WB6 average
Access to finance	3.1: Bank financing framework			4.0	3.5
	3.2: Access to alternative financing sources			2.5	2.4
	3.3: Digital finance			2.4	2.3
Montenegro’s overall score		2.4	2.7	3.0	2.8

The key findings are:

• Montenegro has undertaken significant regulatory changes to align its banking industry’s legal framework with international standards, achieving full compliance with Basel III. This milestone was reached in January 2022 with the implementation of the Law on Credit Institutions and the Law on Resolution of Credit Institutions, supported by the introduction of 40 associated bylaws.

• Relatively stringent collateral requirements hinder access to bank finance for the smallest businesses, as do limited credit guarantee schemes and the absence of policies supporting microfinance. As a result, SME loans from commercial banks accounted for 14.9% of Montenegro's GDP in 2022, lagging behind the Western Balkans' average of 17.7%.

• The development of capital markets in Montenegro faces a hurdle due to the absence of pension funds. To address this, the Capital Market Authority (CMA) has drafted the Law on Pension Funds, expected to be implemented in the last quarter of 2024.

• Montenegro has made good progress in strengthening its legal framework for digital payments as part of its Single Euro Payments Area (SEPA) integration efforts. The legal framework aligns with the EU's Second Electronic Money Directive (EMD2) licensing for e-money institutions, facilitating electronic money issuance. Moreover, Montenegro has extended banks’ payment services to third-party payment service providers with appropriate security requirements in line with the EU’s Second Payment Services Directive (EU PSD2).

• Montenegro is currently paving the way for alternative financing methods, such as private equity and crowdfunding, with new regulations in the works. Notably, the Capital Market Authority has drafted legislation to implement the EU Alternative Investment Fund Managers Directive (AIFMD) in Montenegro for an expected implementation in the last quarter of 2024.

State of play and key developments

Montenegro's financial sector relies heavily on the banking industry, constituting 94.2% of total financial system assets in 2022, a slight increase from 90.6% in 2016 (Central Bank of Montenegro, 2024[1]). This contrasts sharply with the euro area, where the banking sector represents only 50% of total financial assets (European Central Bank, 2023[2]). In the banking sector, consolidation persisted, reducing the number of commercial banks to 11 in 2022, down from 13 in 2019. This trend has led to a notable increase in concentration within the Montenegrin banking market, suggesting a decrease in competitive pressures. In detail, the top three Montenegrin banks manage 83.2% of total assets of the banking industry in 2022, a significant rise from 58.3% in 2013 (World Bank, 2022[3]), surpassing the dominance observed in both the Western Balkans (68.8%) and the EU (71.5%).

The total credit provided by the Montenegrin financial sector has been growing over the past decade, suggesting substantial development in the primary means of accessing finance in Montenegro. In 2022, domestic credit to the private sector was equivalent to 55.7% of GDP, while 47.6% in 2013 (World Bank, 2022[3]). This figure is substantially higher than the average value in the Western Balkan region (46.4% in 2022), yet still below that of the European Union (69.5%).

Sub-dimension 3.1: Bank financing framework

Montenegro has a well-established legal framework for the banking industry, fully implementing Basel III standards since January 2022 through implementing the Law on Credit Institutions and the Law on Resolution of Credit Institutions, accompanied by 40 related bylaws. The regulatory and supervisory frameworks have been strengthened, contributing to the robustness of Montenegrin banks in terms of liquidity and solvency. Notably, Montenegrin banks exhibit high liquidity, boasting a coverage ratio of 317.7% in 2022, surpassing both the Western Balkans (256.6%) and the euro area (163.8%) (European Central Bank, 2024[4]). Furthermore, the Montenegrin banks’ solvency level significantly exceeds the Western Balkan average, with Regulatory Tier 1 capital constituting 18.4% of risk-weighted assets in 2022 (IMF, 2024[5]), in contrast to 11.8% in the Western Balkans and 16.4% in the euro area (European Central Bank, 2024[4]).

Lending requirements are relatively stringent in Montenegro. The Montenegrin legal framework permits secured creditors to establish and enforce their rights over non-fixed assets like securities, movable assets and stocks. However, real estate and land continue to serve as the predominant collateral for loans, posing challenges for firms engaged in activities leading to the production of assets. Additionally, small and medium-sized enterprises (SMEs) face stringent requirements. Nevertheless, existing regulations seek to promote SME lending by reducing banks’ provisioning requirements through lowered risk-weight coefficients for SME loans.

