101 MARTINDALE CENTER FOR THE STUDY OF PRIVATE ENTERPRISE Inherited banking caution and credit constraints for small businesses in Croatia Joseph Gustav Maass When the Croatian banking system emerged from Yugoslav-era social ownership, it inherited an environment of politically driven credit and minimal risk screening: major market economy hazards. This legacy persists in small and medium-sized enterprise finance, where leading banks are reluctant small-business lenders. This article argues that the eased collateral requirements and terms brought by EU-backed instruments reveal strong small and medium-sized enterprise demand for credit, identifying supply-side caution and regulation as the primary binding constraints. Introduction After World War II, Croatia became one of six republics in Josip Broz Tito’s Socialist Federal Republic of Yugoslavia: a nation whose decentralized form of socialism granted enterprises considerable autonomy. Decades later, after Yugoslavia’s dissolution and a period of significant instability, Croatia declared independence in 1991, embarking on a rapid transition toward a market economy that would culminate in accession to the EU in 2013 and adoption of the euro in 2023 (Croatia.eu: Land and People, n.d.). The banking system that emerged is well integrated into European norms but highly concentrated and dominated by foreign-owned institutions. This foreign concentration, and the obstacles that it poses to financial inclusion to small and medium-sized enterprises (SMEs)—which make up 99.8% of domestic firms (European Commission, 2025), reveals legacies of the socialist model still visible in modern Croatia. Persistent constraints to access to finance despite otherwise strong financial indicators raise broader questions about how credit is allocated in Croatia and about the extent to which EU-level financial instruments have altered or been constrained by the structure of Croatia’s financial systems. Considering these tensions, this article asks, Why does Croatia’s stable and well capitalized financial services sector struggle to deliver inclusive credit access to SMEs, and what do these limitations reveal about the intersection of historical legacies, institutional structures, firm-level barriers, and EU development? The Yugoslavian banking system served more as an extension of state planning under the decentralized socialist model than a for-profit intermediary between savers and borrowers. Banks were socially owned and credit decisions were guided by political objectives, such as regional development, industrial strategy, and employment preservation, rather than assessments of risk and profitability (Estrin, 1991). Because no individual was responsible for profits or losses, screening, monitoring, and risk-pricing practices were never institutionalized. Two major consequences of this structure would outlast the system itself. First, credit was often issued to unprofitable enterprises for social or political reasons, leading to widespread inefficiency and misallocation of capital. Second, the lack of requirements for banks to price risk and rigorously screen borrowers prevented the institutional habits for effective commercial lending from developing. As a result, when Croatia declared independence in 1991, it inherited a banking system that was poorly prepared for a true market economy (Filipović et al., 2022). That inheritance has not been undone. This article argues that foreign ownership, EU regulatory integration, and an inherited culture of risk aversion, while making Croatian banking remarkably stable, also exclude SMEs from credit. Transition, war, and financial crisis (1991–2000) The disintegration of Yugoslavia and the subsequent Croatian War of Independence (1991–1995) brought severe economic disruption, leaving the banking system struggling to function amid surging inflation, dwindling output, and the sudden loss of Yugoslav markets, financial relationships, and supply chains. In fact, by 1993, GDP fell to just 60% of its 1990 level (International Monetary Fund, 1996). Recognizing the immediate necessity of economic goverdoi:10.18275/pbe-v044-013
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