FINANCIAL LITERACY AND RESULTANT STABILITY OF THE FINANCIAL SYSTEM

The aim of the author of this paper isto show the relationship between the level of financialresponsibility of individuals and of companymanagers and the stability of financial markets, assetmarkets and the stability of the financial system as awhole. In Bosnia and Herzegovina (B&H) after the1992-1995 conflict, there was a large influx offunding into the local economy both from the fields ofFDI (Foreign Direct Investment) and bilateral andunilateral aid. Many people in BH were keen toaccess loans in a seemingly cash-rich economy, butwere ill-prepared in the fields of financial borrowingand handling debt properly. Subsequently theyexperienced difficulties in servicing obligations andthe loan portfolio of banks has deteriorated. Thus theonset of the financial crisis has brought somethingpositive. Borrowing in B&H dropped, but problemsservicing existing loans rose. The situation has notyet become problematic but banking sector shortfallstend to manifest themselves between 12-18 monthsafter the event. The author believes that a moreserious approach to financial responsibility at microlevelsis necessary for the national economic good.