While the cadastre and credit information systems are well developed, the Montenegrin registration and information systems are not comprehensive regarding the registration of assets. Cadastral information is automatically updated with each transaction and is publicly available on the Real Estate Administration’s (REA) website. Since the last ten years, the REA has undertaken efforts to broaden the coverage of the graphical database, including property ownership and land records, to encompass 94% of Montenegro’s territory. Plans are under way to extend the digital database to include the remaining portion of the territory, although a specific timeline for this expansion has not been communicated. On credit information systems, Montenegro's primary credit information service, the Credit Registry, is managed by the Central Bank of Montenegro (CBCG) and encompasses all financial institutions and non-regulated entities, such as non-bank financial institutions, retailers, and utilities. Mandated reporting by financial institutions includes comprehensive credit and loan-related activity histories for individuals and businesses. Financial institutions can obtain online access to borrower data with written consent. Robust measures are in place to prevent unauthorised access, destruction, loss, or misuse of credit information data. However, a challenge Montenegro’s credit information systems face is the absence of clear guidelines on the retention period for credit information data to align with international data privacy standards. On this specific point, the CBCG indicated that the Decision on Credit Registry will be amended in April 2024 to define retention periods of three years. Finally, regarding the Pledge Register, while the information is digitalised and accessible via applications to the electronic database, it is not comprehensive, which may hurt the assessment of borrowers’ collateral values for Montenegrin banks. Indeed, the available information on registered fixed assets only includes valuation data, lacking details on the characteristics of the assets. Similarly, for non-fixed assets, the information is incomplete, as it does not encompass the valuation and characteristics of the assets.

Montenegrin SMEs face challenges in accessing bank finance, and there is a limited presence of policy initiatives to facilitate their access to finance. SME loans from commercial banks stand for 14.9% of GDP in 2022 (17.2% in 2015), a lower level than in the Western Balkans (17.7%) (IMF, 2023[6]). Furthermore, the EU COSME programme (Competitiveness of Enterprises and Small and Medium-sized Enterprises), targeted at SMEs, and the Programme for Employment and Social Innovation, targeting micro-enterprises – which guaranteed support for the Investment and Development Fund of Montenegro (IDF) – have stopped operating since December 2022 following the end of the last EU multiannual financial framework.1 While remaining at a relatively high level, the end of the EU COSME competitiveness programme had a substantial impact on the activities of the IDF, as the total loans provided by the institution were equivalent to EUR 284.7 million in 2020 (6.8% of GDP), and EUR 185 million in 2022 (3.1% of GDP). As a result, small businesses may not benefit as extensively from the credit enhancement and risk mitigation schemes introduced during the pandemic, potentially leading to a widening gap with their regional counterparts. Addressing this issue, the Ministry of Economic Development, with technical assistance and financial backing from the European Bank for Reconstruction and Development (EBRD), is in the process of establishing the Credit Guarantee Fund of Montenegro (KGF). This fund is intended to offer enduring support to SMEs. In November 2023, the Ministry of Economic Development announced that legislative work would conclude in 2024, and EUR 10 million from the government’s budget would be allocated for its capitalisation and operationalisation.

While the smallest businesses increasingly benefit from microfinance, its development remains limited. In 2022, eight institutions operate in Montenegro, while there were seven in 2019 and six in 2013. Moreover, the loans provided by these institutions are equivalent to 1.3% of GDP in 2022, a slightly higher level than in 2013 (1.0%) (IMF, 2023[6]), confirming the limited development of microcredit solutions in Montenegro. The absence of policies focused on enhancing the competitiveness of microfinance, such as interest caps or facilitating technical accessibility through platforms providing information or services, may impede the sector’s development.

Sub-dimension 3.2: Access to alternative financing sources

Despite relatively developed legal frameworks, alternative financing sources remain limited in Montenegro, maintaining the dependency on traditional banking.

The Montenegrin stock market is the most developed in the Western Balkan region, as total market capitalisation stands for 64.4% of GDP, a level comparable to the EU (75.4%) (World Bank, 2022[3]). Nevertheless, the legal framework governing both stock and debt markets falls short of complete alignment with the EU acquis, posing potential obstacles to cross-border investments, particularly from the EU capital market. The Capital Market Authority (CMA) undertook measures to bridge the gap in response to this challenge. In March 2021, the CMA finalised the drafting of the Law on Open-End Investment Funds with Public Offering, aiming to harmonise it with the EU Undertakings for Collective Investment in Transferable Securities Directive (UCITS). The UCITS Directive seeks to establish a unified market for investment funds, promoting seamless cross-border investments. Additionally, the CMA crafted the Law on Pension Funds to address their absence in the Montenegrin market.2 The CMA indicated that the implementation of both these legislative texts is expected in the third quarter of 2024.

