Capital market development

A developed capital market is considered one of the important determinants of the economic growth and development of a country, given that it should, in terms of expenses, efficiently direct cash surpluses, i.e. national savings into efficient investment projects that can create added value.

Access to capital and the development of the capital market are undoubtedly closely related to a country’s economic development, which is confirmed by numerous theoretical and empirical studies. However, the causal relationship between the development of the capital market and economic growth is not necessarily one-way and it is determined by numerous factors such as the country’s financial system structure, the power of institutional capacities, corporate governance, consumer and minority shareholder protection, etc.

The necessary prerequisites for capital market development are thus reflected in three key interconnected stabilities:

  • stable macroeconomic environment,
  • relatively developed and stable financial system,
  • developed, efficient and stable legislative and institutional framework.

All of the mentioned preconditions have been accomplished in Croatia to a significant extent during the previous years, given the reduction of macroeconomic imbalances and the continuous growth and development of the domestic financial system, especially in the non-bank sector. During more than 20 years, a regulatory and institutional framework has been established, transposing or directly introducing European regulations governing the capital market, provision of financial services and investor protection into the national legislation.

Together with specific capital market regulations, a robust market infrastructure has been developed in the form of an organised trading venue (Zagreb Stock Exchange, ZSE), a clearing and settlement system (Central Depository and Clearing Company Inc., SKDD), and a central counterparty (SKDD-CCP Smart Clear d.d. for the provision of central counterparty services, SKDD CCP). Together, these elements ensure the efficient implementation of transactions in the market and are one of the key factors of the development of market financing of the economy.

On 1 January 2023, the Republic of Croatia became a member of the European Monetary Union and the euro became its official currency. In the payment transactions system, the consolidated T2-T2S platform and the new TARGET system with the associated T2 service have been applied since 20 March 2023, additionally optimising liquidity management in both functional and technical terms. The accession of the SKDD to the European T2S securities settlement platform that standardises and ensures cross-border settlement is expected in September 2023. As many as 20 European countries have already joined this platform managed by the European Central Bank. The access to T2S is a precondition for the participation of the Republic of Croatia in the single system for managing assets used as collateral in the credit operations of the Eurosystem (Eurosystem Collateral Management System, ECMS), whose implementation is announced for April 2024. Together with other TARGET services offered by the Eurosystem – and by using the components it shares with those services – the ECMS will ensure a smooth flow of money, securities and collateral across Europe.

Furthermore, in 2022, the Republic of Croatia started negotiations for joining the OECD. The capital market that ensures the confidence of its investors and participants with its infrastructure, regulatory framework and corporate governance standards is a requirement that accession candidates must meet. The accession of the Republic of Croatia to the OECD provides a strong impetus for restoring confidence in the market and investor protection, as well as the potential of attracting foreign investors.

Therefore, along with the mentioned preconditions realised through legal and institutional, as well as economic context, one of the crucial drivers of the capital market is ensuring its adequate liquidity, which is directly connected to the level of transparency in the market and confidence among market participants.

The main advantage of financing through the capital market is the ability to collect larger amounts of funds in the long run (especially in the case of issuing equity securities given that the capital does not have a maturity date) with more favourable   conditions on a long-term basis. Even though the initial costs of the implementation of this form of financing (costs of issuing securities) are somewhat higher compared to the cost of bank crediting, they are mostly fixed and administrative, so the relative cost burden decreases with the size of the investment financed in the market.

By entering the ownership structure of a company, the investor binds their long-term interest to the operations of the company and directly participates in the achieved results by participating in the profit through the payment of dividends or through further growth and development of the company by means of reinvestment. Equally, in case of unprofitable operations, the investor participates in the loss, which puts less pressure on the liquidity of the company, especially in its early years of the operation. Together with the very uncertainty of assumed debt repayment amounts amid any change of interest rates, the possibility of later availability or debt refinancing conditions is also frequently uncertain, due to which financing by issuing shares instills stability and long-term support to the capital base for the realisation of the plan for future development and growth of the company. Finally, borrowing directly burdens the financial position of a company by increasing financial leverage (the ratio of equity to debt financing), which can reflect on the creditworthiness and evaluation of the company in the future, reducing the possibility and efficiency of its later financing in the capital markets. 

Given the stated advantages of financing by issuing shares, especially in the context of growth and development of small-sized and medium-sized companies, special alternative trading platforms, less demanding in regulatory terms, intended for the merger of micro, small-sized and medium-sized companies are frequently organised in the capital market, with investors interested in investing in emerging business ventures (such is the Progress Platform of the Zagreb Stock Exchange).

Therefore, it is important to develop awareness among potential issuers of the opportunities offered by the capital market and to develop attitudes related to governance, control and corporate culture in general. In this context, in recent years, important efforts have been directed to the development and implementation of the best corporate governance standards for issuers.

For participants in the capital market in the Republic of Croatia, that is, for issuers whose securities are listed on the regulated market of the Zagreb Stock Exchange, the legislative framework is primarily determined by the Capital Market Act, which has been in effect since 1 January 2009. Besides the said law, issuers are obliged to comply with the relevant provisions of the Rules of the Zagreb Stock Exchange (as the regulated market in the Republic of Croatia), the Companies Act, the Accounting Act, the Audit Act, and other relevant regulations. Criteria for the establishment and development of the corporate culture of behaviour for issuers whose shares are listed on the regulated market of the Zagreb Stock Exchange are regulated by the Corporate Governance Code, which has been in effect since 2007, with the latest improved version of the Corporate Governance Code being in effect since 2020.

Companies with a good governance standard and transparency are more likely to attract capital because of the greater confidence shown by their investors. Following the good corporate practice of the EU Member States, it is necessary, as the next step towards the improvement of the corporate governance culture in the Republic of Croatia, to also create economic stimuli that will encourage non-financial companies to increasingly turn to capital market financing. This especially relates to small-sized and medium-sized companies.


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