There is no clear definition of private equity activities in Montenegro, and therefore there is no registered activity; however, the legal frameworks allow these activities to be established as investment funds. The legislation contains basic provisions, such as rules for determining net asset value and detailed requirements for investors. However, a law specific to private equity activities is being developed; the Capital Market Authority has drafted legislation to implement the EU Alternative Investment Fund Managers Directive (AIFMD) in Montenegro to create a specific set of rules for regulating and standardising the operations of managers handling alternative investment funds within the EU.3 The law is being prepared for submission to the European Commission for their review and opinion, with implementation expected in the fourth quarter of 2024. Finally, in the absence of policies fostering the development of Business Angel Networks (BAN), the Montenegrin Business Angels Network (MEBAN), the only active BAN, continues to attract minimal investment. In 2022, EUR 0.24 million was raised, reflecting a significant decline from the already modest EUR 2.1 million raised in 2019 (European Business Angels Network, 2023[7]).

Factoring and leasing are accessible and supported by comprehensive legal frameworks. Their growth has been robust following significant legal enhancements with implementation of the Law on Financial Leasing, Factoring, Purchase of Receivables, Micro-credit and Credit-guarantee Operations in 2018.

Factoring volumes experienced substantial development, representing 1.78% of GDP in 2022 (0.84% in 2015), while factoring turnover was equivalent to 12.6% of GDP in the EU in 2022 (EU Federation of Factoring & Commercial Finance, 2023[8]). Regarding leasing volumes, these accounted for 0.74% of GDP in 2022, a significant increase from 0.18% in 2013, while this figure is 2% of GDP in the EU in 2022 (Leaseeurope, 2023[9]). Such development might be related to the fact that interest on leasing is fiscally deductible, and value added tax (VAT) is only applied to service fees, reducing the overall cost of leasing and therefore supporting market development.

Sub-dimension 3.3: Digital finance

Montenegro has made good progress in strengthening its legal framework for digital payments as part of its SEPA integration efforts, by implementing the amendments to the Payment System Law in October 2023.4 Achieving alignment with the EU’s Second Electronic Money Directive (EMD2) licensing for e‑money institutions, thereby facilitating electronic money issuance, these amendments extended banks' payment services to third-party payment services providers (TPPs) with appropriate security requirements by complying with the Second Payment Services Directive (PSD2).5 Moreover, following these regulatory alignments, Montenegro plans to modernise its payment infrastructure with the operationalisation of instant payments by the CBCG. However, as of 2022, no entities were operating in Montenegro’s digital payment and e-money services sector. The recent legal advancements are anticipated to impact this situation by allowing the emergence of such businesses.

Despite the progress made in developing the legal framework of digital payments, their adoption remains limited. In 2021, around 75% of the Montenegrin adult population reported having made or received a digital payment (World Bank, 2022[3]), which remains significantly lower than the EU average (93.0%).6 The data suggest that Montenegro may be struggling with a digital skills deficit, hindering the widespread adoption of digital payment methods. The overall low penetration of digital payments poses several challenges, ranging from increased business transaction fees to hindered financial accessibility and higher citizen remittance costs. This is particularly crucial for Montenegro considering the importance of remittance inflows standing at 9.8% of GDP in 2022 (World Bank, 2024[10]). To increase the use of digital finance technologies among citizens, the Montenegrin Financial Education Development Programme (2023-27) was endorsed in July 2022 to cultivate financial digital literacy. While the programme is designed to benefit the entire population, it also places particular emphasis on specific demographic groups facing heightened financial education needs.7 The increased digitalisation of the financial system can also promote the use of bank accounts (Khera et al., 2021[11]). However, this is not a significant concern in Montenegro, as 85.3% of the adult population already possesses a bank account – a proportion closely aligned with the EU’s 95.1% (IMF, 2023[6]).

Montenegro currently lacks a legal framework for crowdfunding, leaving it without active operators. However, crowdfunding regulation is under preparation as the CMA completed the drafting of the Law on Alternative Investment Funds, and implementation is expected by the end of 2024. Moreover, there is no legal structure for Distributed Ledger Technology (DLT) for financing, indicating that smaller businesses cannot yet circumvent traditional banking requirements and regulatory requirements associated with capital markets using digital assets (OECD, 2019[12]). However, in April 2023, the CBCG signed an agreement with Ripple, a cryptocurrency and blockchain solutions provider, to enhance capacity through the acquisition of essential knowledge and understanding of digital currency functions, encompassing the provider’s potential, requirements, and implications. Moreover, Montenegro already addressed the DLT security requirements aligned with the Fifth EU Anti-Money Laundering Directive (AMLD5) by adopting the Law on Digital Assets in December 2023 and its subsequent implementation in January 2024 (Official Journal of the European Union, 2018[13]).

Overview of implementation of Competitiveness Outlook 2021 recommendations

Montenegro has made significant strides in aligning its banking regulations with global standards, and several legal projects are in the drafting phase to strengthen capital markets. Despite this progress, there need to be more policies that facilitate businesses' access to long-term debt financing and develop access to capital markets. The critical developments based on the previous CO recommendations are elaborated in Table 4.2.

Table 4.2. Montenegro’s progress on past recommendations for access to finance

CO 2021 Recommendations	Progress status	Level of progress
Continue efforts to align Montenegro’s banking regulations with international standards	Regulation has been harmonised with Basel III standards since January 2022 thanks to implementation of the Law on Credit Institutions and the Law on Resolution of Credit Institutions.	Strong
Extend and simplify the provision of loan guarantees to enable commercial banks to expand lending to SMEs	The loan subsidies of the Investment Fund have experienced a substantial decrease after the COVID-19 pandemic. However, Montenegro is in the process of creating the Credit Guarantee Fund of Montenegro (KGF), which is expected to be active in 2024.	Moderate
Enhance credit information	The legal framework allows for the participation of non-regulated entities (e.g. non-bank financial institutions and utility companies) in the provision of data. It is ensured by Article 3 of the Decision on Credit Registry.	Strong
Continue efforts to diversify financing sources	The Capital Market Authority drafted the Law on Open-End Investment Funds with Public Offering, the Law on Alternative Investment Funds, and the Law on Pension Funds for expected implementation by the end of 2024. Crowdfunding activities are included. Moreover, in June 2023 a collaborative working group comprising representatives from the CBCG, the CMA, and the Ministry of Finance started the drafting of the Law on Digital Assets.	Moderate
Increase investor interest by conducting awareness campaigns on the existence of capital markets and the advantages they offer	There is still no policy aiming to incentivise the use of capital markets for SMEs, such as platforms for SME equity. There is also no digital platform-raising awareness of available financial services among SMEs.	None

The way forward for access to finance

To ensure diverse financing options are available in the financial markets, policy makers should:

• Make bank finance accessible for all businesses. According to the 2023 business environment survey conducted by the Chamber of Economy of Montenegro, the biggest hurdle for businesses in Montenegro is access to finance. To facilitate the growth and innovation of innovative businesses, it is crucial to expand the financing options available to SMEs. Additionally, as the Chamber of Economy of Montenegro's 2023 business environment survey recommended, permanent credit guarantee schemes could broaden financing opportunities for SMEs. Policies to develop microfinance, such as interest rate caps and active platforms, can also help remove barriers to finance for the smallest businesses (Box 4.1).

• Continue efforts to harmonise further capital markets’ legal framework with EU standards. Adopting EU acquis regulations on stock and debt markets can increase investor confidence, attracting investment and raising capital from investors operating on the EU market.

• Implement specific legal frameworks to develop alternative financing sources for SMEs. Alternative investment funds like private equity and digital finance options such as crowdfunding, Initial Coin Offerings (ICOs), and Security Token Offerings (STOs) offer alternative financing avenues for larger corporations. These options help address the challenge of limited availability of early-stage capital financing, which often hampers the growth prospects of promising SMEs.

• Advance digitalisation in the finance industry for all individuals and businesses. Financial services are increasingly digitalised, and individuals with low education levels, those residing in rural areas and elderly people face more significant financial exclusion. Similarly, the smallest businesses might also be the least likely to adopt digital financial solutions. Given the importance of remittance flows, Montenegro would benefit from spreading digital financial solutions in its economy following the substantial savings on transaction costs.

Box 4.1. Accelerator 2 Programme in Lithuania

In May 2021, the Lithuanian National Development Institution for Investment and Business Guarantees and the Ministry of Economy of Lithuania announced an investment of EUR 18 million for the Accelerator 2 Programme. The programme selects two financial intermediaries to set up two venture capital funds (pre-seed and seed). It combines the provision of capital with mentoring, counselling, and education for companies in the early stages of development.

The pre-seed fund will benefit from an endowment of EUR 6.5 million. It will implement two programmes:

1. Pre-acceleration programme: targets individuals working in innovations who wish to start a business, form teams, and generate business ideas.

2. Acceleration programme: designed to strengthen teams of partially or fully established companies. It includes mentoring and counselling to grow participants' competencies.

All eligible companies will be provided with initial venture capital investments.

The seed fund, with an endowment of EUR 2.7 million, aims to provide venture capital to SMEs. However, at least 70% of the allocated funds must be invested in companies that have participated in the pre-seed stage of the fund’s acceleration programme.

Source: OECD (2022[14]).

References

[1] Central Bank of Montenegro (2024), Financial System of Montenegro, https://www.cbcg.me/en/core-functions/financial-stability/financial-system-of-montenegro (accessed on 11 January 2024).

[8] EU Federation of Factoring & Commercial Finance (2023), Annual Factoring Data Factoring turnover in Europe, https://euf.eu.com/data-statistics/annual-factoring-data.html (accessed on 24 November  2023).

[7] European Business Angels Network (2023), EBAN Statistics Compendium 2022, https://www.eban.org/eban-annual-statistics-compendium-for-2022/.

[4] European Central Bank (2024), Supervisory banking data, https://data.ecb.europa.eu/main-figures/supervisory-banking-data (accessed on 11 January 2024).

[2] European Central Bank (2023), ECB Data Portal, https://data.ecb.europa.eu/data-comparison/e595831e-7662-41cf-ab04-f191303138ac (accessed on 24 November 2023).

[5] IMF (2024), “Montenegro: Core Financial Stability Indicators”, https://data.imf.org/regular.aspx?key=63174545 (accessed on 11 January 2024).

[6] IMF (2023), Financial Acess Survey (FAS), International Monetary Fund, https://data.imf.org/?sk=E5DCAB7E-A5CA-4892-A6EA-598B5463A34C&sId=1460043522778 (accessed on 24 November 2023).

[11] Khera, P. et al. (2021), “Is Digital Financial Inclusion Unlocking Growth?”, IMF Working Paper, Vol. WP/21/167, https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021167-print-pdf.ashx.

[9] Leaseeurope (2023), Solifi releases their 2023 Global Leasing Report, https://www.leaseurope.org/solifi-releases-their-2023-global-leasing-report-1 (accessed on 24 November 2023).

[14] OECD (2022), Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard, OECD Publishing, Paris, https://doi.org/10.1787/e9073a0f-en.

[12] OECD (2019), Initial Coin Offerings (ICOs) for SME Financing, http://www.oecd.org/finance/initial-coin-offerings-for-sme-financing.htm.

[13] Official Journal of the European Union (2018), Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843 (accessed on 11 July 2024).

[10] World Bank (2024), Remittences Prices Worldwide, http://remittanceprices.worldbank.org (accessed on 17 January 2024).

[3] World Bank (2022), The Global Financial Development Database, https://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database (accessed on 24 November 2023).

Notes

← 1.  The credit lines provided by the EU COSME Investment Support Programme and EU Programme for Employment and Social Innovation (EASI) lasted until 31 December 2022. The only running scheme, adopted in May 2022, is specific to entities selling wholesale essential food products.

← 2.  The UCITS Directive aims to provide a single European market for investment funds and allows for selling these funds to retail investors throughout the EU (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02009L0065-20140917).

← 3.  The AIFMD Directive regulates the activities of alternative investment fund managers (AIFMs) within the EU (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32011L0061).

← 4.  It can also be mentioned that following the creation of the Fintech Hub and Regulatory Innovation Centre in June 2021, the CBCG launched two surveys to respectively evaluate the Montenegrin Fintech ecosystem and the customer perspective of digital banking and payment services. The outcome of this consultative work is the drafting and pending adoption of the National Fintech Strategy with no specific timeline announced.

← 5.  EMD2 directive: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0110; PSD2 directive: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015L2366.

← 6.  Imputation based on the performance of Montenegro relative to the Western Balkan average in 2017.

← 7.  These groups encompass preschool and school-age children, young adults, high school and university students, unemployed individuals, working adults, senior citizens, and residents of rural areas.